In its first quarter following the close of the Global Crossing purchase, Level 3 Communications (NYSE:LVLT, news, filings) reported Q4 results that were as complicated as expected, and still a bit split in terms of personality. The original Level 3 business had a great quarter with 2.6% CNS growth, while the the Global Crossing side of things went in the other direction with gusto. My own revenue and EBITDA guesses earlier this week for the combined company turned out to be a bit high while loss per share narrowed substantially, but honestly it was a crapshoot this quarter. Here’s a quick table:
| Level 3 | Global Crossing |
Combined (pro forma) |
Comments | |
|---|---|---|---|---|
| – CNS/Invest&grow | $776 | $603 | $1.37B | Level 3 CNS was strong, but Global Crossing CNS was quite weak |
| – Wholesale Voice & Other | $158 | $67 | $211 | Wholesale voice levels aren’t critical, but they ticked a bit lower in Q4. |
| Total Comm. Services | $934 | $670 | $1.58B | Below most projections, including my own. |
| Comm. COGS | 342 | 327 | $660 | |
| Comm. Cash SG&A | 337 | 252 | $587 | |
| Comm. Adjusted EBITDA | $255 | $89 | $332 | Excludes transaction & integration costs |
| Transaction & Integration Costs | $62 | |||
| Adj. Gross margin % | 63.3% | 51.2% | 58.2% | |
| Adj. EBITDA margin % | 27.3% | 13.2% | ~20.8% | |
| Capital Expenditures | $97 | $51 | $148M | Basically where I thought they’d be, on the lower end but reflecting the GLBC revenue number. |
Revenue: Level 3’s core business did very well, powered by revenues from both wholesale and large enterprise/federal. Midmarket and European revenues were up only slightly, but still up. Global Crossing’s ‘invest & grow’ revenues were down sharply sequentially and flat with their performance last year. I had suspected some weakness there, but didn’t expect quite that much.
Going forward, the company will be reporting CNS revenues in three geographical regions (North America, EMEA, and Latin America) each with two subcategories (Wholesale and Enterprise) and one extra for EMEA (UK Government). Other revenues will now be lumped with wholesale voice.
Costs & EBITDA: Adjusted EBITDA was just below the range I expected, entirely due to to the light results from the Global Crossing side of things. The Level 3 business actually expanded its EBITDA margin to 27.3%. For the combined company, adjusted gross margin and adjusted EBITDA margin was generally where I thought it would be. In 2012 the company expects 20-25% EBITDA growth as the integration goes forward from a starting point of $1.216B. That suggests a 2012 number of $1.45-1.52B, and includes integration costs. Loss per share was just $0.62 excluding special items.
Cash Flows: Free cash flow for the fourth quarter checked in at $41M, and would have been $126M not including acquisition costs. In 2012, net cash interest expense is expected to be about $680M, which reflects all the work they’ve been doing on the balance sheet. Capital expenditures are expected to be 12% of revenues, and free cash flow for 2012 is expected to be negative, in part due to working capital swings and of course including all the integration spending they will be doing. But if you take the $1.48B midpoint of their revenue projection and subtract $680M in interest and $760M in capex, you have a little left over.
Integration: The combined company spent $23M on integration during the quarter. They have aligned the sales forces, and the voice networks are exchanging minutes. Soon they will have the transport networks interlinked and will be positioned to apply the metro assets to the extra revenue and squeeze out the synergies there.
Conclusions: The weak Global Crossing numbers have given Level 3 a bit lower reference point to start from than we expected. Hopefully they’ll have those assets performing better in the quarters to come. As some may have noticed, I wasn’t expecting much this quarter – this story gets more interesting in the summertime. I will be listening to the call to see what additional color they add.
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Interestingly, Level 3 expects D&A to be $780M after adjusting their depreciation schedules and writing off some stuff like spectrum. $780M is where capex is, roughly. That means when LVLT finished integrating, their EPS probably crosses break-even sooner than previously expected.
Hmmm, the market likes what they see as the stock is up a buck – and LVLT almost never goes up on earnings day. The EBITDA guidance surely helps.
Nice pickup on the depreciation expense point Rob. FCF + and EPS + don’t carry the same weight but there are large portions of the investor pool which won’t invest without one or both. The FCF estimates I see actually has L3 the cheapest stock in the group who would have ever thought with this asset base you would be seeing that. Maybe this worm does turn.
1) strange that LVLT was priced where it was
2) strange that LVLT moved 9% based on the conference call comments.
LVLT and GLBC both provided financial projections for the fairness opinion.
All of that was included in the merger proxy and the numbers were pretty close to what management said today. $1.4 – $1.5B in EBITDA. The efficient market in action.
Sure enough, in the Cowen upgrade piece today has them doing $0.60/share in earnings next year moving to $2.50 2 years hence.