Level 3’s Q1 Clears the Decks for Storey

April 25th, 2013 by · 4 Comments

Level 3 Communications (NYSE:LVLT, news, filings) closed the books on the Crowe era with their first quarter 2013 numbers.  I wasn't expecting much, and I got what I expected - although with differences in the details of course.  Revenues were rather weak, but costs and those apparent synergies were back on track keeping EBITDA in the expected range.  Here's a tabular look with some context:

$ in millions
Q3/12
Q4/12
Q1/13 Comments
 - North America – Wholesale 386 392 372 N.A. wholesale much weaker than expected, but enterprise was strong
 - North America - Enterprise 577 587 585 
 - EMEA – Wholesale 87 87 89  UK government pulling back as expected
 - EMEA – Enterprise 94 99 97 
 - EMEA – UK Government 42 42 37 
 - Latin America – Wholesale 40 41 40  Venezuela devaluation offsetting steady growth
 - Latin America – Enterprise 139 143 142 
Total Core Network Services 1,365  1,391 1,372 Down 1.4% sequentially.
 - Wholesale Voice & Other 225 223 205  Sharp decline in the low margin stuff.
Total Comm. Services 1,590 1,614 1,577  Below expectations.
 
Comm. COGS 642 655 629 Costs were a much happier story this quarter, both for COGS and SG&A.
Comm. Cash SG&A 576 599 562 
Other Costs  - -47
Comm. Adjusted EBITDA 372 407 386  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) (0.36)  Including 0.10 Venezuela, 0.11 other currency effects, 0.02 legal fees
 
Adj. Gross margin % 59.6% 59.4% 60.1%  Breaking the 60% barrier
Adj. EBITDA margin % 23.4% 25.2% 24.5% 
 
Capital Expenditures 227  198 169  Less than expected, but this number moves around
Free Cash Flow (157) 202 (162)  A bit worse than I thought, but I knew it would be more than 100M.  They maintained guidance for full year postive FCF. 

Revenue: A very weak North American wholesale transport number was only partially offset by a strong enterprise growth performance, while Europe and Latin America took hits from currency fluctuations.  The company says that first quarter churn of 1.6% should return to usual levels for the balance of the year, and that growth should be better in the next three quarters than in the same period last year.  That's good, but one might have hoped to start that ramp from a higher base!

Costs & EBITDA: Costs were the bright spot this quarter, as gross and EBITDA margins regained some ground.  That means EBITDA didn't get hammered despite the revenue miss, not that $386M is anything to write home about of course.

Earnings and Free Cash Flow: Earnings per share were strongly affected by currency issues, and came in below analyst expectations - although this has yet to emerge as a dominant metric for Level 3.  Free cash flow was slightly more red than I had expected even with capex not particularly high, but the company maintained its guidance of positive FCF for the full year.

Thoughts: A regular commenter on my earnings preview suggested this would be something of a 'clear the decks' release for the company, putting in place a foundation for newly minted CEO Jeff Storey to build upon.  That certainly seems to have been the case, although they didn't yet settle the currency hedge.  The stock has lagged in advance of this report, anticipating just this sort of thing - not that traders won't take them down a peg anyway at least initially.

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Categories: Financials · Internet Backbones · Metro fiber

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4 Comments So Far


  • ABC says:

    Yawn…wake me up in another year or so for this POS. Looks like that $22 price target an analyst had is spot on.

  • Anonymous says:

    Clearing the deck? Seems to me they are still on the hook for Crowe in 2q and this mysterious ‘hedge’ that makes estimating FCF a mess. Same old, same old if you ask me.

  • Anonymous says:

    That’s quite some seasonality. Must be a special brand of seasonality that only afflicts LVLT. I think they call it Q4itis, sometimes referred to as bonus-in-jeopardyITIS or guidance-at-riskITIS.

    It’s a seasonal disease LVLT executives and sr. managers catch in Q4. The most visible symptom is managers pushing sales folks to accelerate Q1 funnel opportunities into Q4. Other symptoms include special customer incentives for fence sitting customers, attractive contractual terms, deferred payments, etc.

    The biggest side effect to Q4itis is anemic to negative revenue growth in Q1, but our studies show that you can mask the side effect by blaming it on seasonality.

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