Sorry Level 3–You’re Damned if You Do…and Damned if You Don’t…
February 17, 2009
Or: An Insider’s Guide to the Constant Bait and Switch With Wall Street.
In my past 10 years as CEO of AFS (as well as in my past lives), I have become all too familiar with the continual dance with the boys on Wall Street to obtain the best valuation for our company. It goes something like this…
We meet with The Real Smart Guys on Wall Street, who proclaim, “Well, you have a pretty good company, but it’s not worth what you think it is today. However, once you get funded your value will go up… “
Once you have your funding, you’ll hear, “Well, I guess that’s good news, but once you have gross margins above X, your value will go up…”
Hit that and you’ll hear, ”Once you have a consistent recurring revenue stream…once you are operating cash flow…once you are EBITDA positive…once your EBITDA margins out perform others…once you hit nirvana of achieiving Free Cash Flow Positive (“FCF+”) and net income positive…and so on and so on…”
It’s always the next thing that will drive value.
I bring this up because Level 3 reported results a few days ago. And The Big Wig Analysts, in their infinite wisdom, are trickling out their criticisms of Level 3.
You see, Level 3 explained that they are cutting back on capital expenditures in order to achieve a positive, sustainable free cash flow positive (“FCF+”) position. The rationale is both reasonable and fundamentally sound: by cutting their capital expenses, their cash flows will increase.
This is something our friends on Wall Street have been asking of Level 3 for years—Focus on Free Cash Flow Positive, baby.
So everyone is happy right? Wrong.
Instead, Level 3 heard catcalls from the very same folks pushing them to focus on Free Cash Flow. Here’s the gist of their criticisms: “Hey Level 3–what are doing making an effort to achieve FCF+ by cutting capital expense? This is just going to slow your top line growth and end up squandering the long term advantage you’ve reaped by always investing in capital!”
I am not making this up.
The truth is, if you are a real Telecommunications company with hard assets, it is capital that drives nice margins, market sustainability, and competitive advantage. Capital has been the growth differentiator in telecom since the beginning of time.
So what is Level 3 to do? Focus on Achieving Free Cash Flow in this economy or focus on sustaining their long term advantage by maintaining leaving Cap Ex alone?
Well according to Wall Street, both are wrong answers.
Sorry, Level 3, It appears you are Damned if you do, damned if you don’t.
I’ll have more to say on this in my next post….
Written by Dave Rusin - Telecom Executive
Posted by wbrache | Filed Under American telecom, Telecom expense management, Telecommunications companies, Telecommunications industry, Telecommunications news
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4 Responses to “Sorry Level 3–You’re Damned if You Do…and Damned if You Don’t…”
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Mr. Rusin is of course right in everything he says here. But when will the market reward Level3?
Impossible to reward a company not sustainable in the long term. Stockmarket is overall a measurement of confidence. And L3 has lost all confidence from the Wise Men after so many years of promising the moon. That’s why independetely of what L3 does, they are punished. Well, the real punish people are those that bought L3 shares at 3-6-9 $. The CEO must sell the company quickly before it goes really bad. You cannot compete in the wholesale telco market without investment.
Wall Street’s 250 mil sh short position in LVLT has dropped to 150 mil over the last 3 or 4 mo . As soon as that short position is gone, the Wall St ***agenda*** is gone . The brokerage houses,analysts,mkt makers & financial press , will suddenly see the light .
The overblown complaints about substantial debt will subside . This is a ***CAPITAL INTENSIVE INDUSTRY*** & debt is a virtual necessity . The key is the ability to service that debt & as LVLT is about to prove , they can service that debt with substantial cash to spare .
These same naysayers will be knocking down the doors to earn investment banking fees by refinancing or raising new money for LVLT .
Full disclosure—- i am very long LVLT & follow it on a daily basis .
With no offense to the blogger—-LVLT has the best management in telecom—–they have proved it by coming through the telecom depression of 2001 -2004 without a restructuring . Their current financial position has never been better . They have 768 mil in the bank to pay off 700 mil over the next 2 yrs . My guess is they will be F/C/F positive about 200 mil for 09 [ Q1 will be negative due to working capital needs which reverse as the yr goes forward] .
Morty Dick
PS—- Mason Hawkins & Prem Watsa own about 48% of the cos stock .
Does anyone know what are these class action law suits about? How does it affect L3?
I do believe the market is punishing L3 unfairly. Turn around may take some time as the economy is bad. But I guess if they do what they promised (cutting capEx, increase cash flow) , they will be able to sustain through this bad economy and come out big, when economy turns around.