Over the next 30 hours or so, two of the USA’s largest competitive fiber operators will feature their fourth quarter numbers: tw telecom and Level 3 Communications. Given that Integra and Zayo didn’t offer up any negative surprises, the economic playing field is probably fairly stable. Here’s a preview of what I expect from both companies’ numbers:
Steady as usual at tw telecom – You can generally set your clock by the revenue and EBITDA growth at TW Telecom (NASDAQ:TWTC, news, filings), and this quarter isn’t likely to be much different. They’ll see roughly 2% sequential growth with 37% EBITDA margins while adding around 500 buildings to their network and seeing churn below 1%. As costs tend to step up in Q1, margins usually peak in Q4 so the EBITDA delta will likely be higher this quarter. I will be looking to hear of any change in the company’s M&A stance or of in its expansion plans – which have been exclusively toward depth for some time now. Here is a quick chart of my guesses in some context:
| ($ in millions) | Q4/11 | Q1/12 | Q2/12 | Q3/12 | Q4/12 (my guess) |
Comments |
|---|---|---|---|---|---|---|
| – Data & Internet Services | 171.6 | 176.8 | 182.5 | 189.2 | 196 | +3.5%, their growth engine |
| – Network Services | 85.4 | 84.8 | 83.0 | 81.3 | 81 | trend is slowly down |
| – Voice Services | 86.7 | 89.6 | 91.0 | 91.1 | 92 | +1% growth |
| – Intercarrier Compensation | 7.6 | 7.6 | 8.0 | 7.5 | 7.5 | |
| Total Revenue | 351.5 | 358.9 | 364.5 | 368.9 | 376.5 | A hair above the street |
| M-EBITDA | 128.1 | 131.8 | 134.0 | 136.5 | 140 | |
| M-EBITDA Margin | 36.3% | 36.7% | 36.8% | 37.0% | 37.1% | this number usually peaks in Q4 |
| Earnings per share | 0.11 | 0.13 | 0.13 | 0.14 | 0.15 | inching upward |
| Revenue Churn | 0.8% | 1.0% | 0.9% | 0.8% | <1% | |
| Capital Expenditures | 86.6 | 79.1 | 80.8 | 83.9 | ~80-85 | |
| On-net buildings added | 566 | 467 | 462 | 552 | 450-550 | continuing the present trend |
| Free Cash Flow | 25.6 | 37.3 | 37.7 | 37.2 | ~35 | no surprises |
Growth & EBITDA Guidance Loom Large at Level 3 – As Level 3 winds down the first stage of the Global Crossing acquisition, there are several questions for which Q4 results will be carefully dissected. Did they make their 2012 EBITDA guidance? Is there enough revenue growth there to give us confidence about 2013? And are they really on the verge of becoming sustainably EPS positive later this year, 15 or so years since the company was little more than a twinkle in James Crowe’s eye? If the answer to those three questions is yes, then even the most jaded of long term investors will want to party.
However, I’m going to go with two out of three ain’t bad. Their EBITDA guidance of 20-25% growth over the prior year still looks tough to me, and I’m going to guess they miss the necessary EBITDA of $406M by a just a hair. But the revenue growth and the EPS trend will balance that out and make 2013 look quite interesting. I’m not expecting anything huge on the revenue front this quarter, just an improvement over last quarter’s step up in core network services.
I will be listening for any discussion of additional synergies from the Global Crossing integration, as there could be quite a bit more after the first $300M are achieved. I will also be listening to their comments on the M&A environment, specifically what they think of opportunities across the Atlantic and the Caribbean. I expect no change to their stance on growth, aiming for a return to 2% sequential quarterly CNS growth in a few more quarters but not yet. I also expect them to remind us that Q1 cash burn always sucks, but I’m hoping they’ll forecast 2013 to be materially FCF positive.
Again, here’s a quick chart of my guesses in some context:
| Q4/11 |
Q1/12
|
Q2/12
|
Q3/12
|
Q4/12
(my guess)
|
Comments | |
|---|---|---|---|---|---|---|
| – North America – Wholesale | 388 | 381 | 382 | 381 | 383 | Enterprise growth accelerates to 2% sequentially,wholesale still flat but seasonally up. |
| – North America – Enterprise | 588 | 610 | 621 | 627 | 640 | |
| – EMEA – Wholesale | 94 | 92 | 91 | 89 | 90 | Improvement in wholesale, enterprise offset byfurther UK government weakness |
| – EMEA – Enterprise | 80 | 79 | 81 | 80 | 81 | |
| – EMEA – UK Government | 50 | 48 | 42 | 41 | 39 | |
| – Latin America – Wholesale | 35 | 34 | 33 | 36 | 37 | Faster growth here, but there may be lumpiness. |
| – Latin America – Enterprise | 133 | 138 | 136 | 141 | 145 | |
| Total Core Network Services | 1,368 | 1,382 | 1,386 | 1,395 | 1,415 | Up 1.4% sequentially, though I’d like to see more. |
| – Wholesale Voice & Other | 211 | 204 | 200 | 195 | 190 | Downward trend as usual. |
| Total Comm. Services | 1,579 | 1,586 | 1,586 | 1,590 | 1,605 | A bit light compared with analyst estimates |
| Comm. COGS | 660 | 657 | 648 | 642 | 638 | Synergies more than offsetting increasesfrom revenue growth |
| Comm. Cash SG&A | 587 | 587 | 568 | 558 | 548 | |
| Integration Costs | 23 | 15 | 17 | 18 | 15 | Spending less perhaps to help make EBITDA guidance |
| Transaction Costs | 39 | – | – | – | – | |
| Comm. Adjusted EBITDA | 270 | 327 | 353 | 372 | 404 | Up 19.8% vs 20-25% guidance |
| Adjusted earnings per share | (0.62) |
(0.37) | (0.29) | (0.26) | (0.15) | Next quarter this goes to a loss of a few pennies. |
| Adj. Gross margin % | 58.2% | 58.6% | 59.1% | 59.6% | 60.2% | |
| Adj. EBITDA margin % | 17.1% | 20.6% | 22.3% | 23.4% | 24.9% | |
| Capital Expenditures | 148 | 138 | 180 | 227 | 200+ | Higher is better, assuming it’s success-based |
| Free Cash Flow | 103 | (213) | 3 | (157) | 150-200 | Q4 is their big FCF quarter. |
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Do you think “Help me Donna” will get “Sunit to Sing” about the currency wars taking place, with specific reference to this VZ CF, and what he has done or is doing to take that valuable CACHE out of that DICTATORSHIP with stronger “dollars”???
Level 3 to THIRTY PPS! imo
You forgot LOL
Not for Enron’s premium CLEC twtc, I am sorry to say. The joke is on them today, and will carry through tomorrow as well unless somebody “raptures” them up versus just eating their lunch in the marketplace. imo
The Company expects low first quarter sequential revenue growth due to a $2.2 million fourth quarter customer revenue settlement that will not recur,……..
Read more: tw telecom Reports Fourth Quarter and Full Year 2012 Results – FierceTelecom http://www.fiercetelecom.com/press-releases/tw-telecom-reports-fourth-quarter-and-full-year-2012-results#ixzz2KdPc4bn2
Subscribe: http://www.fiercetelecom.com/signup?sourceform=Viral-Tynt-FierceTelecom-FierceTelecom
http://www.rttnews.com/2054951/tw-telecom-inc-twtc-is-pulling-back-after-q4-miss.aspx
CarlK,
You don’t really read these releases do you? If you do then I am gobsmacked by your lack of reading comprehension. TWTC’s numbers were right around consensus and, particularly in enterprise and data, the growth trend continues. Some might focus on the well explained reason why Q1 may fall a smidgeon short– let them. The story hasn’t changed and they continue to exceed most other alternative carriers in organic growth/margins and predictability.
Oh, I read em, Enron. It may just be that their levered FCF number off by fifty percent according to some expectations might be the sticking point. Or, maybe it was that their 8 percent yoy M-Ebitda growth rate compared to their yoy sales growth rate was too paltry considering their very low “revenue base” versus one other.
If this POS is worth more than thirty pps–your long dated babble–Level 3 is worth more than $100 pps!
We shall learn more tomorrow, and I will shudder if Big (3) dares to pay up your premium for this slow burn twtc story where “access costs” are increasing as well. imo
CarlK,
FCF did not miss by 50% and was right around estimates. The two street estimates I checked, they beat MS FCF est. by 7%, and marginally missed the DB est by $2 million. Any weakness tomorrow will be related to the Q1 guidance and will be temporary. TWTC is not a POS as you claim– btw, what an infantile view.
Part of your issue (actually issues) is that you are married to LVLT and see everything through that prism. I know you don’t manage OPM, I can only hope you don’t try and manage your own.
FCF was lower than I thought mainly due to the capex boost. I hadn’t expected they’d move so quickly on the sales/support headcount additions either – perhaps they were taking advantage of the integration-related layoffs elsewhere in Q4 (L3, Earthlink, Windstream) to quickly bring in the bodies.
In terms of Q4 capx you were not alone in underestimating, and since the majority of that is success based it must be viewed positively along with the higher Capx guidance for ’13. I doubt the headcount increase was opportunistic– rather a desire and reaction to an ability to provision higher levels of sales.
The stock may get hit this morning for no good reason but L/T that is of no consequence.