Earnings Preview: Level 3 Still Seeking Its Groove

July 29th, 2013 by · 10 Comments

Level 3 Communications (NYSE:LVLT, news, filings) will report its second quarter of 2013 and first quarter under the leadership of CEO Jeff Storey on Wednesday this week.  While some of my earlier models have projected they would make the transition to positive EPS this quarter, the last two quarterly reports managed to delay things and it now looks like that’s a Q3 story.  But I’m guessing that this quarter *should* show some improvements in both revenue and EBITDA:

$ in millions
Q1/13 Q2/13
(my guess)
 – North America – Wholesale 386 392 372 372 Enterprise big, wholesale stabilizing?
 – North America – Enterprise 577 587 595 607
 – EMEA – Wholesale 87 87 89  89 Someday Europe will be fun again…
 – EMEA – Enterprise 94 99 97  98
 – EMEA – UK Government 42 42 37 34
 – Latin America – Wholesale 40 41 40 40 Possibly muted by currency effects?
 – Latin America – Enterprise 139 143 142 145
Total Core Network Services 1,365  1,391 1,372 1386
 – Wholesale Voice & Other 225 223 205 200
Total Comm. Services 1,590 1,614 1,577  1586
Comm. COGS 642 655 629 627 More synergies offsetting higher revenue
Comm. Cash SG&A 576 599 562 559
Other Costs  – -47 – 
Comm. Adjusted EBITDA 372 407 386  400
Adjusted earnings per share (0.26) (0.16) (0.36)   (0.05)
Adj. Gross margin % 59.6% 59.4% 60.1%  60.4%
Adj. EBITDA margin % 23.4% 25.2% 24.5%  25.2%
Capital Expenditures 227  198 169  ~200 Reflecting higher Q1 sales numbers
Free Cash Flow (157) 202 (162)   (25)-25 Basically flat this quarter

(unless they settled the hedge)

Relative to the street, I’m a bit more conservative on revenues and a bit less conservative on EBITDA I think.  On free cash flow, this will be a less exciting quarter although my model is more optimistic than their current guidance of ‘positive not including the hedge’ over the balance of the year.

All this assumes they didn’t settle the hedge, whose effects I’m not trying to model just yet.

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10 Comments So Far

  • EvenAMissWouldWin? says:

    Rob, although I don’t put you squarely in the LVLT kool-aid camp, I would characterize you as one of their tasters. Your Feb 2012 Level 3 gush-fest “For Level 3, Even a Miss Would Win” deserves a revisit.


    Care to comment?

    • I would maintain that the situation has in fact improved by leaps and bounds for Level 3 since then, as they are in fact now close to break even and will generate free cash flow etc. They have the scale, and they have many choices they didn’t have before the GLBC deal.

      However, in the process they somehow managed to lose the premium the market had historically given them, despite the fact that their asset base remains perhaps the best out there. Confidence is as low as it has ever been in their ability to execute on real growth. If they can just make progress on that front, things would get better quickly for the stock price too.

      But it’s been a long, long wait and even the kool-aid camp you reference has no patience left… I am a ‘taster’ of many companies in this sector, Level 3 included, as it’s no secret I like fiber assets. And Level 3 still has all that potential if they could just manage to unlock it by putting those incremental margins together with actual growth.

      • Anonymous says:

        Rob, how does underperforming against every forecasted line item in your Feb ’12 “even a miss…” post lead to a “leaps and bounds” improvement?

        Furthermore, that post was written well after the GLBC deal closed so wouldn’t LVLT have had the same choices then as they have now?

        • To your first question, my comment was to the absolute change in infrastructure, balance sheet, and capital flexibility. There can be no doubt that relative to expectations they underperformed since the GLBC deal closed.

          To your second question, no it was necessary to drive the integration first before the company’s options began to open up.

          Level 3 is in a far better spot than they were, but they have yet to *do* anything at all with it, which is why the board finally decided to switch CEOs. There are no guarantees that Storey will have better luck of course.

          If he doesn’t, one option the BOD does have now that wasn’t really feasible before GLBC is to sell the company. It’s actually undervalued relative to the sector now, and the debt isn’t so out-sized relative to the business.

  • Stephen Wasnok says:

    “All this assumes they didn’t settle the hedge, whose effects I’m not trying to model just yet.”

    Are you referring to the interest rate swaps? Or something else?

    Does your model factor in the Quarterly interest rate swaps payments that LVLT makes per the LVLT Q1 2013 Earnings Call:
    “Then as a remainder, the interest rate swap obligations that we had was about $56 million in that range last year. We make equal payments every quarter. We are about $45 million or so left on that obligation. Those payments will happen quarterly over the course of this year and the first quarter of next year.”

    • EvenAMissWouldWin? says:

      Stephen, interesting, but interest related expenses tied to swaps won’t impact EBITDA, Cash Flow from Operations or revenue although will certainly impact FCF.

      Rob, although not surprised to read your above comments, the numbers in that eponymous post have not materialized.

      You forecasted Q2 Core Network Services (CNS) at 1473. You’re now forecasting 1391 a 5.5% haircut and same for EBITDA.

      Level 3 has pretty much been a disappointment factory, failing to deliver time and again.

      The good news for LVLT is that each analyst seems to have a memory like a sieve. So a good quarter could spring board LVLT to rock star status.

  • Anonymous says:

    Gary Breauninger is a hero for LVLT!

  • anonii says:

    Don’t know about anyone else, but I’m giddy with excitement for LVLT earnings. I’m hoping for a great redemption quarter so we can hear from LVLT fan club, including Carlk, and the those who saw no problem with LVLT’s undying gratitdue to SEAM which included a never documented shareholder dilution gift to SEAM from the induced conversion of convertible debt.

    The LVLT fan club here at TR deserve some love. Forget that the S&P 500 is up nearly 30% since 4/14/2011 (the watershed week when LVLT aquired that GC gem that was going to shower LVLT shareholders with untold riches) and LVLT is down more than 15% during same period.

    In the event of a great quarter LVLT loyalists should jump and down swinging index fingers from both hands in the faces of those that have failed to honor the company’s messianic mission to revolutionize the telecommunications industry.

    Of course, should LVLT fail to deliver great numbers, well, there’s always next quarter.

  • Anonymous says:

    Since they fell short of every forecasted line item, this must be a great Level 3 quarter.

  • teetee says:

    Lol! This ponzi scheme of a company under delivers again. The only thing this company is good at is disappointments. Well, maybe besides giving out big salaries and undeserved bonuses. Criminal if you ask me.

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