On Wednesday, Level 3 Communications (NYSE:LVLT, news, filings) will be report earnings for the second quarter, so it’s time for my preview and projections. As I have recently rambled on about, this could be a pivotal quarter for Level 3 given that it is at the midpoint of the Global Crossing integration and is fighting to maintain its growth trend in the face of some market headwinds out of Europe. That seems to be the main caveat analysts are focusing on – a meaningful currency hit to European revenues from the macro environment. Seems likely enough, but it’s largely irrelevant to the overall picture for Level 3 at this point. The company of course spend its time talking up its constant currency results.
While early optimists traded the stock higher in the months following the GLBC deal announcement and then back down again when they realized nirvana was going to take a while, I have long warned that the process wouldn’t really start to show results until this summer even if things went well. Well this summer is here, and if things have gone well enough then the second half should finally see the payoff arrive and the improving numbers will cast the company in a new light. Or, if it hasn’t gone well enough then those who have bet on nothing ever changing at Level 3 will surely take the opportunity to gloat and there will be great clamoring for change from investors. There’s not much patience out there, but at least it seems like the goal posts aren’t that far away this time.
With no further ado, here’s my guesses for Q2 numbers, including currency effects (I’m sure I’ll regret that last part). I’m still quite conservative relative to many in the short term, although long term projections look very favorable.
| Q4/11 |
Q1/12
|
Q2/12
(my guess) |
Comments | |
|---|---|---|---|---|
| – North America – Wholesale | 388 | 381 | 387 | Wholesale improving over Q1Enterprise building some momentum |
| – North America – Enterprise | 588 | 610 | 623 | |
| – EMEA – Wholesale | 94 | 92 | 91 | Currency effects will dominate.Growth on a constant currency basis. |
| – EMEA – Enterprise | 80 | 79 | 78 | |
| – EMEA – UK Government | 50 | 48 | 47 | |
| – Latin America – Wholesale | 35 | 34 | 35 | Steady growth |
| – Latin America – Enterprise | 133 | 138 | 141 | |
| Total Core Network Services | 1,368 | 1,382 | 1,402 | +1.4% sequential, +2% constant currency |
| – Wholesale Voice & Other | 211 | 204 | 202 | |
| Total Comm. Services | 1,579 | 1,586 | 1,604 | Inline with expectations |
| Comm. COGS | 660 | 657 | 656 | Not including integration costs |
| Comm. Cash SG&A | 587 | 587 | 583 | |
| Integration Costs | 23 | 15 | 20 | Integration spending back up a bit |
| Transaction Costs | 39 | – | – | |
| Comm. Adjusted EBITDA | 270 | 327 | 344 | Includes integration & transaction costs |
| Adjusted earnings per share | -0.62 | -0.37 | ? | Too messy to predict at this time |
| Adj. Gross margin % | 58.2% | 58.6% | 59.0% | |
| Adj. EBITDA margin % | 17.1% | 20.6% | 21.4% | |
| Capital Expenditures | 148 | 138 | 160 | Accelerating from here according to guidance. |
| Free Cash Flow | 103 | (213) | (25)-(75) | Much less red, but still red this quarter IMHO. |
Level 3 raised $300M last week and at that time reaffirmed full year guidance, which strongly suggests that the quarter will be incrementally unsurprising. But even on a constant currency basis, there’s going to have to be a substantial second half EBITDA ramp to even come close to the lower end of guidance. I believe that most questions will focus on the company’s ability to deliver on that ramp, both via synergies and via revenue growth.
The other question is when Level 3’s capital expenditures will rise to the levels projected for full year guidance, and what they will be spending it on. Thus far, capex has not been huge but if there is to be a second half revenue ramp then one might expect it to be preceded by a Q2 capex ramp.
Earnings per share is still too messy to get a real handle on, the key numbers will be CNS Revenue, EBITDA, Capex, Integration costs, and Synergies acted on. That last one will come in around $45M I think.
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As per your numbers, there is NO GROWTH except for reduced “dollars” to the balance sheet as a result of unfavorable currency changes/factors. Therefore, talking about a “constant currency” is more smoke and mirrors versus not. I understand its use, but it is not reassuring for a company that reports in US DOLLARS and needs more US DOLLARS from ALL REGIONS of the globe experiencing less dollars due to “currency translations.”
This being said, when you make such “estimates” without regard to “constant currency” comparisons, are you factoring for known “hedges” that have been in place, and might even act as a one time “windfall” depending upon the size and ratios of corresponding “hedges” being incorporated by the finance gurus and mavens inside this ENTERPRISE?
Just because currency is hedged doesn’t mean the effect of the hedge will be felt as a cushion on the CNS revenue line. It’s more of a balance sheet thing, isn’t it?
As for whether constant currency is a useful concept, I’m ambivalent. As long as one gets credit for the positive effects of currency fluctuations equally to the negative effects, it really doesn’t matter much. The point of view from management is to try to isolate what they can control from what they largely can’t.
P.S. So Fancy Pants knows WTH I am talking about, I am specifically referring to EMEA, although the same principle applies to LatAm as a result of any “currency kickers” in the Forex Trading Pits! Let’s see what a whiz Patel is!
I’ll save your balance sheet reference vs. income statement with respect to currency hedges for Enron, because he’s the sharpest tool in the shed and I have a warm spot for him even though he’s a SOB!
As for credits by Wrong Street in either direction, that seems ridiculous to me unless you mean “TACIT.”
Why? Because only US DOLLARS are being valued from a stock price stand point!
Dan Caruso, I am ED KOCH from New York wearing his old mayor’s hat, so, “How am I doing?” 🙂
I appriciate the information you have provided over the years. You have added more to my knowledge of the telcom industry than all other sources combined.
There is one point I need help on. LVLT EBITDA margins in the first quarter were 20.6%. This should mean COS & SGA (with integration costs) are about 79.4%. They would abviously be less for incremental revenue increases. Then it concludes that an $18M increase in revenues would increase costs less than $14.3M. Yet there may be synergy savings of $45M. Wouldn’t this leave a cost change of over ($30M) and increase EBITDA at least $30M.
Regards,
mtsmark
The $45M is annual, and translates to $11M in a single quarter.
And another thing to keep in mind is that whatever synergies are ‘achieved’ in a particular quarter weren’t in effect for the full quarter, so there is a delay – but also a carryover from the prior quarter in this case. It gets messier the closer you look at it from there.
I got what you intend, thanks for putting up.
Woh I am glad to find this website through google.
Bot translations still have a ways to go