Level 3 and tw Held Steady Through Q3

November 5th, 2014 by · 7 Comments

Enterprise growth in the US was strong for both tw telecom and Level 3, helping the now combined companies turn in solid third quarters.  The deal closed late last week, and thus the results of both companies were reported together this morning.  Here is a quick summary of their numbers in some context.  First, tw telecom:

tw telecom summary
($ in millions) Q3/13 Q4/13 Q1/14 Q2/14 Q3/14(actual) Comments
– Data & Internet Services 226.5 235.2 243.7 253.0 261 Solid
– Network Services 61.6 60.0 58.4 56.7 55
– Voice Services 77.3 76.8 77.4 77.9 78
– Intercarrier Compensation 7.3 6.6 6.1 6.7 6
– Taxes & Fees 20.5 21.4 22.8 25.1 25
Total Revenue 393.2 400.0  408.3 419.7 425 Holding their momentum well through the close, inline with estimates and better than my guess.
M-EBITDA 138.5 140.7 136.8 138.4 143 Strong
M-EBITDA Margin 35.2% 35.2% 33.5% 33.0% 33.6%
Adj. Earnings per share 0.12 0.11 0.07 0.08 0.09 Consistent with my guess, a bit lower than estimates
Revenue Churn 1.0% 0.8% 0.8% 0.9%   Not reported yet
Capital Expenditures 102.0 208.0 102.2 95.2 104 Steady as she goes
On-net buildings added 566 607 523 554   Not reported yet
Free Cash Flow 16.3 (34.1) 10.8 20.0 15 Steady as usual

Thoughts: I had left some room in my guesses for a slight faltering going into the closing of the acquisition, but tw telecom’s revenue and EBITDA held rock steady.  Earnings per share were a penny or two light compared with analyst consensus (which Level 3 made up for in their own EPS).  Missing from the usual tw telecom data are the company’s churn and on-net building additions, I wonder if Level 3 will offer some color there on the call. And now here are the numbers in some context for Level 3:

Level 3 Communications summary
$ in millions Q3/13 Q4/13 Q1/14 Q2/14 Q3/14(actual) Comments
 – North America – Wholesale 365 374 368 367 368 A strong enterprise number and a strengthening wholesale number make this the high point.
 – North America – Enterprise 622 651 675 684 695
 – EMEA – Wholesale 88 89 87 86 80 Europe was tough this quarter it seems, probably currency-related but will wait for more color on the call.
 – EMEA – Enterprise 134 134 138 143 139
 – Latin America – Wholesale 39 41 40 42 42 Not as tough as Europe, holding steady.  I’m curious about the currency effects here too if there were any.
 – Latin America – Enterprise 149 154 149 157 158
Total Core Network Services 1,397 1,443 1,457 1,479 1,482 A bit lower than expected due to the European results.
 – Wholesale Voice & Other 172 159 152 146 147 Stronger than anticipated.
Total Comm. Services 1,569 1,602 1,609 1,625 1,629 Inline with analyst projections overall.
Comm. COGS 608 618 614 613 607 They are breaking down SG&A now into network expenses (247) and SG&A (247).  $7M of the latter was tw telecom transaction-related.
Comm. Cash SG&A 576 518 537 553 551
Comm. Adjusted EBITDA 385 466 458 459 471 Includes $7M of transaction costs.
Adjusted earnings per share (0.09) 0.06 0.47 0.21 0.35 A few pennies higher than expected.
Adj. Gross margin % 61.2% 61.4% 61.8% 62.3% 62.7% Still on the rise
Adj. EBITDA margin % 24.5% 29.1% 28.5% 28.2% 28.9% Should be 30%+ in Q4 given the merger.
Capital Expenditures 194 189 163 241 204 Right where it should be.
Free Cash Flow (90) 197 (22) 62 117 On target for a big FCF year.
Thoughts: Revenues were strong in the US, steady in Latin America, and quite weak in Europe.  But costs were well contained, EBITDA was up, and earnings per share were ahead of expectations.  Free cash flow was pretty good, and capex was right where it was supposed to be.  Other than some color on Europe, the main thing to watch for on the call will be the details on the integration plans.
All in all, the two companies didn’t stumble on the way in, so the focus shifts to the future – which will be a year or two of integration to work through.

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7 Comments So Far

  • Anonymous says:

    Using Baseball analogres it would have been perfect timing for LVLT to hit a homerun on earnings but all they mustered was a single unfortunately. Better than a strike out I guess.

  • Anonymous says:

    Who had point for LVLT Europe results this quarter? Sunit. In a recurring revenue business turn arounds (up/down) don’t happen quickly – I’d say the CFO score keeper should be humbled by his own performance, Heard embarrassed with his legacy and Storey painfully aware he is still figuring out what it means to run a global business.

  • Anonymous says:

    Jerks held onto our legacy tw vesting shares until after the announcement and the LVLT price was on its way down. One last FU to the dream that was.

  • davidrohde says:

    On the earnings call I thought it was fascinating how several of the analysts seemed to be pushing Storey for product migrations off of TWT and faster network rationalization (i.e. more customer disruption). I thought Storey handled it effectively and to some extent I think Wall Street still doesn’t completely understand this acquisition. I can refer folks to my blog for my commentary on this, thanks as always.

    • Anonymous says:

      It’s still the honeymoon, David. I would give another 2Q’s at most before they give in to pressure and start the “synergy” axe swinging once they remember that integration is hard.

  • bebbers says:

    If Level(3) wants to scale back the headcount with TW , the easy way is to give a list of the On-Net Buildings to each sales rep and wish them luck.

    • Anonymous says:

      I bet thats already underway. You don’t need 2x local reps in some podunk like Cleveland. It is also not clear how many of those buildings are really multi-tenant either, nor what the win rate or meaningful customer size is even when it is multi-tenant.

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