Level 3 Communications Reports Third Quarter Results
U.S. and European Network Construction Ahead of Schedule Continued Strong Customer Demand Across All Product Lines
BROOMFIELD, COLORADO, October 22, 1999 – Level 3 Communications, Inc. (Nasdaq: LVLT) today announced third quarter 1999 results. Consolidated revenues for the quarter were $134 million. The net loss for the quarter was $147 million, or $0.43 per share. "The third quarter was positive in several areas," said James Q. Crowe, president and chief executive officer of Level 3. "We met or exceeded all of our network infrastructure milestones, and made particularly strong progress in the construction of our upgradeable intercity networks. In the U.S. we completed, on average, over 260 miles a week during the quarter. This is more than twice as fast, and with five times as many conduits, as other companies' reported rates." "In September, we acquired sufficient capital to substantially prefund our business plan through Phase 4," continued Crowe. (See Attachment 4 for a summary of the business plan phases.) "And, we continued to experience exceptionally strong demand for all of our services. During the quarter our roster of customers grew by 40 percent, and sales to existing customers grew significantly. We believe that these and many other indicators point to the extremely strong demand for our services created by Web-based companies."
Third Quarter Financial Highlights Communications and Information Services Revenue:
Communications and information services revenue was $69 million, an 86 percent increase over 1998 third quarter revenue of $37 million. The year-over-year increase was a result of significant growth in the communications business. At the end of the quarter, the company was offering communications services in 26 U.S. markets and four European markets. Other Revenue: Other revenue of $65 million for the third quarter includes $60 million from coal mining, a 5 percent decrease from third quarter 1998 coal mining revenue of $63 million. Coal revenue is generally based on set annual shipments from long-term contracts. As previously disclosed, 1999 coal revenue is expected to be approximately 10 percent less than 1998 annual revenue due to the reduced shipments under those contracts in 1999. Expenses: Cost of Revenue: The cost of revenue for the third quarter 1999 was $100 million. This represents a 113 percent increase from the third quarter 1998 cost of revenue of $47 million. This increase was primarily due to the continued expansion of the communications and information services businesses.
Employee Related Expenses: Selling, general and administrative (SG&A) expenses for the quarter were $139 million. This represents a 65 percent increase from the third quarter 1998 SG&A expenses of $84 million. The company added over 650 employees to the communications business during the quarter. The total number of all Level 3 employees at the end of the quarter was approximately 3,600. The company recognized $39 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, OSOs 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 $63 million, a 320 percent increase over the third quarter 1998 depreciation and amortization expenses of $15 million. These charges reflect the significant increase in capital spending for growth of the communications business. Capital Expenditures: Capital expenditures for property, plant and equipment were $939 million for the quarter. The majority of the spending was for construction of the U.S. and European intercity networks, certain local networks in both the U.S. and Europe, and the transatlantic cable network. Year-to-date 1999 capital expenditures were $2.1 billion. Total capital expenditures for 1999 are now expected to approximate $3.0 billion, versus a previous projection of $2.5 billion. This acceleration in spending is a result of faster than expected completion of network construction.
Capital Raising Transactions Prefund Phase 4 of the Business Plan: During September 1999, Level 3 completed two capital acquisition transactions. The company sold through an underwritten public offering $823 million aggregate principal amount of 6% Convertible Subordinated Notes due 2009, and completed the syndication of a $1.375 billion senior secured credit facility. The net proceeds of the Convertible Note offering and the capital available under the senior secured credit facility substantially prefund Phase 4 of the company's five-phase business plan.
Operational Highlights for the Quarter U.S. and European Network Construction Substantially Ahead of Schedule: Progress on Level 3's U.S. network proceeded rapidly during the quarter. Approximately 3,500 miles of the multi-conduit intercity network were completed, bringing the total miles completed to nearly 6,000, or 150 percent of our previously announced target for the quarter. Approximately 80 percent of the city-to-city connections which comprise the U.S. intercity network are now simultaneously under construction. The company has installed approximately 1,400 miles of fiber optic cable in a single conduit of the completed sections of the U.S. intercity network. The company's multi-conduit network is designed to allow new generations of fiber cables to be installed in the remaining empty conduits at low incremental cost.
The European intercity network build is also ahead of schedule. Over 300 miles of the planned 1,800 mile Ring 1 – which links London, Amsterdam, Frankfurt, Paris and Brussels – were completed during the quarter. Rights-of-way have been secured for over 700 miles in Europe. The company remains on schedule to have Ring 1 completed by September of 2000. As previously announced, the company has entered into an agreement with Colt Telecom Group plc (COLT) to share construction costs for their respective European network builds. The agreement calls for COLT to share construction costs of Level 3's Ring 1 and for Level 3 to share the construction costs of COLT's planned 1,600 miles German intercity network (Ring 2). COLT is expected to report their progress on Ring 2 in early November. Communication Services Offered in 30 Cities Worldwide: The Level 3 local network rollout is proceeding as planned.
The company added gateway facilities and began offering service in five U.S. markets during the quarter – Baltimore, Miami, Newark, Orlando and Tampa. At the end of the quarter, the company had operational gateways in 26 U.S. cites versus a previously announced target of 25 cities. Level 3 gateways are advanced technical facilities, which link Level 3's network to other communications networks, house the company's own network equipment and provide space for customer's colocated equipment and facilities. In addition, Level 3 significantly expanded the total amount of secured technical space in existing markets. During the quarter, the company acquired an additional 560,000 square feet of real estate in New York City and an additional 220,000 square feet of real estate in London. At the end of the quarter, the company had secured over 3 million square feet of such technical space. "During our first year of operation, the demand for Level 3's colocation services has far exceeded expectations," said Kevin O'Hara, executive vice president and chief operating officer of Level 3. "We believe that Level 3 has constructed more colocation space worldwide than any other company. The hundreds of Web-centric companies which locate their facilities in our gateways represent a long term source of rapidly growing demand for our services." Multi-conduit, upgradeable local city networks became operational in six additional U.S. cities during the quarter – Atlanta, Baltimore, Houston, San Diego, San Jose, and Washington, D.C. Level 3 is now able to offer service over its own facilities-based networks in 17 U.S. cities. Construction of multi-conduit, upgradeable local city networks is currently underway in five European cities – London, Paris, Frankfurt, Amsterdam and Brussels.
The company began offering services over the first loop of the completed local city network in London during the quarter. IP (Internet Protocol) 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 by the end of 1999.
IP Voice Service is the second service that uses Level 3's Softswitch architecture - the same system that is used to provide the company's unique Managed Modem service. "The Softswitch platform is operating extremely well. Our Managed Modem service is handling about 2 million calls, or over 30 million minutes a day," said O'Hara. "And we expect this number to increase significantly during 2000." Softswitches are technically advanced software control systems, which Level 3 uses to provide customers with services that combine the innovation and rapidly improving performance of Internet Protocol based networks with the reliability and ubiquity of traditional telephone networks. With its Softswitch technology, Level 3 is able to interconnect as a co-carrier without the need for a circuit switch.
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.
