Earnings Preview: Level 3 Seeks to Hold Its Gains

Last quarter, Level 3 Communications busted through the break-even mark at long last with a big fourth quarter.  On Wednesday morning we get to see if the trend holds, or almost holds given the seasonal revenue hesitation the company generally sees in the first quarter.  I’ve followed Level 3 closely here over the years, and so here are my quarterly earnings guesstimates:

$ in millions	Q1/13	Q2/13	Q3/13	Q4/13	Q1/14 (my guess)	Comments
– North America – Wholesale	372	367	365	374	372	In Q1, they are looking to hold the gains from that big Q4 rather than see sequential growth. Enterprise revenues should hold on stronger than wholesale as usual
– North America – Enterprise	595	603	622	651	652
– EMEA – Wholesale	89	88	88	89	88	Hoping for a solid start to the year in Europe, but nothing particularly strong yet.
– EMEA – Enterprise	97	99	102	105	105
– EMEA – UK Government	37	33	32	29	28
– Latin America – Wholesale	40	40	39	41	42	Should continue to lead the way.
– Latin America – Enterprise	142	149	149	154	155
Total Core Network Services	1,372	1,379	1,397	1,443	1,442	CNS just barely down sequentially is my guess
– Wholesale Voice & Other	205	186	172	159	150	Same trend, wholesale voice isn’t much fun anymore.
Total Comm. Services	1,577	1,565	1,569	1,602	1,592	Down but mostly due to declining wholesale voice.
Comm. COGS	629	616	608	618	613	Extra SG&A due to the shift of some non-cash compensation to cash.
Comm. Cash SG&A	562	562	576	518	541
Other Costs	–
Comm. Adjusted EBITDA	386	387	385	466	438	Flat with the prior quarter.
Adjusted earnings per share	(0.36)	(0.11)	(0.09)	0.06	0.25	Quite a jump from the break-even point, but analysts have it even a few cents higher.
Adj. Gross margin %	60.1%	60.6%	61.2%	61.4%	61.6%
Adj. EBITDA margin %	24.5%	24.7%	24.5%	29.1%	27.5%
Capital Expenditures	169	208	194	189	190-200
Free Cash Flow	(162)	8	(90)	197	(50)-(100)	Swinging back negative as it always is in Q1. But not as negative as in past years.

In other words, with the exception of a shift of non-cash stock compensation to the cash side of SG&A and the usual working capital swing into the red, this quarter should look a lot like last quarter except more profitable.  That’s what the company seemed to be projecting during their Q4 call in February, albeit with very broad strokes.

While Level 3’s stock price has been up, holding in the mid-30s, in pre-reverse-split terms it remains below what used to be the $2.50 mark.  There’s a lot of room for growth there still, but the market is still waiting to see proof of the long-awaited improving revenue momentum.

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