As anticipated, Level 3 Communications (NYSE:LVLT, news, filings) posted its fourth quarter results this morning, and for once there was some good news on the revenue front. The global fiber operator grew CNS revenues by 1.8% sequentially on a constant currency basis, powered by sequential global enterprise revenue growth of 2.2%. Adjusted earnings per share were a couple pennies better than anticipated, but on the EBITDA line it took a rather large one time benefit to make guidance look good. As always, here’s a chart of their numbers in the context of the past four quarters:
|$ in millions||Q4/11||
|– North America – Wholesale||388||381||382||381||388||US wholesale was particularly strong this quarter.|
|– North America – Enterprise||588||610||621||627||636|
|– EMEA – Wholesale||94||92||91||89||88||EMEA enterprise revenues were a high point|
|– EMEA – Enterprise||80||79||81||80||87|
|– EMEA – UK Government||50||48||42||41||42|
|– Latin America – Wholesale||35||34||33||36||37||Right on target here, and solid|
|– Latin America – Enterprise||133||138||136||141||146|
|Total Core Network Services||1,368||1,382||1,386||1,395||1,424||Up 1.8% constant currency – a good growth number|
|– Wholesale Voice & Other||211||204||200||195||190||As expected|
|Total Comm. Services||1,579||1,586||1,586||1,590||1,614||Inline with analyst expectations, if not just above.|
|Comm. COGS||660||657||648||642||655||Not including integration spending, but including $15M in unexpected healthcare and Sandy costs.|
|Comm. Cash SG&A||587||587||568||558||568|
|Integration Costs||23||15||17||18||31||Includes $20M severance|
|Other Costs||39||–||–||–||-47||Adjustment to asset retirement obligations|
|Comm. Adjusted EBITDA||270||327||353||372||407||Includes $47M benefit to asset retirement obligations, and $20M severance charges|
|Adjusted earnings per share||(0.62)
||(0.37)||(0.29)||(0.26)||(0.16)||Slightly better than anticipated.|
|Adj. Gross margin %||58.2%||58.6%||59.1%||59.6%||59.4%|
|Adj. EBITDA margin %||17.1%||20.6%||22.3%||23.4%||25.2%|
|Free Cash Flow||103||(213)||3||(157)||202||Q4 is their big FCF quarter. Q1 will hurt as usual|
Revenues: EMEA enterprise and US wholesale revenues both came along strong, while UK government revenues didn’t drag things down and Latin America was its usual dependable self. Looking ahead the company continues to say that it expects the growth trend to continue to improve, but didn’t offer specifics other than the fact that Q1 will go down sequentially as it usually does due to seasonal effects.
EBITDA and Costs: On the cost line, gross margins went down some – which surpised me. I’m also waiting for the call for more clarification on the integration cost component of cash SG&A but that looks higher than expected as well. There was a one time benefit of $47M due to adjustments to asset retirement obligations, offset partially by a $20M severance charge (those layoffs before xmas), giving a net benefit of $27M. Without that, EBITDA would have been $380M for the quarter – but it’s unclear to me yet which of these effects were included in the guidance of 20-25% growth and which weren’t. Looking ahead, they expect EBITDA to grow in the low double digits from the $1.458M starting point they finished 2012 with. But for the first quarter they expect EBITDA to be flat with the $380M number.
Cash Flow: Free cash flow of positive $202M was roughly were it should have been, and inline with guidance. Looking ahead, the company expects to be FCF positive in 2013 not counting interest rate swap effects.
Conclusions: All in all, those looking for solid revenue growth will find it, those looking for EPS improvement will also find it, but those focused on EBITDA probably have some questions for the CC. More later.
Update: Costs included $15M in extra healthcare and Sandy costs, some of which will persist in Q1. EBITDA was definitely a miss, which is going to make models re-adjust 2013 EBITDA and FCF numbers downward. Hence, the market isn’t responding very well despite the good growth numbers.
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