Tomorrow before the bell Level 3 Communications (NYSE:LVLT, news, filings) will report earnings, which means it is time for a quick earnings preview. Analysts expect total revenues of $910M, flat with the prior quarter and a loss of $0.11 per share. As is often the case, I am slightly more optimistic. But when it comes to Level 3, the details are more important than those overall numbers. The key right now for Level 3 is to demonstrate tangible growth in their core network services. They know it, the street knows it, everyone knows it. Here is a quick table of my own projections in the context of the prior few quarters:
| $ in millions | Q3/2009 | Q4/2009 |
Q1/2010 |
Q2/2010(est) |
|---|---|---|---|---|
| – Wholesale | 347 | 353 | 343 | 345 |
| – Large Enterprise & Federal | 123 | 129 | 136 | 140 |
| – Mid-Market | 155 | 151 | 151 | 153 |
| – Europe | 75 | 73 | 71 | 72 |
| Core Network Services Revenue | 700 | 706 | 701 | 710 |
| Wholesale Voice | 159 | 162 | 165 | 162 |
| Other | 42 | 38 | 34 | 31 |
| Total Communications Revenue | 901 | 906 | 900 | 903 |
| Coal | 15 | 18 | 10 | 10 |
| Total Revenue | 916 | 924 |
910 |
913 |
| – Communications Cost of Revenue | 369 | 361 |
371 |
366 |
| – Communications Cash SG&A | 316 | 328 |
327 |
327 |
| Communications Adjusted EBITDA | 215 | 216 | 200 | 210 |
| Adjusted EPS | (0.10) | (0.11) | (0.11) | (0.10) |
| Capital Expenditures | 75 | 80 | 82 | 90 |
| Free Cash Flow | 9 | 97 | (90) | (50)-0 |
Core Revenues: Wholesale revenues will grow from the prior quarter’s $336 (not including the $7M asset sale), on improving market conditions, however, I’m not expecting fireworks on this number during Q2. The best growth should come from the Large Enterprise and Federal, which has been strong for several quarters. Mid-Market revenues should grow, finally reversing the downward slide they have been on for so long as the local markets initiative takes hold. European revenues will probably increase more on a constant currency basis, but I suspect currency fluctuations will again hide much of that improvement. If the prior reporting method were in place, I’d be looking for a nice Content Markets number as this seems to have been quite strong during the quarter.
Comm. Adj. EBITDA: Last quarter’s $200M will likely be replaced with a restoration to the $210 level again. However, key will be what the outlook for this number is. If capex rises to support a growth trend, EBITDA numbers will surely need to move higher to keep free cash flow near break even. I don’t expect any major shifts in the cost structure.
Free Cash Flow: Level 3 expects that rising capex levels to support second half growth will keep free cash flow slightly negative for the year, and I have no reason to doubt them. A higher capex number would in my opinion be a positive sign, suggesting that the hoped-for growth trend is materializing. When it comes to working capital though, the second quarter is less seasonally negative than the first quarter, and therefore the free cash flow number should be better – though it is as always lumpy.
Earnings Per Share: Analysts peg this at a loss of $0.11, but I’m going to be a bit more optimistic and chop off a penny. Actually, this number matters far less than the core revenue number at this point.
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1] You have reduced cost of rev by 5 mil–why ?
2] lvlt has guided to negative f/c/f —- have they guided to slightly negative ?
I supposed I meant ‘negative’ rather than ‘slightly negative’ which perhaps reflects my own opinion of just how negative. Sorry about that.
Rob, good analysis.
I think the key for them though is not only growth, but bringing their asset utilization in line with the rest of the industry. They’ve built a gold-plated network and still don’t have the top line to show for it. While improving, their Revenue/PP&E is just .65, compared to 1-1.1 for most wireline telcos.
Their SG&As are kind of high as well, so they need a few more years of capex/revenue holding under .10 if they’re going to make those 2014 principal payments.
I think revenue growth and asset utilization are two sides of the same coin!
Regarding SG&A, they are high mainly because revenues aren’t yet high enough to make their fixed expenses small in comparison – again growth is everything.
regarding the European numbers – this 06/30/10 report will be based on a low exchange for the Euro which is up at this moment in time – what exchange rate did you use for your European operations???
Rob, they had high revenue growth but low asset utilization 10 years ago. The key metric is incremental revenue growth/incremental PP&E growth, which is largely tied to keeping capex down.
For a stock hanging around a buck with about 1.6x revenue in long-term debt, I think they need to sell to the customers that give them the best IRR, not just grow the top line for its own sake. As a matter of practice, this often requires narrowing the product line.