Level 3 Finishes Off a Year of Integration and Enterprise Growth

February 4th, 2016 by · 3 Comments

Level 3 posted its fourth quarter 2016 earnings this morning, earning $3.323B, or $9.33 per share.  Most of that staggering number, of course, came from a non-cash benefit due to the recognition for tax purposes that the vast pile of net operating losses they have racked up over the years now appear likely to find some use.  Looking past that, revenues were flat as enterprise growth was offset by currency headwinds in Latin America, and earnings per share were roughly in-line.  Here's a table of Level 3's results in some context:

 

$ in millions Q4/14
pro forma
Q1/15 Q2/15 Q3/15 Q4/15 Comments
 – North America – Wholesale 425 438 450 421 425 Wholesale steady, and Enterprise growth was solid.
 – North America – Enterprise 1080 1097 1,101 1130 1146
 – EMEA – Wholesale 75 69 68 69 69 Enterprise growth is now officially a trend.
 – EMEA – Enterprise/Gov 146 138 136 143 146
 – Latin America – Wholesale 41 40 40 39 35 Currency fluctuations and Venezuela de-consolidation hit hard
 – Latin America – Enterprise 151 145 146 144 125
Total Core Network Services 1,918 1,927  1,941 1,946 1,943
 – Wholesale Voice & Other 134 126 120 116 110
Total Revenue 2,052 2,053 2,061  2,062 2,053 Slightly below estimates.
Network Access Costs  732 723  696 706 708
Network Expenses 364 351 359 356 337
Cash SG&A 332 339 336 325 323 Integration savings seem to be kicking in here
Adjusted EBITDA 625 635 665 657 681 Includes $18M in integration expenses
Adjusted earnings per share -0.24 0.35  0.42 0.00 0.53 Not including Venezuelan deconsolidation, $0.48, ahead of expectations
Network access margin % 64% 64.8% 66.2% 65.8% 65.5% This number seems to have leveled off
Adj. EBITDA margin % 30.5% 30.9% 32.3% 31.9% 33.2% Now approaching where TW Telecom was on the entire revenue base
 
Capital Expenditures 346 254 317 328 330 16% of revenue again.
Free Cash Flow (9) 51  102 247 226 Full year 2015 FCF of $626M

 

Revenue growth: For the full year, Level 3 says core network serves were up 5.3% on a pro forma and constant currency basis, while Enterprise revenues were up 7.2% via the same measure.  Not including the de-consolidation of the Venezuelan business and its $21M of revenue, the growth trend would have been intact both for CNS and total revenue. While the actual numbers haven't gone anywhere lately, they seem poised to have a better 2016.  I didn't expect them to burn up the track on organic growth this year, the main task was to not stumble (or worse) while managing a complex integration, and they succeeded in doing that.  The European enterprise numbers were once again encouraging.

EBITDA & Costs: The big story for Level 3 this year was the surge in EBITDA as they integrated the tw telecom business.  The company says that it has now achieved $216M in annualized run-rated synergies since closing the purchase, exceeding the $140M they had promised to reach by later this quarter and more than the $200M they had promised in total.  EBITDA during the quarter hit $681M, or a new high of 33.2% of revenue.  At 16%, they hit their guidance for full year 2015 EBITDA growth of 15-17%, and for 2016 they are looking at growth of 9-12% starting from $2.592B, which doesn't include the Venezuelan business.  That works out to a range of $2.825-2.903B.

Cash Flows: Free cash flow was strong again during the fourth quarter, giving them a full year FCF number of $626M -- a level many never thought would happen.  Looking forward, Level 3 is looking for 2016 to bring in FCF of $1.0-1.1B, which matches what analysts have been projecting.

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Categories: Fiber Networks · Financials · Internet Backbones

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3 Comments So Far


  • Anonymous says:

    The European enterprise numbers were officially a trend 3 years ago Rob, growing every qtr and at 7% yoy. whereas in fact they are currently flat yoy

  • Tony says:

    My opinion, LVLTs commentary on how they will spend the FCF is in part meant for consumption by potential suitors in the near term, I am not really convinced they want to purchase and integrate anymore sizable companies. I still think they are trying to drum up interest among some of the biggest players and yes Comcast is at the top of my list in that instance, especially with their recent push into the enterprise space…

  • davidrohde says:

    If there wasn’t much sizzle to their organic growth in 2015, there ought to be in 2016. Here’s my commentary for enterprise users on Level 3’s earnings release and call with analysts, headlined “Maybe Level 3 should stop thinking of itself as a turnaround story”:
    http://techcaliber.com/blog/?p=3591

    Meanwhile, I’ll note that Storey’s description of possible acquisition targets is an amazing facsimile of Colt. Check the earnings call transcript – a good way to find these is on Seeking Alpha, just put in the stock symbol, in this case LVLT, and click on Transcripts. I would not be surprised at all to see that transaction soon. Level 3 is currently a buyer, not a seller. I believe you’d have to offer Level 3 an enormous premium even over their increased stock price for them to begin to consider cashing in.

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