Earnings Preview for Level 3, Global Crossing

In the next two days, two next generation carriers that I cover frequently on Telecom Ramblings will report their earnings:  Level 3 Communications (NYSE:LVLT, news, filings) and glbc.  The recession and the wild currency fluctuations that came with it pretty much made financial modeling for these companies into an exercise in futility, but stability has been creeping in across the sector.  Let’s take a quick look at where these two currently stand and what we might expect from them.

Level 3 Communications (NYSE:LVLT, news, filings) has been reeling from revenue pressure all year, and in their second quarter earnings release they suggested that the pressure would abate in the second half but perhaps not go away.   Likewise, the full year EBITDA forecast of $900-950M suggested little or no improvement from Q2 levels.  However, in recent weeks we have seen some signs of life from the telecom equipment sector from the likes of Infinera and Juniper, and that may finally be the turning of the tide in carrier spending that Level 3 has been hoping to see.  That probably will not be enough to give them sequential growth in the third quarter, but all eyes will be on projections for the fourth quarter.  The company is as lean as it has been in a long while, now has its next generation back office mostly in place, and in an ideal world ought to be ready to take advantage of an improving economy in a really big way.  The key revenue number is that of core network services, which dropped to $707M in Q2.  I look for a number in the $700M range.  EBITDA was $229M in Q2, and I look for something in the $225-230M range this quarter as well with cost savings mostly balancing revenue pressure this time.  Cash flow guidance will probably remain ‘neutral for the full year’ and capex will remain low.  The market doesn’t seem to be expecting all that much from Level 3 this quarter — probably less than I am, in fact.

glbc on the other hand saw a return to growth in the second quarter.  Their customer base differs from Level 3, and while the economic crisis certainly took its toll Global Crossing has not seen the type of revenue pressure Level 3 has seen.  Revenue and OIBDA guidance of $2.5-2.6B and $320-380M, respectively, still seem very reasonable and there is potential for them to do better than that on OIBDA if things go really well.  So for Global Crossing, the questions are whether they can follow up on their sequential growth and follow through on their guidance of positive cash flow.  While things are looking better for the company than they have since beginning their second life back in 2004, they have been getting some credit for it lately as the market’s expectations aren’t low.  During the quarter the company’s stock price  surged during the quarter all the way back into the mid-teens, although it has fallen back slightly in the last few days.  I look for revenues in the $640-650M range, and EBITDA in the $90-100M range and a maintenance of guidance.  That’s exclusive of currency fluctuations, about which I have no clue at all.  There are no obvious roadblocks in Global Crossing’s way right now, and with their improved stock price and recent refinancing activity they may be well positioned for M&A this winter as a buyer.

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Categories: Financials · Internet Backbones