RealMoney Silver - LVLT Shows Signs of Improvement

LVLT Shows Signs of Improvement
By Bob Faulkner
RealMoney Contributor
2/7/2008 12:16 PM EST

Updated from 2:59 p.m. EST on Feb 6.

Level 3 Communications (LVLT) reported fourth-quarter 2007 results that included a mildly positive surprise with a lower-than-expected loss per share. However, the company is changing its practices on guidance going forward and will not be offering specific revenue expectations on a quarterly basis.

In the quarter, Level 3 reported total revenue of $1.10 billion (up 30% year over year and 4% quarter over quarter) and a loss of 6 cents per share.

The all-important core communications revenue came in at $955 million, up 5% sequentially and above the high-end of management's prior target. Along with the stronger core revenue, the gross margin on that increased to 59% from 58% in the prior quarter.

The company continues to operate at a loss while it is restructuring, but, on an earnings before interest, taxes, depreciation and amortization basis, it reported $246 million, or 22.7% (up 30 basis points year over year and 210 basis points quarter over quarter).

Cash from operations remained positive in the quarter at $190 million, up from breakeven last year and only $100 million in the prior quarter. Cash and equivalents increased about $20 million, and accounts receivable decreased $45 million, with days sales outstanding dropping five days, to 32 days.

On the two most critical issues that concerned investors, management provided the correct answers.

Although the company is no longer giving specific revenue guidance, management does expect 2008 revenue to be up for core communications in the 8% to 13% range, which would seem to be in the neighborhood of current consensus ($4.3 billion). Management is certainly suggesting that first-quarter seasonality will bring a dip from fourth-quarter levels but a steady increase thereafter.

Overall, Level 3 had a good quarter and is showing the signs of improving execution that investors need to see. Now management needs to keep focused to deliver the margin improvement and solid cash flow that will accelerate the stock.

LVLT Preview: Time to Take Control

Level 3 Communications (LVLT) is scheduled to report its fourth-quarter 2007 results tomorrow before the open and will have a conference call at 10:00 a.m. EST. Current consensus estimates are for revenue of $1.08 billion (up 30% year over year and 4% quarter over quarter) and a loss of 11 cents per share.

In the prior quarter, Level 3 reported revenue of $1.04 billion (up 22% year over year and 1% quarter over quarter) and a loss of 11 cents per share. The gross margin was 57.2%, up 90 basis points year over year and 40 basis points sequentially. The company continues to operate at a loss while it keeps restructuring, but on an earnings before interest, taxes, depreciation and amortization (EBITDA) basis, it reported $215 million, or 20.6% (up 30 basis points year over year and 190 basis points quarter over quarter). Cash from operations turned positive in the quarter at $100 million, but the cash account did decline about $100 million as well. Accounts receivable decreased $20 million, with days sales outstanding dropping two days, to 37 days.

While third-quarter results were in line with expectations, the company reduced its guidance for the December quarter and 2008. In essence, the same service-provisioning problems that plagued it in prior periods have continued and are deeper and more widespread than management's initial assessment.

Management guided fourth-quarter total revenue to be in the $1.05 billion to $1.10 billion range, with EBITDA to be in the $235 million to $255 million neighborhood. The low-end of the new EBITDA guidance assumes no changes in the current provisioning rates.

Realistically, there are only two issues that investors are interested in with this stock:

What progress, if any, has been made to the service provisioning issues that have plagued the company for several quarters? Management went into great depth on its prior call to explain the steps that were being taken by senior executives to resolve the problems and to regain investor confidence.

While execution problems have held the company back, demand had always remained strong. Has that continued to be the case, or have there been any changes in the demand profile due to macroeconomic perceptions? This is situation in which the company controls its execution problems, but there's obviously little it can do if demand softens.

Since that last conference call, the stock fell more than 60% before rebounding recently to the $3.40 level, up about 20% off the low. Level 3 isn't an expensive stock (1.3 times sales), but it has to demonstrate that it has control of its business. Being in the right markets with the right products/services isn't worth squat if management can't deliver on the opportunity.