With 18 months since the tw telecom acquisition under its belt, Level 3 Communications is now entering into what hopefully turn out to be a period of organic growth where the combined company starts to show its promise. There's sure to be ongoing integration work of course, but for 2016 it shouldn't be the dominant feature. They'll be starting from a relatively low overall base though, as today the company released its first quarter numbers, the relevant numbers of which are summarized in the table below:
|$ in millions||Q1/15||Q2/15||Q3/15||Q4/15||Q1/16||Comments|
|– North America – Wholesale||438||450||421||425||434||Wholesale up, and Enterprise growth was solid.|
|– North America – Enterprise||1097||1,101||1130||1146||1167|
|– EMEA – Wholesale||69||68||69||69||65||Ouch, 0uch, and ouch.|
|– EMEA – Enterprise||110||111||117||118||107|
|– EMEA – UK Government||26||25||26||22||19|
|– Latin America – Wholesale||40||40||39||35||39||Venezuelan deconsolidation plus currency fluctuations, but 10% constant currency growth over last year still.|
|– Latin America – Enterprise||145||146||144||125||116|
|Total Core Network Services||1,927||1,941||1,946||1,943||1,947|
|– Wholesale Voice & Other||126||120||116||110||104|
|Total Revenue||2,053||2,061||2,062||2,053||2051||Below expectations|
|Network Access Costs||723||696||706||708||694||Synergies still kicking in.|
|Network Expenses||351||359||356||337||331||Here also.|
|Cash SG&A||339||336||325||323||316||And here|
|Adjusted EBITDA||635||665||657||681||710||Quite strong considering the revenue numbers|
|Adjusted earnings per share||0.35||0.42||0.00||0.53||0.35||Below estimates, but this is still a volatile number.|
|Network access margin %||64.8%||66.2%||65.8%||65.5%||66.2%||Back over 66%.|
|Adj. EBITDA margin %||30.9%||32.3%||31.9%||33.2%||34.6%||35% here we come|
|Capital Expenditures||254||317||328||330||297||14.5% of revenue, higher than last year but down sequentially|
|Free Cash Flow||51||102||247||226||213||Significantly stronger than we usually see in Q1, full year guidance was maintained.|
Revenues - In North America, revenue growth was strong andn sold. Enterprise revenues continued to surge, and wholesale revenues did their part as well for once. But overseas, currency fluctuations dominated the numbers. In South America, a 10% organic enterprise growth rate under constant currency since last year was completely negated by the strong dollar, while in Europe organic weakness across the board was magnified. The overall effect was to bring Level 3's first quarter revenues in under analyst projections of $2.08B.
Expenses & EBITDA - Cost savings from integration synergies continued to roll in, bringing expenses down and raising EBITDA all the way up to $710M for the quarter. At 34.6% of revenues, this is a new high and is knocking on the 35% door. That was good enough for a slight bump in full year guidance from 9-12% growth to 10-12% in EBITDA -- a raising of the lower end.
Earnings & Free Cash Flow - EPS is still a volatile number, but $0.35 per share was below analyst projections and probably won't make traders happy in the short term. The free cash flow number was quite strong for Q1, which historically has been their lowest point of the year. The company maintained full year FCF numbers of $1.0-1.1B.
Further Thoughts - The European business still seems to have a ways to go to turn around, and it seems to me that they'll have to find a better way forward with it. It's overshadowing some pretty good US operational performance. I still think an inorganic move is inevitable, and prices on the other side of the Atlantic are still attractive. But when will Fidelity decide to monetize Colt?
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