On Wednesday morning, Level 3 will report its first quarter earnings. Hence, as has been our custom on this site, here is a quick preview of what to expect. This will be Level 3’s first full quarter with the tw telecom business added in, and I expect to see significant integration expenses in advance of cost savings that will necessarily follow a bit later. Also of note, my admittedly limited reading of the currency markets suggests the storms will be fierce on that front in both Europe and South America, so bring a raincoat. Here is a table with my own guesses alongside the past 4 quarters in context.
|$ in millions||Q1/14||Q2/14||Q3/14||Q4/14
|– North America – Wholesale||368||367||368||443||442||Key here for Level 3 is continuing the growth trend in North American Enterprise revs or at least holding mostly steady in what is traditionally Level 3’s weakest growth quarter. Wholesale will do well to tread water, as usual.|
|– North America – Enterprise||675||684||695||1063||1072|
|– EMEA – Wholesale||87||86||80||75||71||While they are promising better things to come after a few rough years, currency fluctuations will probably mask any early progress here.|
|– EMEA – Enterprise||138||143||139||143||144|
|– Latin America – Wholesale||40||42||42||41||40||Gains offset by currency fluctuations, but nothing new in the underlying market trends.|
|– Latin America – Enterprise||149||157||158||150||152|
|Total Core Network Services||1,457||1,479||1,482||1,915||1,921||Up sequentially but barely, yet it will look better in constant currency terms.|
|– Wholesale Voice & Other||152||146||147||137||132||Trending downward as usual.|
|Total Revenue||1,609||1,625||1,629||2,052||2,053||Flat sequentially, and a bit less than projections|
|Comm. Adjusted EBITDA||458||459||471||625||625||I expect integration expenses will largely offset synergies realized in this quarter’s EBITDA|
|Adjusted earnings per share||0.47||0.21||0.35||0.35||0.30||This number is still rather hard to get a handle on.|
|Adj. Gross margin %||61.8%||62.3%||62.7%||63%|
|Adj. EBITDA margin %||28.5%||28.2%||28.9%||30.5%||30.5%||Deceptively flat given all the moving parts.|
|Capital Expenditures||163||241||204||346||350||Including integration expenses.|
|Free Cash Flow||(22)||62||117||(100-0)||As always, Q1 is the season of cash burn for Level 3, especially when integrating.|
Investors will be watching the enterprise number carefully for signs that the combined company is hitting snags and losing momentum. Currency effects will mean we hear lots of usage of the phrase ‘on a constant currency basis’.
It will be interesting to see how much detail the company gives on the progress of the integration. No matter how easy they try to make it sound, this one will take a lot of elbow grease underneath to get right. But they know that, which is why we aren’t hearing about headcount reductions and such.
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