Earnings Preview: Level 3 Aims For Black

February 3rd, 2014 by · 8 Comments

When Level 3 reports its earnings on Wednesday morning, there is a good chance they will finally pass the threshold of break-even in a sustainable way.  It’s close enough that one time events can swing the actual number around, but analysts have pegged the EPS number at $0.03 for the final quarter of 2013.  Here are my guesses for the various numbers of interest in context with the prior four quarters as usual: 

$ in millions
Q1/13 Q2/13 Q3/13 Q4/13
(my guess)
 – North America – Wholesale 392 372 367 365 371 NA Enterprise should be a strong number, but for earnings as a whole to be strong the wholesale number has to do its part too.
 – North America – Enterprise 587 595 603 622 638
 – EMEA – Wholesale 87 89  88 88 88 The usual European story on wholesale and UK government, with increasing success in enterprise.
 – EMEA – Enterprise 99 97  99 102 104
 – EMEA – UK Government 42 37 33 32 32
 – Latin America – Wholesale 41 40 40 39 40 Better growth in Latin America this quarter, although I’m cautious given the Snowden security uproar in Brazil etc.
 – Latin America – Enterprise 143 142 149 149 152
Total Core Network Services  1,391 1,372 1,379 1,397 1,425 This would be 2% sequential CNS growth
 – Wholesale Voice & Other 223 205 186 172 160
Total Comm. Services 1,614 1,577  1,565 1,569 1,585 A hair below consensus estimates
Comm. COGS 655 629 616 608 610 The SG&A number could be better than this, but I’m assuming some cost savings are still in the pipeline.
Comm. Cash SG&A 599 562 562 576 550
Other Costs -47 – 
Comm. Adjusted EBITDA 407 386  387 385 425 The previous quarter included $30M in severance
Adjusted earnings per share (0.16) (0.36)   (0.11) (0.09) 0.05 Excluding one time expenses.
Adj. Gross margin % 59.4% 60.1%  60.6% 61.2% 61.5%
Adj. EBITDA margin % 25.2% 24.5%  24.7% 24.5% 26.8%
Capital Expenditures  198 169  208 194 ~200
Free Cash Flow 202 (162)   8 (90) 100-200 Including updated net cash interest guidance

The fourth quarter tends to be Level 3’s better quarter in terms of revenue growth, but I have learned to temper my expectations as Level 3’s business covers enough ground that there is always something going the wrong way.  That being said, unless something unexpected does appear there aren’t any obvious black clouds on the horizon threatening to ruin the profitable 2014 Level 3 has been aiming for.  While we’re still waiting for higher growth rates, all the refinancing work Sunit Patel did last year should be ready to pay off.


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Categories: Financials · Internet Backbones

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8 Comments So Far

  • Ben Graham says:

    Level 3 is going full force a head, don’t take away the Super Punch Bowl yet. There is a Seattle sea change taking place, and the Level 3 Eagle is flying higher than any hawk. So says O. Mason Hawkins (the Hawks Win).

  • Crowe the Charlatan says:

    Better late than never…

  • Anonymous says:

    does someone in the financial world know something I should . Another down day leading into earning.

  • Anonymous says:

    Is Level 3 REALLY done playing kick the can? That is all they seem to know.

  • Anonymous says:

    WTF are you talking about Snowden and Brazil for? Snowden’s the least of LVLT’s LatAm issues. (In fact, I don’t even understand the connection you’re trying to make.) More importantly, emerging markets have been imploding. Argentina is a basket case and that’s being kind given the hyperinflationary problem there. The Brazilian Real is down 18% over the last 12months and 9% in Q4.

    As noted many times before those less valuable Reals mean something when you exchange them for US dollars to service dollar-denominated debt or to purchase equipment.

    Sunit the magnificient may be refinancing that debt to lower debt service costs but if LVLT is losing value on those reals (and other latin currencies) he’s barely treading water. His refi efforts start to look a lot like George Jetson stuck on Astro’s treadmill.

    Equally interesting will be revenue tied to LatAm. Somehow LVLT has avoided problems in LatAm but at some point LatAm’s troubles will impact LVLT. It’s just a matter of time.

  • toddforthree says:

    annonymous. if lvlt does the majority of their business with multi nationals in argentina i am guessing they are pricing those contracts in dollars. any business they do at the “official rate” and not the azul mercado with non multi nationals would be a mess. i think sunit should say how they are pricing those

    • Anonymous says:

      Todd, for multinationals with b-ends in LatAm, I agree the contracts are in USD but that is not the majority of the LatAm revenue.

      LVLT doesn’t break out its LatAm revenue by country in their financials so it’s hard to say how much of LatAm’s worst performing currency country, Argentina, represents.

      I had to go all the way back to 2nd Quarter 2006, the last public Impsat quarterly report before Global Crossing acquired them, to find a distribution of revenue by country. (This distribution has changed wildly since then, I’m sure!) At that time, the largest percent of revenue came from Argentina at 27%. Brazil at time was 24%. Colombia at time 24%.

      None of the LatAm currencies has done well vis the USD last year, but Argentina presents the biggest risk with a decline in value of 26% over the last 90 days, most of which happened on January 23.

      I do think Sunit will certainly discuss the Argentina currency issue but how deeply he goes on LatAm currencies and problems will be up to analysts during Q&A.

  • Anonymous says:

    I have to say that their numbers look very impressive. And my comments about LatAm seem wholly unfounded b/c they’re humming along nicely.

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