Tomorrow we will get our monthly window into how Level 3 Communications (NYSE:LVLT, news, filings) is doing with their Q3 report. We started off the year with James Crowe stepping down, after which Jeff Storey stepped up to the CEO role and has been putting his stamp on things as the company continues to seek higher growth rates for its core network services. I continue to hear rumbles out there of good things on the horizon in enterprise sales, but Level 3 is big enough nowadays that it takes a lot to move the needle and the question therefore is to what extent the other headwinds will continue to offset that progress. My quarterly guesses for Level 3’s Q3 numbers are as follows:
|$ in millions||
|– North America – Wholesale||386||392||372||367||369||Solid but not explosive enterprise growth,and better stability in wholesale|
|– North America – Enterprise||577||587||595||603||612|
|– EMEA – Wholesale||87||87||89||88||89||Not much new in Europe to report|
|– EMEA – Enterprise||94||99||97||99||100|
|– EMEA – UK Government||42||42||37||33||31|
|– Latin America – Wholesale||40||41||40||40||41||Growth in Latin America offsetpartially by currency effects.|
|– Latin America – Enterprise||139||143||142||149||152|
|Total Core Network Services||1,365||1,391||1,372||1,379||1,394||1.1% CNS growth, nothing to write home about but not bad.|
|– Wholesale Voice & Other||225||223||205||186||179|
|Total Comm. Services||1,590||1,614||1,577||1,565||1,573||A hair below consensus estimates|
|Comm. COGS||642||655||629||616||612||Including severence related to recent layoffs|
|Comm. Cash SG&A||576||599||562||562||585|
|Comm. Adjusted EBITDA||372||407||386||387||376||Probably near 400 ex severence and restructuring|
|Adjusted earnings per share||(0.26)||(0.16)||(0.36)||(0.11)||(0.20)||With all the refinancing and the one timecosts associated with it, plus layoffs, they’ll
still be in the red until next quarter.
|Adj. Gross margin %||59.6%||59.4%||60.1%||60.6%||61.1%||Continued integration savings trickling in|
|Adj. EBITDA margin %||23.4%||25.2%||24.5%||24.7%||~24%|
|Free Cash Flow||(157)||202||(162)||8||0-50||Breakeven or a bit better, with Q4 taking them to FCF positive.|
The positive financial effects of last quarter’s downsizing plus all the refinancing activity will be a Q4 and 2014 story, and we can expect them to emphasize their extent despite keeping actual quantitative guidance to a minimum. Analysts do now seem to expect the company to earn an actual profit in Q4 and thereafter. It has been a longer road than I expected but they have been making steady progress toward that goal, and the recent surge in the stock price is finally reflecting a bit of that.
In terms of revenue growth, the story will still be in enterprise sales and the potential there. The question will be what the headwinds in Europe, currency, and North American wholesale will look like this quarter. If they’re muted then the numbers will look quite good, but the company never seems to get lucky on that front.
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