With nearly a full year on the books for Level 3’s purchase of tw telecom, the market is looking for both integration savings and better growth prospects going forward. In the company’s Q3 results, we saw some more of the integration savings, and while growth isn’t shifting gears yet the upward trend is still intact. They also announced the deconsolidation of their Venezuela business as of the end of Q3. Here are Level 3’s numbers in some context:
| $ in millions | Q3/14 | Q4/14 pro forma |
Q1/15 | Q2/15 | Q3/15 | Comments |
|---|---|---|---|---|---|---|
| – North America – Wholesale | 368 | 425 | 438 | 450 | 421 | Wholesale dropped back, but Enterprise kicked into higher gear |
| – North America – Enterprise | 695 | 1080 | 1097 | 1,101 | 1130 | |
| – EMEA – Wholesale | 80 | 75 | 69 | 68 | 69 | EMEA Enterprise was a bright spot this quarter |
| – EMEA – Enterprise/Gov | 139 | 146 | 138 | 136 | 143 | |
| – Latin America – Wholesale | 42 | 41 | 40 | 40 | 39 | Venezuela operations to be deconsolidated |
| – Latin America – Enterprise | 158 | 151 | 145 | 146 | 144 | |
| Total Core Network Services | 1,482 | 1,918 | 1,927 | 1,941 | 1,946 | Nothing spectacular, but growth intact |
| – Wholesale Voice & Other | 147 | 134 | 126 | 120 | 116 | |
| Total Revenue | 1,629 | 2,052 | 2,053 | 2,061 | 2,062 | Inline with analyst estimates |
| Network Access Costs | 723 | 696 | 706 | |||
| Network Expenses | 351 | 359 | 356 | |||
| Cash SG&A | 339 | 336 | 325 | Integration savings seem to be kicking in here | ||
| Comm. Adjusted EBITDA | 471 | 625 | 635 | 665 | 657 | Includes $18M in integration expenses |
| Adjusted earnings per share | 0.35 | 0.35 | 0.35 | 0.42 | 0.00 | Not including Venezuelan deconsolidation, $0.48, ahead of expectations |
| Network access margin % | 62.7% | 64% | 64.8% | 66.2% | 65.8% | |
| Adj. EBITDA margin % | 28.9% | 30.5% | 30.9% | 32.3% | 31.9% | Excluding integration expenses, 32.7% |
| Capital Expenditures | 204 | 346 | 254 | 317 | 328 | Almost 16% of revenue. |
| Free Cash Flow | 117 | (9) | 51 | 102 | 247 | A big Q3 FCF number |
The revenue bright spots were clearly on the enterprise side in both the US and Europe, with wholesale pulling back a bit after last quarter’s surge and tempering things. Currency effects and Venezuelan troubles continued to hold back an otherwise strong Latin American business. Level 3 said it will deconsolidate the Venezuelan business going forward, which contributed $25M in revenue and $16M in EBITDA during the quarter. The Venezuelan economy has been rocky to say the least.
As for the integration, Level 3 achieved another $45M in run-rate synergies while spending $18M during the quarter, without which they saw some nice EBITDA expansion to $675M and 32.7% of revenue. The main savings came in SG&A this quarter, with some seasonally higher utility costs helping to hold up things on the network expenses side. Level 3 raised its guidance slightly for full year EBITDA growth to 15-17% from 14-17% as a result.
A one-time charge associated with the Venezuelan deconsolidation pushed earnings per share to breakeven, but otherwise was $0.48 beating analyst projections by a few pennies. As for next quarter, prepare for a huge one-time benefit. Level 3 says it will be releasing $10B in net operating loss, which will give them a $3.1-3.3B non-cash boost to Q4 earnings.
Free cash flow of $247M was quite strong, and Q4 is usually a very good FCF quarter for Level 3 as well, suggesting the aggressive $600-650M they have forecast for the full year is well within range given that they are at $400M after nine months so far. That’s despite spending almost 16% of revenue on capex during the quarter.
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thanks Rob.
Any scuttlebutt on the backstory of John Blount’s “retirement”?
Breauninger is the man! GC people are ruling LVLT.
Nice to see such a unified culture… GC “ruling,” Blount burnout rumors.
The only thing that would make it better is purchase of XO and those ass clowns.
Anything more on this deconsolidation?
Jeff Storey making it the place to work in Colorado. Keep up the good work.
HR or corpcomm?
glassdoor.com would seem to disagree with you.
Sounds like sour grapes to me, Anonymous. He’s telecom’s version of Steve Jobs – only a genuinely nice person.
Hahaha!! Are you Storey’s mother?
Jeff Storey is about as far from Steve Jobs as my son’s little league team is from the Kansas City Royals.
Sure, Storey has (or his investment bankers have) done a very good job selecting acquisition targets. He’s done a good job integrating assets. He’s done a bad job growing revenue. He’s done horrible job innovating anything.
Steve Jobs was an innovator. He introduced products that people didn’t even know they wanted (e.g., iTunes) or needed (e.g., iPad). Jobs grew revenue to levels no one could imagine.
Right now Storey’s a guy who’s engaged in a number of horizontal mergers that have yielded large amounts of cost savings. By that standard he’s Bernie Ebbers with a follow through. In reality Storey’s a guy who doesn’t mind taking the knife to his workforce and slicing large portions of it off, ala Chainsaw Al Dunlap.
Revenue growth at Level 3 is anemic. Practically 100% of the cash flow improvement has come from 3 areas, none of which Steve Jobs (or his biographers) would consider special.
(1) Refinancing high yield debt to lower yielding debt. 90-95% of that improvement is a function of the Federal Reserve, not anything Level 3’s done. If you consider that LVLT had LT debt on average of about $9b (now $11b after TWC) between 2009-2015, they’ve probably lopped off about 500-600bps (or 5-6%). That generates roughly $400m-$500m a year in debt service savings.
(2) Access savings (or reduction in third party costs to VZ, ATT, etc.) from acquisitions. These saving are attained by moving offnet capacity on-net. While this is very prudent, there’s nothing innovative about it.
(3) Reduction in forces. The nice thing about horizontal mergers is that you have a large number of duplicative forces doing the same job. So you get to dump a bunch of them, close the offices (real estate savings) many of the former employees worked in.
Storey’s proven to be an operationally sound CEO, but using the word “Jobs” either proceeding “Steve” or preceding “Creation” ain’t something that comes to mind.
Anonymous, you sound and seem very angry and might suffer from knowitol. You need a little island time. Maybe some scotch.
Touche, it does come across that way!!
Not angry at all although two fingers of Macallan 30 would hit the spot.
Anger notwithstanding, everything I wrote was accurate. 🙂
I didn’t read anger in the comment. The last sentence was a bit snarky, but funny. Take that out and the rest seems pretty accurate.
Not totally accurate —-There is a segment of lvlt business which is other rev,it is not being sold . Its left over from the Wiltel acquisition & is running off at double digits per yr.Used to exceed 1 bil, now under 500 mil . This is decreasing total revenue. Another factor is the strong dollar. Its having a substantial affect on European & south American revenue . Has been causig a loss of over over 50 mil per yr.
These factors are clouding the revenue growth picture!
The sales force, now about double in size should be about ready to adjust to selling new products ,different categories of clients & substantially greater geographical coverage.
Morty
Addendum—-I misspoke re other rev . It is predominantly wholesale voice,which is no longer sold & is running off .
Morty
Morty, your currency issue is a double-edged sword.
For starters, I never heard a CEO on an earnings call discuss or read in a quarterly earnings press release how the weak dollar (2004-2013) was inflating reported revenues or earnings. Yet the USD lost 31% against the BRL and 12% against the EUR during that period.
We started reading about currency impacts in Q1 2015 earnings releases.
CEOs want to have their cake and eat it too. Weak dollar vis BRL, EUR & GBP and revs look great, but no need to point that out. Better that investors think we’re growing our revenue. Strong dollar and revenue abroad suck and we need discuss this by adding “constant currency” into our pro forma earnings releases.
Here’s the double-edged sword part.
The weak EUR/BRL/GBP are not merely cosmetic. If any of those currencies need to be repatriated back (converted) to dollars to pay, for example, debt service or capex, those are real financial impacts.
Simple example, if LVLT needs to use 50m EUR of the $100m euros they have in EU banks (or held in EU gov’t notes) to pay debt service in USD, those currencies get converted to USD. The EURO has lost nearly 20% against the USD since May 2014. That means that 50m EUR buys 10 million fewer dollars than it bought a year ago. If they need 50m USD from the EU they now need to convert 62.5m EUR.
That’s not merely a cosmetic impact.
Anon,
That is absolutely true ! Fortunately for lvlt that is not the current situation as 2016 FCF appears to be above 1 bil [my #s] & future rolls will not be done until 2018,when they start to roll their 2020 debt.
The currency issues may be helpful in the current situation. They are ready to make another acquisition & the currency problems in Europe & South America may create some buying opportunities !
Morty
Holy hyperbole, Batman!
You all should have just let the Jobs comparison stand. It was absurd enough on its own as to discredit the sycophant. For Level 3 nonetheless. What a world!
You all have likely never worked for a despicable human being, therefore don’t appreciate a good and balanced CEO when you see one.
Any thoughts on the VZ enterprise sale Rob, is Comcast the buyer?
Chance for Level 3 to buy some business. Here’s some potential low hanging fruit.
http://finance.yahoo.com/news/exclusive-verizon-weighing-10-billion-180808300.html
Agree on L3 would have interest in parts but what I wonder is:
Do you think the Feds would allow Comcast to buy it?
Would Level 3 be allowed?
Would Level 3 be interested in the whole thing or just parts?
Do you think Zayo or CTL could get it done?
I don’t think the Feds would block either Comcast or Level 3. I doubt Zayo or CenturyLink would take the plunge on this, but Level 3 would have to look at it to be sure.
I agree on Zayo but one never knows what neat trick Dan Caruso has up his sleeves. Still this one seems outside of his traditional M.O..
On Comcast, I see that as the most likely interested party but it would have to be a deal w/o a great deal of synergies b/c they are trying to build their own Enterprise business so likely not a lot of opex savings at the start. Still the potential is very interesting.
Level 3 … i see it but i don’t think they could swing it. Just seems way too big for them. But then again i’ve been wrong in the past. So who knows ….
Too big as in price tag or too big as in integration? Because the latter has never really stopped them before. They just stop integrating after a few months and move on.
i was referring to the financial piece ….
debt mkts would finance them….