LEVEL 3 COMMUNICATIONS REPORTS THIRD QUARTER 1998 RESULTS
Company Has Begun Offering Services In 10 Cities
OMAHA, NEBRASKA – October 29, 1998 – Level 3 Communications, Inc. (Nasdaq: LVLT) today announced its third quarter 1998 results, reporting revenue of $106 million from its information services, communications and coal mining businesses. The net loss for the quarter was $45 million, or $0.15 per share. Since the company's current business plan represents a significant expansion of its communications and information services business and change to its previous business direction, current financials and year-over-year comparisons to previous quarters may not serve as a meaningful indication of the company's results or future financial performance.
Third Quarter Financial Highlights Communications and Information Services Revenue
Communications and information services revenue was $37 million, a 37 percent increase over 1997 third quarter revenue of $27 million. The year-over-year change was primarily a result of the inclusion of revenue from recent acquisitions – three months of revenue from the XCOM Technologies managed modem business and one month of revenue from the miknet Internet Based Services GmbH business.
Other Revenue
Other revenue of $69 million includes $64 million from coal mining, a 28 percent increase from $50 million in the third quarter of 1997. The increase is due to an acceleration in customer shipments in order to meet 1998 annual commitments. Coal mining revenue for full-year 1998 is anticipated to approximate 1997 total coal mining revenue.
Employee Related Expenses
Total general and administrative (G&A) expenses for the quarter were $96 million, an increase of 269 percent over the third quarter of 1997 G&A expenses of $26 million. Third quarter results include approximately $60 million in G&A expenses associated with the expansion of the communications business. The company added 378 employees to the communications business during the third quarter, an approximate 70% increase over the second quarter. Total number of employees for Level 3 Communications, Inc. at the end of the third quarter was approximately 1,900. During the second quarter 1998, Level 3 introduced its out-perform stock option program, which requires the company's stock to outperform the S&P 500 before the options have any value to an employee. Included in the expenses for the third quarter is approximately $12 million of stock based compensation expense accounted for in accordance with SFAS No. 123, "Accounting For Stock-Based Compensation."
INTERNEXT Cost Sharing Agreement
On July 20, 1998 Level 3 announced a $700 million network construction agreement with INTERNEXT, LLC, a wholly owned subsidiary of NEXTLINK Communications, Inc. The agreement gives INTERNEXT the right to use 24 fibers and exclusive use of an additional conduit along the entire route of Level 3's U.S. intercity fiber optic network. The funds will be paid to Level 3 over the next three years as segments of the intercity network are completed and accepted.
Capital Expenditures
Capital expenditures for the quarter were $265 million, up from $144 million in the second quarter of 1998. The large increase in spending was due to the commencement of construction on both the intercity and various local networks. Commenting on the financials Doug Bradbury, executive vice president and CFO of Level 3, said, "As anticipated, our operating and capital expenditures grew substantially during the third quarter as we continued to add employees and move ahead aggressively with our network buildout. We've completed numerous gateway sites and begun offering certain services in a number of cities. At the same time, we've begun construction of our intercity network. It's particularly gratifying that we are in a position of having sufficient capital to substantially pre-fund Phases 1 and 2 of the network construction, given the tighter capital markets."
Mergers and Acquisitions
The company completed the acquisitions of miknet Internet Based Services GmbH on September 1, 1998, and GeoNet Communications, Inc. on September 30, 1998. Miknet, a German Internet Service Provider (ISP) located in Frankfurt, provides direct Internet access to the large business market. GeoNet, a regional ISP based in Silicon Valley, offers direct Internet access to approximatly 200 small and medium business customers. These acquisitions accelerate Level 3's entry into these key markets in the U.S. and Europe. Both acquisitions were stock-for-stock transactions.
Operational Highlights for the Quarter
Communications services being offered in 10 U.S. cities at the end of the third quarter, the company was offering certain services in 10 U.S. markets. These markets are where Level 3 has a sales force offering services over leased capacity. In each of these cities the company has completed gateway facilities, typically 35,000 to 80,000 square feet, which house the local sales staff, operational staff, the company's transmission and Internet Protocol (IP) routing/switching equipment, as well as technical space to accommodate collocation of equipment by Level 3 customers. Official marketing launches in the cities usually follow the technical and sales availability by four to eight weeks. The initial products offered are:
Private Line - a dedicated line connecting two end-user locations for voice and data applications; and
Colocation - a state-of-the-art network facility of telephone and web-hosting equipment that provides reliable and secure 24 hour access for mission critical equipment.
The availability of these services varies by location. The 10 markets in service at the end of the quarter were Los Angeles, San Diego, San Jose, San Francisco, Denver, Dallas, Chicago, Washington DC, Philadelphia, and New York City. The company expects to have 15 markets in service by the end of the year. In addition, managed modem services – a complete outsourcing solution for Internet dial-up network management – are currently being offered in Boston.
Construction begun on both intercity and local networks at the end of the third quarter, local network development was underway in 25 U.S. cities. Of those, gateway sites were completed in 10 cities, with fiber network loop construction started in five cities. A typical intracity network consists of a gateway site connected to a fiber optic network. This city network interconnects with the other carriers and directly to potential customers within a city, ultimately allowing Level 3 to offer end-to-end services. Construction of the intercity network also commenced during the quarter. Approximately 175 miles are currently under construction. Eight Rights of Way (ROW) agreements totaling 1,532 miles were put in place during the quarter. These agreements are all with the individual state Departments of Transportation for use of highway ROW between eight city pairs in the eastern U.S. These agreements, plus those previously signed, bring the total Rights of Way under contract to approximately 70% of Level 3's U.S. intercity network requirements.
International
Level 3's European rollout has been accelerated from the original plan. Facilities for technical gateway and collocation sites have been secured in London, Paris, Amsterdam and Frankfurt. Design and development of local city networks and the pan-European network are currently underway in five European countries. The company expects to begin offering certain services over leased capacity in London during the first half of 1999. In the past few months, transoceanic capacity agreements were signed for three systems.
On August 3, 1998 Level 3 signed a construction agreement to participate in the build of the Japan-U.S. Cable Network, an undersea cable system that will connect Japan and the United States by mid-year 2000. Two agreements were signed for transAtlantic capacity – one with Global Crossing for use of their Atlantic Crossing (AC-1) system, and the other for use of TAT-14. Product Development During the quarter, technical specifications were released for a new protocol suite, Internet Protocol Device Control (IPDC), designed to bridge current circuit-based public switched telephone networks and emerging IP-based networks. The protocols were developed by a Technical Advisory Council, a consortium formed by Level 3 that includes leading communications hardware and software companies from across the industry.
Outlook "This was a significant quarter for the company. We took a number of important steps forward as we continued to roll out our strategic plan," said Jim Crowe, president and CEO of Level 3. "We began to offer services in 10 cities across the U.S. and, in effect, our communications subsidiary was opened for business. We began construction of local network infrastructure in five cities and began construction of our national, intercity network. In Europe, we made an acquisition in Germany and secured technical facilities in several other European cities. Additionally, we signed important agreements that will provide us with capacity across the Atlantic and Pacific Oceans enabling us to link our U.S. and planned European and Asian operations. In both the U.S. and Europe, we continued to attract the specialized work force we need to build the company." "We remain on track and look forward to reporting our progress to you in the quarters ahead."
About Level 3 Communications
Level 3 Communications, Inc. (NASDAQ: LVLT), an international communications company, operates one of the largest Internet backbones in the world, connecting 180 markets in 18 countries. The company serves a broad range of wholesale, enterprise and content customers with a comprehensive suite of services including: Internet Protocol (IP) services, broadband transport and infrastructure services, colocation services, voice and voice over IP services, content delivery and media distribution services. These services provide the building blocks to enable Level 3’s customers to meet their growing demands for advanced communications solutions. The company’s Web address is www.Level3.com.
"Level 3 Communications,” "Level 3," the red 3D brackets and the Level 3 Communications logo are registered service marks of Level 3 Communications, LLC in the United States and/or other countries. Level 3 services are provided by wholly owned subsidiaries of Level 3 Communications, Inc. Any other service, product or company names recited herein may be trademarks or service marks of their respective owners.
Forward-Looking Statement
Some of the statements that we make in this press release are forward looking in nature. These statements are based on management’s current expectations or beliefs. These forward looking statements are not a guarantee of performance and are subject to a number of uncertainties and other factors, many of which are outside our control, which could cause actual events to differ materially from those expressed or implied by the statements. The most important factors that could prevent us from achieving our stated goals include, but are not limited to our ability to: successfully integrate acquisitions; increase the volume of traffic on our network; defend our intellectual property and proprietary rights; develop new products and services that meet customer demands and generate acceptable margins; successfully complete commercial testing of new technology and information systems to support new products and services; attract and retain qualified management and other personnel; and meet all of the terms and conditions of our debt obligations. Additional information concerning these and other important factors can be found within Level 3’s filings with the Securities and Exchange Commission. Statements in this press release should be evaluated in light of these important factors. Level 3 is under no obligation to, and expressly disclaims any such obligation to, update or alter its forward-looking statements, whether as a result of new information, future events, or otherwise.
