Company Met or Exceeded Fourth Quarter and Full Year Projections for 2005
Sequential Revenue Growth Expected Across Core Communications Services During 2006
Consolidated Adjusted OIBDA Expected to Increase to $550 Million to $600 Million in 2006
Company Announces Analyst and Investor Day in New York City on March 28, 2006
Fourth Quarter Financial Highlights
Fourth Quarter Business Highlights
BROOMFIELD, Colo., February 7, 2006 — Level 3 Communications, Inc. (Nasdaq:LVLT) reported consolidated revenue of $944 million for the fourth quarter 2005, compared to $782 million for the third quarter 2005. For the full year 2005 consolidated revenue was $3.61 billion, compared to $3.64 billion in 2004. Communications revenue was $400 million in the fourth quarter, versus $364 million for the previous quarter. Communications revenue for the full year 2005 was $1.64 billion, compared to $1.68 billion in 2004. Information services revenue was $526 million in the fourth quarter, compared to $398 million for the previous quarter and $529 million for the same quarter last year. Information services revenue for the full year 2005 was $1.89 billion, compared to $1.86 billion in 2004. The consolidated and information services revenue provided above for all periods excludes the results of (i)Structure, which was sold in the fourth quarter 2005.
The net loss for the fourth quarter 2005 was $169 million, or $0.24 per share, compared to a net loss of $204 million or $0.29 per share for the previous quarter. Included in the net loss for the fourth quarter were: a net loss of $3 million as a result of the acquisition of WilTel Communications on December 23, 2005; and income of approximately $49 million or $0.07 per share associated with the gain from the sale of (i)Structure on November 30, 2005, and the results of its operations through the closing date of the sale. Net loss for the full year 2005 was $0.91 per share compared to $0.67 per share in 2004.
Consolidated Adjusted OIBDA(1) was $98 million in the fourth quarter 2005, compared to previously provided projections of $85 million to $105 million and $92 million for the previous quarter. Consolidated Adjusted OIBDA for 2005 was $509 million, compared to $510 million in 2004.
“We are pleased with our strong results this quarter. Our Core Communications Services including transport and infrastructure, wholesale IP & Data, and Voice grew 8 percent quarter over quarter, contributing to higher than projected communications revenue for the fourth quarter,” said James Q. Crowe, CEO of Level 3. “The continuing growth in our communications business is a result of improved pricing, revenue recognized from previously awarded contracts and ongoing demand for our transport and IP services.”
| Metric ($ in millions) |
Fourth Quarter Level 3 Results | Results from WilTel Communications From Closing through 12/31/05 | Conslidated Fourth Quarter REsults(1) | Fourth Quarter Projections (2) |
| Communications Services Revenue (3) (excluding termination and settlement revenue) |
$337 | $38 | $375 | |
| Reciprocal Compensation | $24 | $24 | ||
| Termination and Settlement Revenue | $1 | $1 | ||
| Communications Revenue | $362 | $38 | $400 | $340-$360 |
| Information Services Revenue | $526 | $526 | ||
| Other Revenue | $18 | $18 | ||
| Consolidated Revenue | $906 | $38 | $944 | |
| Consolidated Adjusted OIBDA (4)(5) | $98 | $0 | $98 | $85-$105 |
| Capital Expenditures | $69 | $0 | $69 | |
| Unlevered Cash Flow (5) | $49 | $(61) | $(12) | |
| Free Cash Flow (5) | $(99) | $(61) | $(160) | |
| Communications Gross Margin (5) | 73% | 32% | 69% |
(1) Consolidated results for the fourth quarter include the results of WilTel Communications from December 23, 2005, through December 31, 2005.(2) Projections issued October 20, 2005, and excluded the effects of the acquisition of WilTel Communications and the disposition of (i)Structure.(3) Communications Services Revenue is GAAP communications revenue minus reciprocal compensation revenue.
(4) Consolidated Adjusted OIBDA excludes $22 million in stock-based compensation expense and $3 million of non-cash impairment charges
(5) See schedule of non-GAAP metrics for definition and reconciliation to GAAP measures
Communications Business
Revenue
Communications revenue for the fourth quarter 2005 was $400 million, versus $364 million for the previous quarter. Communications revenue for the fourth quarter included $376 million of communications services revenue and $24 million of reciprocal compensation revenue, compared to $345 million and $19 million, respectively, in the third quarter.
Included in communications services revenue was $1 million of termination revenue for each of the fourth and third quarters. Included in communications services revenue for the fourth quarter 2005 is $38 million from WilTel Communications.
Communications services revenue, excluding termination revenue and revenue from WilTel Communications, decreased by $7 million, versus the third quarter, primarily due to expected declines in managed modem and DSL aggregation services. Excluding managed modem and DSL aggregation services, fourth quarter 2005 communications services revenue increased 8 percent, versus the third quarter.
| Communications Revenue ($ in millions) |
Quarter Ended December 31, 2005 |
Quarter Ended September 30, 2005 |
Percent Change |
| Transport and Infrastructure | $146 | $132 | 11% |
| IP & Data Services (excluding DSL) | $70 | $67 | 4% |
| Voice | $33 | $31 | 6% |
| Subtotal | $249 | $230 | 8% |
| Managed Modem | $88 | $97 | (9%) |
| DSL | $0 | $17 | (100%) |
| WilTel Communications Services Revenue | $38 | N/A | N/A |
| Communications Services Revenue | $375 | $344 | 9% |
| Reciprocal Compensation | $24 | $19 | 26% |
| Termination Revenue | $1 | $1 | 0% |
| Communications Revenue | $400 | $364 | 10% |
The communications deferred revenue balance was $929 million at the end of the fourth quarter, compared to $880 million at the end of the third quarter. The deferred revenue balance at the end of the fourth quarter included $33 million from WilTel Communications.
Cost of Revenue
Communications cost of revenue for the fourth quarter 2005 was $125 million, versus $112 million in the previous quarter. Included in the fourth quarter cost of revenue is $26 million from WilTel Communications. Communications gross margin(1) was 69 percent for the fourth and third quarters. Excluding the revenue and cost of revenue from WilTel Communications, communications gross margin was 73 percent for the fourth quarter. The increase in communications gross margin is primarily attributable to lower network expenses due to the final migration of the DSL aggregation business and improvement in third party expenses for the company’s voice termination business.
Selling, General and Administrative Expenses (SG&A)
Communications SG&A expenses were $213 million for the fourth quarter 2005, versus $178 million for the previous quarter. Communications SG&A expenses for the fourth quarter include $12 million from WilTel Communications and $19 million of non-cash stock compensation expense. Third quarter Communications SG&A expenses included a $5 million property tax benefit that did not reoccur in the fourth quarter and $13 million of non-cash stock compensation expense. Excluding non-cash stock compensation expense, expenses from WilTel Communications in the fourth quarter and the property tax benefit in the third quarter, Communications SG&A increased during the quarter by $12 million, primarily as a result of increased headcount, increased costs associated with IT projects, and expenses associated with the WilTel integration.
Adjusted Operating Income Before Depreciation and Amortization (OIBDA)
Adjusted OIBDA(1) for the communications business was $85 million for the fourth quarter 2005, compared to $84 million for the previous quarter, primarily as a result of a decrease in cost of revenue and cash impairment charges more than offsetting the decrease in revenue and increased SG&A costs. Communications Adjusted OIBDA in the fourth quarter includes a $4 million cash lease termination benefit, excludes a $3 million non-cash asset impairment charge, and excludes non-cash stock compensation expense of $19 million in the fourth quarter. Third quarter 2005 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 of $13 million in the quarter. WilTel Communications did not contribute to Communications Adjusted OIBDA in fourth quarter.
Communications Adjusted OIBDA margin(1) was 21 percent for the fourth quarter 2005, versus 23 percent in the previous quarter. Excluding WilTel Communications, Communications Adjusted OIBDA margin was 23 percent, consistent with third quarter 2005.
Pricing
“As we discussed on our previous earnings calls in 2005, the pricing environment improved and stabilized over the course of 2005,” said Kevin O’Hara, president and COO of Level 3. “Annualized price compression during the fourth quarter was generally consistent with what we experienced in the third quarter. We will remain focused on a disciplined pricing approach and focus on customers who want reliability, network scale and breadth, and nationwide solutions. With our continued network investments and the WilTel Communications acquisition we are better able to offer our customers value-based solutions to serve their growing bandwidth demands,” said O’Hara.
Information Services Business
The company’s information services business consists of results from the Software Spectrum subsidiary.
Revenue and Adjusted Operating Income Before Depreciation and Amortization (OIBDA)
Information services revenue was $526 million for the fourth quarter 2005. This compares to revenue of $398 million for the previous quarter and $529 million for the same period last year. Information services Adjusted OIBDA(1) was $13 million for the fourth quarter, which excludes $3 million in non-cash stock compensation expense, compared to information services Adjusted OIBDA of $8 million in the previous quarter which included no non-cash stock compensation expense. For the same period last year, information services Adjusted OIBDA was $12 million and excludes $1 million in non-cash stock compensation expense.
For the full year 2005, information services revenue was $1.89 billion, compared to $1.86 billion in 2004. The increase year over year is primarily a result of higher sales volumes with corporate customers and a large sale to EDS related to their contract with the Department of the Navy moderated by the continued movement toward sales agency agreements, which reduce revenue but do not affect profits. Information services Adjusted OIBDA for 2005 increased to $38 million from $30 million in 2004, primarily as a result of higher sales volumes and higher gross margins.
“Software Spectrum continues to perform well. The increases in revenue and Adjusted OIBDA in the fourth quarter are the result of growing sales volume and typical seasonality,” said Charles C. Miller, vice chairman of Level 3.
As a result of the sale of (i)Structure during the fourth quarter 2005, its results are reflected as discontinued operations for all periods presented. A net gain of $49 million was recognized from the sale in the fourth quarter of 2005.
Withdrawal of SEC Registration Statement
In May 2005, Technology Spectrum, Inc., the holding company for Level 3’s information services group, filed a registration statement with the Securities and Exchange Commission relating to the proposed initial public offering of that company’s common stock. In connection with the completion of the sale of (i)Structure on November 30, 2005, and Level 3’s belief in the future growth prospects from certain Software Spectrum initiatives including the expansion in the mid-market, geographic expansion and new product and service offerings, Level 3 has determined to cause Technology Spectrum to withdraw the registration statement at this time.
Other Businesses
The company’s other businesses consist primarily of coal mining operations.
Revenue and Adjusted OIBDA
Revenue from other businesses was $18 million in the fourth quarter 2005, compared to $20 million for the previous quarter. Other businesses did not contribute Consolidated Adjusted OIBDA(1) in the fourth and third quarters of 2005.
Consolidated Cash Flow and Liquidity
During the fourth quarter 2005, Unlevered Cash Flow(1) was negative $12 million, versus positive $45 million during the third quarter. Consolidated Free Cash Flow for the fourth quarter was negative $160 million, versus negative $50 million for the previous quarter. Included in fourth quarter Consolidated Free Cash Flow is approximately negative $61 million from WilTel Communications.
For the full year 2005, unlevered cash flow was negative $9 million compared to $58 million in 2004, and consolidated free cash flow decreased to negative $425 million in 2005 compared to negative $350 million last year. Consolidated Free Cash Flow, excluding $61 million in working capital needs associated with WilTel Communications and excluding approximately negative $8 million from (i)Structure which was sold in the fourth quarter, was negative $364 million for the full year 2005, compared to the company’s full year projection of negative $370 million to negative $395 million. Consolidated capital expenditures for the company totaled $305 million for the full year 2005.
“With the increased capital investment over 2004 and 2005, we have successfully repositioned the communications revenue base for solid growth from three areas – transport and infrastructure, wholesale IP & Data, and Voice,” said Sunit S. Patel, CFO of Level 3. “In addition, the acquisition of WilTel and upcoming Progress Telecom acquisition combined with the recent debt exchange improve our financial leverage and debt maturity profile.”
As of December 31, 2005, the company had cash and marketable securities of approximately $862 million compared to approximately $1.3 billion at September 30, 2005. Pro forma for the closing of the company’s private exchange offer in January 2006, which included the payment of approximately $46 million in cash consideration and approximately $13 million in cash for accrued interest, the company had cash and marketable securities of approximately $800 million at December 31, 2005.
Corporate Transactions
Mergers and Acquisitions
The company closed its previously announced acquisition of WilTel Communications on December 23, 2005, for consideration of 115 million shares of Level 3 common stock and $386 million in cash, subject to final purchase price or working capital adjustments. As a consequence of the completion of the acquisition of WilTel Communications, the company is in the process of completing its purchase accounting adjustments to the consolidated balance sheet. As a result, the consolidated balance sheet at December 31, 2005, will be included in the company’s Form 10-K, which the company expects to file next month.
“The WilTel Communications acquisition expands Level 3’s role as one of the premier providers of backbone services. Level 3’s and WilTel’s customers benefit from the company’s improved financial strength and expanded network, including the addition of approximately 50 new markets,” said O’Hara.
“Since the announcement of the acquisition in October and the closing in December, we have made further progress on the integration of WilTel and have already integrated certain corporate and operational functions,” added O’Hara. “We are moving aggressively to integrate WilTel’s customers and operations in order to realize the significant cost synergies we discussed at the time of the acquisition announcement. We continue to expect that the integration of WilTel will take approximately 15 to 18 months to complete.”
During the quarter, the company completed the sale of its (i)Structure subsidiary to Infocrossing, Inc. for $84.8 million in total consideration, including $82.3 million in cash and $2.5 million in Infocrossing common stock.
On January 26, 2006, the company announced a definitive agreement to purchase the membership interest of Progress Telecom, LLC for $137 million of consideration, $68.5 million of cash and $68.5 million of unregistered shares of Level 3 common stock. The purchase price is subject to customary working capital adjustments. The transaction is expected to close in the second quarter of 2006 and is subject to customary conditions, including certain state and federal approvals.
Completion of Private Debt Exchange
In January 2006, the company completed a private debt exchange offer for certain of its debt securities maturing in 2008. Approximately $692 million in aggregate principal amount of this debt was tendered in the exchange offer, representing approximately 54 percent of the aggregate principal amount outstanding of debt maturing in 2008. As a result, Level 3 issued approximately $692 million in aggregate principal amount of its 11.5% Senior Notes due March 1, 2010, and paid approximately $46 million in cash premiums and approximately $13 million in cash for total accrued interest on the debt that was exchanged. Associated with this exchange, the company expects to recognize a gain of approximately $27 million in other income in the first quarter of 2006 and associated increase in interest expense.
2006 Revenue Reporting
Beginning with the first quarter of 2006, the company will report its communications revenue in a manner which it believes reflects the changing mix of the company’s revenue.
The company’s communications revenue will be segregated into three components:
2006 Business Outlook
Communications Revenue
“During 2006, we expect organic growth in our Core Communications Services to be approximately 20 percent, excluding expected revenue from our pending acquisition of Progress Telecom,” said Crowe. “This expected growth comes primarily from continuing customer demand for transport, IP and voice services as well as improved transport and IP pricing.
“We expect revenue from our Other Communications Services to continue to decline in 2006, as dial-up subscribers continue to transition to broadband services and as we see the full year effect of DSL aggregation contracts that were terminated in 2005,” said Crowe.
“We expect revenue from the SBC Contract Services to be approximately $1.0 billion in 2006. As we discussed previously, AT&T has announced its intention to migrate the services provided under the agreement to its own network facilities in accordance with terms previously negotiated by WilTel. These terms are incorporated into Level 3’s integration planning and financial projections,” added Crowe.
| Metric ($ in millions) |
First Quarter Projections | 2006 Full Year Projections |
| Core Communications Services revenue | $360 - $370 |
$1,550 - $1,750 (1) |
| Other Communications Services revenue | $115 - $120 | $400 |
| SBC Contract Services | $285 - $295 | $1,000 |
| Total Communications Revenue | $760 - $785 | $2,950 - $3,150 (1) |
| Consolidated Adjusted OIBDA | $105 - $125 |
$550 - $600 |
| Communications Adjusted OIBDA Margin | Mid-teens | N/A |
| Consolidated Capital Expenditures (2) | N/A | $320 - $360 |
| Net Cash Interest Expense (3) | NA | $505 |
(1) Assumes Progress Telecom closes in the second quarter of 2006.
(2) Consolidated Capital Expenditures estimate includes approximately $30 million associated with the integration of WilTel Communications and $20 million for a 9 city dark fiber based expansion in Europe.
(3) Includes approximately $20 million in interest income.
Adjusted OIBDA
“Excluding termination revenue, Consolidated Adjusted OIBDA was $376 million in 2005,” said Patel. “On the same basis, we expect Consolidated Adjusted OIBDA to be $550 million to $600 million in 2006. We further expect Consolidated Adjusted OIBDA, again excluding termination revenue, to increase to $650 million to $700 million in 2007.
“These increases are primarily a result of expected organic growth from our Core Communications Services and the realization of the continuing benefits of the consolidation of WilTel Communications and Progress Telecom. Communications Adjusted OIBDA in 2006 includes approximately $55 million in expected operating expenses associated with the integration of WilTel Communications,” said Patel.
“Communications Adjusted OIBDA margin is expected to increase from the mid-teen percentage range in the first quarter of 2006 to the low 20 percent range in the fourth quarter of 2006 as the company progresses on the integration of WilTel Communications and benefits from the organic growth in Core Communications Services revenue,” said Patel.
Summary
“During 2005, we saw organic growth in our Core Communications Services of approximately 18 percent, as we benefited from improved pricing and our continued focus on key customer segments such as wireless providers, cable companies, content providers and carriers, where we believe our services are clearly differentiated versus our competitors,” said Crowe.
“I believe we have created significant value for our stockholders as a result of growth in our Core Communications Services, our recent acquisition of WilTel Communications and the pending acquisition of Progress Telecom. I am confident that as we move forward, we will continue to take advantage of opportunities to further improve our competitive and financial position,” said Crowe.
Analyst and Investor Day
The company announced that it will hold an analyst and investor day in New York City at the Grand Hyatt New York Hotel on March 28, 2006. Presentations are scheduled to begin at 8:30 a.m. EST and to conclude by noon. The meeting will be Webcast in a listen-only mode. Additional information will be available on Level 3’s Web site shortly.
Conference Call and Web site Information
Level 3 will hold a conference call to discuss the company’s fourth quarter results at 10:00 a.m. Eastern Time today. To join the call, please dial 651-291-0900. A live broadcast of the call can also be heard on Level 3’s Web site at 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 819831. An archived Webcast of the fourth quarter conference call together with the press release, financial statements, historical financial supplement and non-GAAP reconciliations may also be accessed at www.level3.com.
View Q4-05 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.
