Earnings Preview: Watching Level 3’s Momentum

July 27th, 2014 by · 2 Comments

Last quarter the question was whether Level 3’s revenue and EBITDA growth would justify its stock price gains, and they came through big.  On Tuesday they’ll report their Q2 numbers and the dynamics are rather less organic as we have the tw telecom deal hanging overhead.  But it is important that the company maintain its growth momentum going into the merger.  Here are my guesses for Level 3’s Q2 numbers in the usual historical context:

$ in millions Q2/13 Q3/13 Q4/13 Q1/14 Q2/14
(my guesses)
 – North America – Wholesale 367 365 374 368 368 Wholesale will probably continue to drift, while enterprise revenue growth will be the key.  Their North American enterprise revs will be watched closely.
 – North America – Enterprise 603 622 651 675 685
 – EMEA – Wholesale  88 88 89 87 87 Same as in North America, but with enterprise revenues at an earlier stage in the growth process.
 – EMEA – Enterprise 132 134 134 138 140
 – Latin America – Wholesale 40 39 41 40 41 Looking for a better number here than last quarter.  However I am not up to date on the currency fluctuations.
 – Latin America – Enterprise 149 149 154 149 151
Total Core Network Services 1,379 1,397 1,443 1,457 1,472 The growth in CNS has been getting steadily better.
 – Wholesale Voice & Other 186 172 159 152 143 The usual downtrend for this segment.
Total Comm. Services  1,565 1,569 1,602 1,609 1,615 A bit higher than street estimates.
Comm. COGS 616 608 618 614 616
Comm. Cash SG&A 562 576 518 537 540
Comm. Adjusted EBITDA 387 385 466 458 459
Adjusted earnings per share  (0.11) (0.09) 0.06 0.47 0.31 A few pennies higher than estimates currently put it, but this number is not yet very predictable.
Adj. Gross margin % 60.6% 61.2% 61.4% 61.8% 61.8% After a strong bump last quarter, I expect a smaller one this quarter
Adj. EBITDA margin % 24.7% 24.5% 29.1% 28.5% 28.4%
Capital Expenditures 208 194 189 163 ~200
Free Cash Flow  8 (90) 197 (22) 0-100 Could be anything near breakeven or above.

The street doesn’t seem to be expecting too much this quarter, at least from my perspective, with Yahoo Finance consensus estimates at $1.60B in revenue and $0.28 per share in earnings.  My own guesses are a bit better than that, but it still feels conservative if enterprise revenue growth hasn’t taken a breather.  However, on the EBITDA line I expect some early costs from the tw telecom deal preparation will hold things down a bit, while gross margins should hold relatively steady.

But while revenue momentum will be closely watched, I expect analysts will be looking for any details Level 3 is willing to divulge on next quarter’s big project.  That of course would be the tw telecom integration, which will be a big, big job no matter how they slice it.  I’m sure Level 3 will be ready to say what they can, but it probably won’t be much.

The tw telecom deal has one major difference from the many others Level 3 has done over the years.  I’m not talking about the technology or assets or even the difference in customer base, but in the motivation.  This is the first big deal Level 3 has done that was truly offensive and opportunistic.  From Genuity through WilTel, Broadwing, the metro purchases, and Global Crossing the underlying thread was gaining the scale to match the long term debt they came out of the dotcom boom with.  They were essentially forced moves, ones Level 3 almost had to make.

This year they didn’t need to do it.  The balance sheet issues no longer hang over their head, and the decision to buy tw telecom is therefore driven by something new — optimism.   That being said, I doubt very much they will express any appetite for further M&A in the near term given the integration task ahead of them.  I mean, they could do it in Europe I just think they are less likely to risk it for a while.


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Categories: Fiber Networks · Financials

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2 Comments So Far

  • fanfare says:

    Certainly agree with you on that Rob…. the implications re the merger …. not the earnings since I usually leave those estimates to people more qualified than myself. I will say that I am hoping for a bit more…. but I guess we will see soon enough. On the merger: I hated to slow our momentum on organic numbers … but the more I look at this merger the more I like it. Well, I liked it 2 years ago .. but whatever. Bottom line is that this was an offensive move .. compared to the others.

    • Anonymous says:

      You must have received your talking points from the tw side: this is not a “merger” – it is an ACQUISITION. HR and others ought to stop suggesting it as such.

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