Level 3 Pulls Off a Strong Q4

February 5th, 2014 by · 6 Comments

Those looking for a datapoint of strong growth in Level 3’s fourth quarter earnings report got what they were looking for, as the company easily coasted past my own revenue and EBITDA expectations.  And those looking for an actual profit, well they got that too and several cents per share higher than consensus estimates to boot.  Here are the numbers in some context:

$ in millions
Q1/13 Q2/13 Q3/13 Q4/13 Comments
 – North America – Wholesale 392 372 367 365 374 A powerful enterprise performance, backed up by a rare strong wholesale number.
 – North America – Enterprise 587 595 603 622 651
 – EMEA – Wholesale 87 89  88 88 89 About as expected, weaker in UK gov but stronger elsewhere.
 – EMEA – Enterprise 99 97  99 102 105
 – EMEA – UK Government 42 37 33 32 29
 – Latin America – Wholesale 41 40 40 39 41 Strong for both enterprise and wholesale.
 – Latin America – Enterprise 143 142 149 149 154
Total Core Network Services  1,391 1,372 1,379 1,397 1,443 The best sequential CNS performance bump yet.
 – Wholesale Voice & Other 223 205 186 172 159  Same trend, still steep
Total Comm. Services 1,614 1,577  1,565 1,569 1,602
Comm. COGS 655 629 616 608 618
Comm. Cash SG&A 599 562 562 576 518
Other Costs -47 –   
Comm. Adjusted EBITDA 407 386  387 385 466 Includes a $10M from a one-time Latin American tax benefit
Adjusted earnings per share (0.16) (0.36)   (0.11) (0.09) 0.06 Beating my guess by a penny and the street by four.
Adj. Gross margin % 59.4% 60.1%  60.6% 61.2% 61.4%  Still rising, albeit more slowly.
Adj. EBITDA margin % 25.2% 24.5%  24.7% 24.5% 29.1%  Closing in on the 30% barrier unexpectedly quickly.
Capital Expenditures  198 169  208 194 189
Free Cash Flow 202 (162)   8 (90) 197 Not including $30M of accelerated interest and $46M to settle the swaps, FCF for full year 2013 would have been +29M.

Revenue: The charge was clearly led by North American enterprise sales, which rose 5% sequentially.  But North American wholesale managed 2% sequential growth, which is the best we have seen there in a long while.  Europe was weaker, losing some ground in constant currency terms, but in the right range nonetheless.  Latin American revenues have been the company’s best growth engine, and turned in another strong quarter.  Going forward Level 3 is looking at Q1 numbers roughly flat with Q4, reflecting the seasonal strength they see in Q4.

EBITDA: At $466M, or even $456M without the one time Latin American tax item, they easily bested my guess.  I had assumed it would take longer for the results of the various cost cutting actions in Q3 to show up, but it was in fact all there.  Going forward though, Level 3 is shifting a bunch of non-cash bonus compensation to all-cash.  That will reduce dilution (it is no coincidence it came the same time as positive earnings), but it will show up in higher cash SG&A and lower adjusted EBITDA.  If it were in these numbers, EBITDA would have been $438, which is roughly where they expect Q1.

Earnings: $0.06 per share, ’nuff said.  It’s been some 16 years in coming, but it’s a profit nonetheless and my model says it should grow steadily from here.


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6 Comments So Far

  • Anonymous says:

    have to say these numbers are very good across the board — top line, bottom line and middle lines.

    I have argued about Q4 revenue stuffing machinations before and if they hold top line flat in Q1, I’d call that a win. For now they get to enjoy the ride.

  • Rob Powell says:

    James Heard is out at EMEA, with Patel taking over in the interim – presumably they will bring in someone new.

  • Rob Powell says:

    FCF guidance for 2014 is $225-275M, finally an unabashed positive number.

  • Anonymous says:

    FCF projection is solid, especially given the fact they will be paying out bonuses via all cash vs. non-cash. Where does that put 2015 FCF numbers in your opinion?

    • Anonymous says:

      why does paying out bonuses in cash make the FCF projection solid? It’s only Feb 5, don’t you think it’s a bit premature to play past the next 11 months?

  • Anonymous says:

    I am simply assuming the cash bonuses are baked into those numbers so they would even be higher if they didn’t make the change. I meant solid to equate to mean good. Take it up with management if you think they are BS numbers…

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