Level 3’s Q3 Buoyed By Strong Enterprise Revenue Growth

October 30th, 2013 by · 7 Comments

As promised, Level 3 Communications (NYSE:LVLT, news, filings) posted its third quarter earnings report this morning.  And while they were still in the red, there were some promising signs this quarter that the winds are shifting in their direction at last.  Enterprise revenue growth ticked upward, wholesale saw some stabilization, and cost savings continued to trickle in.  Here is a quick table of their numbers in some context:

$ in millions
Q3/12
Q4/12
Q1/13 Q2/13 Q3/13
(actual)
Comments
 - North America – Wholesale 386 392 372 367 365 Big enterprise number, wholesale was better but still down
 - North America - Enterprise 577 587 595 603 622
 - EMEA – Wholesale 87 87 89  88 88 Another strong enterprise number
 - EMEA – Enterprise 94 99 97  99 102
 - EMEA – UK Government 42 42 37 33 32
 - Latin America – Wholesale 40 41 40 40 39 Currency effects fully offset Latin American growth
 - Latin America – Enterprise 139 143 142 149 149
Total Core Network Services 1,365  1,391 1,372 1,379 1,397 1.7% CNS growth adjusted for currency, a pretty good number
 - Wholesale Voice & Other 225 223 205 186 172
Total Comm. Services 1,590 1,614 1,577  1,565 1,569 A hair below consensus estimates
 
Comm. COGS 642 655 629 616 608 Includes severance of $30M
Comm. Cash SG&A 576 599 562 562 576
Other Costs  - -47  
Comm. Adjusted EBITDA 372 407 386  387 385 415 if you exclude the severance
Adjusted earnings per share (0.26) (0.16) (0.36)   (0.11) (0.09) Excluding the severance (0.13) and integration charges (0.08), Level 3 would have earned $0.12 per share.
   
Adj. Gross margin % 59.6% 59.4% 60.1%  60.6% 61.2% Continued integration savings trickling in
Adj. EBITDA margin % 23.4% 25.2% 24.5%  24.7% 24.5% Excluding severance would be 26.4%, with more headcount savings still in the pipeline.
   
Capital Expenditures 227  198 169  208 194
Free Cash Flow (157) 202 (162)   8 (90) A bit more red than I expected.

Enterprise growth was strong everywhere, racking up 3% sequential growth in all three regions - when you discount the currency headwinds in Latin America which offset all gains this time.  If they could just do that all the time, we'd be talking about a different company.  Wholesale revenues were down sequentially, but only marginally so, and even those UK government revenues held up ok during the quarter that was supposed to mark the bottom for them.

The severance from the layoffs in Q3 of $30M skewed EBITDA downward, but will be moving forward from $415M from here which will hopefully banish the sub-400 numbers to the dustbin of history.   Gross margins continued to rise, and SG&A dropped sharply with more to come from the full effect of the headcount reduction.

But the most interesting number was the loss per share of $0.09, which would have been earnings of $0.12 but for the $0.13 severance and $0.08 refinancing charges.  Those are real charges of course, but the run-rate earnings number just passed breakeven at last.

Free cash flow, on the other hand, was more negative than I had expected.  I look forward to more color on that during the call.  They did maintain their FCF positive stance for the full year, not including the potential settling of that pesky swap transaction.

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7 Comments So Far


  • LEVEL(3) says:

    The big Storey is: Excluding the severance (0.13) and integration charges (0.08), Level 3 would have earned $0.12 per share.

  • Anonymous says:

    as things turn positive for Level 3 and Jeff Storey starts to receive accolades for righting the ship I would say hold on. Level 3 was heading into the positve with Jim Crowe this ship was saling and I dont think in 6 months Jeff STorey tunred and moved this in right direction. Credit for massive cost costing for sure but directionally, financially , refinance etc was all in flight and setup prior to him taking the lead. Very happy with confidence investment has for him but lets be fair to Jim Crowe

  • Anonymous says:

    yes, let’s sing their praises while we can. Even a blind squirrel finds a nut.

    On a related note, you do have to admire the short sightedness of investors who can forget a string of misses without missing a beat.

    One more good quarter and Storey will win CEO of the year nominations.

  • Anonymus says:

    It will be interesting to see how the figures evolve after the double cable cut in Brazil and Argentina.
    Big customers like GVT will probably change their provider.

  • Meh says:

    Yes, any revenue being reported today came into the pipeline when Crowe was at the helm. Congrats to L3 for a positive quarter. Hopefully it’s a sign of things to come.

  • Anonymous says:

    And i would add the enterprise focus and investment that is bearing fruit now was also a multi year initative that is now strating to show itself. Didnt happen overnight

  • LEVEL(3) says:

    All Crowe did was kick the can down the road, that’s why he got kicked to the curb.

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