Earnings Preview: Level 3 Aims for Q4 Profit, But Q3 First

Tomorrow we will get our monthly window into how Level 3 Communications (NYSE:LVLT, news, filings) is doing with their Q3 report.  We started off the year with James Crowe stepping down, after which Jeff Storey stepped up to the CEO role and has been putting his stamp on things as the company continues to seek higher growth rates for its core network services.  I continue to hear rumbles out there of good things on the horizon in enterprise sales, but Level 3 is big enough nowadays that it takes a lot to move the needle and the question therefore is to what extent the other headwinds will continue to offset that progress.  My quarterly guesses for Level 3’s Q3 numbers are as follows:

$ in millions	Q3/12	Q4/12	Q1/13	Q2/13	Q3/13 (my guess)	Comments
– North America – Wholesale	386	392	372	367	369	Solid but not explosive enterprise growth,and better stability in wholesale
– North America – Enterprise	577	587	595	603	612
– EMEA – Wholesale	87	87	89	88	89	Not much new in Europe to report
– EMEA – Enterprise	94	99	97	99	100
– EMEA – UK Government	42	42	37	33	31
– Latin America – Wholesale	40	41	40	40	41	Growth in Latin America offsetpartially by currency effects.
– Latin America – Enterprise	139	143	142	149	152
Total Core Network Services	1,365	1,391	1,372	1,379	1,394	1.1% CNS growth, nothing to write home about but not bad.
– Wholesale Voice & Other	225	223	205	186	179
Total Comm. Services	1,590	1,614	1,577	1,565	1,573	A hair below consensus estimates
Comm. COGS	642	655	629	616	612	Including severence related to recent layoffs
Comm. Cash SG&A	576	599	562	562	585
Other Costs	–	-47	–
Comm. Adjusted EBITDA	372	407	386	387	376	Probably near 400 ex severence and restructuring
Adjusted earnings per share	(0.26)	(0.16)	(0.36)	(0.11)	(0.20)	With all the refinancing and the one timecosts associated with it, plus layoffs, they’ll still be in the red until next quarter.
Adj. Gross margin %	59.6%	59.4%	60.1%	60.6%	61.1%	Continued integration savings trickling in
Adj. EBITDA margin %	23.4%	25.2%	24.5%	24.7%	~24%
Capital Expenditures	227	198	169	208	~200
Free Cash Flow	(157)	202	(162)	8	0-50	Breakeven or a bit better, with Q4 taking them to FCF positive.

The positive financial effects of last quarter’s downsizing plus all the refinancing activity will be a Q4 and 2014 story, and we can expect them to emphasize their extent despite keeping actual quantitative guidance to a minimum.  Analysts do now seem to expect the company to earn an actual profit in Q4 and thereafter.  It has been a longer road than I expected but they have been making steady progress toward that goal, and the recent surge in the stock price is finally reflecting a bit of that.

In terms of revenue growth, the story will still be in enterprise sales and the potential there.  The question will be what the headwinds in Europe, currency, and North American wholesale will look like this quarter.  If they’re muted then the numbers will look quite good, but the company never seems to get lucky on that front.

 

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Categories: Financials · Internet Backbones