Earnings Preview: Level 3’s Integration Kicks Into High Gear

April 27th, 2015 by · 3 Comments

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
pro forma
Q1/15
(my guess)
Comments
 – 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.

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 · Internet Backbones

Join the Discussion!

3 Comments So Far


  • Anonymous says:

    Why wait to announce integration is a success and they are done? Every previous one has been just that – a pronouncement devoid of actual completion. Let’s just get it over with and call it good!

  • Anonymous says:

    So sell tomorrow before Wednesday’s less than stellar report is what I am reading…

  • Tim Dawson says:

    Integration Kicks Into High Gear — I’ve been working on getting a quote for over 3 weeks filled with excuses, a jump through hoops process to get pricing approval, bad information i.e., ‘yep that’s on net, no it’s not’. Let me check and get back to you delays.

    Management of the basics like inventory aren’t there. Still the same old same old.

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