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||
|- 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|
|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.|
|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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