Earnings Preview: Level 3 and tw telecom

November 4th, 2014 by · Leave a Comment

With the close of the deal late last week, Level 3 Communications and tw telecom are now a single entity at least on paper. But tomorrow we will hear about how Q3 went for the two of them when still separate.

While the success or failure of the integration ahead really doesn't hinge on small swings in revenue or costs during the run-up to the deal, the markets will nevertheless be watching for any stumbles on the way in. But I think the key this quarter is to listen to just how Level 3 plans to merge the two enterprise businesses. We might not get all that much detail right away, but we should be able to taste the flavor. Whose trajectory will shift? Or will they opt for a more parallel, multiple trajectory approach to the different parts of the enterprise market?  My guess is they'll do their best not to rock either boat initially while they move internally to merge the local teams city by city.  It's those local feet on the ground that have been the engines of growth for bot, and they have to get that part right.

In the meantime, however, we have the numbers. Here are my guesses for both companies with a few quarters of context.  They are conservative in that I expected to see a bit of hesitancy on revenues at tw telecom going into the merger just on the basis of human nature.  We may not get all these numbers this time, but who knows.

Predictions for tw telecom
($ in millions) Q3/13 Q4/13 Q1/14 Q2/14

Q3/14

(my guess)

Comments
- Data & Internet Services 226.5 235.2 243.7 253.0 260  Still steady
- Network Services 61.6 60.0 58.4 56.7 54.5  Soft spot with level 3 on the way
- Voice Services 77.3 76.8 77.4 77.9 78
- Intercarrier Compensation 7.3 6.6 6.1 6.7 6.5
- Taxes & Fees 20.5 21.4 22.8 25.1 23
Total Revenue 393.2 400.0  408.3 419.7 422 Growing, but a bit below analyst projections
M-EBITDA 138.5 140.7 136.8 138.4 139.5
M-EBITDA Margin 35.2% 35.2% 33.5% 33.0% 33.1%
Adj. Earnings per share 0.12 0.11 0.07 0.08 0.09 A couple pennies below consensus
Revenue Churn 1.0% 0.8% 0.8% 0.9% 1.0%
Capital Expenditures 102.0 208.0 102.2 95.2 95 Still working on those expansions, but cautious otherwise
On-net buildings added 566 607 523 554 500  Mostly keeping the pace
Free Cash Flow 16.3 (34.1) 10.8 20.0 20  Steady as usual

And:

Level 3 Communications Predictions
$ in millions Q3/13 Q4/13 Q1/14 Q2/14 Q3/14

(my guess)

Comments
 - North America – Wholesale 365 374 368 367 366
 - North America - Enterprise 622 651 675 684 695
 - EMEA – Wholesale 88 89 87 86 87
 - EMEA – Enterprise 134 134 138 143 145
 - Latin America – Wholesale 39 41 40 42 43
 - Latin America – Enterprise 149 154 149 157 163
Total Core Network Services 1,397 1,443 1,457 1,479 1,499 Up 1.3% sequentially.
 - Wholesale Voice & Other 172 159 152 146 140
Total Comm. Services 1,569 1,602 1,609 1,625 1,639 A bit stronger than analyst projections
 
Comm. COGS 608 618 614 613 620 Includes some tw telecom acquisition costs, seasonally higher utility costs.
Comm. Cash SG&A 576 518 537 553 555
Comm. Adjusted EBITDA 385 466 458 459
464
Adjusted earnings per share (0.09) 0.06 0.47 0.21 0.32 A penny higher than analyst consensus
 
Adj. Gross margin % 61.2% 61.4% 61.8% 62.3% 62%
Adj. EBITDA margin % 24.5% 29.1% 28.5% 28.2% 28.3%
Capital Expenditures 194 189 163 241 200 Nothing surprising
Free Cash Flow (90) 197 (22) 62 0-100 Hard to gauge FCF this quarter

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Categories: Fiber Networks · Financials · Mergers and Acquisitions · Metro fiber

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