Earnings Preview: Level 3 and tw telecom

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