While the quarter’s big announcement was obviously the Level 3 deal which will close later this year, the main priority in the meantime the number one priority of Level 3 Communications (NYSE:LVLT, news, filings) was proving their organic growth trend has legs, and improving legs at that. Their second quarter results show exactly that, slightly exceeding both analyst estimates and my own for core network services growth. Here are their numbers in context:
| $ in millions | Q2/10 | Q3/10 | Q4/10 | Q1/11 | Q2/11 |
|---|---|---|---|---|---|
| – Wholesale | 342 | 343 | 347 | 351 | 358 |
| – Large Enterprise & Federal | 142 | 144 | 144 | 144 | 148 |
| – Mid-Market | 146 | 147 | 151 | 155 | 158 |
| – Europe | 69 | 75 | 78 | 79 | 80 |
| Core Network Services Revenue | 699 | 707 | 720 | 729 | 744 |
| – Wholesale Voice | 163 | 161 | 161 | 164 | 151 |
| – Other | 30 | 27 | 23 | 21 | 18 |
| Total Communications Revenue | 892 | 895 | 904 | 914 | 913 |
| – Coal | 16 | 17 | 17 | 15 | 19 |
| Total Revenue | 908 | 912 | 921 | 929 | 932 |
| – Communications Cost of Revenue | 358 | 353 | 352 | 357 | 347 |
| – Communications Cash SG&A | 324 | 325 | 330 | 332 | 340 |
| Communications Adjusted EBITDA | 209 | 216 | 222 | 225 | 226 |
| Adjusted EPS | (0.10) | (0.10) | (0.09) | (0.12) | (0.11) |
| Capital Expenditures | 104 | 133 | 117 | 115 | 125 |
| Free Cash Flow | (19) | (63) | 73 |
(115) |
6 |
Revenue Growth: All CNS segments of the company advanced in the first quarter, the Large Enterprise and Federal segment posting the largest percentage gain and Europe the smallest. In aggregate, core network services grew by $15M sequentially, or 1.7% on a constant currency basis. That’s still not a big number, but it is a sequential improvement exactly as promised. A decline in the company’s wholesale voice revenues, which are managed for margin contribution, led to a sequential decline in total communications revenues of $1M, but the key is growth in CNS.
Costs & EBITDA: Communications gross margins were up again, rising to 62.0%. SG&A rose, but $8M of it was related to costs for the GLBC purchase. After backing that out, SG&A was flat over the first quarter. Likewise, Communications Adjusted EBITDA of $226M included those costs, and without them would have been $234M which seems to mesh well with qualitative guidance. The $250M quarterly EBITDA mark is always key for them in terms of having the scale necessary to spend for accelerating growth, and they took another step toward it.
Capex and Cash Flow: Capex levels of $125M were up sequentially, but that fits well with a second half ramp – the sales of which need to be in the pipeline already. Free cash flow of $6M was a bit better than I expected, but it fluctuates enough that the pendulum will probably swing back next quarter.
Final Thoughts: Level 3 needed growth and it came through, now we need more growth. The company left existing (minimal) guidance in place, which perhaps they will add more color to on the CC later this morning.
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Realizing they hit my own internal targets of better than two percent qoq high margin cns revenue in aggregate across all business categories, the much lower 30 percent gross margin “wholesale voice” took a massive hit. I understand that it contributes a great deal less to the EBITDA line than cns, but……
I have heard banter that Global’s wholesale voice will follow a similar trajectory once swallowed. I am reminded of skibare in this regard.
On (3)’s side, this has represented more than $600MM per annum in revenues. Haven’t checked Global out yet.
Is this business now in RUN OFF with VOICE going to zero, and should it be considered another legacy business?
There is always something with this POS, isn’t there? 🙁
Would that huge hit on wholsale voice be the remaining pieces of the acquired Wiltel/ATT agreement or as Carl mentioned an omen and future Global crossing revenue disconnects. Here I was thinking they acquired some of the Sprint wholeslae with cable customers and that area may grow.
So, although they attempted to answer the question on wholesale voice without getting pinned down to my personal satisfaction, I guess it’s fair to say that, even if both enterprises replace their wholesale voice annual aggregate numbers, let’s say $1B per year, with dollar for dollar CNS revenues, or the top line hardly moved qoq or yoy, 60 percent EBITDA MARGINS are DOUBLE the 30 percent EBITDA MARGINS wholesale voice represents!
It’s a good thing for VOICE to go to ZERO and get bundled or converged inside of an ALL IP NETWORK where VIDEO is pervasive!
Apologies for mistakenly calling wholesale voice margins “gross margins” earlier as the 30 percent is an EBITDA margin.
yea i wonder too when wholesale voice will be considered legacy. if they could just get that damn business from sprint….grrr. anyway, valuation is still to high for me to own the equity – – id like to see a macro breakdown take lpig down to the dollar range. just sitting here waiting. i have always loved the assets just not the balance sheet.