Level 3’s Q2 Posts Big EBITDA, but Revenue Not As Strong

July 25th, 2012 by · 27 Comments

Level 3 Communications (NYSE:LVLT, news, filings) reported its Q2 earnings this morning, keeping its promise on EBITDA growth with a very nice number that out outpaced my model easily, but with lighter than expected revenues in part due to currency fluctuations.  The integration still appears to be going well, requiring less integration spending for each dollar of synergies than anticipated.  But the macro economy definitely did not help this quarter.  Here's a table of Level 3's numbers in the context of the past two quarters:

Q4/11
Q1/12
Q2/12
Comments
 - North America – Wholesale 388 381 382 Enterprise revenues again strong,

Wholesale treads water

 - North America - Enterprise 588 610 621
 - EMEA – Wholesale 94 92 91 UK Government Revs take big hit
 - EMEA – Enterprise 80 79 81
 - EMEA – UK Government 50 48 42
 - Latin America – Wholesale 35 34 33 Currency effects wash away 2.3% sequential

constant currency growth

 - Latin America – Enterprise 133 138 136
Total Core Network Services 1,368 1,382 1,386 +0.7% constant currency
 - Wholesale Voice & Other 211 204 200
Total Comm. Services 1,579 1,586 1,586 Inline with expectations
 
Comm. COGS 660 657 648 Not including integration costs
Comm. Cash SG&A 587 587 568
Integration Costs 23 15 17 Integration spending under my

model's projections again

Transaction Costs 39 - -
Comm. Adjusted EBITDA 270 327 353 Bigger than anticipated, keeps guidance on track
Adjusted earnings per share (0.62)
(0.37) (0.29)
 
Adj. Gross margin % 58.2% 58.6% 59.1%
Adj. EBITDA margin % 17.1% 20.6% 22.3%
 
Capital Expenditures 148 138 180 Accelerating from here according to guidance.
Free Cash Flow 103 (213) 3 Positive, just barely!

Revenues: In North America, enterprise revenues continued to march upward, but wholesale revenues just tread water from the prior quarter - apparently due to weakness in core VoIP services.  Overseas it was the UK government side of things that sent Europe in the wrong direction, while currency effects turned what would have been steady 2.3% Latin American organic growth into a sequential decline.  Level 3 says order activity picked up during the quarter, which bodes well for a better second half on this front.  But if they could have posted a bigger revenue result this quarter they might have changed a few minds.

Costs & EBITDA: The EBITDA number was big, up $26M sequentially and still on track to beat the lower end of guidance of 20-25% growth over the 2011 pro forma number.  Integration spending of $17M was still lower than I expected, as the company continues to take its time while staying on track toward their overall synergy goals.  In order to make EBITDA guidance, the Q3 and Q4 numbers must be something like 375 and 400.  SG&A and COS both dropped nicely this quarter, giving Level 3 its big EBITDA number despite the light revenues.

Cash Flows & Capex:  Capex rose sharply to $180M, which could reflect a pickup in sales or the arrival of integration capex from bringing GLBC sites on-net now that the networks are fully linked up.  Probably both.  Free cash flow of $3M was positive due to favorable quarterly fluctuations in net cash interest expense, although I wouldn't read too much into that given the usual variability in this number on a quarterly basis.

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27 Comments So Far


  • CoCo says:

    Down 11% anyway. The schozophrenia and fist flailing continues for Level 3, in my opinion.

    But I have a failproof plan they haven’t tried: buy another company, say you integrated it without doing jack other than having your normal monthly layoff, and then lower prices on transport even more.

    Oh, wait…

  • Anonymous says:

    Hey ddm08, you out there? Care to comment now on how wonderful your stock is?

    You sure showed me what great investing prowess you have.

    I know a place you can buy some Spanish gov’t bonds real cheap.

  • Anonymous says:

    At this point in past Level 3 history Kevin Ohara was demonized for his failure and fired , Sunit Patel rewarded with new contract and teflon Jim Crowe chugged along very happily and replaced ( or allowed ) ALL his long time friends and co workers who made him wealthy at MFS and started Level 3 with him with to be replaced with his new best friends Jeff Storey and his leadership team ( Wiltel). 1st from pure integrity to allow the whole team that built level 3 ( and MFS ) to take the bullet and get systematically RIF while he continued to make a fortune says alot about Mr Crowe. 2nd at what point does he take a bullet for the continued an ability to organically grow, 3rd please dont take Mr Crowe out and replace with Jeff STorey and team, it is now 4 years and proven they are not successful at operating a large complex company and capable and turning this ship around. LEVEL 3 NEEDS BIG TIME leadership overhaul with Jim Crowe, Jeff Storey ( and team) replaced. not many chances left and to shuffle same team and promote the old boyz as that shuffle happens will prove to be a failure. Who that new leader should be ( and his team of leaders) I dont know but I know it is proven that Crowe, Storey are not the go forward team. Can Notebart come out of retirement along with his turnaround team from Qwest.

    • Anonymous says:

      Nice post. I’d only tweak one small point. I think LVLT needs to look outside telecom, so thumbs down on Notebart.

      Earlier in the year (February), I posted the following comment here on ramblings about LVLT’s need for an executive overhaul:

      “They need a fresh non-telecom set of eyes to chart their future in the same way IBM brought in Lou Gerstner from Amex Travel Services to chart theirs….merely recycling old telecom executive talent will not radically change Level 3′s course.

      This company is now 2x bigger (in revenue and workforce) than anything Jim Crowe has ever run, including Crowe’s MFS days.

      Unfortunately, the bungling Level 3 board of directors lacks the gumption to bring in fresh executives, for example, from Caterpillar, IBM, M&M Mars, GE, etc. So instead investors get more of the same thinking, strategy, tactics, marketing, service delivery, bundling, and so on.

      An executive appointment from a strong outsider would send a meaningful signal to investors, customers and stakeholders that Level3 plans to grow its business beyond the traditional models currently tweaked from time to time at the edges.

      Too many of us in this business think it’s impossible for an outsider to step in and understand it…”

  • B says:

    It has gotten to the point I feel and hope they just get bought out. I honestly don’t see how anyone can run and utilize these assets as bad as Crowe & Co. have done.

    • beetlejuice says:

      Yes, it is little disheartening lately in the field. Everyone wishing for some great national players to emerge other than AT&T and Verzn. But who is left? CenturyLink is AWOL on a lot of things, XO deeply disfunctional and obviously just looking for a good price point and date, Level 3 can’t pull a successful quarter and no one calls them on it, TWTC could do it but seems totally catatonic (their sycophants call it “conservative”, lulzers).

      I guess we all have to convince the cableco’s to hurry up and figure it out!

  • Carlk says:

    Rob, it appears that there are no tacit agreements by Wall Street in accepting constant currency metrics to excuse reduced dollars in translated sales to the income statement or U.K. contracts that were “expected to be lost” when looking for “growth.”

    Donna had done that work nearly a year ago, but insufficiently in the form of stock price as is being proven today.

    From my perspective, on the other hand, Wall Street remains the crux of the problem and not until they are snuffed out from their highest perches, will there be a chance for peace and prosperity around the globe.

    In the case of both Netflix and Level 3 today, Wall Street continues to prove that it has no respect for companies investing intelligently to grow businesses around the globe, assuming they defer profits while doing so.

    There is something inherently wrong with what Wall Street stands for.

    I will say that it remains good to hear that Netflix remains a very valuable, important customer of Level 3’s today and tomorrow!

    http://investorvillage.com/smbd.asp?mb=444&mn=112732&pt=msg&mid=11950576

    • Anonymous says:

      Carlk, you sound like Dick Fuld blaming his Wall Street brethren for Lehman’s problems. It turns out that Fuld’s problems were his own doing and Wall Street merely held a magnify glass to them. The repo 105 were his doing, or should I say undoing. The over-exposure to RMBS and CMBS were decisions he made.

      Before you attribute the sell off to a Wall Street’s short and distort program, shouldn’t you ask if there’s good reason for it?

      When it comes to LVLT we’re always told to look ahead. But the rear view mirror is full of wreckage of past quarterly misses. So why should investors trust what LVLT management says is in front of the windshield?

      The EURO crisis has been with us for 3-4 years. With eyes wide open LVLT purchased a company with large exposure there. Clearly, they overpaid for the European risk they purchased.

      The IMF, Brazilian officials and economic forecasters of all stripes have repeatedly adjusted Brazilian economic forecasts down throughout the year. Why should investors believe that LVLT’s LatAm business will be unaffected by the lower forecasts?

      Perhaps the current LVLT tea leaves don’t warrant a guidance revision (as Crowe said on this morning’s call), but it’s not hard to imagine looking through the rear view mirror in October when LVLT reports Q3 earnings and say there’s another wreck behind us.

      (A version of this was posted in comment section on another website.)

      • Anonymous says:

        I will also add that for those who think the exchange rate issue is meaningless and merely a reporting problem, I remind you that much of LVLT’s debt is dollar denominated while much of the cash generation comes from Pounds, Euros and Reals. If LVLT uses cash from operations in Europe and LatAm to service the debt in dollars, the foreign currencies first must be converted to dollars. UNLESS LVLT IS FULLY HEDGED (and even hedging costs money, it’s not free) the cheaper foreign currencies impact long term cash flow. It’s like buying a gold bracelet for your wife when Gold is $2k an ounce vs. $1k an ounce.

        • Carlk says:

          Anonymous, why don’t you notify the board what you should already know because if you were listening, you had been told by the CFO that Level 3 doesn’t do what you’re negatively implying overseas, and is “fully hedged!”

          Back to shorting now!

          • Carlk says:

            Anonymous, why don’t you also teach the rest of your Fancy Pants audience about the beauty of CASH which was collected UPFRONT and booked years ago overseas, being reduced in the “foreign deferred revenue” bucket that continues to be amortized for the life of those previously sold IRU’s, i.e. non cash acctg.

            Do you see any 2K per oz. gold bracelets that you were previously selling from your wife’s jewelry box that are now costing you more money as a result of “product recalls” which are causing you to have to pay more money from those original buyers, or are you sure that the 2K per oz. gold was SOLID GOLD with cash having been placed in your bank acct. long ago, with no corresponding effect today tied to “exchange rates” i.e. a non event? 🙂

            Understanding, of course, that this is mostly, if not all, legacy Global Crossing!

            Sunit S. Patel

            The second question was on deferred revenue. So probably, about 1/2 of the decline in the deferred revenue was FX-driven since we have deferred revenue balances outside the U.S. in other currencies. So that was 1/2. The other 1/2 was we had amortization exceeding cash collections on IRUs. As you know, the IRU revenue stream is generally lumpy in nature. Overall, we don’t really — putting FX aside, we don’t really expect much in the way of change to the deferred revenue or measured if you look on a year-over-year basis. The only one difference outside that we’ve talked about a couple of quarters ago is that we certainly are not doing the kind of prepaid high-speed IP and other contracts that Global Crossing used to do. We don’t think those are commercially in our best interests so we were not doing both that. But in general, the IRU business is lumpy. We don’t expect too much change in the deferred revenue balance year-over-year, excluding the effects of FX.

      • Carlk says:

        You make your argument for destroying value sound so appealing, so prudent, sensible and plausible while referencing a plethora of risks threatening to derail mankind as a whole through eyeglasses such as yours. Chicken Little has absolutely USURPED WRONG STREET!

        Spoken like a professional short with much “pricing influence” behind him or her, I will give you credit for your effort there.

        With eyes wide open, the Global Crossing purchase became opportunistic by them laying down their swords in light of said risks knowing the combined synergies and cross selling opportunities including the U.K. Govt. where they stand today, would result in more reward than risk in the final analysis.

        For the most part, today’s number presentation with careful attention being paid to the favorable ongoing integration as well as accelerated synergies, should have made investors happy knowing all the rest!

        In the meantime, the incumbents are on notice that The Battle of Stalingrad is continuing at a feverish pace; one ENTERPRISE BUILDING at a time. Strangely enough, Level 3 is The Russians in this epic confrontation revisited, and their SHARP SHOOTERS are hungry to see the dead bodies of their enemies in telecom land.

        This will be better for society as a whole, a society whose businesses are committed to servicing and entertain them, because when Level 3’s work, err INVESTMENTS are complete; superior products and services along with better price points will enhance quality of lives everywhere.

        If you don’t stop looking behind, you will go blind.

        • Carlk says:

          “One Enterprise Building at a time…..” Level 3’s scope, size, reach and scale will ensure success. The BLIND like Anonymous will NOT SEE it coming because they’re always stuck with their heads up their arses, oops, I mean looking in their rear view mirrors while crashing into the trees and missing the beautiful forest in front of them.

          Michael Rollins – Citigroup Inc, Research Division

          Just a couple, if I could. Firstly, could you talk a little bit more specifically about the enterprise segment across regions?

          James Q. Crowe

          With respect to enterprise, there are a number of answers to your questions. What is it that’s driving enterprise growth? I made a comment at the start. I think Jeff underlined and made the same comment, which I’ll repeat in summary. And again, we encourage to talk to customers. We hear this uniformly and we’ve tested it not only through our own context but through third parties. We’ve retained, asked the same set of questions. There is a big opportunity for a company that has the kind of perceived strength financially, the size, the reach, the network reach that the incumbents have but is actually investing in the wireline business, growing, investing, adding new products, adding new services. We think that’s an almost unique opportunity for Level 3 given our scope and scale, which gives nothing up to the incumbents. They’re clearly more dense in their service territories, but if you look at the kind of footprint we have and the almost $40 billion of gross property plant equipment that was invested in our infrastructure, we give up nothing to the incumbents. And we think our product portfolio tends to be more of what customers want today and far less of legacy services that have to be managed down.

  • Carlk says:

    I mean, it takes an awful lot of hubris for a scoundrel like this to “reverse courses” while suggesting a repeal of a prior repeal, after having benefited personally by raping and pillaging global citizens along with their lands!

    Do you get my drift, Fancy Pants! Off with their heads!

    http://money.cnn.com/2012/07/25/news/economy/sandy-weill-banks/

    • STAYONTOPICPLEASE says:

      Carlk, can you please keep this dialog on topic? The issue is LVLT’s reported earnings.

      There’s 100s of blogs out there where you can put your two cents in about Sandy Weill’s comments about Glass Steagall.

      • Fancy Pants says:

        Hah, he is on topic in his mind.

        Anyway, next quarter
        next quarter
        next quarter
        next quarter
        next quarter
        next quarter
        next quarter
        next quarter

      • Carlk says:

        Level 3’s price/value is DICTATED by The Wall Street Machine. Sandy Weill is connected to that Machine including being an architect!

        We are dealing with the biggest criminal HYPOCRITES known to mankind with power to cast judgment on ENTERPRISES which are attempting to add VALUE to SOCIETY. During the process, they steal jobs and lifestyles while oftentimes emboldening bad business models otherwise.

        Their response to Level 3’s report today, makes my claim against this CRIMINAL ENTERPRISE ON TOPIC! The same applies to Netflix, if you evaluated their numbers!

        Off with their HEADS! imo

  • B says:

    Call me crazy but I would say that puny .7% top line growth caused today’s fall. But hey, maybe it’s just me.

  • Dan says:

    Is harvey gone from lvlt or dan e back to run the show finally?

  • formerGCenjoying says:

    As a former GC sr. manager, I have to admit, I’m truly enjoying the beating LVLT stock is taking. The arrogance of the managers at LVLT is amazing. They came in as cocky as can be — as if they were google, GE or apple instead of a company that hadn’t had a single successful integration from their countless acquisitions — thumbed their noses at sr. and jr. GC managers with the plan of dumping as many as they could.

    They talked about selecting the very best from each company but the small print was that you had to move to one of their chosen locations which would force spouses to give up jobs and, worse, force people to sell homes that were obviously under water. In other words, they had no intention of keeping you.

    The group lovefest they have with one another out in broomfield insulates them from fresh ideas.

    The two GC executives who made millions on the merger were given generous relocation packages to stay. One of those remaining execs ran the UK when all the government contracts were lost. I believe he’s currently Level 3’s chief marketing officer. Seems that he still has the magic touch.

    Leaving was the best thing that ever happened to me and I’m getting the biggest kick watching them fail.

    To all my former GC colleagues, CHEERS!!!

  • Carlk says:

    It’s always better to place a face behind the name of the person you are slamming, don’t you think? Where is your picture?

    http://www.level3.com/en/about-us/company-information/management-team/anthony-christie/

    Sorry that you almost lost your home because your wife’s income was crucial to your well being assuming that you crossed over the Level 3 bridge when you had the chance.

    You should have earned more money in your telecom area of expertise, and that may be why you’re an outsider finding glee in Level 3’s stock price, a data point that is oftentimes non reflective of reality; be it success or failure.

    There is no efficient market theory here! imo

  • Mp says:

    Time to get the gc crew back to drive growth. Long live john legere

  • Mp says:

    Imagine the one two punch of legere and sunit. Amazing

  • formerGCenjoying says:

    well, that’s certainly a step above jeff skilling and scott sullivan but perhaps LVLT could aim a bit higher.

  • Tony says:

    I just can’t get past the shares purchased by STT in May. Why would they do that?! I think it is because they know something, maybe about the quality of that funnel filling up and the 2nd half of the year.
    Makes sense that in May the 17% increase no matter how anyone wants to define it, was making itself known. STT purchases in May, knowing there is going to be a revenue miss because of the UK. They know the share price is going to get smashed. They know Southeastern Asset Management and they certainly know about the perceived issue with the shorts. A May purchase gives them plausible deniability on any type of insider trading if it ever came up. After all, why would they purchase in May with their insider knowledge, they have currently lost 25% of the value of that investment. Someone please bring this over to the IV board, I would like to see it discussed, some smart people on that board and their level of disgust has got me more worried than the current share price.

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