The most complicated earnings report among competitive telecoms always comes from Level 3 Communications (NYSE:LVLT, news, filings), and this one is no different. Actually, I take that back, it is different this time. Even as wholesale revenues flagged a bit, enterprise revenues surged mightily to more than compensate - something I've never seen from them before. Here are the numbers in the context of last quarter - the only other comparable one we have since the GLBC deal closed:
|- North America – Wholesale||388||381||Wholesale weak, Enterprise very strong|
|- North America - Enterprise||588||610|
|- EMEA – Wholesale||94||92||Currency effects, overall trend stabilizing.|
|- EMEA – Enterprise||80||79|
|- EMEA – UK Government||50||48|
|- Latin America – Wholesale||35||34||Wholesale weak, Enterprise very strong.|
|- Latin America – Enterprise||133||138|
|Total Core Network Services||1,368||1,382||+1.0% sequential, +1.2% constant currency|
|- Wholesale Voice & Other||211||204|
|Total Comm. Services||1,579||1,586||Inline with expectations|
|Comm. COGS||660||657||Not including integration costs|
|Comm. Cash SG&A||587||587|
|Integration Costs||23||15||Integration spending down?|
|Comm. Adjusted EBITDA||270||327||Includes integration & transaction costs|
|Adjusted earnings per share||-0.62||-0.37||Excluding one-time costs|
|Adj. Gross margin %||58.2%||58.6%|
|Adj. EBITDA margin %||17.1%||20.6%|
|Capital Expenditures||148||138||Accelerating from here according to guidance.|
|Free Cash Flow||103||(213)||Very red, as expected|
Revenue: Enterprise revenues were up 3% sequentially - with strength in both North America and Latin America, while wholesale revenues were down 2% sequentially - taking a hit in every region. The net result was sequential growth of 1.0%, or 1.2% in constant currency for core network services, but the real story lies in just what's driving the divergence between wholesale and enterprise at the moment - I look for more color on the call.
Costs & EBITDA: Integration costs fell to $15M during the quarter, rather less than I figured. That left EBITDA higher, but they offered no color on synergies achieved in the press release beyond a reaffirmation of the $300/$40M in opex/capex they expect to finish with. Further integration details will no doubt be discussed on the call. Gross margins rose to 58.6%, while EBITDA margins rose to 20.1%. They reaffirmed EBITDA guidance of 20-25% growth over last year's numbers, which still implies a fast ramp from here to $400M+ per quarter by Q4.
Capex and Free Cash Flow: I told you the burn number would be big. $213M is definitely that, mostly due to working capital swings and such. I did figure capex would be higher than this, and the company reaffirmed its guidance of capex at 12% of revenue this year. That suggests a big capex ramp in the second half though, as in Q1 it was less than 9%. I guess that starts when they begin building out the metro to Global Crossing's customers.
Earnings: EPS of $(0.66) was a bigger loss than analysts forecast, but did include a one time item of $(0.29) from debt extinguishment.
Conclusions: Revenue trends were good overall, but some color on what lies underneath would help a lot here. The same goes for the integration.
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