As longtime readers know, I have spent some effort over the years modeling the results of Level 3 Communications (NYSE:LVLT, news, filings), but haven't tried to quantify much on the subject since the Global Crossing deal was concluded. The company reports its Q4 results on Wednesday morning, and there are so many moving parts that it is hard to predict just what they will say. But many eyes will be on the company this week, so I'll give it a go anyway.
I'll spare you a long list of calculations, estimates, extrapolations, and bona-fide hand waving and just get right to the point:
|- Core Network Services||$1.37-1.41B||This will be the number to watch re: growth.|
|- Wholesale Voice||$210-220M||They may discuss early synergies from integration in this category.|
|- Other Comm. Services||$15-20M||It is possible that additional revenues might shift into this category from CNS|
|Total Comm. Services||$1.60-1.64B||I'm a bit below the consensus estimates on Yahoo, mostly due to caution. I look forward to being wrong.|
|Comm. Cash SG&A||$610-630M|
|Comm. Adjusted EBITDA||$335-355M||Include net $20M in integration costs, as spending precedes synergies.|
|Gross margin %||~59%||Assumes that Level 3's definitions are maintained, which differed from GLBC|
|Adj. EBITDA margin %||~21%||The low point from which it rises steadily to above 25% next spring?|
I'm ignoring coal now that they sold the mines. I'm also assuming that integration spending of about $30M in opex and $10M of capex has yielded little savings actually booked thus far, as there is a delay between spending and effect.
Integration - It's still very early in the integration process, where they will likely have spent but not yet seen the results contribute much. It's also too early for anything substantial to have gone wrong other than slower sales at GLBC before the close. Everything is surely still on track, but the question is how much granularity they give us on synergies realized in Q4 and expected in Q1. One thing to note is that while there were a few layoffs in Q4, the bulk of that activity is probably yet to come.
Revenue Growth - Seasonally strong Q4 growth will have been tempered somewhat by slowdowns at Global Crossing in Q3 before the deal that will have bled into Q4, while core Level 3 will have done better. Remember that there are three days of Global Crossing's Q4 revenue missing, which corresponds to around $20M less than what the pro-forma result would be. Given the overall economic uncertainty, the integration work ahead, and the need not to over-promise, I expect nothing more from the usual qualitative 2012 guidance than the general promise to aim for mid-single digits growth rates in 2012 and aim for an expansion next year.
Revenue breakdowns - In the past, Level 3 has separated core network services into Wholesale, Large Enterprise and Federal, Mid-Market, and Europe. I'm guessing that initially they'll just add in a Latin American segment for now. But they could also take this opportunity to shake up the way they report segments.
Free Cash Flow - In Q4 I have no idea. None at all. Traditionally working capital swings FCF very positive in the fourth quarter, but with all the balance sheet activity, early integration spending, and unguessable numbers of one-time events the actual FCF number they give tomorrow could be anything. For 2012, I expect them to continue to be very vague on this subject. As far as I can tell numbers seem to work out with FCF being just under break even, give or take a few hundred million dollars. I know, like that really helps a lot eh?. Nevertheless, many will be listening very carefully to whatever they do say on the subject and how far it is from 'break even' will probably be how it is measured. Q1 free cash flow will be very negative though due to both seasonality and integration spending, of that you can be sure.
Earnings per share - Anybody who claims to know what this will be is probably known by the initials S.P. And while EPS will finally start to really matter to investors soon for Level 3, this quarter the actual number isn't nearly as relevant as the current status of revenue, EBITDA, growth, integration spending, and synergies realized.
Conclusions: I am not of the school of thought that this quarter's results will satisfy anyone. The Global Crossing acquisition made huge sense and will transform the company, as I have said many times. But it will take a few quarters to see it, and for now Level 3 simply has a lot of work yet to do and today's 'now'-focused markets will be impatient. Springtime for Level 3 will be summertime.
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