Earnings Preview: Level 3 Aims for Q4 Profit, But Q3 First

October 29th, 2013 by · 4 Comments

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
Q3/12
Q4/12
Q1/13 Q2/13 Q3/13
(my guess)
Comments
 - 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
Other Costs  - -47
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%
   
Capital Expenditures 227  198 169  208 ~200
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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Categories: Financials · Internet Backbones

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4 Comments So Far


  • LEVEL(3) says:

    The main reason it has been a long road for Level 3, is because the Bush administration allowed at&t and Verizon to be put back together after the break up.

    Level 3 was built to be a wholesaler, but was forced into shifting over to enterprise to survive. Blame it on that dam Bush.

  • anon says:

    BLAME BUSH FOR LEVEL 3’s FAILURE! IT HAS NOTHING TO DO WITH THEIR LONG TERM INEPT MANAGEMENT!
    There’s a new one. They are and have for years been a lost cause and a joke…. or maybe next quarter things will be better hahaha!

  • Crowe the Visionary says:

    Don’t blame me!

  • telecomwon01 says:

    Hey…it’s hard not to be profitable. What other CLEC has it’s own finance arm feeding it $? Smoke ‘n Mirrors…better yet…Up ‘n Smoke…Cheech.

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