Level 3’s North American enterprise revenue may fall short of expectations, says Jefferies

Level 3 could be facing close investor scrutiny when it announces its third quarter earnings on Nov. 3 with sequential results that financial analysts say might not meet the 1.5 to 2 percent growth path it has seen in previous quarters.

Jefferies said in a research note that if Level 3 reports lower revenue results it would suggest that customer churn remained high during the third quarter -- but that would not be the only cause.

“We do not believe churn alone accounted for the 2Q shortfall, implying challenges on the revenue acquisition front as well,” Jefferies said. “Key to the quarter will be the level of growth, with expectations seemingly dropping to sub-1%. We reduce our 3Q and 4Q forecasts to 0.9% and 1.3%, respectively.”

Barclays painted a similar picture in their recent report on Level 3, saying that investors should brace themselves for a “choppy near term” with continuing customer losses.

“Whether attributed to management's missteps or cable's encroachment into the enterprise arena, we expect recent churn issues to persist, tempering near-term growth prospects,” Barclays said.

Barclays added that it expects Level 3 to turn around the CNS revenue ship as more of its customers purchase higher speed services to meet their business initiatives.

“Over time, however, we consider management's 1.5-2.0% QoQ CNS revenue growth an achievable target due to rising bandwidth needs and initiatives put into place to improve execution,” Barclays said.

During the second quarter, Level 3 reported churn among its smaller enterprise customer base and wholesale customers, which took a toll on revenues as these segments transitioned to other technologies and the industry consolidated.

Level 3’s credit rating upgraded by Fitch, reflecting enterprise revenue growth
Level 3's Storey: We'll do more to make smaller customers more profitable

In particular, the service provider had to issue a $5 million credit related to a two-year contract extension, which it said put pressure on revenue in the short term. Level 3 added that this move will provide Level 3 with $100 million of additional revenue during the extension period.

During the quarter, Level 3 reported a number of enterprise customers disconnected service. Meanwhile, wholesale customers disconnected as some service providers were acquired.

Despite the near-term revenue issues, Level 3 continues to establish itself as a viable competitor to AT&T and Verizon on the domestic and global Ethernet front.

In North America, Level 3 continues to rank as the second largest Ethernet provider over Verizon on Vertical Systems Group’s U.S. Ethernet Leaderboard, trailing only AT&T but facing new competition from the new Charter. Similarly, the service provider surpassed Verizon as the fifth largest service provider on VSG’s Global Ethernet Leaderboard, a factor the research firm due to the service provider’s ongoing network expansions in Europe and South America.

Looking toward 2017, Jefferies said that while it does not have enough visibility yet “we continue to see mid-single digits as achievable, and lower our forecast to 6.0%, down from 6.7% prior.”