With nearly a full year on the books for Level 3's purchase of tw telecom, the market is looking for both integration savings and better growth prospects going forward. In the company's Q3 results, we saw some more of the integration savings, and while growth isn't shifting gears yet the upward trend is still intact. They also announced the deconsolidation of their Venezuela business as of the end of Q3. Here are Level 3's numbers in some context:
|$ in millions||Q3/14||Q4/14
|– North America – Wholesale||368||425||438||450||421||Wholesale dropped back, but Enterprise kicked into higher gear|
|– North America – Enterprise||695||1080||1097||1,101||1130|
|– EMEA – Wholesale||80||75||69||68||69||EMEA Enterprise was a bright spot this quarter|
|– EMEA – Enterprise/Gov||139||146||138||136||143|
|– Latin America – Wholesale||42||41||40||40||39||Venezuela operations to be deconsolidated|
|– Latin America – Enterprise||158||151||145||146||144|
|Total Core Network Services||1,482||1,918||1,927||1,941||1,946||Nothing spectacular, but growth intact|
|– Wholesale Voice & Other||147||134||126||120||116|
|Total Revenue||1,629||2,052||2,053||2,061||2,062||Inline with analyst estimates|
|Network Access Costs||723||696||706|
|Cash SG&A||339||336||325||Integration savings seem to be kicking in here|
|Comm. Adjusted EBITDA||471||625||635||665||657||Includes $18M in integration expenses|
|Adjusted earnings per share||0.35||0.35||0.35||0.42||0.00||Not including Venezuelan deconsolidation, $0.48, ahead of expectations|
|Network access margin %||62.7%||64%||64.8%||66.2%||65.8%|
|Adj. EBITDA margin %||28.9%||30.5%||30.9%||32.3%||31.9%||Excluding integration expenses, 32.7%|
|Capital Expenditures||204||346||254||317||328||Almost 16% of revenue.|
|Free Cash Flow||117||(9)||51||102||247||A big Q3 FCF number|
The revenue bright spots were clearly on the enterprise side in both the US and Europe, with wholesale pulling back a bit after last quarter's surge and tempering things. Currency effects and Venezuelan troubles continued to hold back an otherwise strong Latin American business. Level 3 said it will deconsolidate the Venezuelan business going forward, which contributed $25M in revenue and $16M in EBITDA during the quarter. The Venezuelan economy has been rocky to say the least.
As for the integration, Level 3 achieved another $45M in run-rate synergies while spending $18M during the quarter, without which they saw some nice EBITDA expansion to $675M and 32.7% of revenue. The main savings came in SG&A this quarter, with some seasonally higher utility costs helping to hold up things on the network expenses side. Level 3 raised its guidance slightly for full year EBITDA growth to 15-17% from 14-17% as a result.
A one-time charge associated with the Venezuelan deconsolidation pushed earnings per share to breakeven, but otherwise was $0.48 beating analyst projections by a few pennies. As for next quarter, prepare for a huge one-time benefit. Level 3 says it will be releasing $10B in net operating loss, which will give them a $3.1-3.3B non-cash boost to Q4 earnings.
Free cash flow of $247M was quite strong, and Q4 is usually a very good FCF quarter for Level 3 as well, suggesting the aggressive $600-650M they have forecast for the full year is well within range given that they are at $400M after nine months so far. That's despite spending almost 16% of revenue on capex during the quarter.