Earnings Preview: Not Looking For Much From Level 3’s Q1

April 22nd, 2013 by · 6 Comments

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
(my guess)
 – 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 
Other Costs  – -47 – 
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% 
Capital Expenditures 227  198 192 
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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Categories: Fiber Networks · Financials · Internet Backbones

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6 Comments So Far

  • ABC says:

    So, this company is still a joke is what you are saying?

  • Anonymous says:

    I dont think there is hostility any longer. We have the Messiah on place now . The messiah held no accountability for last 5 years of company poor performance that all goes to Jim Crowe and of course the mess he inherited. He has simply been so brilliant as COO the recovery and subsequent rise to greatness for Level 3 is inevitable.

  • ABC says:

    No hostility… just stating the obvious is all. The share price is sitting at $20 and that is 18 months after a supposed ‘game changing’, transformational acquisition of GLBC. I would call that a joke of a company in my book.

  • toddforthree says:

    rob, there is quite a bit of hostility by the alphabet posters. can he give us a list of his holdings so we can look at them with a helpful eye.

    the pessimism and smugness is overdone. lvlt’s execution has been awful but past history doesnt mean it stays that way. my guess is lvlt takes the big bath approach to this quarter to clears the decks for storey to look good going forward. the interest rate swap may be taken out here to get rid of that known loss and they may expense alot of crowes severance as well.

  • Anonymous says:

    I raised this a year ago and I’ll raise it again because it was never resolved (although schmuckinsurance might think it was). Where is the REVENUE seasonality in LVLT’s business?

    Specifically, which services CONSISTENTLY drop in Q1 enough to materially affect REVENUE? Seasonality means revenue in a specificic service drops. A Q1 decline in IP Transit one year and a Q1 drop in hosted voice the next is not seasonality. If management claims that Q1 suffers from seasonality, analysts should ask and know what service suffers each year.

    I have contended that Q1 seasonality in telcos like LVLT are merely a function of revenue stuffing in Q4 to meet (or come as close to meeting as possible) the previous year’s full year guidance. Thus Q1 seasonality arises because Q1 funnel opportunities were rushed into the previous year’s Q4 leaving fewer opportunities to close in Q1. That is not seasonality.

    Telecom is not a seasonal business. I don’t use the internet or make fewer calls in Q1 than I did in Q4 nor do most businesses. More importantly, with the exception of voice (which I’m unaware of being seasonal except, mildly, perhaps in August when much of Europe is on holiday leading to decline in business voice) most of LVLT’s business revenue comes from monthly recurring revenue, not usage sensitive revenue.

    Customer contracts expire and are renegotiated every month of the year so revenue writedowns (which, it bears noting, fall outside the definition of a seasonality event anyway) should not be greater in Q1 than in Q4, Q3 or Q2.

    Seasonality in the auto industry, for example, arises when factories retool for the next season’s cars. In retail, Christmas generates the highest traffic. In the flower industry Valentines day generates disproportionate sales. But in telecom, I don’t see the seasonality.

    Can someone please explain.

    This is about revenue, not about cash flow or EBITDA. Cash flow is seasonal because companies may make large capital purchases in first part of year to, hopefully, harvest in latter part of year. EBITDA is lumpy too. (For this reason EBITDA and cash flow should only be evaluated on a trailing twelve month basis, not quarterly). Quarterly EBITDA and cash flow can be easily manipulated.

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