Company Increases 2006 Communications Revenue;
2006 and 2007 Consolidated Adjusted OIBDA Projections
First Quarter Financial Highlights
First Quarter Business Highlights
BROOMFIELD, Colo., April 25, 2006 — Level 3 Communications, Inc. (Nasdaq:LVLT) reported consolidated revenue of $1.27 billion for the first quarter 2006, compared to $944 million for the fourth quarter 2005. Communications revenue was $804 million in the first quarter, versus $400 million for the previous quarter. Information services revenue was $445 million in the first quarter, compared to $526 million for the previous quarter and $466 million for the same quarter last year.
The net loss for the first quarter 2006 was $168 million, or $0.20 per share, compared to a net loss of $169 million, or $0.24 per share, for the previous quarter. Included in the net loss for the first quarter is a gain of $27 million, or $0.03 per share, associated with the company’s $692 million private debt exchange offers completed in January 2006. Included in the net loss for the fourth quarter was income of approximately $49 million, or $0.07 per share, associated with the gain from the sale of Level 3’s (i)Structure subsidiary on November 30, 2005, and the results of its operations through the closing date of the sale.
Consolidated Adjusted OIBDA(1) was $150 million in the first quarter 2006, compared to previously increased projections of $140 million to $150 million and $98 million for the previous quarter.
“Our solid first quarter results reflect ongoing positive trends in our Core Communications Services business due to the benefit of a full quarter of revenue from the WilTel transaction, growth in customer demand and lower than expected expenses associated with the WilTel integration,” said James Q. Crowe, CEO of Level 3. “We believe that these positive trends bode well for our business going forward.”
| Metric ($ in millions) |
Conslidated First Quarter Results(1) | First Quarter Projections (2) |
| Core Communications | $389 | $360 - $370 |
| Other Compensation | $123 | $115 - $120 |
| SBC Contract Services | $292 | $285 - $295 |
| Total Communications Revenue | $804 | $760-$785 |
| Information Services Revenue | $445 | |
| Other Revenue | $18 | |
| Total Consolidated Revenue | $1,267 | |
| Consolidated Adjusted OIBDA (2)(3)(5) | $150 | $140-$150 |
| Capital Expenditures | $59 | |
| Unlevered Cash Flow (5) | $(12) | |
| Free Cash Flow (5) | $(122) | |
| Communications Gross Margin (5) | 51% | ~50% |
| Communications Adjusted OIBDA Margin (4)(5) | 18% | Mid-teens |
(1) Consolidated results for the first quarter include approximately $2 million of revenue and approximately $1 million of Adjusted OIBDA from Progress Telecom for March 20, 2006, through March 31, 2006.
(2) Projections issued February 7, 2006, and updated March 28, 2006.
(3) Consolidated Adjusted OIBDA excludes $15 million in non-cash compensation expense and $3 million of non-cash impairment charges.
(4) Communications Adjusted OIBDA Margin excludes $14 million in non-cash compensation 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 first quarter 2006 was $804 million, versus $400 million for the previous quarter.
Core Communications Services which includes transport and infrastructure, wholesale IP and Data, Voice and Vyvx, experienced growth primarily due to the inclusion of a full quarter of WilTel Communications revenue as well as quarter over quarter growth in Core Communications Services primarily from dark fiber, colocation, voice and wholesale IP revenue. In addition, revenue from Progress Telecom was approximately $2 million.
Other Communications Services which includes managed modem, related reciprocal compensation and managed IP services declined to $123 million primarily as a result of a decline in managed modem revenue.
| Communications Revenue ($ in millions) |
Quarter Ended March 31, 2006(1) |
Quarter Ended December 31, 2005(2) |
Percent Change |
| Transport and Infrastructure | $198 | $150 | 32% |
| Wholesale IP & Data Services | $64 | $52 | 23% |
| Voice | $98 | $38 | 158% |
| Vyvx | $29 | $3 | Not meaningful |
| Total Core Communications Services | $389 | $243 | 60% |
| Other Communications Services | $123 | $131 | (6%) |
| SBC Contract Services | $292 | $25 | Not meaningful |
| Termination Revenue | $0 | $1 | Not meaningful |
| Total Communications Revenue | $804 | $400 | 101% |
(1) First quarter 2006 includes $2 million of revenue from Progress Telecom from March 20, 2006, through March 31, 2006.
(2) Fourth Quarter 2005 includes $38 million in revenue from WilTel Communications from December 23, 2005, through December 31, 2005.
The communications deferred revenue balance was $922 million at the end of the first quarter 2006, compared to $936 million at the end of the fourth quarter. The decline in communications deferred revenue quarter over quarter is a result of the amortization of previously recognized deferred revenue balances partially offset by deferred revenue from Progress Telecom and new transactions in the quarter.
Cost of Revenue
Communications cost of revenue for the first quarter 2006 was $396 million, versus $125 million in the previous quarter. Cost of revenue increased during the quarter primarily due to the inclusion of a full quarter of expenses related to the WilTel Communications business.
Communications gross margin(1) was 51 percent for the first quarter, versus 69 percent for the fourth quarter. The decrease in communications gross margin is primarily attributable to the lower gross margin revenue from WilTel Communications.
Selling, General and Administrative Expenses (SG&A)
Communications SG&A expenses were $274 million for the first quarter 2006, versus $213 million for the previous quarter. Communications SG&A expenses for the first quarter increased primarily due to the inclusion of a full quarter of expenses related to the WilTel Communications business and includes approximately $14 million of non-cash compensation expense. First quarter Communications SG&A benefited from a $7 million property tax benefit. Fourth quarter Communications SG&A expenses include $19 million of non-cash compensation expense.
Adjusted Operating Income Before Depreciation and Amortization (OIBDA)
Adjusted OIBDA(1) for the communications business increased to $147 million for the first quarter 2006, compared to $85 million for the previous quarter, primarily as a result of the inclusion of a full quarter of WilTel Communications.
Communications Adjusted OIBDA margin(1) was 18 percent for the first quarter 2006, versus 21 percent in the previous quarter.
Communications Adjusted OIBDA in the first quarter includes $1 million in cash restructuring charges associated with reductions in force as part of the WilTel Communications transaction and excludes a $3 million non-cash asset impairment charge, and $14 million of non-cash compensation expense. Fourth quarter 2005 Communications Adjusted OIBDA includes a $4 million cash lease termination benefit, excludes a $3 million non-cash asset impairment charge and $19 million of non-cash compensation expense.
Information Services Business
The company’s information services business consists of the results from the Software Spectrum subsidiary.
Revenue and Adjusted Operating Income Before Depreciation and Amortization (OIBDA)
Information services revenue was $445 million for the first quarter 2006. This compares to revenue of $526 million for the previous quarter and $466 million for the same period last year. Information services Adjusted OIBDA(1) was $3 million for the first quarter, which includes $1 million in cash restructuring charges related to business solution partnering agreements and excludes $1 million in non-cash compensation expense; and compares to information services Adjusted OIBDA of $13 million in the previous quarter, which excludes $3 million in non-cash stock compensation expense. For the same period last year, information services Adjusted OIBDA was $5 million and excludes $1 million in non-cash stock compensation expense.
“Software Spectrum performed well in the first quarter due to continued growth in the mid-market customer segment,” said Charles C. Miller, vice chairman of Level 3. “Revenue declined quarter over quarter due to typical seasonality.”
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 both the first quarter 2006 and fourth quarter 2005. Other businesses contributed zero Consolidated Adjusted OIBDA(1) in the first quarter 2006 and in the fourth quarter 2005.
Consolidated Cash Flow and Liquidity
During the first quarter 2006, Unlevered Cash Flow(1) was negative $12 million, the same as the fourth quarter 2005. Consolidated Free Cash Flow for the first quarter was negative $122 million, versus negative $160 million for the previous quarter.
As of March 31, 2006, the company had cash and marketable securities of approximately $992 million compared to approximately $862 million at December 31, 2005. Pro forma for the issuance of an additional $300 million of aggregate principal amount of 12.25% Senior Notes due 2013 in April 2006, the company had cash and marketable securities of approximately $1.3 billion at March 31, 2006.
Pricing and Customers
“Our pricing environment remains favorable, and we are focused on continuing to execute best pricing practices,” said Kevin O’Hara, president and COO of Level 3. “On a blended basis, our lit transport services continue to experience volume increases and generally stable pricing quarter over quarter. Pricing continues to vary by line speed, segment, and the complexity of the solutions delivered to the customer. The average closing price for our high-speed IP service has generally remained flat quarter over quarter.
“Our first quarter Core Communications Services revenue growth was driven primarily by incremental demand from wireless providers, carriers, cable companies and satellite/content distributors.”
Corporate Transactions
Mergers and Acquisitions
The company closed its previously announced acquisition of Progress Telecom on March 20, 2006, for consideration of approximately 19.7 million shares of unregistered Level 3 common stock and $68.5 million in cash, subject to final purchase price and working capital adjustments. As a consequence of the completion of the acquisition of Progress Telecom, 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 March 31, 2006, will be included in the company’s Form 10-Q, which the company expects to file next month.
On April 17, 2006, the company announced a definitive agreement to purchase all of the issued and outstanding common stock of ICG Communications, Inc. for $163 million of consideration, $127 million of unregistered shares of Level 3 common stock and $36 million of cash. The purchase price is subject to working capital adjustments. The transaction is expected to close in mid-2006 and is subject to customary closing conditions, including certain state and federal approvals.
Pursuant to the terms of the WilTel Communications purchase agreement, Level 3 received $27 million in cash from Leucadia National Corporation in April for post-closing working capital and other adjustments.
Integration Update
“During the quarter, the company made significant progress on the WilTel integration,” said O’Hara. “The IP backbones of each network are now fully interconnected, and we’ve migrated a portion of the WilTel IP traffic to the Level 3 IP backbone. Operating expense reduction targets are on track and we are ahead of our expectations with respect to overall timing and cost savings.
“With the closing of Progress Telecom, Level 3 is in the midst of completing integration planning and expects to commence integration work shortly.
“Regarding our recent announcement to acquire ICG Communications, integration is expected to begin shortly after the closing of the transaction.
“With the WilTel integration proceeding better than expected and given our plans for the integration for Progress Telecom and ICG Communications, we are confident in our ability to continue to provide our customers with excellent service and an increasingly expanded portfolio of services and network reach.”
Completion of Private Offering of New Senior Notes
In March 2006, the company completed a private offering of $400 million aggregate principal amount of senior notes consisting of $150 million aggregate principal amount of Floating Rate Senior Notes due 2011 and $250 million aggregate principal amount of 12.25% Senior Notes due 2013 to qualified institutional buyers. In April 2006, the company completed an additional offering of $300 million aggregate principal amount of the 12.25% Senior Notes due 2013.
2006 Business Outlook
Communications Revenue
“With the first full quarter of the combined operations behind us and with expected revenue from ICG Communications later this year, we continue to expect solid revenue growth in our Core Communications Services and have therefore increased our projections for 2006,” said Crowe.
“We are pleased with the continuing positive trends in our Core Communications Services business over the last few quarters and remain cautiously optimistic that these trends will continue. As previously discussed, we continue to expect a ramp down in revenue from the SBC Contract Services going forward. While the timing of SBC’s migration of traffic from the WilTel Communications network is difficult to project, the take-or-pay contract, which specifies a minimum gross margin commitment, gives us confidence with respect to its overall contribution over the next few years.”
| Metric ($ in millions) |
Second Quarter Projections | 2006 Full Year Projections |
| Core Communications Services revenue | $415 - $425 |
$1,650 - $1,800 (1) |
| Other Communications Services revenue | $115 - $120 | $400 - $450 |
| SBC Contract Services | $285 - $295 | $950 - 1,000 |
| Total Communications Revenue | $815 - $840 | $3,000 - $3,250 (1) |
| Consolidated Adjusted OIBDA | $170 - $190 |
$640 - $690 |
| Communications Adjusted OIBDA Margin | ~20% | ~20% |
| Consolidated Capital Expenditures (2) | N/A | $320 - $360 |
| Net Cash Interest Expense | N/A | $520 |
(1) Assumes ICG Communications closes mid-2006.
Adjusted OIBDA
“As a result of our better than expected first quarter communications revenue, our improved revenue and expense outlook for the balance of the year and the acquisition of ICG Communications, we now expect Consolidated Adjusted OIBDA to be $640 million to $690 million in 2006, compared to our previous projections of $600 million to $650 million,” said Sunit S. Patel, chief financial officer of Level 3. “We are also increasing our 2007 Consolidated Adjusted OIBDA projections to $680 million to $740 million from our previously issued projections of $650 million to $700 million.
“Communications Adjusted OIBDA margin is expected to be approximately 20 percent for the full year 2006 as a result of better than expected communications revenue and associated expenses together with the pending acquisition of ICG Communications.”
Summary
“As evidenced by this quarter’s results, we continue to believe that Level 3 is very well positioned to benefit from visibly improving industry conditions,” said Crowe.
Conference Call and Web site Information
Level 3 will hold a conference call to discuss the company’s first quarter results at 10 a.m. EDT today. To join the call, please dial 612-332-0806. 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 825199. An archived webcast of the first 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 Q1-06 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.
