Year 2000 Communications Revenue Estimates Increased to $825 Million
Senior Management Promotions Announced
BROOMFIELD, COLORADO, July 20, 2000 – Level 3 Communications, Inc. (Nasdaq: LVLT) today announced its second quarter 2000 results. Consolidated revenue for the quarter was $234 million. The net loss for the quarter was $281 million, or $0.77 per share. The per share calculation was determined giving effect to an increase in the number of shares of common stock outstanding as the result of a follow-on equity offering in February 2000.
Included in the company's results is a gain of $57 million relating to the issuance of stock by RCN Corporation (Nasdaq: RCNC), in which Level 3 has an equity investment, for RCN's acquisition of 21st Century Telecom Group, Inc. Excluding this non-operating gain, the net loss for the quarter was $338 million, or $0.92 per share.
LEVEL 3 2ND QUARTER 2000 RESULTS
The results for the quarter also include a $49 million non-cash charge, the greatest portion of which is due to the company's Outperform Stock Option Program. Excluding this charge and the RCN gain, the net loss for the quarter was $0.79 per share. "Overall, it was a particularly strong quarter for us," said James Q. Crowe, CEO of Level 3. "Customer demand continues to outpace our expectations. The rate at which our revenues increased is particularly noteworthy given that we are still operating in a supply-constrained environment. As we move from services supplied over a leased network to our own facilities over the course of this year, we believe we can meet customer demand at an even more rapid rate."
Organizational Changes Announced:
Level 3 announced the following organizational changes: Kevin O'Hara has been named president and chief operating officer (COO), and will manage the daily operations of the company.
Douglas Bradbury has been named vice chairman of the Board of Directors, and will continue to oversee the strategic financial planning for the company. In addition, Bradbury has assumed global responsibility for setting policy aimed at attracting and retaining employee-owners.
Sureel Choksi has been appointed chief financial officer (CFO), with responsibility for managing the financial activities of the company.
Colin Williams, executive vice president, global services and systems, will formally retire from the company in November. Williams will continue to serve on the Executive Management Committee, the company's most senior operating committee, and to participate in setting global strategy and policy.
Level 3 is pleased to announce that Lee Jobe, formerly president, Network and Systems, for Concert, has been named President of Global Operations for Level 3, overseeing sales and operations in the U.S., Europe and Asia. Jobe will report to Kevin O'Hara. "Lee is a highly regarded leader in the industry who is known and respected for his management and operations expertise," said O'Hara. " am particularly pleased to have someone of his caliber joining Level 3 and further strengthening our management team."
Second Quarter Financial Highlights
Company Increases Revenue Projections:
Total communications revenue for 2000 is projected to be approximately $825 million versus the previously announced $750 million. Of that amount, approximately $200 million is expected to come from dark fiber sales, an amount that is unchanged from previous estimates. "Due to the strong revenue growth we are experiencing, we are increasing our estimates for communication services revenue for the year," said Bradbury.
Communications and information services revenue for second quarter 2000 was $181 million, a 242 percent increase over 1999 second quarter revenue of $53 million. The year-over-year increase was a result of significant growth in the communications business.
LEVEL 3 2ND QUARTER 2000 RESULTS
Total communications revenue was $153 million for the quarter, a 750 percent increase over 1999 second quarter communications revenue of $18 million, and a 58 percent increase over first quarter 2000 communications revenue. Revenue from communications services only – excluding dark fiber sales and reciprocal compensation – was $104 million. This represents a 37 percent increase over first quarter 2000 communications services revenue of $76 million. Included in the total communications revenue was $35 million of non-recurring revenue from dark fiber sales.
Also included in total communications revenue for the quarter was $14 million attributable to reciprocal compensation. Level 3's customer base continues to increase rapidly. At the end of the quarter, the company had approximately 2,000 customers – a 33 percent increase in the number of customers since the end of the first quarter 2000. Almost 80 percent of the customer base currently purchase more than one Level 3 product.
Communications Services Currently Offered in 43 U.S. and European Markets:
At the end of the quarter, the company offered communications services in 38 U.S. and 5 European markets.
Other Revenue:
Other revenue of $53 million for the second quarter included $48 million from coal mining, versus second quarter 1999 coal mining revenue of $47 million.
Full year 2000 coal revenue is expected to be approximately 10 percent less than full year 1999 coal revenue due to reduced shipments under long-term coal contracts in 2000.
Expenses – Cost of Revenue:
The cost of revenue for second quarter 2000 was $154 million, representing a 90 percent increase over second quarter 1999 cost of revenue of $81 million. The year-over-year increase in the cost of revenue was primarily a result of an increase in leased network costs and costs associated with dark fiber sales.
Selling, General and Administrative Expenses (SG&A):
SG&A expenses for the quarter were $200 million, a 56 percent increase over second quarter 1999 SG&A expenses of $128 million. This increase primarily results from the company's addition of 1,800 employees during the past 12 months.
The company added approximately 700 employees to the communications business during the second quarter, bringing the total number of Level 3 employees to approximately 5,000.
Outperform Stock Option Expense:
The company recognized $49 million in stock-based compensation expense during the quarter. The substantial majority of this expense was due to Level 3's Outperform Stock Option (OSO) Program.
This non-cash expense is accounted for in accordance with SFAS NO. 123, Accounting For Stock-Based Compensation. Level 3 expenses the value of OSOs over the two-year vesting period. This approach is in contrast to the current practice of most corporations under which conventional stock options are not accounted for as an expense on the income statement.
LEVEL 3 2ND QUARTER 2000 RESULTS
Under Level 3's plan, OSOs are issued quarterly to all employees, with the exercise price indexed to the performance of the company's common stock relative to the performance of the Standard & Poor's 500 (S&P 500) Index. The company believes that this program aligns Level 3 employees and stockholders interests by basing stock option value on the company's ability to outperform the S&P 500.
Depreciation and Amortization:
Depreciation and amortization expenses for the quarter were $139 million, a 172 percent increase from the second quarter 1999 depreciation and amortization expenses of $51 million. These charges reflect the significant increase in capital spending to support the growth of the communications business.
Other Income – Gains from Equity Investments:
Included in "Other Income" is a pre-tax gain of $57 million from the company's equity investment in RCN. During the second quarter, RCN issued shares of common stock in conjunction with an acquisition. This reduced Level 3's ownership of RCN from 33 percent to approximately 31 percent, but increased the value of its proportionate share of RCN's net assets. Capital Expenditures: Capital expenditures for property, plant and equipment were $1.7 billion for the quarter. The majority of the spending was for construction of the U.S. and European intercity networks, certain local networks in the U.S. and Europe, and the transatlantic cable network.
Total capital expenditures for 2000 are expected to be approximately $6.3 billion versus the previously announced estimate of $4.5 billion. This increase in rate of expenditure is the result of the rapid build-out of Level 3's network, as well as the expansion of the business plan. The previously announced expansion of the company's business plan includes an additional 3.1 million square feet of global gateway and technical space – resulting in a global total at completion of 6.5 million square feet.
Also included is the build-out of seven additional local markets in Europe and Asia, the third ring of the European intercity network, and the expansion of existing local facilities. Network Development Highlights for the Quarter U.S. and European Intercity Network Construction Ahead of Schedule: Construction of 2,431 miles of the multi-conduit U.S. intercity network was completed during the second quarter 2000, bringing the total miles of conduit installation completed to 14,231 miles, or 89 percent of the total planned intercity network.
As previously announced, Level 3 advanced the construction completion date of this portion of the network by more than three months, and now expects construction of the U.S. intercity multi-conduit network to be substantially completed by the end of fourth quarter 2000. The company also installed an additional 3,800 miles of fiber optic cable during the quarter, bringing the total intercity route miles with fiber installed to approximately 9,200 miles. Construction of the multi-conduit European intercity network is also ahead of schedule. Over 340 miles were completed in the second quarter 2000, bringing the total miles of conduit
LEVEL 3 2ND QUARTER 2000 RESULTS
The installation of conduit on Ring 1, which connects London, Amsterdam, Frankfurt, Paris and Brussels, is now complete. Ring 2, which connects Frankfurt, Dusseldorf, Hamburg, Berlin and Munich, is expected to be complete by the end of the third quarter. Level 3's multi-conduit network is designed to enable new generations of fiber cable to be installed more quickly and at lower incremental cost than traditional network designs.
Over 1,700 Miles of Intercity Network Lit: During the second quarter, Level 3 lit over 1,700 miles on its U.S. intercity network, bringing the total network miles lit to approximately 2,500. A fiber network is considered to be "lit" when electronics are installed, thereby enabling the network to carry customer traffic. Gateways and Local Fiber Networks: At the end of the second quarter, Level 3 had operational Gateways in 38 U.S. markets and five European markets. Level 3 Gateways are advanced technical facilities, where customers can physically locate their equipment and connect directly to Level 3's broadband network. Additionally, Gateways provide direct connection to other communications networks, and can house Level 3's network equipment. The eight markets added during the quarter were Phoenix, Cleveland, Kansas City, Omaha, Louisville, Jacksonville, Wilmington and Nashville. Additionally, at the end of the second quarter, markets with Level 3 built local fiber networks totaled 31 – 26 in the U.S. and five in Europe.
Transatlantic Cable System:
The four fiber pair, 1.28 terabit system announced by Level 3 in April 1999 has been fabricated, and is currently being installed. The cable is currently scheduled to be in service by September 2000.
Asian Developments:
Level 3 has made significant progress in the construction of Gateways in Hong Kong and Tokyo. The company has procured a landing site in Japan to bring ashore its undersea fiber optic cable linking Hong Kong and Tokyo and expects to begin offering service in the fourth quarter of this year. Level 3 also recently announced its intention to construct Gateways in Taipei, Taiwan and Seoul, South Korea. These two markets will be connected to the rest of the company's global network via its Northern Asian undersea fiber-optic cable system. The company expects to begin offering services by the second half of 2001.
"Japan, Taiwan, South Korea and Hong Kong have about 42 million Internet users and the growth rate is extraordinary. We are excited to serve Web-centric customers in this key area of the world," said Crowe.
LEVEL 3 2ND QUARTER 2000 RESULTS
Level 3 offers services primarily to Web-centric companies, which deliver their services over the Level 3 Network. The Level 3 Network will include metropolitan networks in 56 U.S. markets and 21 international markets connected by an approximately 16,000 mile U.S. intercity (long-distance) network, an approximately 4,750 mile European intercity network, both transpacific and transatlantic undersea cables and 6.5 million square feet of gateway and technical space. Level 3 expects to substantially complete the U.S. and first two rings of the European intercity network by the fourth quarter of 2000. Level 3 currently offers broadband infrastructure services in 38 U.S. markets and five European markets. Its Web address is www.Level3.com.
(* Softswitches are advanced software based switching systems, which enable Level 3 to provide services combining the best features of the Internet and traditional telephone networks.)
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.
