Fiber Earnings Primer: tw telecom, Level 3

February 11th, 2013 by · 8 Comments

Over the next 30 hours or so, two of the USA's largest competitive fiber operators will feature their fourth quarter numbers: tw telecom and Level 3 Communications.  Given that Integra and Zayo didn't offer up any negative surprises, the economic playing field is probably fairly stable.  Here's a preview of what I expect from both companies' numbers:

Steady as usual at tw telecom - You can generally set your clock by the revenue and EBITDA growth at TW Telecom (NASDAQ:TWTC, news, filings), and this quarter isn't likely to be much different.  They'll see roughly 2% sequential growth with 37% EBITDA margins while adding around 500 buildings to their network and seeing churn below 1%.  As costs tend to step up in Q1, margins usually peak in Q4 so the EBITDA delta will likely be higher this quarter.  I will be looking to hear of any change in the company's M&A stance or of in its expansion plans - which have been exclusively toward depth for some time now.  Here is a quick chart of my guesses in some context:

($ in millions) Q4/11 Q1/12 Q2/12 Q3/12 Q4/12
(my guess)
Comments
- Data & Internet Services 171.6 176.8 182.5 189.2 196 +3.5%, their growth engine
- Network Services 85.4 84.8 83.0 81.3 81 trend is slowly down
- Voice Services 86.7 89.6 91.0 91.1 92 +1% growth
- Intercarrier Compensation 7.6 7.6 8.0 7.5 7.5
Total Revenue 351.5 358.9 364.5 368.9 376.5 A hair above the street
M-EBITDA 128.1 131.8  134.0 136.5 140
M-EBITDA Margin 36.3% 36.7% 36.8% 37.0% 37.1% this number usually peaks in Q4
Earnings per share 0.11 0.13  0.13 0.14 0.15 inching upward
Revenue Churn 0.8% 1.0% 0.9% 0.8% <1%
Capital Expenditures 86.6 79.1 80.8 83.9  ~80-85
On-net buildings added 566 467 462 552 450-550 continuing the present trend
Free Cash Flow 25.6 37.3 37.7  37.2 ~35 no surprises

Growth & EBITDA Guidance Loom Large at Level 3 - As Level 3 winds down the first stage of the Global Crossing acquisition, there are several questions for which Q4 results will be carefully dissected.  Did they make their 2012 EBITDA guidance?  Is there enough revenue growth there to give us confidence about 2013?  And are they really on the verge of becoming sustainably EPS positive later this year, 15 or so years since the company was little more than a twinkle in James Crowe's eye?  If the answer to those three questions is yes, then even the most jaded of long term investors will want to party.

However, I'm going to go with two out of three ain't bad.  Their EBITDA guidance of 20-25% growth over the prior year still looks tough to me, and I'm going to guess they miss the necessary EBITDA of $406M by a just a hair.  But the revenue growth and the EPS trend will balance that out and make 2013 look quite interesting.  I'm not expecting anything huge on the revenue front this quarter, just an improvement over last quarter's step up in core network services.

I will be listening for any discussion of additional synergies from the Global Crossing integration, as there could be quite a bit more after the first $300M are achieved.  I will also be listening to their comments on the M&A environment, specifically what they think of opportunities across the Atlantic and the Caribbean.  I expect no change to their stance on growth, aiming for a return to 2% sequential quarterly CNS growth in a few more quarters but not yet.  I also expect them to remind us that Q1 cash burn always sucks, but I'm hoping they'll forecast 2013 to be materially FCF positive.

Again, here's a quick chart of my guesses in some context:

Q4/11
Q1/12
Q2/12
Q3/12
Q4/12
(my guess)
Comments
 - North America – Wholesale 388 381 382 381  383 Enterprise growth accelerates to 2% sequentially,wholesale still flat but seasonally up.
 - North America - Enterprise 588 610 621 627  640
 - EMEA – Wholesale 94 92 91 89 90 Improvement in wholesale, enterprise offset byfurther UK government weakness
 - EMEA – Enterprise 80 79 81 80 81 
 - EMEA – UK Government 50 48 42 41 39 
 - Latin America – Wholesale 35 34 33 36 37  Faster growth here, but there may be lumpiness.
 - Latin America – Enterprise 133 138 136 141 145
Total Core Network Services 1,368 1,382 1,386 1,395  1,415  Up 1.4% sequentially, though I'd like to see more.
 - Wholesale Voice & Other 211 204 200 195  190 Downward trend as usual.
Total Comm. Services 1,579 1,586 1,586 1,590 1,605  A bit light compared with analyst estimates
 
Comm. COGS 660 657 648 642 638 Synergies more than offsetting increasesfrom revenue growth
Comm. Cash SG&A 587 587 568 558 548
Integration Costs 23 15 17 18 15 Spending less perhaps to help make EBITDA guidance
Transaction Costs 39 - -  - -
Comm. Adjusted EBITDA 270 327 353 372 404 Up 19.8% vs 20-25% guidance
Adjusted earnings per share (0.62)
(0.37) (0.29) (0.26) (0.15) Next quarter this goes to a loss of a few pennies.
 
Adj. Gross margin % 58.2% 58.6% 59.1% 59.6% 60.2%
Adj. EBITDA margin % 17.1% 20.6% 22.3% 23.4% 24.9%
 
Capital Expenditures 148 138 180 227  200+ Higher is better, assuming it's success-based
Free Cash Flow 103 (213) 3 (157) 150-200 Q4 is their big FCF quarter.

 

 

 

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8 Comments So Far


  • CarlK says:

    Do you think “Help me Donna” will get “Sunit to Sing” about the currency wars taking place, with specific reference to this VZ CF, and what he has done or is doing to take that valuable CACHE out of that DICTATORSHIP with stronger “dollars”???

    Level 3 to THIRTY PPS! imo

  • TC TEEDUB says:

    You forgot LOL

  • CarlK says:

    Not for Enron’s premium CLEC twtc, I am sorry to say. The joke is on them today, and will carry through tomorrow as well unless somebody “raptures” them up versus just eating their lunch in the marketplace. imo

    The Company expects low first quarter sequential revenue growth due to a $2.2 million fourth quarter customer revenue settlement that will not recur,……..

    Read more: tw telecom Reports Fourth Quarter and Full Year 2012 Results – FierceTelecom http://www.fiercetelecom.com/press-releases/tw-telecom-reports-fourth-quarter-and-full-year-2012-results#ixzz2KdPc4bn2
    Subscribe: http://www.fiercetelecom.com/signup?sourceform=Viral-Tynt-FierceTelecom-FierceTelecom

    http://www.rttnews.com/2054951/tw-telecom-inc-twtc-is-pulling-back-after-q4-miss.aspx

  • en_ron_hubbard says:

    CarlK,

    You don’t really read these releases do you? If you do then I am gobsmacked by your lack of reading comprehension. TWTC’s numbers were right around consensus and, particularly in enterprise and data, the growth trend continues. Some might focus on the well explained reason why Q1 may fall a smidgeon short– let them. The story hasn’t changed and they continue to exceed most other alternative carriers in organic growth/margins and predictability.

  • CarlK says:

    Oh, I read em, Enron. It may just be that their levered FCF number off by fifty percent according to some expectations might be the sticking point. Or, maybe it was that their 8 percent yoy M-Ebitda growth rate compared to their yoy sales growth rate was too paltry considering their very low “revenue base” versus one other.

    If this POS is worth more than thirty pps–your long dated babble–Level 3 is worth more than $100 pps!

    We shall learn more tomorrow, and I will shudder if Big (3) dares to pay up your premium for this slow burn twtc story where “access costs” are increasing as well. imo

  • en_ron_hubbard says:

    CarlK,

    FCF did not miss by 50% and was right around estimates. The two street estimates I checked, they beat MS FCF est. by 7%, and marginally missed the DB est by $2 million. Any weakness tomorrow will be related to the Q1 guidance and will be temporary. TWTC is not a POS as you claim– btw, what an infantile view.

    Part of your issue (actually issues) is that you are married to LVLT and see everything through that prism. I know you don’t manage OPM, I can only hope you don’t try and manage your own.

  • FCF was lower than I thought mainly due to the capex boost. I hadn’t expected they’d move so quickly on the sales/support headcount additions either – perhaps they were taking advantage of the integration-related layoffs elsewhere in Q4 (L3, Earthlink, Windstream) to quickly bring in the bodies.

    • en_ron_hubbard says:

      In terms of Q4 capx you were not alone in underestimating, and since the majority of that is success based it must be viewed positively along with the higher Capx guidance for ’13. I doubt the headcount increase was opportunistic– rather a desire and reaction to an ability to provision higher levels of sales.

      The stock may get hit this morning for no good reason but L/T that is of no consequence.

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