As expected, the largest of the next generation backbones, Level 3 Communications (NYSE:LVLT, news, filings), reported its fourth quarter 2010 earnings today. Total fourth quarter revenues of $921 and a loss per share of $0.09 (not including $0.06 in a one time tax benefit) will not surprise the street much. But with Level 3, one has to look deeper than the overall numbers to understand the company’s trajectory. As regular Telecom Ramblings readers know, I offered my own detailed guesses on Monday, and just to toot my own horn for once, I pegged the CNS and EBITDA numbers right on, and was quite close across the board:
| $ in millions | Q4/2009 |
Q1/2010 |
Q2/2010 |
Q3/2010 |
Q4/2010 actual |
Variance from my guess |
|---|---|---|---|---|---|---|
| – Wholesale | 353 | 336 | 342 | 343 | 347 | -1 |
| – Large Enterprise & Federal | 129 | 136 | 142 | 144 | 144 | -4 |
| – Mid-Market | 151 | 151 | 146 | 147 | 151 | +3 |
| – Europe | 73 | 71 | 69 | 75 | 78 | +2 |
| Core Network Services Revenue | 706 | 694 | 699 | 707 | 720 | 0 |
| – Wholesale Voice | 162 | 165 | 163 | 161 | 161 | 0 |
| – Other | 38 | 34 | 30 | 27 | 23 | -1 |
| – Asset Sale | 7 | |||||
| Total Communications Revenue | 906 | 900 | 892 | 895 | 904 | -1 |
| – Coal | 18 | 10 | 16 | 17 | 17 | 0 |
| Total Revenue | 924 | 910 | 908 | 912 | 921 | -1 |
| – Communications Cost of Revenue | 361 |
371 |
358 | 353 | 352 | -3 |
| – Communications Cash SG&A | 328 |
327 |
324 | 325 | 330 | +2 |
| Communications Adjusted EBITDA | 216 | 200 | 209 | 216 | 222 | 0 |
| Adjusted EPS | (0.11) | (0.11) | (0.10) | (0.10) | (0.09) | 0.01 |
| Capital Expenditures | 80 | 82 | 104 | 133 | 117 | -8 |
| Free Cash Flow | 97 | (90) | (19) | (63) | 73 | +36 |
Revenue: Core network services grew 2% sequentially, which is right inline with what I was expecting. European and, surprisingly, mid-market revenues led the way, and wholesale did well. The large enterprise and federal segment which had been leading the way was flat this quarter. The company guided the first quarter to be up sequentially again, despite the slight seasonality from Vyvx that often sees them dip in Q1. For the full year, they were cautious (as expected), promising growth but no numbers yet. We’ll see if they offer further color on the call.
Costs: SG&A was up slightly, and COS down slightly, but both within normal parameters.
EBITDA and EPS: EBITDA of $222 won’t set the world on fire, but it probably slightly beats analyst expectations – as my own guess was slightly higher than most. Not including a one time tax benefit, loss per share was $0.09, a penny better than the street was expecting.
Cash Flow & Capex: Free cash flow was higher than my pessimistic expectation, but working capital is hard to predict. The company predicts as usual that Q1’s number will again flow in the other direction. Full year 2011 cash flow is expected to be negative, which I also predicted – they are (and must) spend for growth, but the FCF breakeven point won’t come until the end of the year if they succeed. Capex fell sequentially to $117M, still up from those recessionary numbers, and they guided to capex levels of about 12% of revenues, which suggests that $110-120 will be the norm.
Conclusions: All in all, Level 3 had a very steady quarter. I did not expect them to shoot the moon, just put themselves in a position to do well in 2011. They did that, but there is much work ahead.
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Categories: Financials · Internet Backbones
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Nice forecasting Rob! Seems to me that Morche’s group can’t sell to the government! I didn’t know the “Census Bureau” account was the only thing bolstering Federal sales, did you? Another one time event churned away.
Storey’s group seems as disappointing as O’Hara’s. Just a lot of yada, yada, yada.
Munger’s wisdom must not be forgotten. The definition of insanity is doing the same things over and over again, while expecting a different outcome.
That’s the (3) Story perpetually.
A comment or perhaps a question. It has been 2 + years since we celebrated the departure/excising of Kevin Ohara”the problem with Level 3″ and replaced with Jeff Storey. Seems Jeff has received a free ride. Level 3 with KOH or Jeff Storey in charge was simply based on teh 100 million integration investment were going to get betterit was amatter of time and that time has passed and they seem to be better. I alos know we call for Crowe head quarterly , but what has Jeff Storey accomplished for Level 3 in 2 years to earn teh free pass and when do we start looking for results from him ( like Barrack using I inherited Bush mess) ? we lost 100’s million a year with KOH and now with Storey. Only difference us we dont have integration and stubbed toes to blame it on, nor are we in crippling recession , in recession yes but aruably stablized. Are we better with Storey today or is it just a different suit collecting the money with for poor results.
Let’s not rehash the past and just say that yes he got some freebie time given the mess he inherited. When that freebie time ran out is a matter of opinion, but I think few would argue that he has any left. This is Storey’s baby now.