Level 3 Rides Enterprise Revs to Another Big Quarter

April 30th, 2014 by · 7 Comments

In its first quarter report, Level 3 Communications picked up where it left off in Q4 of 2013.  That’s a good thing, because Q4 was their biggest in recent memory.  CNS and total revenues beat expectations (both mine and the street’s), as did EBITDA and earnings per share.  Here are the numbers in some context:

$ in millions Q1/13 Q2/13 Q3/13 Q4/13 Q1/14 Comments
 – North America – Wholesale 372 367 365 374 368 Big enterprise number, almost matching Q4 gains.Wholesale still weaker, but not unexpected.
 – North America – Enterprise 595 603 622 651 675
 – EMEA – Wholesale 89  88 88 89 87 Now reporting UK Gov as part of enterprise,which was +4M — also stronger than wholesale
 – EMEA – Enterprise 97  99 102 105 138
 – EMEA – UK Government 37 33 32 29  
 – Latin America – Wholesale 40 40 39 41 40 Weaker than normal, looks like currency though.  Awaiting further color.
 – Latin America – Enterprise 142 149 149 154 149
Total Core Network Services 1,372 1,379 1,397 1,443 1,457 I was wrong, good sequential growth for a Q1
 – Wholesale Voice & Other 205 186 172 159 152 A little less painful this quarter.
Total Comm. Services 1,577  1,565 1,569 1,602 1,609 Up sequentially, beating estimates
Comm. COGS 629 616 608 618 614 Costs under control, gross margins up.
Comm. Cash SG&A 562 562 576 518 537
Other Costs –   
Comm. Adjusted EBITDA 386  387 385 466 458 Down sequentially, but unexpectedly strong given the shift to cash bonus structure.Guidance now for 14-18% EBITDA growth.
Adjusted earnings per share (0.36)   (0.11) (0.09) 0.06 0.48 Very strong.
Adj. Gross margin % 60.1%  60.6% 61.2% 61.4% 61.8%
Adj. EBITDA margin % 24.5%  24.7% 24.5% 29.1% 28.5%
Capital Expenditures 169  208 194 189 163
Free Cash Flow (162)   8 (90) 197 (22) The smallest Q1 cash burn number I’ve ever seen them post.  Guidance now $250-300M for 2014.

Key takeaways:

  • Revenue – US enterprise revenues were huge, and Europe showed signs of life there as well — more than offsetting a rare smaller number in Latin America.  I’ll have to listen if that was a currency thing or some other effect.  Wholesale remained a bit soft, but not soft enough to ruin the overall party at all.
  • EBITDA – Higher revenues with better margins saw this number do far better than the ‘flat with Q4 adjusted for cash compensation shift’ that they had suggested.  Good enough in fact for them to raise guidance to 14-18% EBITDA growth.
  • Free Cash Flow – This has always been a big downer in Q1 for Level 3, but at $-11M this quarter it was unexpectedly strong.  Strong enough to let them boost guidance for this metric as well.
  • Earnings per share – Blowing away the street’s $0.28 composite estimate — strong revenues and improving margins will do that.

Is the momentum finally on Level 3’s side now?

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7 Comments So Far

  • Walter Scott says:

    I told you to hold your LVLT shares and you will be happy.

  • Grant Lewis says:

    Does anyone know why the goodwill amount seems to remain steady at 2,575-ish? Seems a little high but may be legitimate based upon feedback.

  • Anonymous says:

    Goodwill isn’t amortized. I imagine they perform a goodwill impairment test annually and the fact they aren’t writing any off is a good thing.

    • Grant Lewis says:

      But why wouldn’t it come down over time? Or is this simply an amount that is likely due to the prior acquisitions? If it is what is it? Is it Intellectual Property?

      • Anonymous says:

        no it’s goodwill. hence the name.

      • Anonymous says:

        If you look at their FS, you will see Goodwill and Other Intangible Assets, Net. Most of the goodwill was purchased ’05-’07 and ’11. Companies purchased detailed in those reports too. They amortize the intangible assets.
        They do an annual impairment test to determine if goodwill requires a write-down.
        Those on the site who are better able to analyze stock values can give an opinion on whether or not having that much goodwill on books means anything. Not affecting cash flow.

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