Level 3 Motors Through Q3 and Into Integration

November 2nd, 2011 by · 7 Comments

Fresh off the closing of the Global Crossing deal four weeks ago, Level 3 Communications (NYSE:LVLT, news, filings) has reported its Q3 numbers, which seem to be very much in line with expectations.  Revenues grew at the same rate as in the prior quarter, while EBITDA expanded.  They also released enough of Global Crossing’s Q3 data to give investors enough to work with in estimating where the combined entity started from.  Here’s a quick summary of the company’s metrics in the context of the prior four quarters:

$ in millions Q3/10 Q4/10 Q1/11 Q2/11 Q3/11
– Wholesale 343 347 351 358 361
– Large Enterprise & Federal 144 144 144 148 153
– Mid-Market 147 151 155 158 163
– Europe 75 78 79 80 82
Core Network Services Revenue 707 720 729 744 759
– Wholesale Voice 161 161 164 151 152
– Other 27 23 21 18 16
Total Communications Revenue 895 904 914 913 927
– Coal 17 17 15 19 20
Total Revenue 912 921 929 932  947
– Communications Cost of Revenue 353 352 357 347 342
– Communications Cash SG&A 325 330 332 340 349
Communications Adjusted EBITDA 216 222 225 226 236
Adjusted EPS (1.50) (0.45) (1.80) (1.65)
Capital Expenditures 133 117 115 125 110
Free Cash Flow (63) 73 (115) 6 (42)

Some thoughts:

  • Revenue growth: Very nice enterprise growth for both large and midmarket was tempered by a slower wholesale number.  Europe grew a bit faster than it has lately, and it would have been a lot faster (5%) without currency fluctuations.  Nothing spectacular here, but they did what they needed to do in maintaining their growth trend into the merger.
  • EBITDA: Not including costs related to the merger, adjusted EBITDA would have been $247M.  That’s higher than I think most expected, despite seasonally higher SG&A (summer energy bills etc).  It’s also very close to that $250M/quarter ($1B/year)  threshold, which was really the sustainable free cash flow break even point prior to the merger.  Gross margins were up again to 63.1%, and EBITDA margins to 25.5% not including those restructuring costs.
  • Adjusted EPS: Not including the debt extinguishment and extra interest expenses from the pre-merger debt moves, loss per share was $1.16, which is better than anticipated.  It’s still going to be a very volatile number over the next year — lots of integration related one time events and such — but it’s time to start watching this metric in more detail for Level 3.
  • Free Cash Flow: This was a bit on the negative side, though it seems to be mostly due to a working capital swing.  The company now expects the final three quarters to be merely break-even, not including the GLBC elephant in the room.  No telling what Q4 will really look like on this front, it depends on the timing of integration spending I think.
And as for Global Crossing, their numbers were a model of holding down the fort prior to the merger while paying out a few extra bonuses:
$ in millions Q3/10 Q4/10 Q1/11 Q2/11 Q3/11
– GCUK 112 128 113 116 116
– GC Impsat 145 151 148 163 165
– ROW 317 335 326 349 354
– Intersegment Eliminations (6) (12) (8) (6) (6)
Total Invest & Grow 568 602 587 622 629
– Wholesale Voice 79 81 74 69 68
Total Revenue 648 683 661 692 697
OIBDA 109 121 84 96 102
Free Cash Flow (1) 102 (93) 10 (13)
Capex & Capital Leases 43 64 52  59 48

Revenues saw growth, particularly in the Rest-of-World segment, but nothing spectacular.  If anything, the South American division was a bit slower than its usual performance, but overall this is pretty much as expected.  Adjusted OIBDA, however, was a bit lower than I expected, and probably suggests that the company’s $425M full year guidance would have been missed – unless they were going to pull out $142M in Q4.  The fourth quarter is always their strongest, but not that strong I think.  The lower number relative to Q3/10 came from higher accrued incentive payments (bonuses) than in the prior year.  Free cash flow was inline.

The CC should feature more talk of the integration etc.  I will post on it then if there is anything of interest.

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7 Comments So Far

  • Carlk says:

    On Global’s financial end, back out “early termination” revenue of seven million in the quarter, and add approx. 1.5MM in “transaction costs” which are comprised of three million that were divided in two quarters. Would you agree, Rob?

    “Invest and grow” revenues included $7 million and $9 million in early termination revenue in the third quarter 2011 and the second quarter 2011, respectively.

    OIBDA for the second and third quarters of 2011 also included $3 million in costs associated with the transaction.

  • Carlk says:

    Based upon the combined entities EBITDA’s, while giving them a stingy seven multiple for Donna, don’t help me, the stock should be above three pps.

    Very nice quarter. Who is going to ask them how they’re preparing for The Masters of the Universe’s claims that, The Euro is going to IMPLODE on them soon? I want to know about exact numbers for both entities in Euro, as well as ongoing hedges which may or may not be worth the paper it is written on, as well as forward expectations over the pond beyond THE POUND that are predicting “worst case scenarios.” 🙂

  • B says:

    Just another average, ho hum qtr to me. What is the over/under on how many times we hear the phrase “we are well positioned” in the CC? Haven’t they been well posiitioned for 3,4,5 years or so now…

  • Anonymous says:

    what is truly amazing about Level 3 is that aside from a handful of quarters they have managed to lose 150-200 million a quarter for 12 years. Yet they still can sell a compelling story, raise money and continue to operate with large amount of future optimism about greatness. Using the Dan caruso invested captital vs company value model this is one big pig.

  • Carlk says:

    Ebitda and Oibda “pro forma” are virtually the same according to Sunit with the exception of writing off some “non cash balances” with reference to the 8K.

    On a forward annual run rate, that’s already better than the projections laid down upon announcement of the deal in April.

    According to Jeff Storey, Europe is fine, and continues to be so while looking ahead. Apparently, cross border gaming in the consumer space is driving robust CDN traffic.

    Analysts seem focused on Global Crossing’s failure with much trepidation regarding their UK transition being wound down, Latin America growth rates and DF sales. It’s good that they kept Legere aboard to ride his pony until all the paths that were being represented become clearly successful.

    Donna J wanted to know if LVLT would be approaching DF sales more aggressively like she implied Global was doing, with answer from Sunit suggesting, “no sharp changes,” and the decision to sell IRU’s will be very customer focused, and measured like in the past.

    Fiber in the right places at the right time, remains too valuable, it appears.

    Rob, I seem to think GLBC’s handling of the seven million termination revenue in the quarter, is different than I have always understood from (3) because, when they talked about the “elimination” of that number, qoq and yoy growth rates were better vs. worse as I was thinking.

    I thought termination revenue was a “non cash” adjustment because cash had been paid upfront for the original sale of an IRU, and they’re just booking the remaining revenues from the life of a contract now deceased versus incrementally had they still been alive. There is no real cash to the revenue line for future bookings, has been my understanding of “termination revenue” previously.

    Do you understand how this would work favorably on the numbers, as was being implied, if it was removed, Rob? Is this another Red Herring?

    Jim Crowe disagrees about the video opportunity not being visible, and that Level 3 continues to be beneficiaries of this trend including being “share takers” as compared to JD and Paul Sagan over at Akamai. Csco states that 90 percent of internet traffic in 2014 will be video, and this excludes traffic that will be getting handed off to mobile devices via 4G, aka, LTE wireless technologies.

    Crowe was hopping on a plane to visit certain federal agencies inquiring about (3) services in the Federal Markets Group, especially now that more than five years of vetting the company via Networx is behind them with agencies extending to states and local governments that are over budget and seeking higher quality, lower cost solutions.

    I am seeing revenue projection numbers being touted as “analyst expectations,” which are significantly higher than your more optimistic forecast here, which they almost made at $927MM vs. your $929MM, that are being used for the red blood being taken out on the stock today.

    Some things just don’t change, it appears, even while progress is being made.


  • Carlk says:

    I must have read this wrong earlier believing it was stating that there was a revenue “miss,” where in fact it does not, while stating higher revenues. I was probably thinking that mixing the $927MM CSR #, and then mentioning analysts expectations surrounding the inclusion of coal for $942MM seemed like, or implied a miss, because they didn’t state that (3)’s total revenues including coal came in at $947MM, or better than analyst expectations.

    The author was nice enough to call me back, and state that he was fully aware they beat revenue expectation numbers according to the analysts.

    Rob, it’s funny how they missed your CSR # by just two million, but blew your coal number away by five million!

    Have those coal mines become more valuable recently?

  • CarlK says:

    I must have really had my head in the Global Crossing “CLOUD” on this morning’s call since it was not John Legere, rather, their former CFO, John Kritzmacher, attempting to explain strong Q3’s(2 percent growth), albeit slower than Q2’s(3 percent growth), while referencing these “buy back contracts” tied to “termination revenues.”

    Rob, can you explain the accounting behind this 7 million termination revenue, and how it works on Global’s books vs. what I had thought previously according to (3)’s accounting methods in this matter? tia

    Michael J. Funk – BofA Merrill Lynch, Research Division

    I have 2 quick questions. I appreciate you don’t want to comment specifically on Global Crossing guidance. I think a lot of investor attention is focused going on the Global Crossing results. And I thought you’d just comment on what your thoughts as far the pace and trajectory of sales installations at Global Crossing at the end of 3Q. Understand there might have been some distractions at the end of the deal closing. And then second, do you think you can update us on your thinking around the impact of the intercarrier compensation reform over the FCC, what impact that might have on Level 3?

    James Crowe

    John Kritzmacher?

    John A. Kritzmacher

    Sure. So first, Mike, in response to your question around the pace of sales and installations at Global Crossing, I would say my observations are that we continued to maintain the momentum of the business albeit, if you look back, we had very solid sequential growth in the second quarter versus the first. At the time, we noted that it was unusually strongly impacted by a number of items, including some customer buyouts on contracts. But when you look at the momentum, the second quarter and then again in the third quarter, as Sunit noted, normalizing for the impacts of currency and normalizing impact with these customer buyouts, we had strong 3% sequential growth in the second quarter and then strong 2% sequential growth in the third quarter. So we’re feeling good about the momentum of the business, order intake continue to be strong. On a year-to-date basis, our order intake in 2011 is up 9% over 2010 so the pace is looking good. And we continue to maintain our growth momentum.


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