Q2/11 Earnings Preview: Level 3 and Global Crossing

Level 3 and Global Crossing both report earnings on Wednesday morning, which of course is not a coincidence given their pending combination later this year.  Here’s a quick preview of what to expect, or at least what I expect.

Level 3’s Key: Show Us the Organic Growth

For Level 3 Communications (NYSE:LVLT, news, filings), the market’s interest in the company’s Q2 numbers and any Q3 guidance has very little to do with the merger and everything to do with a more immediate item on their agenda:  their current growth trend, its sustainability, and its potential acceleration.  Level 3’s qualitative guidance is simply that Q2’s growth in core network services will improve on what we saw in Q1.  Due to high incremental EBITDA margins, adjusted EBITDA ought to grow faster.  Meanwhile, free cash flow is forecast to be positive for Q2-Q4 in the aggregate but of those quarters Q2 is usually the weakest on cash flow.  All indications are that none of these are high hurdles this quarter.  However, the street isn’t expecting them to do any better than eek past.  Despite my increasingly positive view of the company’s strategic position and their ability to capitalize on it, I think the market is right to be cautious about the rate of acceleration in the short term.  Things always take longer than our internal clock eternally hopes, and hence my guess for the company’s Q2 numbers is a minimal satisfaction of guidance:

$ in millions	Q2/10	Q3/10	Q4/10	Q1/11	Q2/11 (my estimate)
– Wholesale	342	343	347	351	356
– Large Enterprise & Federal	142	144	144	144	145
– Mid-Market	146	147	151	155	158
– Europe	69	75	78	79	80
Core Network Services Revenue	699	707	720	729	739
– Wholesale Voice	163	161	161	164	164
– Other	30	27	23	21	19
Total Communications Revenue	892	895	904	914	922
– Coal	16	17	17	15	15
Total Revenue	908	912	921	929	937
– Communications Cost of Revenue	358	353	352	357	360
– Communications Cash SG&A	324	325	330	332	334
Communications Adjusted EBITDA	209	216	222	225	230
Adjusted EPS	(0.10)	(0.10)	(0.09)	(0.12)	(0.10)
Capital Expenditures	104	133	117	115	115
Free Cash Flow	(19)	(63)	73	(115)	(25)-0

Of course, I hope to see more acceleration than that, but I must make them show me first.  But of course any news we do get about the merger will be important, especially any additional information about the timing of the close.  I just do not expect them to get specific just yet though, given the DOJ’s second request and the many other items outside their control.

Global Crossing’s Key:  Hold the Line

While the merger probably doesn’t rank high in Level 3’s perceived performance Wednesday, it’s probably the only thing on the mind of the market when it comes to glbc.  When the quarter began, the company’s stock price was at 14.  Currently it’s just shy of 38, and surprise can only damage it.  So how not to surprise?  Stability or perhaps a little growth in the UK, the same or better in the US, and strength in Latin America – adding up to something that keeps them on track for guidance of 6-9% organic growth and EBITDA in the neighborhood of $425M+ for the year.

$ in millions	Q2/10	Q3/10	Q4/10	Q1/11	Q2/11 (my estimate)
– GCUK	113	112	128	113	114
– GC Impsat	134	145	151	148	152
– ROW	314	317	335	326	330
– Intersegment Eliminations	(6)	(6)	(12)	(8)	(8)
Total Invest & Grow	555	568	602	587	598
– Wholesale Voice	74	79	81	74	75
Total Revenue	630	648	683	661	673
– Cost of Revenue	431	440	452	456	461
– SG&A	106	99	110	121	112
OIBDA	93	109	121	84	100
Free Cash Flow	(13)	(1)	102	(93)	(25)-25
Capex & Capital Leases	63	43	64	52	55

 

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Categories: Financials · Internet Backbones