More M&A Likely Looms for Level 3 After Q2 Profit, Minus Debt

Channel stalwart Level 3 Communications reported a loss in the second quarter, but the company cited growing margins and reaffirmed its business outlook for the year.

The Broomfield, Colorado-based communications provider posted a net loss of $13 million, or 4 cents per share, on revenues of $2.06 billion. Analysts polled by Thomson Reuters forecast Level 3 would report a per-share profit of 39 cents and revenues of $2.08 billion, according to The Wall Street Journal.

Excluding the loss, which was related to extinguishing debt, Level 3 reported a profit of $150 million, or earnings per share of 42 cents. According to an analysts’ consensus tracked by Zacks Equity Research, Level 3 was expected to report a per-share profit at 40 cents, excluding stock option expenses.

“The company has an impressive track record having delivered positive earnings surprises in each of the last four quarters, with an average beat of 10.9 percent,” wrote Zacks, which rates Level 3 a “strong buy,” commenting on Level 3’s second-quarter results.

Level 3 said its adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) margin rose to 32.3 percent, and the company reaffirmed its 2015 business outlook. For the entire year, the company anticipates adjusted EBITDA growth of 14 percent to 17 percent, and free cash flow of $600 million to $650 million.

Level 3 has been performing well in recent years and gobbling up competitors along the way. Last October, Level 3 completed its $5.7 billion acquisition of tw telecom.

Assuming Level 3 had completed the acquisition on Jan. 1, 2014, total revenues in the second quarter rose to $2.06 billion from $2.03 billion, the company reported. Core network services (CNS) revenues climbed 5 percent to $1.941 billion.

“We continue to see growth in CNS revenue from our enterprise customers across all regions,” said Sunit Patel, Level 3’s executive vice president and chief financial officer.

Earlier this year after Level reported a first-quarter profit of $122 million, Goldman Sachs called the company “one of the best fundamental turnaround stories in telecom as a result of improved execution and transformative M&A.”

Level 3 may not be finished with acquisitions.  

Although the company has been focused on integrating tw telecom, D.A. Davidson & Co. analyst James Moorman said he anticipates that Level 3 may look to Europe and other areas for additional M&A targets.

“At some point, we think it would make sense for LVLT to look at consolidating other European networks — especially if it has an enterprise focus,” wrote Moorman in a July 30 research note. He rates Level 3 a “buy,” but he reduced by $1 the 12-to-18-month price target on the company’s stock to $66.

Shares of Level 3 closed Thursday at $50.05. The stock price has ranged from a 52-week low of $37.61 to a 52-week high of $57.08 on May 5, 2015, just days after the company reported its first-quarter results.

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