Integration of Acquired Companies on Track
Continued Core Services Revenue Growth
Financial and Business Highlights
BROOMFIELD, Colo., April 26, 2007 - Level 3 Communications, Inc. (NASDAQ: LVLT) reported consolidated revenue of $1.056 billion for the first quarter 2007, compared to consolidated revenue of $846 million for the fourth quarter 2006.
The net loss for the first quarter 2007 was $647 million, or $0.44 per share, compared to a net loss of $237 million, or $0.20 per share, for the previous quarter. Included in the net loss for the first quarter 2007 was a $427 million loss or $0.29 per share on the extinguishment or refinancing of approximately $3.0 billion of long-term debt during the quarter. Included in the net loss for the fourth quarter 2006 was a $54 million loss on the extinguishment or refinancing of $497 million of long-term debt, or $0.05 per share.
“We are pleased with our results for the first quarter, particularly with the substantial progress we made in reducing and restructuring our long-term debt and the integration of our acquired businesses, as well as the continued revenue growth from our core services,” said James Q. Crowe, CEO of Level 3. “We met or exceeded all guidance measures this quarter, and believe we will see continued revenue and EBITDA growth as a result of customer demand, strong sales and the benefit of our integration activities going forward.”
Consolidated Adjusted EBITDA(1) was $170 million in the first quarter 2007, compared to $189 million for the fourth quarter 2006.
First Quarter 2007 Financial Results
| Metric ($ in millions) Revenue |
Consolidated |
First Quarter Projections(1) |
|
Core Communications |
$870 |
$860-$880 |
|
Other Communications |
$84 |
$80-$85 |
|
SBC Contract Services |
$83 |
$60-$80 |
|
Total Communications Revenue |
$1,037 |
$1,000-$1,045 |
|
Other Revenue |
$19 |
|
|
Total Consolidated Revenue |
$1,056 |
|
|
Consolidated Adjusted EBITDA (2)(3) |
$170 |
$150-$170 |
|
Capital Expenditures |
$155 |
|
|
Unlevered Cash Flow (3) |
$(69) |
|
|
Free Cash Flow (3) |
$(248) |
|
|
Communications Gross Margin (3) |
57% |
|
|
Communications Adjusted EBITDA Margin (3) |
16% |
|
Communications Business
Revenue
Communications revenue for the first quarter 2007 increased 25 percent to $1.037 billion, versus $830 million for the previous quarter. Communications revenue increased primarily as a result of the inclusion of the results of the Broadwing Corporation acquisition and growth in Core Services revenue, offset by declines in Other Communications Services revenues and SBC Contract Services revenue. The company recognized less than $1 million in termination revenue in its Core Communications Services revenue during the first quarter 2007, compared to $8 million in termination revenue during the fourth quarter 2006.
| Communications Revenue ($ in millions) | Quarter ended March 31, 2007 | Quarter ended December 31, 2006 | PercentChange |
|
Transport and Infrastructure |
$406 |
$315 |
29% |
|
IP and Data |
$144 |
$92 |
57% |
|
Voice |
$289 |
$178 |
62% |
|
Vyvx |
$31 |
$34 |
(9%) |
|
Total Core Communications Services |
$870 |
$ 619 |
41% |
|
|
|
|
|
|
Other Communications Services |
$84 |
$95 |
(12%) |
|
|
|
|
|
|
SBC Contract Services |
$83 |
$116 |
(28%) |
|
|
|
|
|
|
Total Communications Revenue |
$1,037 |
$830 |
25% |
Core Communications Services
Core Communications Services revenue, which includes transport and infrastructure, IP and Data, Voice and Vyvx services, increased quarter over quarter by 41 percent. The increase was due to the benefit of revenue from Broadwing and the Content Distribution Network (CDN) business and growth in voice, colocation and IP services. Excluding the benefit of revenue from Broadwing and the acquired CDN business in the first quarter and $8 million of termination revenue in the fourth quarter 2006, Core Communications Services revenue increased approximately 3 percent in the first quarter.
In the first quarter 2007, the percent of Core Communications Services revenue by each market group was as follows:
Other Communications Services
Other Communications Services revenue declined 12 percent to $84 million during the quarter, primarily as a result of expected declines in managed modem services.
SBC Contract Services
SBC Contract Services revenue declined by 28 percent to $83 million quarter over quarter. Fourth quarter 2006 revenue included a year-end performance bonus of $12.5 million.
As previously disclosed, SBC 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 Communications, LLC (WilTel), a company subsequently acquired by Level 3. Under the terms of this agreement, SBC agreed to pay WilTel a minimum amount of gross margin regardless of the actual revenue generated under the contract. Accordingly, while the company expects future SBC Contract Services quarterly revenue will be difficult to predict, the gross margin contribution over time is fixed. As of the end of the first quarter, there was approximately $37 million of gross margin commitment remaining on the contract through 2007 and an additional $75 million for 2008 through 2009.
Deferred Revenue
The communications deferred revenue balance increased to $939 million at the end of the first quarter 2007, compared to $895 million at the end of the fourth quarter 2006. More than 70 percent of the increase was from new indefeasible rights of use (IRU) sales during the quarter primarily to government and wireless customers. The remainder of the increase came from the acquisition of Broadwing.
Cost of Revenue
Communications cost of revenue for the first quarter 2007 increased to $450 million, versus $311 million in the previous quarter. Cost of revenue increased during the quarter primarily due to the addition of Broadwing network expenses, partially offset by a reduction in third-party lease costs due to the benefit of integration efforts and a reduction in expenses associated with supporting the SBC contract.
Communications Gross Margin(1) was 57 percent for the first quarter 2007, versus 63 percent for the fourth quarter 2006. The decrease in communications gross margin is primarily attributable to the lower margin revenue from Broadwing, partially offset by the reduction in lower margin SBC Contract Services revenue.
Selling, General and Administrative (SG&A) Expenses
Communications SG&A expenses were $439 million for the first quarter 2007, versus $365 million for the previous quarter. The first quarter 2007 and fourth quarter 2006 Communications SG&A expenses include $24 million and $32 million, respectively, of non-cash compensation expense. SG&A expenses increased in the first quarter 2007 primarily due the addition of expenses associated with Broadwing and the acquired CDN business.
Adjusted EBITDA
Adjusted EBITDA(1) for the communications business decreased to $168 million for the first quarter 2007, compared to $186 million for the previous quarter. Communications Adjusted EBITDA declined in the period primarily due to the absence of the annual SBC performance bonus of $12.5 million and termination revenue of $8 million each of which were recognized in the fourth quarter 2006, the decline of Other Communications Services revenue and SBC Contract Service revenue, as well as the increase in SG&A expenses related to planned integration activities in the first quarter 2007. This decline was partially offset by the benefit of Adjusted EBITDA from Broadwing and growth in Core Communications Services revenue.
First quarter Communications Adjusted EBITDA excludes $24 million of non-cash compensation expense and includes a $4 million restructuring charge associated with reductions in workforce as part of the company’s integration efforts. Fourth quarter 2006 Communications Adjusted EBITDA excludes $32 million of non-cash compensation expense.
Consolidated Cash Flow and Liquidity
During the first quarter 2007, Unlevered Cash Flow(1) was negative $69 million, versus positive $65 million for the previous quarter. Consolidated Free Cash Flow for the first quarter 2007 was negative $248 million, versus negative $29 million for the previous quarter, resulting primarily from higher net cash interest expense, higher working capital uses, lower Consolidated Adjusted EBITDA, and higher capital expenditures. Net cash interest expense for the first quarter 2007 was $179 million.
Working capital uses increased in the first quarter primarily due to prepayments of software maintenance and contractual prepayments to equipment vendors, bonus payments, payments against purchase price liabilities associated with acquisitions, and reductions in accounts payable. Increases in accounts receivable were offset by increases in deferred revenue. The company expects Consolidated Free Cash Flow to improve significantly in the remaining three quarters of 2007 versus the first quarter of 2007 as a result of lower cash interest expense, sharply lower working capital needs, improving Consolidated Adjusted EBITDA and cost efficiencies resulting from ongoing integration of acquired companies.
As of March 31, 2007, the company had cash and marketable securities of approximately $892 million.
Integration Update
Corporate Transactions
Acquisitions
On January 3, 2007, Level 3 completed the purchase of Broadwing. Under the terms of the agreement, Level 3 paid Broadwing stockholders $8.18 of cash plus 1.3411 shares of Level 3 common stock for each share of Broadwing common stock outstanding at closing. In total, Level 3 paid approximately $744 million of cash and issued approximately 123 million shares of common stock. In addition, during the first quarter, $179 million of Broadwing’s outstanding debentures were converted by the holders thereof pursuant to their terms into approximately 17 million shares of Level 3 common stock and $105 million in cash. The remaining $1 million of debentures was tendered to Level 3 pursuant to the change of control offer made by Level 3 after completion of the acquisition
On January 23, 2007, Level 3 completed the acquisition of the CDN business assets from SAVVIS. Level 3 paid $132.5 million in cash to acquire certain assets, including network elements, customer contracts, and intellectual property used in the SAVVIS’ CDN business.
On April 4, 2007, Level 3 purchased certain assets from AT&T Corporation that were ordered divested as a result of the merger between AT&T and SBC Communications Inc. The acquired assets consist of IRUs for dark fiber connections to over 200 buildings and more than 1,600 metro route miles in six markets where AT&T was required to divest certain assets. Level 3 will acquire the divested fiber assets in Detroit, Hartford, Kansas City, Milwaukee, San Francisco and St. Louis. Under the terms of the agreement, Level 3 has the right to add new buildings to the acquired assets.
Capital Markets Activity
In January 2007, in two separate transactions, Level 3 exchanged a total of $605 million in aggregate principal amount of its 10% Convertible Senior Notes due 2011 for approximately 196.8 million shares of Level 3’s common stock. The company recorded a $177 million loss in the first quarter on these transactions.
In February 2007, Level 3’s wholly owned subsidiary, Level 3 Financing, Inc. issued $700 million aggregate principal amount of its 8.75% Senior Notes due 2017 and $300 million aggregate principal amount of its Floating Rate Senior Notes at LIBOR + 375 bps due 2015, in private transactions.
In March 2007, Level 3 Financing refinanced its senior secured credit agreement. The effect of this transaction was to increase the amount of senior secured debt from $730 million to $1.4 billion, reduce the interest rate on that debt from LIBOR + 300 bps to LIBOR + 225 bps and extend the final maturity from 2011 to 2014. The company recognized a $10 million loss on this transaction related to unamortized debt issuance costs.
During the quarter, Level 3 also redeemed $722 million aggregate principal amount and repurchased $941 million aggregate principal amount of debt due 2008 to 2011. The company recognized a $240 million loss associated with the redemptions and repurchases in the first quarter. The cash portion of the loss on redemptions and tenders in the first quarter totaled $165 million and the remaining $75 million consisted of unamortized debt issuance costs and discounts.
As of March 31, 2007, the company had long-term debt of approximately $6.8 billion.
“With the improvements in operating performance, we were able to refinance the substantial majority of non-convertible senior notes outstanding at Level 3 Communications, Inc.,” said Sunit Patel, CFO of Level 3. “The refinancing materially reduced our average cost of debt and extended our debt maturity profile.”
2007 Business Outlook
“We are pleased with the continued growth in revenue and sales activity in the first quarter,” said Patel. “We expect continued strong Core Communications Services revenue growth in the second quarter. As such, we are projecting Total Communications Revenue of $1,000-$1,045 million in the second quarter. As we begin to see additional benefits of merger-related synergies, we are projecting Consolidated Adjusted EBITDA to increase to $180-$200 million in the quarter. Additionally, we are reaffirming our previously disclosed full-year guidance for 2007 and 2008.”
| Metric ($ in millions) |
Second Quarter 2007 Projections | 2007 Full Year Projections |
|
Core Communications Services revenue |
$890-$910 |
$3,600-$3,800 |
|
Other Communications Services revenue |
$65-$70 |
$245-$285 |
|
SBC Contract Services |
$45-$65 |
$180-$220 |
|
Total Communications Revenue |
$1,000-$1,045 |
$4,025-$4,305 |
|
Consolidated Adjusted EBITDA |
$180-$200 |
$860-$920 |
|
Consolidated Capital Expenditures |
N/A |
$600-$650 |
|
Net Cash Interest Expense (1) |
N/A |
$500 |
Summary
“We delivered a solid quarter, and our merger integration efforts are on target,” said Crowe. “We are encouraged by the continued strong industry environment, and believe we are well-positioned to take advantage of the growing demand for bandwidth and the rapid migration of applications and content to Internet-based distribution.”
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 612-332-0636. A live broadcast of the call can also be heard on Level 3’s Web site at www.level3.com/investor_relations/index.html. An audio replay of the call will be accessible on the company’s Web site or by dialing 320-365-3844; access code 868890. An archived webcast of the first quarter conference call together with the press release, financial statements and non-GAAP reconciliations may also be accessed at www.level3.com/investor_relations/index.html.
View Q1-2007 Financial Statements
View Schedule to Reconcile to non-GAAP Financial Metric
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.
