Thursday, October 20, 2005
Financial Highlights
Business Highlights
BROOMFIELD, Colo., October 20, 2005 – Level 3 Communications, Inc. (Nasdaq:LVLT) reported consolidated revenue of $799 million for the third quarter 2005, compared to $910 million for the second quarter 2005. Communications revenue was $364 million in the third quarter, versus $371 million for the previous quarter. Information services revenue was $415 million, compared to $520 million for the previous quarter.
The net loss for the third quarter 2005 was $204 million, or $0.29 per share, compared to a net loss of $188 million or $0.27 per share for the previous quarter. Consolidated Adjusted OIBDA(1) was $95 million in the third quarter 2005, compared to previously provided projections of $75 million to $95 million and $115 million for the previous quarter.
“Level 3’s third quarter performance reflects several positive industry dynamics including continuing strong demand for wholesale communications services and the continuing moderation of price compression,” said James Q. Crowe, CEO of Level 3. “We are pleased with the growth in our transport, IP and Voice over IP services during the quarter, and we believe our results point to the improving fundamentals of our business.”
Third Quarter Financial Results
| Metric ($ in millions) |
Third Quarter Actuals | Third Quarter Projections (1) |
| Communications Services Revenue (2) (excluding termination and settlement revenue) |
$344 | |
| Reciprocal Compensation | $19 | |
| Termination Revenue | $1 | |
| Communications Revenue | $364 | $345-$365 |
| Information Services Revenue | $415 | |
| Other Revenue | $20 | |
| Consolidated Revenue | $799 | |
| Consolidated Adjusted OIBDA (3)(4) | $95 | $75-$95 |
| Capital Expenditures | $95 | |
| Unlevered Cash Flow (4) | $47 | |
| Free Cash Flow (4) | ($48) | |
| Communications Gross Margin (4) | 69% |
(1) Projections issued July 21, 2005
(2) Communications Services Revenue is GAAP communications revenue minus reciprocal compensation revenue
(3) Consolidated Adjusted OIBDA excludes $14 million in stock-based compensation expense and $2 million of non-cash impairment charges
(4) See schedule of non-GAAP metrics for definition and reconciliation to GAAP measures
Communications Business
Revenue
Communications revenue for the third quarter 2005 was $364 million, versus $371 million for the previous quarter. Communications revenue for the third quarter included $345 million of communications services revenue and $19 million of reciprocal compensation revenue, compared to $342 million and $29 million, respectively, in the second quarter.
“While third quarter reciprocal compensation revenue was below our year-to-date quarterly average, this is the result of normal fluctuations caused by a variety of factors,” said Sunit Patel, CFO of Level 3. “We expect to see reciprocal compensation in the fourth quarter 2005 increase to more closely approximate our 2005 quarterly average.”
Included in communications services revenue was $1 million and $2 million of termination revenue for the third and second quarters, respectively.
Communications services revenue excluding termination revenue increased by $4 million, versus the second quarter, primarily due to increases in transport and infrastructure revenue and voice revenue, offset partially by expected declines in managed modem, DSL aggregation and legacy low-speed IP managed services. Excluding managed modem and DSL aggregation, communications revenue increased 8 percent, versus the second quarter.
| Communications Revenue ($ in millions) |
Quarter Ended September 30, 2005 |
Quarter Ended June 30, 2005 |
Dollar Change |
| Transport and Infrastructure | $132 | $122 | $10 |
| IP & Data Services (excluding DSL) | $67 | $66 | $1 |
| Voice | $31 | $25 | $6 |
| Managed Modem | $97 | $103 | ($6) |
| DSL | $17 | $24 | ($7) |
| Communications Services Revenue | $344 | $340 | $4 |
| Reciprocal Compensation | $19 | $29 | ($10) |
| Termination Revenue | $1 | $2 | ($1) |
| Communications Revenue | $364 | $371 | ($7) |
The communications deferred revenue balance was $880 million in the third quarter, compared to $879 million in the second quarter.
Cost of Revenue
Communications cost of revenue for the third quarter 2005 was $112 million, versus $110 million in the previous quarter. Communications gross margin(1) was 69 percent for the third quarter, compared to 70 percent in the second quarter. The decline in communications gross margin is primarily attributable to a decrease in reciprocal compensation revenue.
Selling, General and Administrative Expenses (SG&A)
Communications SG&A expenses were $178 million for the third quarter 2005, versus $182 million for the previous quarter. SG&A expenses for the third quarter include a $5 million property tax benefit and $13 million of non-cash stock compensation expense. Second quarter SG&A expenses included a $2 million property tax benefit and $9 million of non-cash stock compensation expense.
Adjusted Operating Income Before Depreciation and Amortization (OIBDA)
Adjusted OIBDA(1) for the communications business was $84 million for the third quarter 2005, compared to $88 million for the previous quarter, primarily as a result of a decrease in reciprocal compensation revenue, partially offset by a reduction in operating expenses.
Communications Adjusted OIBDA margin(1) was 23 percent for the third quarter 2005, versus 24 percent in the previous quarter. Communications Adjusted OIBDA includes a $3 million cash lease termination charge, excludes a $2 million non-cash asset impairment charge, and excludes non-cash stock compensation expense of $13 million in the third quarter. Second quarter Communications Adjusted OIBDA excludes a $4 million non-cash asset impairment charge and non-cash stock compensation of $9 million in the quarter.
Information Services Business
Results for the information services business include the Software Spectrum and (i)Structure subsidiaries.
Revenue and Adjusted Operating Income Before Depreciation and Amortization (OIBDA)
Information services revenue was $415 million for the third quarter 2005. This compares to revenue of $520 million for the previous quarter and $392 million for the same period last year. Adjusted OIBDA(1) for the information services business was $11 million for the third quarter, which excludes $1 million in non-cash stock compensation expense, compared to Adjusted OIBDA of $15 million in the previous quarter, excluding $1 million in non-cash stock compensation expense. For the same period last year, Adjusted OIBDA was $9 million.
“Our information services group continues to perform well, including solid revenue growth and profitability,” said Charles C. Miller, vice chairman of Level 3. “The Software Spectrum business continues to show double digit profit growth from last year, in part as a result of our recent focus on sales to middle market enterprise customers. In addition, our (i)Structure subsidiary signed three contracts with a value of $76 million in the quarter. Normal seasonality accounts for the decrease in revenue and Adjusted OIBDA in the third quarter, as compared to the second quarter.”
Other Businesses
The company’s other businesses consist primarily of coal mining operations.
Revenue and Adjusted OIBDA
Revenue and Adjusted OIBDA(1) from other businesses were $20 million and zero, respectively, in the third quarter 2005, compared to $19 million and $12 million for the previous quarter. Adjusted OIBDA for the third quarter included approximately $2 million in one-time expenses. Second quarter Adjusted OIBDA included an $11 million benefit related to favorable resolution of certain coal production tax issues, favorable settlement of an obligation to provide insurance for employees of the company’s former packaging business and the receipt of insurance proceeds reimbursing the company for payments made to settle environmental litigation.
Consolidated Cash Flow and Liquidity
During the third quarter 2005, Unlevered Cash Flow(1) was positive $47 million, versus positive $3 million during the second quarter. Consolidated Free Cash Flow for the third quarter was negative $48 million, versus negative $96 million for the previous quarter.
“The company’s negative Consolidated Free Cash Flow improved in the third quarter primarily as a result of working capital improvements in the communications business, partially offset by higher capital expenditures,” said Patel.
As of September 30, 2005, the company had cash and marketable securities of approximately $1.3 billion, which approximated the balance at the end of last quarter.
Corporate Transactions
During the quarter, the refinancing of the mortgage on the company’s corporate headquarters was completed in the principal amount of $70 million with a 6.86 percent fixed interest rate and an initial maturity date of September, 2010.
Customer and Operations Update
“Demand for transport, IP and VoIP services remains strong,” said Kevin O’Hara, president and chief operating officer of Level 3. “We believe our customers value Level 3’s ability to provide a unique combination of transport, IP and VoIP solutions. Additionally, we continue to see improvements in the pricing environment.”
The company currently estimates its cost of recovery from Hurricane Katrina at less than $5 million. Any payments received under the company’s insurance coverage will reduce the cost of recovery estimate.
Network Upgrades and Improved Cost Efficiencies
During the quarter, Level 3 completed a substantial portion of its optical transport network upgrade. The company is installing a new generation of equipment that employs photonic integrated circuits. The company is also making technical upgrades to its core Internet Protocol network. Both deployments are expected to be completed by year-end in North America and by mid-2006 in Europe. These network upgrades are expected to significantly improve the operational and economic efficiencies of the company’s network.
Business Outlook
“We remain focused on providing our customers value through our ability to offer scaleable transport, IP and VoIP solutions,” said Crowe. “Given improvements in both market demand and pricing that we believe are becoming apparent, we have increased funding for capital expenditures by approximately $45 million versus beginning of the year projections. The resulting network upgrades are expected to lead to substantial improvements in unit capital cost and operating efficiencies. Additionally, we are increasing capacity on our network to support expected growth from signed contracts and anticipated contracts.”
Full Year 2005 Projections
Fourth Quarter 2005
| Metric ($ in millions) |
Fourth Quarter Projections | Full Year 2005 Projections |
| Communications Revenue | $340 to $360 | 4 percent to 6 percent decline |
| Consolidated Adjusted OIBDA | $85 to $105 | N/A |
| Communications Adjusted OIBDA Margin | N/A | Mid-20 percent range |
| Negative Consolidated Free Cash Flow | N/A | $370 to $395 |
Summary
“We are pleased with the results of our continued disciplined approach to pricing and our decision to further invest in our business. Our network investments enable us to comprehensively meet high bandwidth customers’ growing needs and maintain our low-cost position,” Crowe said. “In addition, our strong liquidity position gives us the flexibility to support ongoing customer demand and seek opportunities to further grow our business.”
Conference Call and Web site Information
Level 3 will hold a conference call to discuss the company’s third quarter results at 10:00 a.m. Eastern Time today. To join the call, please dial 612-288-0318. A live broadcast of the call can also be heard on Level 3’s Web site at http://www.level3.com/. An audio replay of the call will be accessible on the company’s Web site or by dialing 320-365-3844; access code 797035
An archived webcast of the third quarter conference call together with the press release, financial statements, historical financial supplement and non-GAAP reconciliations may also be accessed at http://www.level3.com/.
View Q3-05 Financial Statements
View Schedule to Reconcile to non-GAAP Financial Metrics
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.
