This will be a big earnings week, as companies across the sector offer up their Q1 numbers. Level 3 Communications (NYSE:LVLT, news, filings) will be one of those, coming off a decent growth but disappointing EBITDA quarter in Q4 but with a newly minted/promoted CEO. I have had several folks ask me where I think their numbers will come in, and I have to say it has been a hard one for me to get a handle on. But nevertheless, here's the usual table with my guesses:
|$ in millions||
|- North America – Wholesale||386||392||388||Growth trends offset by seasonal weakness.|
|- North America - Enterprise||577||587||587|
|- EMEA – Wholesale||87||87||86||UK government transition will be the biggest effect.|
|- EMEA – Enterprise||94||99||100|
|- EMEA – UK Government||42||42||38|
|- Latin America – Wholesale||40||41||41||Venezuela devaluation offsetting steady growth|
|- Latin America – Enterprise||139||143||143|
|Total Core Network Services||1,365||1,391||1,383||Sequential decline, but not tripping up
the overall growth trend
|- Wholesale Voice & Other||225||223||219|
|Total Comm. Services||1,590||1,614||1,602||Inline with analyst expectations, if not just above.|
|Comm. COGS||642||655||643||Now including integration costs, since they
won't be breaking them out any more.
|Comm. Cash SG&A||576||599||570|
|Comm. Adjusted EBITDA||372||407||389||Generally flat with the baseline from Q4 after adjusting
for one time events as best I could manage.
|Adjusted earnings per share||(0.26)||(0.16)||(0.20)||$0.04 below Yahoo Finance's composite analyst estimate|
|Adj. Gross margin %||59.6%||59.4%||59.8%|
|Adj. EBITDA margin %||23.4%||25.2%||24.3%|
|Free Cash Flow||(157)||202||(100)-(150)||The usual first quarter cash burn,
but maybe half of last year's.
Projecting a big Q1 for Level 3 has never been a productive idea, and indeed to make the numbers come out within the minimal guidance provided I am not expecting much. The full year numbers that go with the table above would be EBITDA of $1,655B (up 13.4% over 2012), and total revenues of $6.50B that includes CNS growth of about 4.1% over 2012 -- all powered by the usual second half ramp.
Revenue growth: My Q1 total revenue guess comes in slightly below the consensus of $1.61B, reflecting less CNS growth to offset the UK government and currency effects. The company continues to target 2% sequential CNS growth, but that's on an average basis and in Q1 I think if they keep it flat it will be a victory.
Costs & EBITDA: The toughest pieces to put together are SG&A and COS, as this is where the Q4 EBITDA got hammered as well as where all the one time effects were - an unknown amount of which spill into the first quarter. There were higher costs from investments in sales and products, a dispute settlement, lower costs from that headcount reduction they started in December, and healthcare and Sandy costs whose lingering effects were particularly unclear. There are also further integration costs & savings hitting in the short term, though they will tail off from here, but we won't be getting detail on the actual integration spending. All that makes both SG&A and COS particularly hard to predict, but my guesses put Q1 adjusted EBITDA at $389M, rather below where I had once hoped they'd be but in place for the guidance given for 2013.
Free Cash Flow: Always negative in Q1 due to the timing of the way interest payments and other bills & bonuses and such get paid for Level 3. It should be half as bad as last year, but red enough to piss a fair number of folks off until July rolls around - as usual. Despite this, my model still projects about $100-150M in positive free cash flow for the year when all is said and done. The company has just said it will be positive, which given the variability in this number is probably a case of simply not raising the bar too high after doing precisely that for EBITDA in 2012.
Earnings per share: With the one time items already mentioned, I have them losing $0.20 per share this quarter - four pennies worse than the consensus on Yahoo Finance. On the other hand, I have them actually earning $0.01 per share *next* quarter, four pennies better than is apparently expected. Adjusted EPS is still a number that is hard to use given the frequency of one time events, but it's becoming more relevant each quarter.
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