Faster Growth For Level 3, EBITDA Gets One Time Boost

February 12th, 2013 by · 23 Comments

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%
Capital Expenditures 148 138 180 227  198
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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Categories: Fiber Networks · Financials

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23 Comments So Far

  • Anonymous says:

    i know this argument took place last year, but the only Q1 seasonal effect level 3 has is revenue stuffing Q4.

  • TC TEEDUB says:

    Perhaps Crowe will announce his departure and we’ll see $30 in no time?

  • Bob says:

    Look for a few sites to be shutting down… Southfield MI, Rochester NY, and Coudersport, PA this year. Site closures are briefly mentioned in the earnings release. I suspect it might be discussed in greater detail on the CC.

  • ABC says:

    Ouch. Down 11%. Executives will still get their bonuses and this ponzi scheme like company will continue its floundering path like always. I though this time was different? LOL!

  • Costs were definitely ugly relative to expectations, which is making folks re-jigger their 2013 EBITDA expectations.

  • CarlK says:

    Charlie Munger: “ebitda is just a way of saying bullshit earnings”

  • CarlK says:

    To my impostor quoting Charlie Munger on Ebitda, “Level 3 remains too hard to figure,” and there is no way they’re going to make O. Mason happy by “overpaying” for his other twtc slug. Acquisitions only satisfy the pocketbooks of the Wrong Street charlatans while destroying shareholder equity most, if not all of the time. Ask, “but, but, but,” Buddy Miller about it!

    Very similar report to twtc with twtc following Level 3’s “hire sales people” lead at the same time (3) is > four times as large. Excluding Level 3’s Ebitda operating leverage at 2 times CNS revenue growth not to mention 80 percent gross margins for 4 out of 5 buildings they keep adding ON NET in order to “control” versus being exploited by incumbents’ “access charges.”

    A twenty two million Bolivar “other income” currency loss for Donna to model as well while these idiots suck bonuses from owners in Q1 for “misses.”

    What’s so great about this CFO’s foresight which makes some on Wrong Street and others who sniff around them like Schmuckinsurance ascribe DEITY status to this man?

    Note to Rob: Their Ebitda miss was 2-7 percent at 18 percent “net” growth yoy “excluding” the positive effects or “benefits” of this quarter’s accounting machination on ARO’s etc. Original estimates being 20-25 percent yoy Ebitda growth rate. imo

  • CarlK says:


    Charlie Munger thinks I’m a raisin mixed in with turds and wrong street is too hard to figure out. Level 3 is a wonderful business for storing white mice. I will just have to ask Donna to marry me.

  • CarlK says:

    Impostors all day long being enabled by Mr. Powell. For shame on his network security system which he should hire Level 3 to manage. Will the real CarlK please stand up, and strike that SOB, enron, along with his cohorts down!

    CarlK • a few seconds ago −
    The net loss for the fourth quarter 2012 was $0.16 per share, excluding a loss on the extinguishment of debt of $0.23 per share and a benefit from special items recognized in the fourth quarter 2012 of $0.13 per share. The net loss for the fourth quarter 2012 was $0.26 per share prior to excluding the effects of the loss on extinguishment of debt and the benefit from the special items.

  • Walter Scott says:

    The End Game for Level 3

    Given the age of Crowe and Scott, it is time for them to declare victory and to exit. 

    The way to declare victory is to sell the company at a modest premium to today’s stock price which, in fact, is way undervalued compared to the sunk capital. 

    First, however, Jimbo and the gang need to line up a bunch of options at today’s low prices. 

    Possible scenarios: 

    1. A “hostile” buyer. I say one candidate is David Sokol. Yes, the former head of BRK sub Mid-American Energy. He’s been cleared by the SEC. 

    He knows the PKS culture. And, most importantly, he pulled off a similar deal with California Energy. 

    Dave, if you are reading this please contact me through our mutual friend the sculptor John Labja. I would be happy to work for you at the new LVLT. 

    2. A “friendly” LBO with someone like KKR or Blackstone providing the money. Crowe can be Chairman and Storey can be CEO. 

    3. A telecom purchaser such as Sprint, VZ or ATT. 
    Marissa at TWTC would also be a good buyer as she knows how to make money. 

    The man in Singapore would also be a good fit given the weakness of the dollar. 

    4. A tech purchaser. AMZN, Apple or even MSFT. 

    Bottomline, on an EV value it is cheap, Crowe has failed to turn a profit and just about anyone else would do better running this company.


    • Anonymous says:

      Option 2 is a complete waste. I don’t see Storey changing much of the course and speed of the current trajectory. I find it hard to believe that Storey’s vision of Level 3 is that different from Crowe’s.

      Paraphrasing from a post last year…

      Level 3 would benefit immensely from a fresh set of non-telecom eyes to chart their future in the same way IBM brought in Lou Gerstner from Amex Travel Services to chart theirs.

      An executive appointment from a strong outsider would send a meaningful signal to investors, customers and stakeholders that Level3 plans to grow its business beyond the traditional models currently tweaked from time to time at the edges.

      I also don’t love option 3a or 3b. Don’t think ATT, VZ or Sprint have much need for LVLT. However, I do think Comcast is a much better fit, especially as they move up the value chain from consumer to SME to large enterprise. (Not sure what Comcast would do with the international pieces. Maybe sell the pieces but retain a long term sweetheart deal for ethernet and transport services so LVLT has a European and South American b-end partner.) Long term a LVLT, Sprint or T-Mobile, Comcast tie-up would be fascinating.

      3b., Singapore, is a waste. STT and Temasek are incompetent. Too many confuse excess wealth with brilliance. Lest you forget STT’s wealth doesn’t come from investment prowess but from excess dollar reserves accumulated over many years of trade surpluses with the US.

      Option 4, a tech purchaser, is a good fit. With the exception of Comcast (acquiring NBC) we haven’t seen many combinations between a network operator (which is what Comcast really was) and non-netowrk operator. Telecom has been pretty incestuous with the bigger network players eating the small ones.

      I prefer option 1 or similar only because the LVLT board doesn’t have the gumption for a radical managerial change.

      Bottom line is LVLT’s management is awful but, scarily, think they’re not.

  • CarlK says:

    Then Bluejay goes on to say “Zayo,” but as a Creighton Jesuit, he should know better!

    Do you believe in GOD and JUDGEMENT DAY? F ENRON and ALL the HORSEMEN that he rides with, says The Real CarlK! imo

  • Anonymous says:

    Legere, Barua, Breauninger, Toplisek need to come back and save this place.

    • Anonymous says:

      omg, let it die already; they were every bit as worthless as the boobs managing this titanic and created even less shareholder value than this crew.

      • en_ron_hubbard says:

        That puts an appropriate touching finish to my day– two anonymous guys arguing with each other to no obvious end.

  • Waylonglvlt says:

    Bank of America 

    Reiterate Buy rating with a $37.50 price objective

    We reiterate our Buy rating and $37.50 price objective. Level 3 represents the best risk/reward with the most company specific drivers in our alternative carrier.

    • Anonymous says:

      and how much of that 4-5b in refi’d debt did BOA underwrite? at 2% underwriting fees that would be an $80m-$100m pie for the underwriters. I think it’s safe to say the sell-side may not be the best place to get your LVLT advice.

  • SEAM&WATSA says:

    Who better than Warren Buffett and or his Board of Directors to take over all the LVLT shares from STT, Hawkins, and Fairfax.

    Microsoft, Walt Disney, Intel, and Comcast would all like to take over control of Level 3’s globe end to end fiber network. And the odd thing about these companies, is they all have seats on the board of directors of Berkshire Hathaway. And let’s not leave out Warren’s IBM that needs Level 3 to build out IBM’s smart cities.

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