Earnings Preview: Level 3’s Integration Kicks Off

On Wednesday morning, Level 3 will report its fourth quarter numbers with two months of the former tw telecom’s results to add in.  That will make hash out of the usual table of context I use to keep things in perspective, so instead we’ll try something else to make relatively clear predictions with:

$ in millions except per share data	Level3 Q3/2014	tw telecom Q3/2014	Level 3 Q4/2014 (my estimate)	Level 3 Q4/2014 (pro forma estimate)	Thoughts
North America			(with 62 days of tw)	(with 92 days of tw)
– wholesale	368	86	421	450	Some revenue overlap and general wholesale softness
– enterprise	695	339	953	1065	3% sequential growth
EMEA
– wholesale	80	0	80	80
– enterprise	139	0	140	140	better than last quarter, but not expecting much
Latin America
– wholesale	42	0	43	43
– enterprise	158	0	162	162	looking for some growth down south
Core Network Services	1482	425	1799	1940
Wholesale Voice & Other	147		142	142
Total Revenue	1629	425	1941	2082
Network Access	607	150?	725	775	Includes $5M integration costs
Network Expenses	304	72?	353	378	Includes $3M integration costs
Cash SG&A	247	60?	291	313	Includes $5M integration costs
Adjusted EBITDA	471	143	572	616
Adjusted EPS	0.35	0.09	?	?	No idea
Adjusted gross margin %	62.7%	~64.7%	62.5%	62.8%
Adjusted EBITDA margin %	28.9%	~33.6%	29.4%	29.6%	30+% ex integration
Capital Expenditures	204	104	275	300	14-15% of revenue, reflecting tw’s higher capex model
Free Cash Flow	62	20	150-250	150-250	Lots of moving parts, but Q4 cash flow for L3 is usually strong.

The third column is with 62 days of tw telecom results, and the fourth is as if the tw telecom deal closed on October 1.  I’m making a few assumptions about the breakdown of both revenue and expenses here. I lumped the network, taxes & fees, and intercarrier compensation into the Level 3’s wholesale group, and the rest as enterprise.  Also, I made a guess at breaking down tw telecom’s costs along the lines of Level 3’s accounting practices. It’s just an estimate, I have no direct knowledge of this piece.  It could all be irrelevant, as Level 3 may shake up the reporting structure anyway.

Yahoo finance estimates are far enough apart that I suspect it includes contributions of both columns 3 and 4, which is going to make things confusing come Wednesday. And even if there was some consistency in that, there are so many moving parts that trying to estimate EPS this quarter is an exercise in futility – unless of course you get paid for that sort of thing and have to come with a number no matter what, which I don’t.

But the bottom line is that I’m not expecting a big growth quarter in Q4 for the combined company, just because it seems more likely that positives will be offset by other crap due to the complex situation.  I’d be happy to be lowballing things, it’s just that combinations make me conservative and I’m just trying to get a sense of what the combined company will look like.  Integration spending will have just gotten going while the benefits will be mostly down the road.

When you look at these numbers though, you do get the feeling that Level 3’s appetite for more M&A has to be overseas.  The Latin American and EMEA sections do well enough that they just need some better revenue scale to really make them sing.

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Categories: Fiber Networks · Financials