Expected 2007 Integration Synergies on Track
Strong Sales During the Quarter
Financial and Business Highlights
BROOMFIELD, Colo., July 26, 2007 - Level 3 Communications, Inc. (NASDAQ: LVLT) reported consolidated revenue of $1.052 billion for the second quarter 2007, compared to consolidated revenue of $1.056 billion for the first quarter 2007.
The net loss for the second quarter 2007 was $202 million, or $0.13 per share, compared to a net loss of $647 million, or $0.44 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 long-term debt.
“While we have a great deal of work remaining, we made good progress on our overall integration of acquired companies,” said James Q. Crowe, CEO of Level 3. “We are pleased with the continued positive operating environment in terms of demand and importantly, our efforts from integration and continued cost savings resulted in improved profitability and growth in Consolidated Adjusted EBITDA.”
Consolidated Adjusted EBITDA(1) was $193 million in the second quarter 2007, compared to $170 million for the first quarter 2007.
Second Quarter 2007 Financial Results
|
Metric |
Consolidated |
Second Quarter Projections(1) |
|
Core Communications Services |
$888 |
$890-$910 |
|
Other Communications Services |
$71 |
$65-$70 |
|
SBC Contract Services |
$76 |
$45-$65 |
|
Total Communications Revenue |
$1,035 |
$1,000-$1,045 |
|
Other Revenue |
$17 |
|
|
Total Consolidated Revenue |
$1,052 |
|
|
Consolidated Adjusted EBITDA (2)(3) |
$193 |
$180-$200 |
|
Capital Expenditures |
$170 |
|
|
Unlevered Cash Flow (3) |
$(64) |
|
|
Free Cash Flow (3) |
$(141) |
|
|
Communications Gross Margin (3) |
58% |
|
|
Communications Adjusted EBITDA Margin (3) |
19% |
|
Communications Business
Revenue
Total Communications Revenue for the second quarter 2007 decreased slightly to $1.035 billion, versus $1.037 billion for the previous quarter. An $18 million increase in Core Communications Services revenue in the quarter was offset by a $20 million decline in Other Communications Services revenue and SBC Contract Services revenue. The company recognized $2 million in termination revenue in its Core Communications Services revenue during the second quarter 2007, compared to less than $1 million in termination revenue during the first quarter 2007.
|
Communications Revenue |
Quarter ended June 30, 2007 |
Quarter ended March 31, 2007 |
Percent |
|
Transport and Infrastructure |
$420 |
$406 |
3% |
|
IP and Data |
$143 |
$144 |
(<1%) |
|
Voice |
$292 |
$289 |
1% |
|
Vyvx |
$33 |
$31 |
6% |
|
Total Core Communications Services |
$888 |
$870 |
2% |
|
|
|
|
|
|
Other Communications Services |
$71 |
$84 |
(15%) |
|
|
|
|
|
|
SBC Contract Services |
$76 |
$83 |
(8%) |
|
|
|
|
|
|
Total Communications Revenue |
$1,035 |
$1,037 |
(<1%) |
Core Communications Services
Core Communications Services revenue increased quarter over quarter by 2 percent. The increase was due primarily to the growth in long-haul transport services and Vyvx broadcast services. IP and Data revenue declined primarily as a result of the implementation of new prices under a contract renewal by the company’s largest high-speed IP customer.
Core Communications Services revenue increased in the Business Markets Group, Content Markets Group and European Markets Group, as a result of continued customer demand. The Wholesale Markets Group had lower than expected Core Communications Services revenue primarily due to longer than expected service activation times and lower than expected wholesale voice revenues.
In the second quarter 2007, the percent of Core Communications Services revenue by each market group was as follows:
Other Communications Services
Other Communications Services revenue declined by 15 percent to $71 million during the quarter, primarily as a result of expected declines in managed modem services.
SBC Contract Services
SBC Contract Services revenue declined by 8 percent to $76 million quarter over quarter.
Deferred Revenue
The communications deferred revenue balance increased to $943 million at the end of the second quarter 2007, compared to $939 million at the end of the first quarter 2007 as a result of indefeasible right of use (IRU) sales during the quarter.
Cost of Revenue
Communications cost of revenue for the second quarter 2007 decreased to $437 million, versus $450 million in the previous quarter. Cost of revenue decreased during the quarter primarily due to the benefit of ongoing optimization and integration efforts.
Communications Gross Margin(1) was 58 percent for the second quarter 2007, versus 57 percent for the first quarter 2007. The increase in communications gross margin is primarily attributable to lower third-party facilities expenses resulting from completed integration activities to date.
Selling, General and Administrative (SG&A) Expenses
Communications SG&A expenses were $427 million for the second quarter 2007, versus $439 million for the previous quarter. Both the second quarter 2007 and first quarter 2007 Communications SG&A expenses include $24 million of non-cash compensation expense. SG&A expenses decreased in the second quarter 2007 primarily due to a decrease in headcount related to completed planned integration activities.
Communications Adjusted EBITDA
Communications Adjusted EBITDA(1) increased to $194 million for the second quarter 2007, compared to $168 million for the previous quarter. Communications Adjusted EBITDA increased in the period primarily due to SG&A and cost of revenue synergies being realized from completed integration efforts and the growth in Core Communications Services revenue, partially offset by declines in Other Communications Services and SBC Contract Services revenues.
Second quarter 2007 Communications Adjusted EBITDA excludes $24 million of non-cash compensation expense and $1 million of non-cash impairment charges and includes a $1 million restructuring charge associated with reductions in workforce as part of the company’s integration efforts. First quarter 2007 Communications Adjusted EBITDA excludes $24 million of non-cash compensation expense and includes a $4 million restructuring charge related to integration.
Consolidated Cash Flow and Liquidity
During the second quarter 2007, Unlevered Cash Flow(1) was negative $64 million, versus negative $69 million for the previous quarter. Consolidated Free Cash Flow(1) for the second quarter 2007 was negative $141 million, versus negative $248 million for the previous quarter, resulting primarily from a decrease in net cash interest expense partially offset by higher capital expenditures. Net cash interest expense for the second quarter 2007 was $77 million.
Working capital was a use of cash in the quarter, primarily from a reduction in accounts payable and an increase in accounts receivable as days sales outstanding (DSO) increased during the quarter.
As of June 30, 2007, the company had cash and marketable securities of approximately $807 million.
Integration and Operating Environment Update
“In the second quarter, we continued to make progress on reducing network and operating expenses through our integration efforts,” said Kevin O’Hara, president and COO of Level 3. “And from a sales perspective, we continued to see positive fundamentals across the business: substantial contract wins, a stable pricing environment, and continued demand for the services Level 3 has in its portfolio. However, we did see an increase in service activation times as we continue to use the multiple order entry and provisioning processes and systems that were operated by the acquired companies. This cycle time increase had a negative effect on the rate of Core Communications Services revenue growth during the quarter. As we have consolidated key operational functions and organizations, we believe that for the short term, our operating environment has become more complex.
“We remain on track for completing the ongoing process and system development work that is being implemented as part of the integration efforts, which are expected to provide significant improvements to our operations. The systems under development are scheduled to be deployed in the third quarter of 2007 and will continue to be implemented through 2008. While the operational benefits vary by each project, we expect to realize meaningful improvements to the operating environment during 2007. In addition, we are currently taking steps to improve the interim processes and systems to address the increase in service activation times, and we expect to see improvement in our operations over the course of the second half of 2007.
“In terms of cost reductions expected as a result of integration activity, we are on track to deliver overall integration synergies, which earlier in the year we disclosed would be $200 million of network and operating expenses on an annualized basis. Given the progress made year to date in this regard, we believe we will realize the $200 million of synergies earlier in the year than originally expected.”
Corporate Transactions
Acquisitions
On July 11, 2007, Level 3 acquired Servecast, a Dublin, Ireland provider of live and on-demand video management and streaming services for broadband and mobile platforms, expanding the company’s content delivery network capabilities. The company paid approximately $45 million in cash consideration. This is a strategic capabilities acquisition that does not require the type of physical integration associated with the larger, previously announced metro and backbone transactions.
Business Outlook
“In the third quarter, we expect to see accelerated growth in Core Communications Services revenue and expect to have resolved some of the operational challenges that dampened Core Communications Services revenue growth in the second quarter,” said Sunit Patel, CFO of Level 3. “We expect that this growth should accelerate again in the fourth quarter as we see the benefit of strong sales and seasonality. Growth in Core Communications Services revenue, from the first quarter to fourth quarter, on an annualized basis is still expected to be approximately 17 percent.
“We believe that we will see further expansion in gross margins and Communications Adjusted EBITDA margins as network and operating expenses from integration efforts decrease and synergies increase in the latter half of 2007. We are projecting Consolidated Adjusted EBITDA to increase to $210-230 million for the third quarter. We remain confident in projected year-over-year trends, and are reaffirming our full year 2007 guidance as well as full year 2008 Consolidated Adjusted EBITDA guidance of $1.15 billion to $1.3 billion.”
|
Metric |
Third |
2007 Full Year Projections |
|
Core Communications Services Revenue |
$905-925 |
$3,600-3,800 |
|
Other Communications Services Revenue |
$60-65 |
$245-285 |
|
SBC Contract Services Revenue |
$40-60 |
$180-220 |
|
Total Communications Revenue |
$1,005-1,050 |
$4,025-4,305 |
|
Consolidated Adjusted EBITDA |
$210-230 |
$860-920 |
|
Consolidated Capital Expenditures |
N/A |
$600-650 |
|
Net Cash Interest Expense (1) |
N/A |
$500 |
Summary
“We are on track to deliver synergies from our acquisitions as expected, and we believe our competitive advantages and position in the marketplace are being recognized by our customers,” said Crowe. “As a result, we saw strong sales momentum throughout the quarter, and demand for our services continues to grow across multiple market segments.
“While service activation challenges remain, we have a well developed plan to substantially improve these processes. We continue to expect significant growth in Core Communications Services revenue throughout 2007. Longer term, both market fundamentals and our competitive position continue to improve.”
Conference Call and Web Site Information
Level 3 will hold a conference call to discuss the company’s second quarter results at 10 a.m. EDT today. To join the call, please dial 612-288-0337. A live broadcast of the call can also be heard on Level 3’s Web site at http://www.level3.com/investor_relations/presentations_events/conference_calls/q0207report.html. An audio replay of the call will be accessible until 11:59 p.m. EDT on Thursday, August 9, 2007 by dialing 320-365-3844; access code 877643. An archived webcast of the second quarter conference call together with the press release, financial statements and non-GAAP reconciliations may also be accessed at http://www.level3.com/investor_relations/index.html.
View Q2-2007 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.
