Level 3 Communications (LVLT) reports earnings Thursday morning, the first US nextgen carrier to do so. And when they do, the first thing everyone is going to look for is evidence of economic deterioration. LVLT’s business has many units and their earnings reports can be rather complex in comparison to a pure colocation provider like Equinix or an equipment provider like Infinera. So it’s important to review where they have been and just what to expect beforehand.
Thejuice posted his model’s predictions earlier this month, and what follows are my own. Here is my quick summary of the Q3 numbers and a quick discussion of what to look for. All numbers are in millions unless otherwise specified, and I don’t care about coal so it isn’t in the table except for its contribution to EPS and EBITDA:
LVLT’s growth this quarter, should there be any, should come from the wholesale network and European businesses. The business markets group is known to be churning off lower margin customers and hence will probably be flat, and while content markets is growing organically the Q2 number had perhaps $6M or so in revenue from the Vyvx Ad business that was sold in June. Other revenue includes both the SBC contract and managed modem amongst other things, and will probably decline as per normal.
LVLT has given annual guidance of 8-13% core revenue growth, where ‘core’ means the 4 major business units. At this point, hitting the top of that range would seem to require some sort of divine intervention, even thought the company has forecast the usual seasonality in its growth rate. Indeed, Q1 and Q2 growth was light, and hence Q3 and Q4 will need to show solid progress to come near its core revenue guidance. The company has struggled for the last few quarters first with provisioning issues and then with recovering their growth profile, but indications are strong that they are no longer limited by internal problems. Of course, now we have external economic issues to deal with – it’s always something, but let’s see what LVLT has to say on growth now.
LVLT’s 2008 EBITDA guidance of $950-1100 is a wide range that they seem certain to hit, even zero EBITDA growth in Q3 and Q4 will get them there. The Q2 number had some one time items, including some extra deferred revenue. Also, further improvements in SG&A are expected in Q4, but not so much in Q3. Hence, the Q3 EBITDA number is not likely to increase much over Q2. The company may narrow EBITDA guidance, given that a $150M error bar will render current guidance rather useless.
But what effect will the crisis in the financial markets have on Level 3? Well, it could show up in several places. European revenues could show the effects of currency fluctuations. Business markets may show more churn than expected. Or the wholesale markets might see growth evaporate. It certainly will come up regarding the bonds that mature in 2009 and 2010. But there’s always the possibility it might not show up in Q3, and we will hear something akin to ‘so far things are ok, but we will be watching carefully for macro trends to impact our results’. In 24 hours we will see.
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Isn’t ATT the first US next gen carrier to come out with earnings and not LVLT?
ATT’s comments on wholesale during Q3 seem to be positive for growth…
— 16.2 percent increase in wireline IP data revenues driven by expansion in AT&T U-verse(SM) services and growth in business products such as Virtual Private Networks (VPNs), managed Internet services and hosting
— Major turnaround and return to growth in wholesale revenues, reflecting solid demand from wireless carriers, Internet service providers and other customers.
I would classify AT&T as an RBOC, not a nextgen operator. But yes, I do think AT&T’s wholesale results are a good sign, though I would caution that they tend to play up their IP data growth and forget to mention that much of it simply churned from their legacy data products and represents migration more than anything else.
Looking at communications ebitda—-Q1 was 205 mil & Q2 less the 12 mil one time item was 239 mil [coal was -2] —-there was a one time charge of 4 mil cash for layoffs .
I believe true ebitda [my term] was 243 mil for Q2 .
Morty
I believe there was a one time charge of 7 mil for layoffs in Q1 —- true ebitda was 212.
Yes, there are always such one time items, but guidance was for ebitda and not ‘true ebitda’ so I didn’t want to rehash the subject.
rob;
frankly i cannot see a scenario where the don’t beat expectations. but the real question will be 1) guidance, and 2) 10 debt. not sure we can breath easier until question 2 is answered.
jeremy.
The problem with putting up 251 ebitda for Q2 is that you end up with a total distortion of growth or lack thereof in Q3—–If LVLT comes in with 251 in communications ebitda it looks like a flat qtr when in fact it masks growth of 12 mil ebitda . It defeats your purpose .
Morty
the european #s may be lower due to the Euro at 1.2903 and the LB at 1.6337 with both currencies seemingly in free fall with their economies not much better.
A note on the link “The Catch-22 of the Level 3 Con Game”. This is NOT about LVLT. The article is about assets held by regulated financial institutions (banks) that are classified as “level 3”