Communications Cash Revenue Grows to Record $657 Million
Communications GAAP Revenue Increases 297 percent to $385 Million from the First Quarter 2000
Level 3 Reaffirms or Increases EBITDA, Adjusted EBITDA, and Free Cash Flow Projections and Adjusts Revenue Forecast
North American Intercity Network Now Operational
BROOMFIELD, CO, April 18, 2001 - Level 3 Communications, Inc. (Nasdaq:LVLT) today announced its first quarter 2001 results. Communications cash revenue for the quarter was $657 million. Consolidated revenue for the quarter was $449 million, compared with $177 million for the same period last year. The net loss for the quarter was $535 million, or $1.45 per share. Excluding charges for stock-based compensation expenses of $77 million, net loss for the quarter was $1.25 per share. "It was another strong quarter for us," said James Q. Crowe, CEO of Level 3. "Our communications revenue and customer base continues to grow, and we are focused on making Level 3 the leading provider of broadband communications services. We are carefully monitoring the macroeconomic and industry environments, and while we are not immune to their effects, we are taking steps to further strengthen our strong financial position, which remains a competitive advantage."
"It is important to note that despite adjusting our projections for revenue, we are reaffirming our previous projections for EBITDA, Adjusted EBITDA and free cash flow, based on prudent management of network expenses, operating expenses and capital expenditures. As a result, we continue to maintain a position of financial strength and a fully funded plan with an adequate cushion," said Crowe.
First Quarter Financial Highlights
Communications Cash Revenue and GAAP Revenue: Communications cash revenue for the first quarter was $657 million. Communications cash revenue is defined as communications revenue plus changes in cash deferred revenue. Communications cash revenue reflects upfront cash received for dark fiber and other capacity sales that are recognized as GAAP revenue over the life of the contract, generally ranging from 5-20 years. Communications GAAP revenue for first quarter 2001 was $385 million, a 297 percent increase over the same period last year. The increase was a result of growth in both existing customers as well as new customer contracts. Included in total communications revenue was $193 million of services revenue, plus $155 million of non-recurring revenue from dark fiber sales, and $37 million attributable to reciprocal compensation. Excluding revenue from reciprocal compensation and the one-time sale of transatlantic capacity during the fourth quarter of 2000, quarter over quarter services revenue growth was approximately 12 percent. With the recent announcement of an agreement with BellSouth Telecommunications (NYSE:BLS), the company has negotiated rates for exchange of local and Internet Service Provider (ISP) bound traffic in 34 states. "Our reciprocal compensation agreements now cover nearly all of the areas where Level 3 provides local service," said Kevin O'Hara, president and chief operating officer of Level 3. "These agreements provide substantial stability and financial predictability concerning an issue over which much of the industry is in turmoil. Pursuant to the Telecommunications Act, the BellSouth agreement has been filed with the appropriate state commissions"
At the end of the quarter, the company had approximately 2,975 customers - an 11 percent increase in the number of customers since the end of the fourth quarter 2000. Approximately 75 percent of the customer base currently purchases more than one Level 3 service.
Other Revenue: Other revenue of $64 million for the first quarter included $33 million from (i)Structure and $25 million from coal mining, versus (i)Structure revenue of $26 million and coal mining revenue of $48 million for the same period last year.
Expenses
Cost of Revenue: Consolidated cost of revenue for first quarter 2001 was $268 million, representing a 106 percent increase from the first quarter 2000 and a 14 percent decrease from the fourth quarter 2000. Gross margin for the communications business was 42 percent for the quarter, up from five percent for the same period last year. "Our ability to migrate customer traffic from leased facilities to our own network well ahead of schedule is a major reason why our gross margins have markedly improved," said O'Hara.
Selling, General and Administrative Expenses (SG&A): SG&A expenses for the quarter were $295 million, compared to $188 million for the same period last year. Total SG&A was three percent higher than fourth quarter 2000, including a one-time charge of approximately $10 million during the first quarter related to the company's previously announced workforce reduction.
Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) and Adjusted EBITDA: Consolidated EBITDA, excluding stock-based compensation expense, was negative $114 million for the first quarter, compared to negative $141 million for the same period last year. Consolidated Adjusted EBITDA was positive $240 million for the first quarter. Consolidated Adjusted EBITDA is defined as Consolidated EBITDA plus change in cash deferred revenue and excluding non-cash cost of goods sold associated with certain capacity sales and dark fiber contracts. "We consider Consolidated Adjusted EBITDA to be a material indicator of the company's financial strength," said Sureel Choksi, chief financial officer of Level 3.
Stock-Based Compensation Expense: The company recognized $77 million in stock-based compensation expense during the quarter. The OSO Program represents the principal component of the company's stock-based compensation. This expense is accounted for in accordance with SFAS No. 123, "Accounting For Stock-Based Compensation." Level 3 expenses the value of OSOs and its other stock-based compensation over the respective 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. Under Level 3's plan, OSOs are issued quarterly to all employees, with the value of the options 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 better aligns Level 3 employees' and stockholders' interests by basing stock option value on the company's ability to outperform the S&P 500. Further, as the OSO awards are granted quarterly at the then current market price, the company believes the program continues to provide a significant performance incentive, even in an environment where the company's stock price is volatile.
Depreciation and Amortization: Depreciation and amortization expenses for the quarter were $239 million, a 172 percent increase over the same period last year. These charges reflect the significant increase in capital spending to support the growth of the communications business.
Capital Expenditures: Capital expenditures for property, plant and equipment were $1.2 billion for the quarter, reflecting continuing buildout of the company's global network.
Network and Operating Highlights
North American and European Intercity Network: Level 3's intercity network in North America and Europe is now operational and the company has migrated approximately 50 percent of the customer traffic over to its own network from the existing leased network. The company lit over 4,900 miles since the beginning of the year, bringing the total lit miles on the North American intercity network to over 14,900, which represents more than 93 percent of the total miles. A fiber network is considered to be "lit" when electronics are installed, thereby enabling the network to carry customer traffic. Level 3's North American intercity network consists of eight rings, all of which are lit and operational, with either owned or leased wavelengths. These eight rings include 69 individual segments, of which 65 are currently lit and operational on Level 3's own network. "We expect to have approximately 95 percent of the customer traffic migrated over by the end of May," said O'Hara. "This shows the substantial progress we have made since the completion of our network last quarter, and we continue to be ahead of our original schedule. The benefit of this expense reduction is visible in our improving gross margins."
New Markets and Local Fiber Networks in Service: At the end of the first quarter, Level 3 offered services in 65 markets; 54 North American markets, nine European markets and two Asian markets. The five new markets in service added during the quarter were Richmond, Charlotte, Raleigh, Pittsburgh and Princeton. At the end of the first quarter, markets with Level 3 local fiber networks totaled 33, including 26 in the U.S. and seven in Europe. To date, the company has secured approximately 6.1 million square feet of data center, transmission and technical space around the world and has pre-funded the acquisition of another 400,000 square feet. Approximately 3.0 million square feet of this space is built out globally as of the end of the first quarter. The company will continue to build out finished technical space in accordance with customer demand.
Business Outlook
"In light of the continuing weakness in the economy, we have conducted a detailed review of the company's backlog of existing business, sales and proposal flow, capital expenditures and operating expense projections," said Choksi. "In addition, we have assessed the effects of the current condition of the capital markets on our existing customer backlog of revenue and on our order flow. Our revised financial projections are consistent with the more difficult environment in which certain of our customers are operating."
Revised Financial Projections
Communications Cash and GAAP Revenue: Communications cash revenue is expected to grow to approximately $2.3 to $2.4 billion in 2001 versus the previous estimate of $2.4 to $2.6 billion, and $3.1 to $3.3 billion in 2002 versus the previous estimate of $3.4 to 3.6 billion. Level 3 expects communications GAAP revenue in 2001 of $1.4 to $1.5 billion, an approximate 70 percent increase from last year, down from the earlier projection of $1.7 billion. Of the $1.4 to $1.5 billion, approximately $280 million is expected to come from non-recurring dark fiber sales and $135 million from reciprocal compensation. In 2002, communications GAAP revenue is expected to be $2.3 to $2.5 billion, down from the previous estimate of $2.9 billion. In 2001, excluding non-recurring dark fiber sales, transport is expected to generate 45-50 percent of communications revenue, IP and colocation 20-25 percent, and softswitch enabled services - including reciprocal compensation - 25-30 percent. As a result of reduced demand for colocation space, the company expects colocation revenues to be lower than previous projections. This is partially offset by continued strong growth in transport services, which as a result increases as a percentage of the total. Level 3 had backlog of approximately $5.3 billion as of quarter end, compared to year-end 2000 backlog of $5.1 billion. Backlog is defined as total communications revenue from signed contracts that have not been provisioned, as well as current revenue run-rate. The company's updated revenue projections are based on a detailed assessment of this backlog, taking into account changes in customer credit quality and financial condition. Level 3 expects communications cash revenue for the second quarter of 2001 of approximately $575 million and communications GAAP revenue of approximately $330 million. Approximately $235 million of this revenue is expected to come from services revenue with the balance from reciprocal compensation and non-recurring dark fiber sales. "It is important to note that recurring services revenue growth is expected to accelerate quarter over quarter from 12 percent last quarter to approximately 22 percent this coming quarter," said Choksi. "At the same time, total communications cash revenue and communications GAAP revenue are projected to decline quarter over quarter due to higher non-recurring dark fiber revenue during the first quarter versus the second quarter."
Level 3 expects communications GAAP revenue to grow at a compounded annual percentage rate in the mid-50s and communications cash revenue to grow at a compounded annual percentage rate in the mid-40s between 2000 and 2005.
Information Services and Other Revenue: Total information services and other revenue estimates are unchanged at approximately $220 million for both 2001 and 2002.
Gross Margin: The gross margin for the communications business is expected to increase to approximately 52 percent for 2001, two percent higher than previous estimates and 60 percent for 2002, five percent higher than previous estimates. Consolidated gross margin is expected to be approximately 49 percent in 2001 and 58 percent in 2002.
Selling, General and Administrative Expenses (SG&A): Consolidated SG&A expenses for the year 2001 are expected to be approximately 69 percent of total revenues and decrease to approximately 48 percent of total revenues in 2002, versus previous projections of 65 percent and 48 percent, respectively.
EBITDA and Adjusted EBITDA: The company expects to turn consolidated EBITDA positive, on a run-rate basis, excluding stock-based compensation, during the fourth quarter 2001. For 2001, the company expects negative EBITDA of approximately $330 million and $200 to $250 million of positive EBITDA in 2002, an increase compared to previous projections. The company expects Consolidated Adjusted EBITDA to be approximately $700 million for the year 2001, at the high end of the company?s previous forecast, and $1.0 billion to $1.1 billion for 2002, which is $250 million higher than previously forecasted.
Earnings Per Share: The company expects the net loss in 2001 to be approximately $7.25 per share, an improvement of $0.25 per share versus the previous projection of $7.50 per share.
Capital Expenditures: The company expects capital expenditures to be $3.3 to $3.4 billion in 2001 versus previous projections of $3.4 billion. 2002 capital expenditures are expected to be $2.0 to $2.4 billion versus previous projections of $2.0 to $2.5 billion. Capital expenditures estimates for 2001 reflect the deferral of certain capital projects, including construction of Ring 3 of Level 3's pan-European network, an increase in the cost of the North American intercity network due to environmental and permitting requirements, other costs as well as an expected decrease in success-based capital expenditures.
Free Cash Flow Breakeven: Taking into account the factors discussed in this press release, the company expects to achieve free cash flow breakeven in late 2003 versus the previous projection of free cash flow breakeven in the first half of 2004; and remains prefunded in accordance with its updated business plan. "Overall, this has been another strong quarter for us in a difficult market," said Crowe. "We've exceeded our cash and GAAP communications revenue projection for the quarter, and feel comfortable with our revised forecast of approximately 60 to 75 percent communications revenue growth year over year. Moreover, we now expect to reach free cash flow breakeven earlier than previously announced. We continue to analyze the market conditions, and will take appropriate and prudent measures to leverage our financial strength and competitive position."
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.
