If investors were looking for a big revenue rebound at Level 3 Communications with today's earnings report, they'll have to wait another quarter. CNS revenues were up sequentially but further wholesale weakness and more UK government leakage continued to offset much of the solid enterprise revenue growth they've been finding. Here's a table of Level 3's Q2/2013 results in some context:
|$ in millions||
|- North America – Wholesale||386||392||372||367||Wholesale still weak|
|- North America - Enterprise||577||587||595||603|
|- EMEA – Wholesale||87||87||89||88||About as expected|
|- EMEA – Enterprise||94||99||97||99|
|- EMEA – UK Government||42||42||37||33|
|- Latin America – Wholesale||40||41||40||40||Strong Enterprise #|
|- Latin America – Enterprise||139||143||142||149|
|Total Core Network Services||1,365||1,391||1,372||1,379||Up sequentially, but not strongly|
|- Wholesale Voice & Other||225||223||205||186||More declines expected in this low margin segment|
|Total Comm. Services||1,590||1,614||1,577||1,565||Below my guesses|
|Comm. COGS||642||655||629||616||SG&A includes $13M severance, else it would have dropped to 549.|
|Comm. Cash SG&A||576||599||562||562|
|Comm. Adjusted EBITDA||372||407||386||387||Excluding severance, EBITDA was $400M - right on my guess.|
|Adjusted earnings per share||(0.26)||(0.16)||(0.36)||(0.11)||Includes $0.03 of severance/restructuring|
|Adj. Gross margin %||59.6%||59.4%||60.1%||60.6%|
|Adj. EBITDA margin %||23.4%||25.2%||24.5%||24.7%||Without severance/restructuring, this rose to 25.6%|
|Free Cash Flow||(157)||202||(162)||8||Right on breakeven, as I expected.|
Revenues: The top line took a hit from further declines in the low margin wholesale voice business, of which there are apparently more yet to come. Wholesale CNS revenues in the US continued to slide. But enterprise revenues were up in all three regions, with Latin America shining the brightest as usual.
Costs: There was a big $13M severance/restructuring charge, much of which was for Crowe's departure. Once you get past that, however, cost savings were quite good. Gross margins rose to 60.6% while SG&A savings brought this quarter's numbers down 5.5% from last year not including the severance item.
EBITDA and Earnings: The good cost savings offset lower-than-hoped-for revenue growth to bring EBITDA back to the $400M mark not including severance/restructuring. That in turn kept the loss per share about where analysts had pegged it at, though not quite as improved as I had guessed. According to my models, the transition above 0.00 probably comes next quarter. EBITDA guidance for the full year was clarified to not include the $10M in severance from Crowe's depature, which happened later.
Conclusions: Still no resolution for those long-suffering LVLT shareholders, maybe next quarter. The good news is that at current EV/EBITDA valuations there isn't much room to fall if the market doesn't like it.