Level 3 Sees Faster Growth, But Just Barely

October 24th, 2012 by · 8 Comments

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.

Q4/11
Q1/12
Q2/12
Q3/12
(actual)
Comments
 - 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
Transaction Costs 39 - -  -
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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Categories: Financials · Internet Backbones

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8 Comments So Far


  • ABC says:

    What an absolute turd of a company and management. And this was supposed to be a transformational acquisition of glbc…lol.

  • Anonymous says:

    Though I find you usually favorably disposed to level 3, I think you may have been a bit harsh here. The company was guiding to better than 1% 2H12 rev growth. With 3Q coming to even ever-so-slightly above that, with seasonality coming their way you would think they are going to hit the most contentious point of guidance of >1% 2H rev growth which was highlighted by all the focus on the ever elusive funnel.

    You toss in the capex being spent likely enough to ensure that topline, finally a secondary growth driver outside of enterprise in LatAm that was previously thought to be another GLBC myth and I think at a nice discount to TWTC on NTM ebitda and a huge discount on fwd FCF yield – the mkt may start to slowly appreciate these results upside synergy potential aside.

  • CarlK says:

    I would like to see Uncle Warren add The Big Bad Cables as well as satellite companies into his assessment of too hard to know what they will look like in five years. That’s “SHORT ENOUGH TERM” for Wrong Street to get on the right “INTERNET TRAIN,” isn’t it? IMO

    http://finance.yahoo.com/news/buffett-no-global-economy-slowing-114005660.html

    He rejected Joe Kernen’s suggestion he buy shares in Verizon (VZ)or AT&T (T) because he doesn’t know what they will “look like five to ten years from now.”

    On a side note, the best news from (3) this morning seems to be contained in their “Business Outlook” including their ever decreasing aggregate interest expense for that Mother Debt Load which was needed to create $40B in cost NEW PP&E to RIDE tomorrow’s INTERNET TRAIN!

  • Internet Train Wreck says:

    Did not get an overly optimistic vibe from the conf. call concerning the next two quarters. It seems as though management echoed Uncle Warren except the time frame is 1-2 qtrs. The revenue growth is still heading to the competition while LVLT still struggles to figure out how to grow revenue and train a sales force.

    Any confidence to meet the guidance in Q4?

  • Anonymous says:

    well…i guess we’ll have to wait a few more quarters for the cash generating machine to kick-in.

    Someone above used the term turd….i think that says it all.

  • Mike B. says:

    Despite the back-slapping about ramping up revenue growth from 0.7% QoQ to 1.1% QoQ, I found it to be more of the same – “wait till next year”. The best sales job LVLT has ever done isn’t to a customer, it’s to the Board that keeps believing in what Crowe is selling. Thought the $1.0 billion annualized capex spending was out of control for a company still losing money, +10 years in existence, and after all the acquisitions – seems irresponsible to me.

    • beetlejuice says:

      “The best sales job LVLT has ever done isn’t to a customer, it’s to the Board that keeps believing in what Crowe is selling.”

      Amen, its quite amazing, honestly. On the other hand, you have to see it like a really heavily invested gambler: the more they up the ante, the harder it is to simply back out and cut your losses – so you keep pushing the bet up.

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