LEVEL 3 COMMUNICATIONS REPORTS FOURTH QUARTER 1998 RESULTS
Results Reflect Accelerated Network Construction Schedule Communications Services Being Offered in 19 Cities
OMAHA, NE, February 18, 1999 – Level 3 Communications, Inc. (Nasdaq: LVLT) today announced fourth quarter 1998 results, reporting consolidated revenues of $96 million. Revenue for the full year 1998 totaled $392 million. The net loss for the quarter was $35 million, or $0.11 a share. This includes a net pre-tax gain of $116 million related to certain company investments, which principally represents a pre-tax gain of $90 million from the sale of the company's interests in Cable Michigan, Inc. (Nasdaq:CABL), gains recognized in connection with issuances of stock by RCN Corporation, and other asset dispositions. The net loss also includes a $20 million charge for third party software and associated development costs.
Full year 1998 earnings of $730 million, or $2.42 a share, include a $608 million gain attributable to the discontinued construction operations. This gain was distributed to the former Class C shareholders at the March 31, 1998, separation of Level 3 from the Kiewit Construction Group. The 1998 net loss from continuing operations was $202 million, or $0.67 per share.
"In 1998, we focused on building our communications business, and we are very pleased with the progress we've made," said James Q. Crowe, president and chief executive officer of Level 3. "We remain on track with our strategic plan, and, in fact, have accelerated our network construction schedule. Moreover, we're currently offering service to customers in 19 cities in the U.S. and Europe." "During the year we achieved a number of significant strategic, operational and financial milestones, which will allow us to proceed rapidly with the implementation of our strategic plan during 1999," said Crowe.
Fourth Quarter Financial Highlights Since the company's current business plan represents a significant expansion of its communications and information services business, and a change from its previous business direction, year over year comparisons to previous quarters may not serve as a meaningful indication of the company's results or future financial performance.
Communications and Information Services Revenue:
Communications and information services revenue was $42 million, a 50 percent increase over 1997 fourth quarter revenue of $28 million. The year over year increase was primarily a result of the inclusion of revenue from the acquisitions completed during 1998 – XCOM Technologies, Inc.; GeoNet Communications, Inc.; and miknet Internet Based Services GmbH. The fourth quarter also included revenue from new communications services that were launched in 10 U.S. cities at the end of the third quarter 1998.
Other Revenue:
Other revenue of $54 million includes $50 million from coal mining, a 14 percent decrease over fourth quarter 1997 coal revenue of $58 million. The decrease was due to an acceleration of customer shipments in earlier quarters of 1998. Full year 1998 coal revenue of $228 million was slightly ahead of full year 1997 revenue of $222 million. General and Administrative: Employee Related Expenses: Total general and administrative (G&A) expenses for the quarter were $117 million, an increase of 388 percent over the fourth quarter 1997 G&A expenses of $24 million. Fourth quarter 1998 results include approximately $84 million in G&A expenses associated with the expansion of the communications business, including expected additions in personnel. The company added 300 employees to the communications business during the fourth quarter, bringing the total number of employees for Level 3 Communications, Inc. to approximately 2,200. Additional employee related expenses in the fourth quarter include $16 million of stock based compensation expense. During the second quarter 1998, Level 3 introduced its Outperform Stock Option program, which requires the company's stock to outperform the S&P 500 before the options have any value to an employee. These expenses are accounted for in accordance with SFAS No. 123, "Accounting For Stock-Based Compensation."
Software Development:
Approximately $20 million was charged against fourth quarter earnings for third party software and associated development costs. The charge was in accordance with new accounting rules (Statement of Position 98-1), which changed the allocation allowances of items that can be expensed or capitalized for internally developed software.
R&D Write-Off:
On April 23, 1998, the company completed the acquisition of XCOM Technologies, a privately held company that developed certain components necessary for the company to develop an interface between its Internet Protocol (IP) based network and the public switched telephone network (PSTN). The company accounted for this transaction, valued at $154 million, as a purchase. Of the total purchase price, $115 million was attributed to acquired in-process research and development, and was taken as a nondeductible charge to earnings in the second quarter of 1998. In October 1998, the Securities and Exchange Commission (SEC) issued new guidelines, which are applied retroactively, for valuing acquired research and development. The company believes its accounting for the acquisition was made in accordance with generally accepted accounting principles and established appraisal practices at the time of the acquisition. However, due to the significance of the charge relative to the total value of the acquisition, the company plans to meet with the SEC to review the facts and assumptions. It is possible that the SEC will require the company to restate its results. A reduction of any portion of this write-off would result in increased earnings per share for Level 3 for 1998 and increased goodwill associated with the XCOM transaction, which is amortized over five years.
Sale of Cable Michigan Interests:
On November 10, 1998, the company announced the completion of the sale of Cable Michigan to Avalon Cable of Michigan, Inc. The company received approximately $129 million in cash, resulting in a gain of approximately $90 million. Capital Expenditures: Capital expenditures of property, plant and equipment for the quarter were $501 million, up from $265 million in the third quarter 1998. The significant increase was due to the acceleration of construction for both the intercity and certain local networks in the U.S. and Europe. Full year capital expenditures totaled $910 million for 1998.
Debt Offering:
On December 2, 1998, Level 3 completed the sale of $833 million principal amount at maturity of 10.5 percent senior discount notes in a transaction that was exempt from registration under the Securities Act of 1933. The company intends to use the net proceeds of the offering, which were approximately $486 million, to accelerate the implementation of the business plan. Subsequent Events: In January 1999, Level 3 acquired BusinessNet Limited, a leading London based Internet Service Provider (ISP). This acquisition accelerated Level 3's entry into the UK market as BusinessNet had an established market focus on the financial and professional services community, specifically through its Intracity Network, which offers access to financial and other Internet Protocol (IP) oriented services.
Operational Highlights for the Quarter Communications Services Being Offered in 19 U.S. and International Cities:
At the end of the fourth quarter, the company was offering services in 17 U.S. cities, and one international city (Frankfurt, Germany). The company began offering services in London in January 1999, bringing the current total to 19 cities. Current services are being offered using a combination of Level 3 network equipment and facilities connected with leased capacity. This leased capacity will be displaced as the Level 3 network becomes operational. Due to increased demand for its IP based services, Level 3 announced an agreement with IXC Communications on December 18, 1998, to lease capacity over approximately 7,400 route miles on its network. This capacity agreement is in addition to a previous capacity agreement signed with Frontier Corporation.
U.S. Intercity Network Construction Schedule Accelerated:
The company has expanded the scope of its intercity network build and accelerated its completion schedule. During the quarter, the company: Signed turnkey agreements for construction of a portion of the intercity network through Canada. The agreements provide all necessary rights-of-way along Canadian Pacific Railways lines and a multiconduit network for an approximate 750 mile loop. The routes from Albany, NY, to Montreal are being constructed by Mi-Link, LLC, a subsidiary of Michels Pipeline. The routes from Montreal to Buffalo, NY, via Toronto are being constructed by Worldwide Fiber, Inc. Added approximately 1,000 miles to the planned U.S. intercity network, bringing the total routes to approximately 16,000 miles. Signed a license agreement with Norfolk Southern Corporation, providing Level 3 rights-of-way access to 1,200 miles of rail routes east of the Mississippi. The signing of this agreement brings the total Level 3 intercity rights-of-way acquired to 14,400 miles, or 93 percent of the total required to complete the U.S. intercity network. Increased the number of conduits Level 3 is deploying on its entire intercity network to 10, up from earlier projections of six to eight. This followed extensive feasibility testing to insure the increase would not affect the network's quality or completion schedule.
On high traffic routes, Level 3 plans to install an additional two conduits for a total of 12. The additional conduits provide a way for Level 3 to "future proof" its network at a low incremental cost. Additionally, spare conduits in excess of Level 3's requirements may be made available to other parties, with the proceeds used to lower overall network expenses. At the end of the fourth quarter, approximately 400 miles of the intercity network were completed – compared with a previously targeted total of 100 miles – with approximately 800 miles under construction. The company has accelerated its current 1999 intercity network completion schedule by more than 50 percent, with the number of miles expected to be completed now totaling 6,500, up from 4,000 miles.
U.S. Local Network Construction Underway:
At the end of the quarter, local network development was underway in 25 U.S. cities. In January 1999, the first loops of local networks became operational in three cities - Dallas, Denver and Seattle - with construction of loops in five additional cities expected to be completed in the second quarter of this year.
European Network Construction Underway:
Level 3 has been granted Public Telecommunications Operator (PTO) and National and International Facilities licenses in the UK, France, Germany and the Netherlands. National and International facilities licenses have also been granted in Belgium. Technical space has been secured for gateway sites in Paris, Amsterdam and Frankfurt, with a 75,000 square foot gateway site currently operational in London. Design and development of local city networks and the Pan-European network are currently underway in five countries. The network rollout schedule is included herein as Attachment 2.
IP Voice Product Development:
On November 16, 1998, Level 3 and Bellcore announced the merger of their respective specifications for a new protocol designed to bridge between the current circuit based PSTN and emerging IP technology based networks. The merged specification, called the Media Gateway Control Protocol (MGCP), represents a combination of the Internet Protocol Device Control (IPDC) specification – developed by a consortium formed by Level 3 and made up of leading communications hardware and software companies – and the Simple Gateway Control Protocol (SGCP), developed by Bellcore and Cisco Systems. The MGCP specification is available without a fee to service providers and hardware and software vendors interested in implementing it in their networks and equipment. Development of the MGCP specification was a significant step toward Level 3's goal of providing customers with the best of both the traditional PSTN and the newer IP technology networks. Such integration will enable customers to benefit from the lower cost of IP network services, including voice and fax, without modifying existing telephone and fax equipment or dialing access codes. Level 3 plans to use MGCP in the development of its own network and envisions any next-generation IP telephony service providers soon requiring this functionality in their own networks.
During the quarter, Level 3 announced the formation of the Packet Multimedia Carrier Coalition, a coalition of 15 telecommunications service providers dedicated to the rapid establishment of additional protocols required to bridge between the PSTN and IP based networks. At Level 3's Analyst and Investor conference, on February 2, 1999, the company provided a demonstration of its IP based voice service, which seamlessly integrates Level 3's IP network with the PSTN, unlike other service providers that require "double dialing." The company plans to begin commercial testing of its IP voice service in select markets in the second quarter of 1999.
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.
