Earnings Preview: Level 3’s Integration Kicks Off

February 2nd, 2015 by · 1 Comment

On Wednesday morning, Level 3 will report its fourth quarter numbers with two months of the former tw telecom’s results to add in.  That will make hash out of the usual table of context I use to keep things in perspective, so instead we’ll try something else to make relatively clear predictions with:

$ in millions except per share data  Level3
tw telecom
Level 3
(my estimate)
Level 3
(pro forma estimate)
 North America   (with 62 days of tw)  (with 92 days of tw)
 – wholesale 368 86 421 450 Some revenue overlap and general wholesale softness
 – enterprise 695 339 953 1065 3% sequential growth
  – wholesale 80 0 80 80
  – enterprise 139 0 140 140  better than last quarter, but not expecting much
 Latin America
 – wholesale 42 0 43 43
 – enterprise 158 0 162 162 looking for some growth down south
Core Network Services 1482 425 1799 1940
Wholesale Voice & Other 147 142 142
Total Revenue 1629 425 1941 2082
Network Access 607 150? 725 775 Includes $5M integration costs
Network Expenses 304 72? 353 378 Includes $3M integration costs
Cash SG&A 247 60? 291  313 Includes $5M integration costs
Adjusted EBITDA 471 143 572 616
Adjusted EPS 0.35 0.09 ? ? No idea
Adjusted gross margin % 62.7% ~64.7% 62.5% 62.8%
Adjusted EBITDA margin % 28.9% ~33.6% 29.4% 29.6% 30+% ex integration
Capital Expenditures 204 104 275 300 14-15% of revenue, reflecting tw’s higher capex model
Free Cash Flow 62 20 150-250 150-250 Lots of moving parts, but Q4 cash flow for L3 is usually strong.

The third column is with 62 days of tw telecom results, and the fourth is as if the tw telecom deal closed on October 1.  I’m making a few assumptions about the breakdown of both revenue and expenses here. I lumped the network, taxes & fees, and intercarrier compensation into the Level 3’s wholesale group, and the rest as enterprise.  Also, I made a guess at breaking down tw telecom’s costs along the lines of Level 3’s accounting practices. It’s just an estimate, I have no direct knowledge of this piece.  It could all be irrelevant, as Level 3 may shake up the reporting structure anyway.

Yahoo finance estimates are far enough apart that I suspect it includes contributions of both columns 3 and 4, which is going to make things confusing come Wednesday. And even if there was some consistency in that, there are so many moving parts that trying to estimate EPS this quarter is an exercise in futility – unless of course you get paid for that sort of thing and have to come with a number no matter what, which I don’t.

But the bottom line is that I’m not expecting a big growth quarter in Q4 for the combined company, just because it seems more likely that positives will be offset by other crap due to the complex situation.  I’d be happy to be lowballing things, it’s just that combinations make me conservative and I’m just trying to get a sense of what the combined company will look like.  Integration spending will have just gotten going while the benefits will be mostly down the road.

When you look at these numbers though, you do get the feeling that Level 3’s appetite for more M&A has to be overseas.  The Latin American and EMEA sections do well enough that they just need some better revenue scale to really make them sing.

If you haven't already, please take our Reader Survey! Just 3 questions to help us better understand who is reading Telecom Ramblings so we can serve you better!

Categories: Fiber Networks · Financials

Join the Discussion!

1 Comment, Add Yours!

  • Anonymous says:

    Bottom line EPS will be all over the place with debt retirement, tax valuation allowance release (see Q3 10-Q), and a strong dollar.

Leave a Comment

You may Log In to post a comment, or fill in the form to post anonymously.

  • Ramblings’ Jobs

    Post a Job - Just $99/30days
  • Event Calendar