Materially higher growth rates for its core network services continued to prove elusive for Level 3 in the third quarter. Revenues and earnings per share both came in a little shy of analyst estimates in this morning’s quarterly report, but the company nevertheless maintained its guidance for full year EBITDA, free cash flow, and revenue growth trends.
|– North America – Wholesale||388||381||382||381||Enterprise growth slows to 1% sequentially, wholesale still flat.|
|– North America – Enterprise||588||610||621||627|
|– EMEA – Wholesale||94||92||91||89||Europe is still not pretty, though enterprise revs grew in constant currency terms|
|– EMEA – Enterprise||80||79||81||80|
|– EMEA – UK Government||50||48||42||41|
|– Latin America – Wholesale||35||34||33||36||The bright spot, and it was even brighter in constant currency terms.|
|– Latin America – Enterprise||133||138||136||141|
|Total Core Network Services||1,368||1,382||1,386||1,395||Up 1.1% sequentially in constant currency, better but nothing to write home about yet.|
|– Wholesale Voice & Other||211||204||200||195||Downward trend as usual.|
|Total Comm. Services||1,579||1,586||1,586||1,590||A bit light compared with analyst estimates|
|Comm. COGS||660||657||648||642||Synergies still kicking in quite nicely.|
|Comm. Cash SG&A||587||587||568||558|
|Integration Costs||23||15||17||18||Integration proceeding at a similar pace|
|Comm. Adjusted EBITDA||270||327||353||372||Guidance implies above $405M in Q4 now.|
|Adjusted earnings per share||(0.62)
||(0.37)||(0.29)||(0.26)||Analysts had projected a lower loss than this, but not me.|
|Adj. Gross margin %||58.2%||58.6%||59.1%||59.6%|
|Adj. EBITDA margin %||17.1%||20.6%||22.3%||23.4%|
|Capital Expenditures||148||138||180||227||Capex surged to 14% of revenue in Q3|
|Free Cash Flow||103||(213)||3||(157)||Even higher net cash interest than expected|
Revenues: Latin America saved Level 3’s quarter, turning in big growth numbers (and bigger in constant currency terms) that carried both North America and Europe. North American wholesale continued to go nowhere, while enterprise revenue growth slowed down a bit. Europe was still not fun, although it would have been more painful if UK government revenues hadn’t held the line much better this time. Level 3 says that Q4 revenue growth will be another step upward, but one hopes it will be a bigger one this time!
EBITDA: Cost savings continued to be impressive, as more synergies kicked in. Particularly impressive was the SG&A number, which came in much lower despite higher seasonal energy costs. EBITDA of $372M was a bit under my guess, but still theoretically in range of the company’s guidance. To reach 20-25% growth above the $1.216B base they quoted will require $407M or more next quarter. That will require not just synergies but a material amount of CNS revenue growth.
Free Cash Flow: Cash burn of $157M during the third quarter was higher than anticipated, mostly due to even higher cash interest requirements than I guessed, a big surge in capex, and a negative working capital bias. Level 3 says that in aggregate the last three quarters will be FCF positive, which implies that Q4 will see cash generation of $155M or more.
Conclusions: I doubt the market will be terribly happy here. This was probably the minimum result Level 3 could have checked in with and still maintain its current stance. Synergies still appear to be working faster than planned, but better growth than 1.1% sequentially will be needed to change minds. The macroeconomic situation isn’t helping much of course, but hopefully the traditionally stronger Q4 quarter will kick things off.
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