The most complicated earnings report among competitive telecoms always comes from Level 3 Communications (NYSE:LVLT, news, filings), and this one is no different. Actually, I take that back, it is different this time. Even as wholesale revenues flagged a bit, enterprise revenues surged mightily to more than compensate – something I’ve never seen from them before. Here are the numbers in the context of last quarter – the only other comparable one we have since the GLBC deal closed:
| Q4/11 |
Q1/12
|
Comments | |
|---|---|---|---|
| – North America – Wholesale | 388 | 381 | Wholesale weak, Enterprise very strong |
| – North America – Enterprise | 588 | 610 | |
| – EMEA – Wholesale | 94 | 92 | Currency effects, overall trend stabilizing. |
| – EMEA – Enterprise | 80 | 79 | |
| – EMEA – UK Government | 50 | 48 | |
| – Latin America – Wholesale | 35 | 34 | Wholesale weak, Enterprise very strong. |
| – Latin America – Enterprise | 133 | 138 | |
| Total Core Network Services | 1,368 | 1,382 | +1.0% sequential, +1.2% constant currency |
| – Wholesale Voice & Other | 211 | 204 | |
| Total Comm. Services | 1,579 | 1,586 | Inline with expectations |
| Comm. COGS | 660 | 657 | Not including integration costs |
| Comm. Cash SG&A | 587 | 587 | |
| Integration Costs | 23 | 15 | Integration spending down? |
| Transaction Costs | 39 | 0 | |
| Comm. Adjusted EBITDA | 270 | 327 | Includes integration & transaction costs |
| Adjusted earnings per share | -0.62 | -0.37 | Excluding one-time costs |
| Adj. Gross margin % | 58.2% | 58.6% | |
| Adj. EBITDA margin % | 17.1% | 20.6% | |
| Capital Expenditures | 148 | 138 | Accelerating from here according to guidance. |
| Free Cash Flow | 103 | (213) | Very red, as expected |
Revenue: Enterprise revenues were up 3% sequentially – with strength in both North America and Latin America, while wholesale revenues were down 2% sequentially – taking a hit in every region. The net result was sequential growth of 1.0%, or 1.2% in constant currency for core network services, but the real story lies in just what’s driving the divergence between wholesale and enterprise at the moment – I look for more color on the call.
Costs & EBITDA: Integration costs fell to $15M during the quarter, rather less than I figured. That left EBITDA higher, but they offered no color on synergies achieved in the press release beyond a reaffirmation of the $300/$40M in opex/capex they expect to finish with. Further integration details will no doubt be discussed on the call. Gross margins rose to 58.6%, while EBITDA margins rose to 20.1%. They reaffirmed EBITDA guidance of 20-25% growth over last year’s numbers, which still implies a fast ramp from here to $400M+ per quarter by Q4.
Capex and Free Cash Flow: I told you the burn number would be big. $213M is definitely that, mostly due to working capital swings and such. I did figure capex would be higher than this, and the company reaffirmed its guidance of capex at 12% of revenue this year. That suggests a big capex ramp in the second half though, as in Q1 it was less than 9%. I guess that starts when they begin building out the metro to Global Crossing’s customers.
Earnings: EPS of $(0.66) was a bigger loss than analysts forecast, but did include a one time item of $(0.29) from debt extinguishment.
Conclusions: Revenue trends were good overall, but some color on what lies underneath would help a lot here. The same goes for the integration.
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The earnings presentation on LVLT’s site does give the total synergies realized as $80M, which is a pretty good number thus far.
a more unvarnished assessment…
http://www.fool.com/investing/general/2012/05/02/can-level-3-keep-crushing-the-market.aspx
couldn’t find that number. where did you see it? and is that a full year run rate number or synergies savings actually realized in quarter? (I assume former, otherwise their quarter would be a lot more impressive.)
My first impression is EMEA continues to be a mess and wholesale looks weak across all the regions.
Also, the swing to negative cash flow from operations (not real positive) highlights how volatile their A/P and A/R practices are. A/R grew by 35m (but rev only grew by 7m) and A/P shrank by 23m (but COGS shrank by 3m) impacting cash flow from ops by a 58m to the bad.
Page 3 on http://lvlt.client.shareholder.com/common/download/download.cfm?companyid=LVLT&fileid=565783&filekey=91a75853-fbfb-4fc7-a3c3-606bb142f939&filename=1Q12_External%20Earnings%20Deck_FINAL.pdf
My question is: how do they get to re-iterated guidance of 20% iimprovement of adjusted ebitda over the 2011 base of 1.21B? That would be 2012 ebitda of 1.45B of which we got 327M in the 1st qtr, leaving 1.123B or an average of 374M per quarter for the rest of the year.
The path they’ve got in mind probably looks something like 327, 350, 374, 399.
Never mind, I guess its coming a little from organic growth and a lot from realized synergies.
So, the big boys keep trying to starve us in wholesale, while we attack successfully ONE ENTERPRISE BUILDING at a time! Certainly, the Germans were inferior as well as ill equipped vs. Big (3) in The Battle of Leningrad!
I think we should buy Netflix and go DIRECT with an end run to retail end users as well, finally putting it to these last mile TITANS/manipulators, many of whom are using previously sold fiber from us to them with expiry’s in force!
In the end, this is what will be bode well for global consumers, that being, ONE NETWORK for ALL predicated upon the highest quality and lowest price!
“BRING IT ON!” Carl Crowe
Very surprised at early rise in stock price. Lose 215 million, but tell a good story and bam 5% increase.
Whats happens when the good story is combined with free cash flow.
The future is getting very interesting and exciting
I agree, a bit shocked that these numbers generated such a big pop, but, who knows, the day isn’t over yet. Clearly, someone liked what they heard.
Maybe you need to review the heterodastic implications more thoroughly?
or eat more peanut butter 🙂
Forget the peanut butter it’s too damn dry without the jelly! Did you notice Donna Dearest from Janco is asking questions about A/R’s when she really meant A/P’s, and yet why aren’t you concerned about A/R’s which grew in the quarter?
Green Mountain remains an old customer, for example, and Einhorn is licking his CHOPS today, while there was a disclosed bad debt example on the wires last week including Direct T.V. who seemed to be the TRIGGER for starting it!
Sunit once blew us up with letting Sun Rocket A/R’s go on for too long, which turned into an ugly bad debt expense.
Anonymous is finally finding TRUE RELIGION. The TRUE RELIGION is best for mankind because it serves his worldly needs well, making life easier and more enjoyable along the way! Keep up the good work, Anonymous!
Certainly, positive operating cash flow shouldn’t be missed either considering that MAMMOTH sucking sound in the FORM of INTEREST ALBATROSS that this enterprise continues to be BURDENED with!
OMG, Anonymous. Go OCCUPY CBS and make that TUM SUCKING, TUM EATING, Harvard born, CIA ops man, mind controlling brain washer, SUMNER REDSTONE’s belief system that “his” content is king, stop FORCING their DUMB EM DOWN BUNDLES on our PEOPLE for accessing internet content in return! This is despicable. imo
http://wallstcheatsheet.com/stocks/poor-hulu-cbs-is-playing-hard-to-get.html/
CBS Corp. (NYSE:CBS) announced Tuesday it is looking into potential content deals with Hulu, a video streaming joint venture between Disney (NYSE:DIS), News Corp. (NASDAQ:NWS), and Comcast (NASDAQ:CMCSA). The entertainment company’s new-found interest stems from Hulu’s plan to begin requiring users to prove they have a pay-TV subscription before allowing them access to free online content.
Robert, after today’s call, which global expanding opportunity increasing Level 3’s “addressable market” further comes first:
A) EMEA with specific focus on England
B) LatAM
Unfortunately, Slim ain’t HEAVY on FINES.
http://www.forbes.com/sites/kerryadolan/2012/05/03/carlos-slims-america-movil-gets-reprieve-on-1-billion-fine-sees-net-worth-climb/
One analyst, who confuses accounts receivable(A/R’s) with accounts payable(A/P’s) while having predicted that Level 3’s empty pipes would only benefit “white mice” travelling the globe because fiber would “never” become scarce, lead the pack of lemmings on predicting “EARNINGS” which Level 3 still doesn’t have!
It doesn’t matter that there are some who suggest that ONE Level 3 PIPE with fiber in it, is worth at least six billion to an earnest buyer looking to “exclusivity, privacy and security” in an age of cyber hacking by nefarious groups who call themselves, “ANONYMOUS!”
http://finance.yahoo.com/q/sa?s=lvlt
It seems that further consolidation in Europe, with specific focus on Great Britain, or Mother England is necessary.
http://www.bbc.co.uk/news/technology-17954346