Shares of Level 3 Communications (NYSE: LVLT ) are up marginally today on an up day for the market, thanks to a good, but not great, fourth-quarter earnings report.
The company, which operates a massive national fiber-optic network and Web content-delivery service, reported an adjusted net loss of $1.02 per share, in line with Wall Street estimates. Revenue came in about $60 million light, however.
Investors are probably right to be cautious. Cash is flowing, but not as bountifully as I'd like:
|Free cash flow (mil.)
|FCF as a % of revenue
|Cash / debt (mil.)
||$918 / $8,450
||$616 / $6,448
Source: Level 3 earnings press release.
None of these metrics inspires me. Quite the contrary -- I'd much rather see free cash flow (FCF) growing faster than revenue and accounting for a greater portion of sales. And while I can understand the use of leverage to acquire Global Crossing, it's somewhat troubling to see net debt rise 29% when Level 3 has spent years working off the leverage on its balance sheet.
Bulls will nevertheless point out that debt is the cost of scale, and acquiring Global Crossing gives the company salable fiber in 45 countries at a time when our collective appetite for fat data files -- (cough) video (cough) -- is rising. Level 3 is investing to meet demand.
The question is whether management's bets will yield a payoff above cost. It's been a struggle so far, but returns on capital and gross margin are rising, and that's despite peer Akamai Technologies (Nasdaq: AKAM ) beating fourth-quarter profit forecasts by 12.5% as revenue improved 14%. The implication? Level 3's success or lack thereof doesn't necessarily have to come at the hands of rivals. More likely, this industry is like a pie big enough to feed all the industry's participants.
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