Level 3 Awaits Its 2013 Sunrise

January 7th, 2013 by · 30 Comments

Several next-generation fiber operators have made the transition to positive earnings per share over the past few years (AboveNet, tw telecom, and Cogent), but none had further to go to achieve it than Level 3 Communications (NYSE:LVLT, news, filings).  But this year the numbers say that at long last it is likely Level 3's turn to definitively end its long run of red ink.

Level 3 Network Snapshot

Last February I made the point that even a miss would win for Level 3, and while 2012 wasn't its breakout year it was plenty good enough for the shift in fortunes I was talking about. Although there are still many moving parts, my own modeling efforts predict that top line revenues will grow to $6.5-6.6B for 2013, with EBITDA growth of greater than 20%, free cash flow of greater than $200M, and of course earnings per share of a quarter to a half dollar with an appreciable quarterly ramp. Such numbers don't require heroic assumptions, merely a relatively passive uptick in organic growth and continued integration progress.

They've spent the year steadily integrating the Global Crossing business, while the question of when meaningful organic growth will start to kick in has dominated the attention of impatient investors. In December reliable sources tell me they began to accelerate the long-delayed RIF activity associated with consolidating facilities and NOCs and such, with Southfield MI feeling some pain. There will be more of that, but it seems clear that the heavy lifting is done or soon will be, and they have probably finished (or nearly so) achieving the first 2/3 of the $300M synergies by the end of last quarter. Yet it's important to note that the $300M was just a preliminary, conveniently round numerical target. There are more savings available, and while the rate they are achieved will surely decelerate it will be meaningful for many quarters to come whether they break it out or not.

But the most important change this year for Level 3 will simply be the flexibility they gain by not having a debt load that is so outsized compared to their operations as to distort their decisions. When you're making a profit despite the debt, which they should start doing by summertime, you simply have more options to generate the growth that everyone is expecting. And only growth can turn those incremental margins they have been pointing to for a decade into real money.

A more reasonable balance between their balance sheet and operations will also have the effect of making M&A less urgent and hence more opportunistic. They no longer need to chase scale to survive their debt, which is why I think they'll be looking at more strategic purchases like Colt than for more US synergies. While they're surely less hungry, they will have the opportunity to raise money at cheaper rates.

Whether or not the company's Q4 will be big enough to make the lower rung of their guidance of 20-25% EBITDA growth for 2012 is of lesser importance. I think it will be very close, a 50/50 shot at best that depends on seeing the US enterprise and wholesale businesses pick up the pace. But whether they're a few million short or ahead of that target is rather less of a big deal than the fact that they may finally be ready to banish the negative FCF bogeyman and stand eye to eye with their debt.

The company's stock price has risen of late, but it's important to note that they still trade at less than 7.5 times projected 2013 EBITDA levels - a substantial discount to historical levels and to the prices paid for most of the fiber businesses bought in the past few years.

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Categories: Fiber Networks · Financials · Internet Backbones

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30 Comments So Far


  • Anonymous says:

    It seems like getting to free cash and earnings positive would be pedestrian but I view it the same way you do – wow. finally.

    • CarlK says:

      Fifteen years of high risk, high stakes poker to witness “pedestrian.”

      And, a coin flip at making their 2012 EBITDA Guidance soon to be determined.

      I continue to be grateful for such tempered views as I take a “walk” around the park this morning.

  • en_ron_hubbard says:

    Rob,

    Good summary. A few additional observations:

    — the credit market already believes the company’s debt issues are behind them as witnessed by terms obtained in recent financings.
    — using very conservative top line growth assumtions (4-5% p.a.) over the next five years results in a 35% CAGR in FCF in the same period, from ~$200 million in FY ’13 to $1 billion in 2018, which represents $4.50 in FCF/share. Neither of the close comps offer that sort of profile.
    — As you point out, this does not require heroic performance, it is mechanical and it’s how the numbers work

    I would be disappointed if they miss on Q4 EBITDA only because they reiterated, but it wouldn’t change my mind on the bigger picture.

  • CarlK says:

    My “walk” in the park was rather refreshing this morning. Such temperance surrounding this stock up to and through January 15th–just eight calendar days, and six more manipulative trading days–remains very good, very good indeed for Level 3!

    I continue to see 6.37M shares or nearly 3 percent of the current shares outstanding being salvaged if Level 3 pays that $172M convert balance off in cash in lieu of shares.

    I have another prediction outside of MNA for this board also, when thinking about the manipulative criminals who sometimes make market or influence “trading” in this security.

    When “stevie” Cohen of SAC starts serving his time in the slammer with respect to justice being served, the Level 3 stock price with TRIPLE from wherever it is at that time!

    Lastly, Rob, I notice there is another CarlK appearing on the Xo thread this morning. There can’t be TWO of US, can there be? God forbid!

    You should really correct that “flaw” in your “user name” bag of tricks behind the scenes. imo

    • en_ron_hubbard says:

      I noticed the “other” CarlK and immediately identified him as an impostor– he was concise, to the point, and understandable. have no fear, you will not be mistaken for him/her.

      • Idaho says:

        en_ron………..that was funny!!! ; -)

        • CarlK (imposter) says:

          Sorry, that was me. I was just so tired of illogical tirades that i hijacked his name. Alas he was back … more confusing than ever. Sometimes i wonder is he or she really just that confusing or is there someone super smart who just doesn’t convey the crisp, concise message.

          • en_ron_hubbard says:

            Please keep it up. We need an alterantive CarlK.

            • CarlK says:

              No Enron! What we need today is for “The Storey” to turn dour or at least remain tepid like this board–you are neither hot nor cold just LUKEWARM–in order that JEFF doesn’t talk the stock up for those remaining usury artists desperately seeking to get their paws on 6.37M “convert shares!”

              That’s my alternative “STOREY,” you SOB! 🙂

              http://finance.yahoo.com/news/level-3-present-2013-citi-130000357.html

              • CarlK (imposter) says:

                Message translation:

                I really hope that the upcoming Citi Media, Internet & Telecommunications event for which Jeff Storey goes better than expected. All the best to them.

                • CarlK says:

                  Big (3) is ready for “opportunistic” acquisitions without any hiccups from Global Crossing–integration has been smooth–while really focusing on the size, scope and scale of the factory which continues growing without acquisitions at the same time protecting their “customers” from cyberspace attacks including those hacks like “ANONYMOUS” over here and elsewhere, all while maintaining one of the largest CDN’s in the world(Poor Akamai). 🙂

                  Initially, wholesale clients helped them get to network scale to leverage their huge factory footprint to ENTERPRISE.

                  Jeff is focusing on his DISTANCE FORMULA for “bit mile peering” arrangements. Why wouldn’t the largest, most advanced IP Network in the world not charge for DISTANCE!

                  “We don’t sell COTTON CANDY!, and a man can’t be too rich, too thin, or own too much bandwidth!” Jim Crowe

                • Anonymous says:

                  carlk(imposter), if you do not have a day job, please get in touch with Rob immediately b/c I am sure he would be willing to pay for this type of service. In the off-chance he isn’t please publish your paypal account on this board and look for a few anonymous donations.

  • CarlK says:

    Are you sure he/she wasn’t “IT” and “ARTIFICIAL INTELLIGENCE?”

    The MONOPOLY WALLS in last mile CABLE and RBOC Land who you continue to defend, will come TUMBLING DOWN, and when they do this time–SBC previously rescuing Ma Bell– all the King’s horsemen and all the King’s men will not be able to put those HUMPTY DUMPTY’s back together again!

    http://www.kansascity.com/2013/01/07/3998164/att-unveils-5-video-straming-service.html

  • CarlK (imposter) says:

    I can’t respond to the followup CarlK comments to the CarlK (imposter) message translation so i am replying here. To that end see the following message interpretation:

    Level 3’s integration of GC appears to be going more smoothly than prior acquisitions and thus are now prepared again for “opportunistic” acquisitions where it is strategic and appropriate. Although there were initial significant synergies and increased capabilities associated to GC the size and scope of the combined network, products, services and capabilities have provided for additional service capabilities spanning all areas including CDN and managed security services.

    I believe Jeff Storey has a strong message to communicate to the upcoming Citi event where its clear Level 3’s increasing service capability is driving additional opportunity for partnering and business development for both direct and indirect partners, customers and operators.

    In conclusion Level 3 remains poised to strategically take advantage of its increased product and service capabilities to better serve our customers.

  • CarlK says:

    CarlK (imposter), that commentary of yours is awesome! Can I clone you to become me! Can you be doing multiple tasks in communication with five or six people in concert with listening to the live conference like I was also? I felt as though I was conducting a symphony today! 🙂

    Btw, Enron, the board HERO around here, said that Clearwire(CLWR) was only worth $2.90 pps give or take 5-10 cents. I said it was worth four or more, so let the bidding war continue! 🙂

    http://dealbook.nytimes.com/2013/01/08/dish-network-makes-bid-for-clearwire-trumping-sprint-offer/

    • en_ron_hubbard says:

      No, CarlK,

      You did not say it was worth $4 +, you said it was worth $8-10 which is/was moronic. I look forward to the “new CarlK” translating whatever gibberish you might serve up in response.

      • CarlK says:

        The most recent record is on this board for those who want to waste their time and look backwards at what I told you.

        I will say that Crest and Mount Kellett think it’s worth a price range like you are alluding to. They still may be right in this game of “CHICKEN!” Four is fine for me, however.

        I command you to LOOK AHEAD, Enron BlowHard, and ponder another “prediction” I see coming to “LIGHT!”

        Mr. Wang is going to sink the SAC ship! Loose lips, sink ships!

        When this man is finally brought to JUSTICE, the Big (3) ship will sail “THREE TIMES” from whenever the conviction is!

        http://www.businessinsider.com/wang-names-20-more-insider-trader-names-2013-1

  • Anonymous says:

    DISH is not going to get Clearwire. But the activity will, however, help increase their EV by showing they are actively exploring inorganic opportunity. The end game isn’t clear but until we get there its going to be interesting.

    BTW, i actually enjoy the imposter message translations. They are quite an improvement.

  • CarlK says:

    Verily I say to you, Enron Blowhard, an ATHEIST with no stake in the God of Our Universe, “The Level 3 Stock Price will MULTIPLY THREE TIMES soon after “stevie” cohen of SAC is INCARCERATED!”

    Now, if you want to call me out on what I have been saying about Level 3 for many years, it is as true today as it has always been that I believe they will be a triple digit B for billion market cap corp. and bellwether company for telecom and the internet!

    Bring it on, and Goldman still sucks! imo

  • CarlK says:

    One important thing stood out in my mind when Jeff Storey spoke yesterday. It was almost as though I was listening to Dan Caruso’s brother.

    Jeff referenced LVLT’s “capital intensity” to be unbeatable and unstoppable compared to competitors at least in the public domain.

    Quite frankly, as Super Dan knows and has opined on this board, it is probably the gift that keeps on giving when illustrated as a “ratio.”

    Will Big (3)’s Storey along with the help of Krowetonite be able to weaken Super Dan sufficiently, by offering him a high enough bid to ride on The Level 3 Space Shuttle back to Planet Krypton again?

    Lord knows that Big (3) needs SUPER HEROES on board their Enterprise Ship in order to travel to places that no man has ever gone before, so, “Bring it on!” 🙂

  • Jimmy Crowe says:

    Dan is the man, I will resign from Level 3 after Zayo merges with Level 3. Dan knows how to make money for his shareholders, on the other hand I’m a reckless destroyer of capital for my LVLT shareholders. Please fire me Donald Trump. Walter Scott will be happy, as will shareholders. The crowd cheers “DAN DAN DAN YOU ARE OUR MAN!”

  • CarlK says:

    “stevie” Cohen is going downtown with “jimmie” Crowe and Level 3 going uptown threefold from here:

    http://finance.yahoo.com/news/sac-bracing-big-exodus-funds-071600406.html

    Hedge-fund group SAC Capital Advisors has told employees and business partners it is bracing for client withdrawals of at least $1 billion this year—nearly 17% of the money it manages for outside investors—amid intense regulatory scrutiny of alleged insider trading, people briefed on the conversations said.

  • Jimmy Crowe says:

    Lock up Stevie & Jimmie in the Level 3 empty tubes with the white mice and unlock the pent up intrinsic value of LVLT. Ben Graham will set you free.

  • CarlK says:

    What is it about your friends at SEAM especially O. Mason Hawkins which attracts them to greedy bastards like Jimmie Kryptonite Crowe as well as this pedigree smart ass, Aubrey Meretricious McClendon?

    When you find out the answer, stop the flow of money to them, and FILL MY broadband “PIPES” up with fiber and natural gas!

    Chesapeake Energy CEO Aubrey McClendon forfeited a few more perks, but changes the natural gas producer announced at the start of the week apparently have failed to convince skeptics its turnaround effort is moving fast enough.

    http://articles.marketwatch.com/2013-01-10/markets/36254257_1_natural-gas-chesapeake-energy-chesapeake-shares

  • Jimmy Crowe says:

    ValueCarlK, It’s all about the intrinsic value of the business being bought for 50 cent on the dollar. The pied pipper will pay the full price for all the natural gas & bandwidth in Level 3’s pipes. O. Mason Hawkins will hold LVLT until it approaches close to full value, which today is well over $100. He loves buying deep discounted businesses. Management is secondary, although very very important – Jimmy Crowe passed the smell test but he still STINKS!

  • CarlK says:

    LOL! 🙂

  • Anonymous says:

    Legere needs to come back and save lvlt. Biggest mistake was to let him go.

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