Level 3 Maintains Its Momentum, Posts Another Strong Quarter

With the tw telecom transaction still looming large in the autumn, Q2 and Q3 for Level 3 are about not tripping over anything.  And they didn’t, posting another strong quarter of enterprise revenue growth.  This time it was Europe and South America that held things up, even after taking out boosts from currency fluctuations.  Here are their actual numbers in some context:

$ in millions	Q2/13	Q3/13	Q4/13	Q1/14	Q2/14 (actual)	Comments
– North America – Wholesale	367	365	374	368	367	The smallest bump up in N.A. enterprise in the past year, but enough to keep the momentum going
– North America – Enterprise	603	622	651	675	684
– EMEA – Wholesale	88	88	89	87	86	A big enterprise number for Europe, helped a bit by forex but still up 2.5% sequentially in constant currency.
– EMEA – Enterprise	132	134	134	138	143
– Latin America – Wholesale	40	39	41	40	42	Also a bit enterprise number for Latin America, helped by forex a bit but still up 3.6% sequentially in constant currency.
– Latin America – Enterprise	149	149	154	149	157
Total Core Network Services	1,379	1,397	1,443	1,457	1,479	Up 1.5% sequentially.
– Wholesale Voice & Other	186	172	159	152	146	A decelerating decline lately.
Total Comm. Services	1,565	1,569	1,602	1,609	1,625	Beating expectations, including mine.
Comm. COGS	616	608	618	614	613	Strong COGS number.  SG&A was up a bit even after transaction costs.
Comm. Cash SG&A	562	576	518	537	553
Comm. Adjusted EBITDA	387	385	466	458	459	Includes $4M in tw telecom transaction costs, as I expected.  Otherwise, $463M
Adjusted earnings per share	(0.11)	(0.09)	0.06	0.47	0.21	Not counting a forex hit in Venezuela, $0.37 per share.
Adj. Gross margin %	60.6%	61.2%	61.4%	61.8%	62.3%	Very strong
Adj. EBITDA margin %	24.7%	24.5%	29.1%	28.5%	28.2%	Not including tw telecom transaction costs, this was flat
Capital Expenditures	208	194	189	163	241	A substantial number this quarter
Free Cash Flow	8	(90)	197	(22)	62	Could be anything near breakeven or above.

Revenue: North American enterprise revenues were up, but not as much sequentially as we have seen lately.  However, Europe and South America made up for that.  Wholesale was, as usual, far less exciting.  The strength came from mostly IP&Data, as it generally has lately.

EBITDA & Margins: EBITDA was pretty much where I expected it to be, with the extra revenue offset by some higher SG&A even after discounting the tw telecom transaction costs of $4M.  Gross margins were quite strong, however.

Earnings: Not including the Bolivar devaluation, EPS would have been $0.37 which was better than the street’s number and mine too.  Including it, $0.21 was still well into the black for another quarter of actual positive earnings for Level 3 — which is still taking some getting used to.

Free Cash Flow: FCF of $62M was essentially where I expected, despite a big bump in capex up to $241M.  I’m curious where the spending went to this quarter.

Meanwhile, Level 3 also this morning announced plans to offer $600M in senior notes.  The new funds will go into escrow until the tw telecom deal closes, funding the cash portion of the deal.

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