This is the article everyone must be looking at. Lovely analysts. More buying time for me I guess..
2Q Headline Numbers Helped by 1-Time
Benefits and Non-Core Revenue
v Transitory Benefits Help Headline Results — Level 3 reported revenue of $1.090 billion in 2Q versus our estimate of $1.069 bil. and consensus of $1.075 bil., although the upside was from a combination of temporary benefits from 1-time items and discontinued ops of $18 million plus upside from SBC contract revenue that is poised to fall substantially over the next few quarters. Normalized OIBDA of $237 million did outperform our
estimate of $227 million and consensus of $220 million on an in-line gross margin of around 58%. EPS of ($0.02) was helped by around 7 cents from transitory benefits versus our estimate and consensus calling for a loss of ($0.10). LVLT provided guidance that it now expects positive free cash flow for '08 based on capital spending intensity to fall to 11-12% of revenue from 12-14% of revenue previously, implying capital spending of $478-$521 million versus our current forecast of $518 million. v Key Customer Revenue Segments Were Soft — Excluding the 1-time benefits, core communications services revenue of $954 million was well below our estimate of $979 million as business markets virtually stalled sequentially, wholesale voice and total wholesale revenue fell sequentially, and content was also shy of our estimate. Europe modestly outperformed. Normalized wholesale revenue of $536 million was below our forecast of $544 million and below 1Q of $541 million. Business Markets group of $241 million was below our estimate of $253 million and only improved $1 million sequentially. Normalized Content Markets Group ex Vyvx was around $94 million versus our estimate of $102 million and only improved $1 million sequentially on a normalized basis. European Markets at $83 million did outperform our forecast of $80 million. The upside in the quarter primarily came from SBC revenue of $54 million versus our estimate of $25 million coupled with the transitory revenue benefit from an accounting change of $12 million and transitory revenue from the discontinued Vyvx advertising unit of around 46 million. Hence, the company showed no meaningful progress, in our view, at improving the revenue contributions from its enterprise segment, which we view as a key opportunity to improve its longer-term revenue trajectory. SG&A of $395 million was better than our forecast of $408 million and contributed to the outperformance of OIBDA. v Reiterate Sell Rating on LVLT — Bulls are likely to focus on better headline results and positive free cash flow in the quarter with an expectation for
positive free cash flow for the remainder of the year, albeit helped by some transitory benefits and lower capital spending, as CFFO of $110 million in 2Q was well below our estimate of $204 million. We believe the underperformance in recurring revenue within key customer segments continues to highlight the operating challenges, and we remain a seller of
LVLT given the premium equity valuation
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