Enterprise growth in the US was strong for both tw telecom and Level 3, helping the now combined companies turn in solid third quarters. The deal closed late last week, and thus the results of both companies were reported together this morning. Here is a quick summary of their numbers in some context. First, tw telecom:
| tw telecom summary | ||||||
| ($ in millions) | Q3/13 | Q4/13 | Q1/14 | Q2/14 | Q3/14(actual) | Comments |
|---|---|---|---|---|---|---|
| – Data & Internet Services | 226.5 | 235.2 | 243.7 | 253.0 | 261 | Solid |
| – Network Services | 61.6 | 60.0 | 58.4 | 56.7 | 55 | |
| – Voice Services | 77.3 | 76.8 | 77.4 | 77.9 | 78 | |
| – Intercarrier Compensation | 7.3 | 6.6 | 6.1 | 6.7 | 6 | |
| – Taxes & Fees | 20.5 | 21.4 | 22.8 | 25.1 | 25 | |
| Total Revenue | 393.2 | 400.0 | 408.3 | 419.7 | 425 | Holding their momentum well through the close, inline with estimates and better than my guess. |
| M-EBITDA | 138.5 | 140.7 | 136.8 | 138.4 | 143 | Strong |
| M-EBITDA Margin | 35.2% | 35.2% | 33.5% | 33.0% | 33.6% | |
| Adj. Earnings per share | 0.12 | 0.11 | 0.07 | 0.08 | 0.09 | Consistent with my guess, a bit lower than estimates |
| Revenue Churn | 1.0% | 0.8% | 0.8% | 0.9% | Not reported yet | |
| Capital Expenditures | 102.0 | 208.0 | 102.2 | 95.2 | 104 | Steady as she goes |
| On-net buildings added | 566 | 607 | 523 | 554 | Not reported yet | |
| Free Cash Flow | 16.3 | (34.1) | 10.8 | 20.0 | 15 | Steady as usual |
Thoughts: I had left some room in my guesses for a slight faltering going into the closing of the acquisition, but tw telecom’s revenue and EBITDA held rock steady. Earnings per share were a penny or two light compared with analyst consensus (which Level 3 made up for in their own EPS). Missing from the usual tw telecom data are the company’s churn and on-net building additions, I wonder if Level 3 will offer some color there on the call. And now here are the numbers in some context for Level 3:
| Level 3 Communications summary | ||||||
| $ in millions | Q3/13 | Q4/13 | Q1/14 | Q2/14 | Q3/14(actual) | Comments |
| – North America – Wholesale | 365 | 374 | 368 | 367 | 368 | A strong enterprise number and a strengthening wholesale number make this the high point. |
| – North America – Enterprise | 622 | 651 | 675 | 684 | 695 | |
| – EMEA – Wholesale | 88 | 89 | 87 | 86 | 80 | Europe was tough this quarter it seems, probably currency-related but will wait for more color on the call. |
| – EMEA – Enterprise | 134 | 134 | 138 | 143 | 139 | |
| – Latin America – Wholesale | 39 | 41 | 40 | 42 | 42 | Not as tough as Europe, holding steady. I’m curious about the currency effects here too if there were any. |
| – Latin America – Enterprise | 149 | 154 | 149 | 157 | 158 | |
| Total Core Network Services | 1,397 | 1,443 | 1,457 | 1,479 | 1,482 | A bit lower than expected due to the European results. |
| – Wholesale Voice & Other | 172 | 159 | 152 | 146 | 147 | Stronger than anticipated. |
| Total Comm. Services | 1,569 | 1,602 | 1,609 | 1,625 | 1,629 | Inline with analyst projections overall. |
| Comm. COGS | 608 | 618 | 614 | 613 | 607 | They are breaking down SG&A now into network expenses (247) and SG&A (247). $7M of the latter was tw telecom transaction-related. |
| Comm. Cash SG&A | 576 | 518 | 537 | 553 | 551 | |
| Comm. Adjusted EBITDA | 385 | 466 | 458 | 459 | 471 | Includes $7M of transaction costs. |
| Adjusted earnings per share | (0.09) | 0.06 | 0.47 | 0.21 | 0.35 | A few pennies higher than expected. |
| Adj. Gross margin % | 61.2% | 61.4% | 61.8% | 62.3% | 62.7% | Still on the rise |
| Adj. EBITDA margin % | 24.5% | 29.1% | 28.5% | 28.2% | 28.9% | Should be 30%+ in Q4 given the merger. |
| Capital Expenditures | 194 | 189 | 163 | 241 | 204 | Right where it should be. |
| Free Cash Flow | (90) | 197 | (22) | 62 | 117 | On target for a big FCF year. |
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Using Baseball analogres it would have been perfect timing for LVLT to hit a homerun on earnings but all they mustered was a single unfortunately. Better than a strike out I guess.
Who had point for LVLT Europe results this quarter? Sunit. In a recurring revenue business turn arounds (up/down) don’t happen quickly – I’d say the CFO score keeper should be humbled by his own performance, Heard embarrassed with his legacy and Storey painfully aware he is still figuring out what it means to run a global business.
Jerks held onto our legacy tw vesting shares until after the announcement and the LVLT price was on its way down. One last FU to the dream that was.
On the earnings call I thought it was fascinating how several of the analysts seemed to be pushing Storey for product migrations off of TWT and faster network rationalization (i.e. more customer disruption). I thought Storey handled it effectively and to some extent I think Wall Street still doesn’t completely understand this acquisition. I can refer folks to my blog for my commentary on this, thanks as always.
http://techcaliber.com/blog/?p=3019
It’s still the honeymoon, David. I would give another 2Q’s at most before they give in to pressure and start the “synergy” axe swinging once they remember that integration is hard.
If Level(3) wants to scale back the headcount with TW , the easy way is to give a list of the On-Net Buildings to each sales rep and wish them luck.
I bet thats already underway. You don’t need 2x local reps in some podunk like Cleveland. It is also not clear how many of those buildings are really multi-tenant either, nor what the win rate or meaningful customer size is even when it is multi-tenant.