In recent quarters, it has been enterprise sales that have held up the company's growth trajectory, but in Q2 it was the wholesale side that chipped in when enterprise revenues came in a bit light. That combined with strong savings on network access let Level 3 beat estimates on EPS and EBITDA even as total revenue came up a bit short.
|$ in millions||Q2/14||Q3/14||Q4/14
|– North America – Wholesale||367||368||425||438||450||NA Enterprise revenues grew slightly, but didn't impress. But wholesale saw another strong quarter of growth.|
|– North America – Enterprise||684||695||1080||1097||1,101|
|– EMEA – Wholesale||86||80||75||69||68||Stabilizing at last perhaps? I look forward to the company's comments on this sector|
|– EMEA – Enterprise/Gov||143||139||146||138||136|
|– Latin America – Wholesale||42||42||41||40||40||Still not the growth engine it had been for so long, but holding steady nonetheless.|
|– Latin America – Enterprise||157||158||151||145||146|
|Total Core Network Services||1,479||1,482||1,918||1,927||1,941||Growing 5% over the same period last year, pro forma.|
|– Wholesale Voice & Other||146||147||134||126||120||No surprises.|
|Total Revenue||1,625||1,629||2,052||2,053||2061||Analyst estimates had this at $2.08B, which turned out to be high. But the growth trend is intact.|
|Network Access Costs||724||723||696||This is the big cost savings number for Q2. Was it all integration, or were there any one-time items to be aware of? Fodder for the conference call.|
|Network Expenses||357||351||359||I'd guess this is where we saw some integration spending in Q2.|
|Cash SG&A||344||339||336||As promised, headcount savings from the integration are not being hurried.|
|Comm. Adjusted EBITDA||459||471||625||635||665||Very strong, mostly carried by network access savings. Includes $5M of integration expenses|
|Adjusted earnings per share||0.21||0.35||0.35||0.35||0.42||Excludes a loss of $0.46 from debt extinguishment.|
|Network access margin %||62.3%||62.7%||64%||64.8%||66.2%||The biggest gross margin we've seen from Level 3.|
|Adj. EBITDA margin %||28.2%||28.9%||30.5%||30.9%||32.3%||The same gross margin boost shows through in a significant EBITDA margin jump.|
|Capital Expenditures||241||204||346||254||317||Seems to be in the right range.|
|Free Cash Flow||62||117||(9)||51||102||With Q1 and Q2 both positive, this is looking to be a banner year for FCF for Level 3.|
Revenues: I'll be curious to hear the story behind the North American enterprise revenue growth deceleration, although it had to hiccup sometime. Wholesale strength surprised me in the other way though. Looking to hear more about the European turnaround project, and hopefully about Latin American projects as well.
EBITDA: Cost savings in network access were huge, driving the rest of the numbers to happy places. This appears to be where the company has put its integration spending, and it has paid off. With only $5M in integration spending during the quarter, though, one wonders when the really heavy lifting starts.
Outlook: Revenues may have looked a bit light to the street, but the margin profile improvements more than compensate for that in my book. Level 3 maintained its general projections for the full year of 14-17% adjusted EBITDA growth and $600-650M in free cash flow.