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
(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|
|– enterprise||139||0||140||140||better than last quarter, but not expecting much|
|– enterprise||158||0||162||162||looking for some growth down south|
|Core Network Services||1482||425||1799||1940|
|Wholesale Voice & Other||147||142||142|
|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 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.
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