With tw telecom in Tow, Level 3 Posts Q4 Earnings

February 4th, 2015 by · 15 Comments

In a release that offered a blizzard of combined, standalone, and pro-forma results for the fourth quarter of 2014, Level 3 started a new chapter of its story with the incorporation of tw telecom.  Lots of data, but just what does it say?  My initial take is that North American enterprise revenue growth remained pretty strong for both legacy Level 3 and tw, wholesale was weak, and acquisition costs were big enough to distort it all quite effectively.

Rather than try to mirror it all, I'm going to just put the pro-forma numbers for Q4 we do have alongside Level 3's past quarters.  That will hopefully show the change in shape and give starting point and new shape of the company, i.e. the place with which we'll be comparing Q1 in a few months.  For a more detailed look at the performance of the two businesses on a standalone basis, see the main release (and good luck).

$ in millions Q4/13 Q1/14 Q2/14 Q3/14 Q4/14
Pro Forma
 – North America – Wholesale 374 368 367 368 443 Strong enterprise growth, weak wholesale.
 – North America – Enterprise 651 675 684 695 1063
 – EMEA – Wholesale 89 87 86 80 75 Strong enterprise growth, weak wholesale.
 – EMEA – Enterprise 134 138 143 139 143
 – Latin America – Wholesale 41 40 42 42 41 Down sequentially, strong dollar?
 – Latin America – Enterprise 154 149 157 158 150
Total Core Network Services 1,443 1,457 1,479 1,482 1,915
 – Wholesale Voice & Other 159 152 146 147 137 A steep drop sequentially, but last number's quarter was probably the outlier.
Total Comm. Services 1,602 1,609 1,625 1,629 2052
Network Access Costs 618 607
Network Related Costs 298 307
SG&A 263 266
Comm. Adjusted EBITDA 466 458 459 471 625 excludes $156M in acquisition expenses else EBITDA was $469M
Adjusted earnings per share 0.06 0.47 0.21 0.35 0.35
Adj. Gross margin % 61.4% 61.8% 62.3% 62.7%
Adj. EBITDA margin % 29.1% 28.5% 28.2% 28.9% 30.5% including acquisition expenses, 22.9%
Capital Expenditures 189 163 241 204 346 17% of revenue, I wonder how high this will go now
Free Cash Flow 197 (22) 62 117

For 2015, Level 3 offered a powerful free cash flow range of $550-600M for the full year.  Adjusted EBITDA is expected to grow 12-16% from $2.271B, which works out to $2.54-2.63B.  Net cash interest will be about $640M, capex will be about 15% of revenue, D&A will be $1.16B, taxes will be about $60M, and non-cash compensation about $120M.

For further color, I'll be listening to the call and trying to digest the rest of the data this morning.

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Categories: Fiber Networks · Financials

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15 Comments So Far

  • mhammett says:

    Now where’s the combined map, hopefully in KML or shapefile? :-p

  • Rob Powell says:

    oops, fixed the N.A. enterprise number typo

  • Rob Powell says:

    Currency effects have been a major headwind this year it seems.

  • Rob Powell says:

    $38M of run-rate synergies achieved in Q4

  • Rob Powell says:

    More UK government pain.

    • carrier1 says:

      It’s not more UK Government pain Rob, it’s always been a known train wreck that needed to be sold 2 years ago. There was never space at that table for Level 3. Enterprise growth has been a solid c9% for the last 3 years, Wholesale will be an issue going forward. Needs significant investment in buildings and focus on core markets for Enterprise to mitigate declines elsewhere. Look at Capex as a % of revenue v higher growth competitors and number of buildings v NA. The key is a significant acquisition that will solve much of this at a stroke.

  • schmuckinsurance says:

    Interoute recently quoted their sales, margin, funding structure and business mix to an industry trade rag – I would say it is safe to assume they are looking.

  • schmuckinsurance says:

    I agree carrier1, not sure why Colt would sell here.

  • carrier1 says:

    schmuckinsurance, great handle btw:) your right, Interoute are looking and have been for a couple of years, the price is high though and while it is somewhat accretive and certainly there are some significant network synergies across continental Europe, it basically gives Level 3 more of the same, good continental European reach, but no depth, i.e. metro and buildings, therefore winning pan european and in-country Enterprise business will be challenging due to the large off-net component, meaning lower margins, challenging customer delivery and service and no new USP. Until they solve this, Level 3’s European sweet spot will continue to be serving the needs of US Enterprise customers who require connectivity into Europe and vice versa where their TA and US assets are compelling. so for what it’s worth in summary, my considered view is that they need to:
    1. Focus on winning high margin wholesale business and not spread themselves too thin
    2. Ramp up a heavyweight indirect channel across western Europe, that will allow them to reach enterprise markets without increasing opex and complexity in each country
    3. Sell, or partner with say BT / Vodafone etc for the UK Government business, or find the right partner as this business is deflecting from the enterprise efforts in terms of resources and is highly complex in terms of legacy GC systems and processes and of course it isn’t and won’t grow as UK Government dept’s don’t buy vanilla bandwidth or even just a VPN, they want LAN and Desktop management as table stakes and Level 3 cannot persuade them to change their buying behavior.
    4. To be a truly global player, they urgently need to invest in Europe, the focus has been on the US for 3 years now. The GC acquisition was a great platform to build from, but it needed significant investment in the metro, certainly in the UK, Germany, France and Netherlands in order to leverage this network, otherwise they cannot compete.
    That’s my 2 cents anyway.

  • schmuckinsurance says:

    thanks for the long and insightful post carrier1, I hope it won’t be the last.

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