Level 3 Beats Estimates, Deconsolidates Venezuela, Expects NOL Windfall

October 28th, 2015 by · 25 Comments

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
pro forma
Q1/15 Q2/15 Q3/15 Comments
 – 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
Network Expenses 351 359 356
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.


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25 Comments So Far

  • schmuckinsurance says:

    thanks Rob.

    Any scuttlebutt on the backstory of John Blount’s “retirement”?

  • Anonymous says:

    Breauninger is the man! GC people are ruling LVLT.

  • Anonymous says:

    Nice to see such a unified culture… GC “ruling,” Blount burnout rumors.

    The only thing that would make it better is purchase of XO and those ass clowns.

  • mhammett says:

    Anything more on this deconsolidation?

  • Anonymous says:

    Jeff Storey making it the place to work in Colorado. Keep up the good work.

    • Anonymous says:

      HR or corpcomm?

      glassdoor.com would seem to disagree with you.

      • Anonymous says:

        Sounds like sour grapes to me, Anonymous. He’s telecom’s version of Steve Jobs – only a genuinely nice person.

        • Anonymous says:

          Hahaha!! Are you Storey’s mother?

          Jeff Storey is about as far from Steve Jobs as my son’s little league team is from the Kansas City Royals.

          Sure, Storey has (or his investment bankers have) done a very good job selecting acquisition targets. He’s done a good job integrating assets. He’s done a bad job growing revenue. He’s done horrible job innovating anything.

          Steve Jobs was an innovator. He introduced products that people didn’t even know they wanted (e.g., iTunes) or needed (e.g., iPad). Jobs grew revenue to levels no one could imagine.

          Right now Storey’s a guy who’s engaged in a number of horizontal mergers that have yielded large amounts of cost savings. By that standard he’s Bernie Ebbers with a follow through. In reality Storey’s a guy who doesn’t mind taking the knife to his workforce and slicing large portions of it off, ala Chainsaw Al Dunlap.

          Revenue growth at Level 3 is anemic. Practically 100% of the cash flow improvement has come from 3 areas, none of which Steve Jobs (or his biographers) would consider special.

          (1) Refinancing high yield debt to lower yielding debt. 90-95% of that improvement is a function of the Federal Reserve, not anything Level 3’s done. If you consider that LVLT had LT debt on average of about $9b (now $11b after TWC) between 2009-2015, they’ve probably lopped off about 500-600bps (or 5-6%). That generates roughly $400m-$500m a year in debt service savings.

          (2) Access savings (or reduction in third party costs to VZ, ATT, etc.) from acquisitions. These saving are attained by moving offnet capacity on-net. While this is very prudent, there’s nothing innovative about it.

          (3) Reduction in forces. The nice thing about horizontal mergers is that you have a large number of duplicative forces doing the same job. So you get to dump a bunch of them, close the offices (real estate savings) many of the former employees worked in.

          Storey’s proven to be an operationally sound CEO, but using the word “Jobs” either proceeding “Steve” or preceding “Creation” ain’t something that comes to mind.

          • Anonymous says:

            Anonymous, you sound and seem very angry and might suffer from knowitol. You need a little island time. Maybe some scotch.

            • Anonymous says:

              Touche, it does come across that way!!

              Not angry at all although two fingers of Macallan 30 would hit the spot.

              Anger notwithstanding, everything I wrote was accurate. 🙂

            • anotomiss says:

              I didn’t read anger in the comment. The last sentence was a bit snarky, but funny. Take that out and the rest seems pretty accurate.

          • Morty says:

            Not totally accurate —-There is a segment of lvlt business which is other rev,it is not being sold . Its left over from the Wiltel acquisition & is running off at double digits per yr.Used to exceed 1 bil, now under 500 mil . This is decreasing total revenue. Another factor is the strong dollar. Its having a substantial affect on European & south American revenue . Has been causig a loss of over over 50 mil per yr.
            These factors are clouding the revenue growth picture!
            The sales force, now about double in size should be about ready to adjust to selling new products ,different categories of clients & substantially greater geographical coverage.


            • Morty says:

              Addendum—-I misspoke re other rev . It is predominantly wholesale voice,which is no longer sold & is running off .


            • Anonymous says:

              Morty, your currency issue is a double-edged sword.

              For starters, I never heard a CEO on an earnings call discuss or read in a quarterly earnings press release how the weak dollar (2004-2013) was inflating reported revenues or earnings. Yet the USD lost 31% against the BRL and 12% against the EUR during that period.

              We started reading about currency impacts in Q1 2015 earnings releases.

              CEOs want to have their cake and eat it too. Weak dollar vis BRL, EUR & GBP and revs look great, but no need to point that out. Better that investors think we’re growing our revenue. Strong dollar and revenue abroad suck and we need discuss this by adding “constant currency” into our pro forma earnings releases.

              Here’s the double-edged sword part.

              The weak EUR/BRL/GBP are not merely cosmetic. If any of those currencies need to be repatriated back (converted) to dollars to pay, for example, debt service or capex, those are real financial impacts.

              Simple example, if LVLT needs to use 50m EUR of the $100m euros they have in EU banks (or held in EU gov’t notes) to pay debt service in USD, those currencies get converted to USD. The EURO has lost nearly 20% against the USD since May 2014. That means that 50m EUR buys 10 million fewer dollars than it bought a year ago. If they need 50m USD from the EU they now need to convert 62.5m EUR.

              That’s not merely a cosmetic impact.

              • Morty says:

                That is absolutely true ! Fortunately for lvlt that is not the current situation as 2016 FCF appears to be above 1 bil [my #s] & future rolls will not be done until 2018,when they start to roll their 2020 debt.
                The currency issues may be helpful in the current situation. They are ready to make another acquisition & the currency problems in Europe & South America may create some buying opportunities !


        • Anonymous says:

          Holy hyperbole, Batman!

          You all should have just let the Jobs comparison stand. It was absurd enough on its own as to discredit the sycophant. For Level 3 nonetheless. What a world!

  • Anonymous says:

    You all have likely never worked for a despicable human being, therefore don’t appreciate a good and balanced CEO when you see one.

  • schmuckinsurance says:

    Any thoughts on the VZ enterprise sale Rob, is Comcast the buyer?

  • Anonymous says:

    Chance for Level 3 to buy some business. Here’s some potential low hanging fruit.


  • schmuckinsurance says:

    Agree on L3 would have interest in parts but what I wonder is:

    Do you think the Feds would allow Comcast to buy it?
    Would Level 3 be allowed?
    Would Level 3 be interested in the whole thing or just parts?
    Do you think Zayo or CTL could get it done?

    • Rob Powell says:

      I don’t think the Feds would block either Comcast or Level 3. I doubt Zayo or CenturyLink would take the plunge on this, but Level 3 would have to look at it to be sure.

      • Grant Lewis says:

        I agree on Zayo but one never knows what neat trick Dan Caruso has up his sleeves. Still this one seems outside of his traditional M.O..

        On Comcast, I see that as the most likely interested party but it would have to be a deal w/o a great deal of synergies b/c they are trying to build their own Enterprise business so likely not a lot of opex savings at the start. Still the potential is very interesting.

        Level 3 … i see it but i don’t think they could swing it. Just seems way too big for them. But then again i’ve been wrong in the past. So who knows ….

  • schmuckinsurance says:

    debt mkts would finance them….

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