LEVEL 3 COMMUNICATIONS REPORTS SECOND QUARTER RESULTS
Construction of Both U.S. and European Networks Ahead of Schedule
BROOMFIELD, COLORADO July 22, 1999 – Level 3 Communications, Inc. (Nasdaq: LVLT) today announced second quarter 1999 results, reporting consolidated revenues of $106 million. The net loss for the quarter was $44 million, or $0.13 per share. Included in the results are income relating to the company's equity holdings of RCN Corporation (Nasdaq: RCNC), and gains from the sale of non-strategic assets. Excluding these non-operating gains, the net loss for the quarter was $127 million, or $0.37 per share.
"Level 3 continues to make progress on or ahead of our announced targets," said James Q. Crowe, president and chief executive officer of Level 3. "We met or exceeded all of our construction milestones, and made particularly strong progress in our European builds. We are well ahead of our expectations for recruiting, and interest from candidates remains very strong. Finally, demand for our services continues to be stronger than expected, which resulted in significant customer and vendor contracts during the quarter."
Second Quarter Financial Highlights Communications and Information Services Revenue: Communications and information services revenue was $53 million, a 47 percent increase over 1998 second quarter revenue of $36 million. The year-over-year increase was primarily a result of significant growth in the communications business. At the end of the quarter, the company was offering communications services in 21 U.S. markets and 4 European markets. During the quarter, the company changed its revenue recognition policy with respect to reciprocal compensation. Reciprocal compensation is the fee local exchange carriers pay to terminate calls on each other's networks. Since the company's acquisition of XCOM Technologies, Inc. in April of 1998, Level 3 has received these fees in conjunction with its managed modem services. In May 1999, the Massachusetts Department of Public Utilities ruled that Bell Atlantic was no longer required to pay the established reciprocal compensation rates for certain services. As a result, Level 3 has elected not to recognize this revenue source until these uncertainties are resolved. In addition to the communications revenue reported, the company signed long term contracts relating to dark fiber and conduit totaling approximately $250 million during the quarter. Revenue from these contracts will be recognized in future quarters.
Other Revenue: Other revenue of $53 million for the second quarter includes $47 million from coal mining, a 24 percent decrease from second quarter 1998 coal mining revenue of $62 million. Coal revenue is based on set annual shipment requirements. The year-over-year decline in the second quarter coal revenue was primarily due to timing of customer shipments. As previously disclosed, annual revenue from the coal operations will decline due to the maturation of long term contracts. 1999 coal revenue is expected to be approximately 10 percent less than 1998 annual revenue.
Expenses:
Cost of Revenue: The cost of revenue for the second quarter 1999 increased 65 percent, year-over-year, to $81 million. The increase was primarily due to the planned expansion of the communications and information services businesses.
Employee-Related Expenses:
Selling, general and administrative (SG&A) expenses for the quarter were $128 million. This represents a 20 percent increase from the first quarter 1999 SG&A expenses of $107 million. The company added over 500 employees to the communications business during the quarter, bringing the total number of Level 3 employees to approximately 3,200. The company recognized $29 million in stock based compensation expense during the quarter. The majority of this expense is due to Level 3's Outperform Stock Option program (OSO). Under this plan, OSO's are issued to all employees quarterly, with the exercise price indexed to the performance of the Standard & Poors (S&P) 500 Index. This program directly aligns management's and stockholders' interests by basing stock option value on the company's ability to outperform the market in general. This is a non-cash expense, accounted for in accordance with SFAS No. 123, "Accounting For Stock-Based Compensation."
Depreciation and Amortization:
Depreciation and amortization expenses for the quarter were $51 million, compared to $10 million for the second quarter 1998. These charges reflect the significant increase in capital spending for the growth of the communications business along with amortization of goodwill associated with prior acquisitions.
Capital Expenditures:
Capital expenditures for property, plant and equipment for the quarter were $808 million. The majority of the spending was for construction of the U.S. intercity network and certain local networks in both the U.S. and Europe. Total 1999 capital expenditures are expected to be approximately $2.5 billion.
Other Income - Gains from Equity Investments:
The company recognized a pre-tax gain of $111 million from its equity investment in RCN. During the second quarter, RCN issued stock in a public offering and for certain acquisitions. This diluted Level 3's ownership of RCN from 41 percent at December 31, 1998 to 35 percent at June 30, 1999, but increased its proportionate share of RCN's net assets. The recognized gain reflects this increase. Also during the quarter, the company sold other non-strategic assets that resulted in a pre-tax gain of $17 million.
Operational Highlights for the Quarter Local Network Construction Ahead of Schedule:
Gateway facilities were launched in three European cities during the quarter - Frankfurt, Paris and Amsterdam, bringing the total number of operational Gateways in Europe to four. The first metropolitan loop was completed in the City of London, a full quarter ahead of schedule. The company will begin to offer service over this network in the third quarter. Construction of local city networks is currently underway in five cities - London, Paris, Frankfurt, Amsterdam and Brussels. Local network construction is currently underway in 21 U.S. cities. Facilities-based local metropolitan networks became operational in four additional cities during the quarter - Los Angeles, St. Louis, New York City and Philadelphia - bringing the total number of U.S. cities with facilities-based metropolitan networks to 11. "In less than a year, Level 3 has built large operational Gateways and is offering services in 25 major U.S. and European cities," said Kevin O'Hara, executive vice president and chief operating officer of
Level 3. "Our local fiber networks and Gateways are critical components of our long-term strategy."
Intercity Network Builds Proceeding Rapidly Progress on Level 3's European intercity network proceeded rapidly during the quarter. Initial rights-of-way (ROW) were secured for the first 250 miles of the planned 2,000 mile Ring 1. The company remains on schedule to have Ring 1 completed by September of 2000. During the quarter, the company entered into a network construction cost sharing arrangement with COLT Telecom Group plc (COLT). The agreement calls for Level 3 to share construction costs of COLT's planned 1,600-mile intercity German network. In return, COLT will share construction costs of Level 3?s Ring 1. This arrangement will accelerate
Level 3's German network plans by approximately 12 months. At the end of the quarter, approximately 2,500 miles of the 12 conduit U.S. intercity network were completed with another 6,800 miles under construction. In June,
Level 3 began installing a 96 fiber cable in the first conduit. In addition, ROW acquired during the quarter brings the total ROW under contract to 99.5 percent of the total required. "It is clear that the pace of change in optical technology is accelerating rapidly," said O'Hara. "Currently, we believe manufacturers will introduce new generations of fiber every 18 to 24 months. Each new generation of fiber means higher data rates, greater distances between optical equipment, and more wavelengths of light -- all combining to move more information faster and at radically lower costs. The bottom line is that the multiple conduit system gives Level 3 the flexibility to harness the rapid pace of change as the next, more economical generations of fiber are introduced."
Transatlantic Cable Agreement Signed:
On April 23, 1999, Level 3 signed an agreement with Tyco Submarine Systems to build a 1.28 terabit per second transatlantic cable system. This system will provide a critical link in Level 3's international IP Network. The system is currently under development and is expected to be in service in the third quarter of 2000. Asian Development Underway: Initial development work began in Asia in May 1999. The company established its Asian corporate headquarters in Hong Kong during the quarter, and incorporated local operating companies in both Japan and Hong Kong. IP Voice Development On Track: Level 3's IP Voice service is currently in commercial ('beta') testing. Subject to successful completion of this testing, commercial launch of the voice service is expected for the second half of 1999. On June 23, 1999, Level 3 announced it had signed a minimum four year, $250 million strategic agreement with Lucent Technologies to purchase Lucent systems, including breakthrough software switches or "softswitches". These softswitches will be deployed in Level 3's network to support voice services. Level 3's IP Voice Service will offer customers voice quality comparable to traditional telephone networks, but with the cost advantages of IP. A key feature of the softswitch is its ability to provide traditional telephone system quality and reliability.
In addition, the companies agreed to collaborate on future enhancements of softswitches and Gateway products to support next generation broadband services for business and consumers that will combine high-quality voice and video communications with Internet-style Web data services.
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.
