On Wednesday, Level 3 Communications (NYSE:LVLT, news, filings) will report its third quarter financials, and this will be the last time the company looks anything remotely like this. The Global Crossing merger and synergy progress will dominate the fourth quarter, and is already playing havoc with projected numbers – Yahoo Finance has one analyst projecting $1.64B in revenue for the quarter as if the deal closed in July. So let’s go through Ramblings’ usual preview of Level 3’s results.
Key things to look for:
- An Update on Integration & Synergies— Now that the deal is complete and Level 3 has had four weeks of hands-on experience with Global Crossing’s operations, they may offer an update on the expected synergies and the timing on which we will see them. Or they may wait until February and just go with qualitative explanations now. Of course, the emphasis will continue to be on customer service during the integration, but the expected synergies the street has been working with were put together two quarters ago – there has been much water under the bridge since.
- CNS Growth Momentum — Level 3 has been forecasting an improving growth trend across their core network services. The past two quarters have seen sequential growth of 1.25% and 2.0%, respectively, and the second half usually sees faster growth than the first. Hence, a CNS growth rate of above 2.0% would be in the right range but I don’t think it’s a good idea to expect anything huge. Good revenue momentum going into the GLBC merger is the key Q3 statistic to watch.
- Capex & FCF — Capex has been higher recently, as the company has been gearing up for a sustained higher growth rate. That has kept free cash flow mostly in the red, although they did forecast the last three quarters of 2011 to be FCF positive as a group. Capex for Q3 will probably be steady at the same levels though, though an acceleration might forecast greater organic growth momentum going into the merger. Free cash flow for the quarter is likely to be close to the break-even line, with Q4 being the positive one as usual – except that with the merger that may be lost in the noise.
- Adjusted EBITDA — Better organic growth should show up in a comparatively larger EBITDA bump, offset by whatever pre-merger-closing expenses they saw. But I’m not expecting fireworks here.
- Global Crossing’s Q3 results? — Will Level 3 offer up Global Crossing’s Q3 numbers on Wednesday too? And if they do, in how much detail? It will be hard enough to project anything for Q4 as it is, but without knowing how Global Crossing did in Q3 we might as well go with a monkey throwing darts.
- Earnings per share — Given the reverse split, EPS is going to feel huge and negative. But the good news is that this number will offer us much more granularity now, varying by far more than a penny here or there as in the past.
| $ in millions | Q3/10 | Q4/10 | Q1/11 | Q2/11 | Q3/11
(my estimate) |
|---|---|---|---|---|---|
| – Wholesale | 343 | 347 | 351 | 358 | 366 |
| – Large Enterprise & Federal | 144 | 144 | 144 | 148 | 153 |
| – Mid-Market | 147 | 151 | 155 | 158 | 162 |
| – Europe | 75 | 78 | 79 | 80 | 81 |
| Core Network Services Revenue | 707 | 720 | 729 | 744 | 762 |
| – Wholesale Voice | 161 | 161 | 164 | 151 | 151 |
| – Other | 27 | 23 | 21 | 18 | 16 |
| Total Communications Revenue | 895 | 904 | 914 | 913 | 929 |
| – Coal | 17 | 17 | 15 | 19 | 15 |
| Total Revenue | 912 | 921 | 929 | 932 | 944 |
| – Communications Cost of Revenue | 353 | 352 | 357 | 347 | 352 |
| – Communications Cash SG&A | 325 | 330 | 332 | 340 | 342 |
| Communications Adjusted EBITDA | 216 | 222 | 225 | 226 | 235 |
| Adjusted EPS | (1.50) | (0.45) | (1.80) | (1.65) |
(1.??) |
| Capital Expenditures | 133 | 117 | 115 | 125 | 125 |
| Free Cash Flow | (63) | 73 | (115) |
6 |
(25)-25 |
But what about those Global Crossing Q3 results? Well, in the event that Level 3 gives us something to look at that is vaguely comparable to Global Crossing’s past format, here are a few quick projections also in the context of the last four quarters. I’ve assumed slower growth than in Q2 to be conservative, but enough that the company would at least be close to on-track for 2011 EBITDA guidance of $425M.
| $ in millions | Q3/10 | Q4/10 | Q1/11 | Q2/11 | Q3/11
(estimate) |
|---|---|---|---|---|---|
| – GCUK | 112 | 128 | 113 | 116 | 115 |
| – GC Impsat | 145 | 151 | 148 | 163 | 172 |
| – ROW | 317 | 335 | 326 | 349 | 352 |
| – Intersegment Eliminations | (6) | (12) | (8) | (6) | (6) |
| Total Invest & Grow | 568 | 602 | 587 | 622 | 633 |
| – Wholesale Voice | 79 | 81 | 74 | 69 | 70 |
| Total Revenue | 648 | 683 | 661 | 692 | 703 |
| – Cost of Revenue | 440 | 452 | 456 | 468 | 468 |
| – SG&A | 99 | 110 | 121 | 128 | 122 |
| OIBDA | 109 | 121 | 84 | 96 | 113 |
| Free Cash Flow | (1) | 102 | (93) | 10 | (25)-25 |
| Capex & Capital Leases | 43 | 64 | 52 | 59 | 55 |
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I can only assume if GLBC stand alone #’s were good for 3Q we will hear a lot about it. If not, we will hear more about proforma and future synergies, etc…
I see you might be in a quandary regarding interest expense–missing loss per share #- especially since it will have been weighted negatively for carrying premature finance costs for Global Crossing during Q3.
I notice Yahoo Finance utilizing 118.82MM shares outstanding(1.782B pre reverse split), and I believe Thomson One is predicting a $1.29 loss per share(8.6 cents pre reverse split), or 13.73 percent better than the same quarter one year ago(Q3, 2010) of $1.50 loss per share.
Your CNS forward annual growth rate is just underneath double digits; fractionally below ten percent. It’s so close to ten percent, that only a “high frequency trader” on Wall Street would be able to profit from a miss.
Let’s break the double digit barrier, of ten percent annualized! 🙂 Nice work as always in helping your readers avoid experiencing vertigo, Rob.
Yes, I’m totally at sea on the EPS number at the moment. It hasn’t been a reliable way to look at LVLT’s progress (or lack thereof) historically, and with one time interest expense stuff from the M&A this time around I expect it will be especially hard to interpret.
Don’t worry my sailor friend, Sunit will give us plenty of “color” to paint land bound murals with on Wednesday, and if we are really lucky, maybe he will talk about the “secret sauce recipe” he has been applying to the cable companies along with how (3) and other internet enablers might benefit from this FCC USF overhaul.
I for one am hopeful that our U.S. Public Library Systems are upgraded with the fastest speeds available to mankind at the moment. Americans need it and deserve it!
The future is all about a visual Internet – James Crowe
The wireless operators need to connect their channels (frequencies) with the Level 3 fiber channel (IP-based global network) using Dynamic spectrum access (DSA) installed on all the 50 billion devices becoming available in a few years.
Because the bandwidth traffic over the IP backbone will be more Upstream – Internet data, over the top video, HD broadcast, SD broadcast, 3D video.
The flow of Downstream traffic (Internet data, OTT video) will be less than Upstream.
Network operators need to consider architecting a fibre-based access network designed to support and capitalise on OTT video (and Internet growth in general) based upon symmetrical bandwidth delivery. The ability to deliver 100 Mbps. or a gigabit in either direction addresses the need to support OTT video, and allows the service provider to capture the incremental revenues subscribers are willing to pay for OTT video and gaming services.
When all this comes together Level 3″s free cash flows will be HUGE!
“It’s a Fiber-world, after all!”
GLBC had record sales of 4.8 mil MRR in Q1—-they set new records in Q2 with MRR of 5 mil . S1 filed had ebitda for 2011 at 440 [glbc management] & 438 by LVLT management.
LVLT Q2 ebitda was reduced by 8 mil—would have been 234 without the acquisition exp . Acquisition expenses should be less this qtr [3 mil sticks in my mind, don’t remember why]—-My guess is 240 + ebitda for Q3
I ran into GLBC a ton in Q1 and Q2. They were giving away the house! I wonder what margin came with these record quarters?