Level 3 Communications earnings comments by D Klein 07/30/09

There is only one word for this quarters earnings report, disappointing.  They missed (my) expectations on all important metrics such as core revenue, EBIDTA, and most importantly free cash flow (FCF).  2009 revenue per diluted share is coming in at a four year low.  (See my last blog post for a discussion on revenue per diluted share).

The LVLT state of the art network has not given the company enough of a competitive edge to out price the competition as was originally envisioned when this company went public, nor have they convinced major carriers (in any meaningful way) to move substantial traffic onto LVLT’s network that would grow the top line.  The company cannot provide enough value or provide assurances their future is stable enough to attract these cash cows.  Sprint highlighted this to some extent with their concern about the balance sheet, and recent earnings will only increase this concern. 

The trend and managements tone indicate a continued revenue decline for Q3 before things start to level off.  Management expects FCF to be about breakeven for 2009 but I believe it will be slightly negative for the year considering Q1 FCF loss of 82 million.

On the plus side I do not see the stock breaking the dollar barrier again given the results and expectations.  However, if there are few signs of improvement in top line growth by year end will spell trouble given the companies massive debt load.  It’s all about top line growth folks because without it they will not generate the FCF needed to make this a very compelling investment, and massive dilution could again become a reality given a continued lack of growth.

There are too many competitors and unless this industry consolidates LVLT’s required growth may not materialize, and yes LVLT needs to be part of this consolidation as either an acquirer or seller.

LVLT still ranks as a highly speculative investment, if investment is the right word, maybe gamble fits better.

The model is available at the IIEX Stock Data page.


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