In a release that offered a blizzard of combined, standalone, and pro-forma results for the fourth quarter of 2014, Level 3 started a new chapter of its story with the incorporation of tw telecom. Lots of data, but just what does it say? My initial take is that North American enterprise revenue growth remained pretty strong for both legacy Level 3 and tw, wholesale was weak, and acquisition costs were big enough to distort it all quite effectively.
Rather than try to mirror it all, I’m going to just put the pro-forma numbers for Q4 we do have alongside Level 3’s past quarters. That will hopefully show the change in shape and give starting point and new shape of the company, i.e. the place with which we’ll be comparing Q1 in a few months. For a more detailed look at the performance of the two businesses on a standalone basis, see the main release (and good luck).
| $ in millions | Q4/13 | Q1/14 | Q2/14 | Q3/14 | Q4/14 Pro Forma Combined |
Comments |
|---|---|---|---|---|---|---|
| – North America – Wholesale | 374 | 368 | 367 | 368 | 443 | Strong enterprise growth, weak wholesale. |
| – North America – Enterprise | 651 | 675 | 684 | 695 | 1063 | |
| – EMEA – Wholesale | 89 | 87 | 86 | 80 | 75 | Strong enterprise growth, weak wholesale. |
| – EMEA – Enterprise | 134 | 138 | 143 | 139 | 143 | |
| – Latin America – Wholesale | 41 | 40 | 42 | 42 | 41 | Down sequentially, strong dollar? |
| – Latin America – Enterprise | 154 | 149 | 157 | 158 | 150 | |
| Total Core Network Services | 1,443 | 1,457 | 1,479 | 1,482 | 1,915 | |
| – Wholesale Voice & Other | 159 | 152 | 146 | 147 | 137 | A steep drop sequentially, but last number’s quarter was probably the outlier. |
| Total Comm. Services | 1,602 | 1,609 | 1,625 | 1,629 | 2052 | |
| Network Access Costs | 618 | 607 | ||||
| Network Related Costs | 298 | 307 | ||||
| SG&A | 263 | 266 | ||||
| Comm. Adjusted EBITDA | 466 | 458 | 459 | 471 | 625 | excludes $156M in acquisition expenses else EBITDA was $469M |
| Adjusted earnings per share | 0.06 | 0.47 | 0.21 | 0.35 | 0.35 | |
| Adj. Gross margin % | 61.4% | 61.8% | 62.3% | 62.7% | ||
| Adj. EBITDA margin % | 29.1% | 28.5% | 28.2% | 28.9% | 30.5% | including acquisition expenses, 22.9% |
| Capital Expenditures | 189 | 163 | 241 | 204 | 346 | 17% of revenue, I wonder how high this will go now |
| Free Cash Flow | 197 | (22) | 62 | 117 |
For 2015, Level 3 offered a powerful free cash flow range of $550-600M for the full year. Adjusted EBITDA is expected to grow 12-16% from $2.271B, which works out to $2.54-2.63B. Net cash interest will be about $640M, capex will be about 15% of revenue, D&A will be $1.16B, taxes will be about $60M, and non-cash compensation about $120M.
For further color, I’ll be listening to the call and trying to digest the rest of the data this morning.
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Now where’s the combined map, hopefully in KML or shapefile? :-p
oops, fixed the N.A. enterprise number typo
Currency effects have been a major headwind this year it seems.
$38M of run-rate synergies achieved in Q4
More UK government pain.
It’s not more UK Government pain Rob, it’s always been a known train wreck that needed to be sold 2 years ago. There was never space at that table for Level 3. Enterprise growth has been a solid c9% for the last 3 years, Wholesale will be an issue going forward. Needs significant investment in buildings and focus on core markets for Enterprise to mitigate declines elsewhere. Look at Capex as a % of revenue v higher growth competitors and number of buildings v NA. The key is a significant acquisition that will solve much of this at a stroke.
“The key is a significant acquisition that will solve much of this at a stroke” – such as?
Colt would be the obvious candidate.
Actually Colt is the ONLY candidate, other than integrating a number of western European metro assets, which would take a lot longer to bring together. Am sure they will sell, but the price will be rich and the timescale won’t be before mid 2016.
Perfect! That will give Level 3 just enough time to quit the tw integration about halfway through.
Yes, I’ve been beating the Colt drum for years – it’s always been the logical candidate for L3 in Europe. But perhaps acquiring Interoute might get them part of the way there? If it were for sale, of course.
Interoute recently quoted their sales, margin, funding structure and business mix to an industry trade rag – I would say it is safe to assume they are looking.
I agree carrier1, not sure why Colt would sell here.
schmuckinsurance, great handle btw:) your right, Interoute are looking and have been for a couple of years, the price is high though and while it is somewhat accretive and certainly there are some significant network synergies across continental Europe, it basically gives Level 3 more of the same, good continental European reach, but no depth, i.e. metro and buildings, therefore winning pan european and in-country Enterprise business will be challenging due to the large off-net component, meaning lower margins, challenging customer delivery and service and no new USP. Until they solve this, Level 3’s European sweet spot will continue to be serving the needs of US Enterprise customers who require connectivity into Europe and vice versa where their TA and US assets are compelling. so for what it’s worth in summary, my considered view is that they need to:
1. Focus on winning high margin wholesale business and not spread themselves too thin
2. Ramp up a heavyweight indirect channel across western Europe, that will allow them to reach enterprise markets without increasing opex and complexity in each country
3. Sell, or partner with say BT / Vodafone etc for the UK Government business, or find the right partner as this business is deflecting from the enterprise efforts in terms of resources and is highly complex in terms of legacy GC systems and processes and of course it isn’t and won’t grow as UK Government dept’s don’t buy vanilla bandwidth or even just a VPN, they want LAN and Desktop management as table stakes and Level 3 cannot persuade them to change their buying behavior.
4. To be a truly global player, they urgently need to invest in Europe, the focus has been on the US for 3 years now. The GC acquisition was a great platform to build from, but it needed significant investment in the metro, certainly in the UK, Germany, France and Netherlands in order to leverage this network, otherwise they cannot compete.
That’s my 2 cents anyway.
thanks for the long and insightful post carrier1, I hope it won’t be the last.