Q1/11 Earnings Preview: Level 3 and Global Crossing

On Tuesday before the market opens we will hear from the internet backbone duo of Level 3 and Global Crossing, who of course announced their intentions to get hitched a few weeks ago.  Since that deal seems rather unlikely to fall through, it seems appropriate to preview earnings for both companies at the same time.  The two share some common features when it comes first quarter results, namely  a) slower sequential growth due to a seasonally strong Q4, and b) higher cash usage due to seasonal expense trends.  This year, both companies are also projecting a stronger overall growth trend.  But of course they are not yet joined at the hip, so let’s look at each in turn:

Level 3 Communications Q1/11 Preview: Despite the seasonality in their Vyvx business, Level 3 has said that it should see core network services grow sequentially although just barely.  I’m taking them at their word on this, and I see no reason for their fortunes to vary much across their four reporting segments.  Higher expenses will probably drag communications EBITDA down slightly sequentially, and a loss from refinancing debt will cut into EPS.  Other than that, I’m not expecting fireworks of any sort.  Level 3 will continue the drumbeat on organic revenue growth with a ramp that is as always weighted toward the second half.  Here’s a quick but detailed rundown of my projections for Level 3’s numbers:

$ in millions	Q1/2010	Q2/2010	Q3/2010	Q4/2010	Q1/2011  (my estimate)
– Wholesale	336	342	343	347	347
– Large Enterprise & Federal	136	142	144	144	145
– Mid-Market	151	146	147	151	150
– Europe	71	69	75	78	79
Core Network Services Revenue	694	699	707	720	721
– Wholesale Voice	165	163	161	161	161
– Other	34	30	27	23	20
– Asset Sale	7
Total Communications Revenue	900	892	895	904	902
– Coal	10	16	17	17	17
Total Revenue	910	908	912	921	919
– Communications Cost of Revenue	371	358	353	352	350
– Communications Cash SG&A	327	324	325	330	333
Communications Adjusted EBITDA	200	209	216	222	219
Adjusted EPS	(0.11)	(0.10)	(0.10)	(0.09)	(0.11)
Capital Expenditures	82	104	133	117	115
Free Cash Flow	(90)	(19)	(63)	73	(75)-(100)

My estimates a bit more conservative than the street as my revenue number comes in a little lighter – your mileage may vary.  Over the years, I have found that Q1 is just not the time to expect to be impressed — so therefore I just don’t anymore.  Nevertheless 2011 promises to be a much better year for Level 3 organically, while 2012 will be about integration progress and little else.

Global Crossing Q1/11 Preview: Global Crossing had a big Q4, but before projecting Q1 one has to keep in mind a few caveats.  First, GCUK revenues had $13M in one time events, and therefore we must shift sequential expectations accordingly.  Second, they suggested higher opex in the neighborhood of $15M, which will cut into OIBDA.  Global Crossing will continue to place much emphasis on their large enterprise business and on investments in managed/cloud services.

$ in millions	Q1/10	Q2/10	Q3/10	Q4/10	Q1/11  (my estimate)	FY2011  (guidance)
– GCUK	119	113	112	128	115
– GC Impsat	129	134	145	151	152
– ROW	312	314	317	335	337
– Intersegment Eliminations	(6)	(6)	(6)	(12)	(8)
Total Invest & Grow	554	555	568	602	596	+6-9%
– Wholesale Voice	94	74	79	81	80
Total Revenue	648	630	648	683	676
– Cost of Revenue	455	431	440	452	460
– SG&A	116	106	99	110	120
OIBDA	77	93	109	121	96	425 (midpoint)
Free Cash Flow	(72)	(13)	(1)	102	(50)-(75)	> 0
Capex & Capital Leases	55	63	43	64	55

Again, my revenue projections are a bit lower than composite analyst estimates – for the same aversion to Q1 optimism as I expressed for Level 3.

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Categories: Financials · Internet Backbones