Level 3 Pulls Off a Strong Q4

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	Q4/12	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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