LEVEL 3 COMMUNICATIONS REPORTS SECOND QUARTER 1998 RESULTS
Results Reflect R&D Write-Off for XCOM Technologies Acquisition Construction of IP Network Underway; Company to Begin Offering Services Using Leased Capacity in Third Quarter
OMAHA, NEBRASKA, August 12, 1998 – Level 3 Communications, Inc. (Nasdaq: LVLT) today reported second quarter 1998 revenue of $103 million from its information services, communications and coal mining businesses. The company took a one-time in process research and development (R&D) write-off of $115 million in conjunction with the acquisition of XCOM Technologies, Inc., which closed during the quarter. The net loss for the quarter was $116 million, or $0.39 per share. Excluding the merger related charges, the net loss for the quarter was $1 million, or $0.01 per share. The per share calculations are determined giving effect to a 2 for 1 stock split, which was effective on August 10, 1998.
"The second quarter of 1998 was very positive for the company. We have made progress on a number of fronts and remain firmly on track with our business plan," said Jim Crowe, president and chief executive officer of
Level 3. "We have begun construction of our U. S. network – both the local and intercity, successfully negotiated strategic rights of way agreements, made some key acquisitions, and signed an important agreement that will enable us to share some of the cost of building the network. We are now poised to begin offering service to customers in the third quarter."
Since the company's current business plan represents a significant change to the previous business direction, current financials and year over year comparisons to previous quarters may not serve as a meaningful indication of the company's results or future financial performance.
Second Quarter Financial Highlights Communications and Information
Services Revenue Communications and information services revenue was $36 million, an increase of 50 percent from 1997 second quarter revenue of $24 million. The year over year change is due to growth in both the computer outsourcing and systems integration businesses of PKS Information Services, and the inclusion of two months of revenue from XCOM Technologies. The XCOM revenue is primarily reciprocal compensation from its managed modem business. Reciprocal compensation is the fee a regional bell operating company pays to a competitive local exchange carrier (CLEC) whenever a local call is terminated on the CLEC?s network.
Other Revenue
Other revenue of $67 million includes $62 million from coal mining, a 15 percent increase from $54 million for second quarter 1997. The year over year change was primarily the result of increased shipments of alternate source coal. 1998 annual coal mining revenue is anticipated to approximate 1997 revenue.
R&D Write-Off for XCOM Technologies Acquisition On April 23, 1998: the company completed the acquisition of XCOM Technologies, Inc. Under the terms of the agreement, approximately 2.6 million shares of Level 3 common stock were exchanged for all of the outstanding common and preferred stock of XCOM. The results for the quarter reflect a one-time charge of $115 million related to in process R&D from the acquisition. The transaction, which was accounted for using purchase accounting, resulted in $30 million in goodwill.
Employee Related Expenses
Results for the second quarter include approximately $33 million in general and administrative (G & A) expenses associated with the expansion of the communications business. The company added 245 employees during the second quarter, bringing the total number of employees to 1,520. G&A expenses for the second quarter were $55 million, a 189 percent increase over 1997 second quarter G&A expenses of $19 million. Included under G&A are approximately $9 million of stock based compensation expense accounted for in accordance with SFAS 123, "Accounting For Stock Based Compensation."
INTERNEXT Cost Sharing Agreement
Subsequent to the close of the quarter, Level 3 announced a $700 million cost sharing network construction agreement with INTERNEXT, LLC. The agreement gives INTERNEXT the right to use 24 fibers and exclusive use of an additional conduit along the entire route of the Level 3 intercity fiber optic network in the U.S. The company anticipates that the proceeds of this agreement will offset the capital expenditures made by Level 3 for the intercity build. The funds will be paid to Level 3 as segments of the intercity network are completed. Mergers and Acquisitions The company completed three acquisitions during the last few months. The most significant was the acquisition of XCOM Technologies, Inc., a CLEC and communications software developer headquartered in Cambridge, Massachusetts. XCOM developed new technology that will provide key components necessary for Level 3 to develop an interface, or 'bridge', between its Internet Protocol(IP)-based network and the public telephone networks. The transaction was completed on April 23, 1998.
Level 3 Communications' subsidiary, PKS Systems Integration LLC, acquired Orygen Limited located in Dublin, Ireland on July 8, 1998. Orygen provides critical capabilities in application development and experience in providing solutions for the top financial institutions in Ireland. This acquisition will further enhance PKS Systems Integration's business and expansion plans in Europe. The third acquisition was of UltraLine (Bermuda) Limited, a telecommunications start up company in the process of developing high-speed transatlantic services. Colin Williams, the company's founder, has joined Level 3 to lead the company's international operations.
"Having Colin Williams assume leadership of the international operations is an important development for the company. He built the international operations at MFS from the ground up and then, as CEO of WorldCom's international operations, integrated and grew the combined international businesses of MFS and WorldCom. Very few executives have Colin's level of experience and expertise in building advanced telecommunication systems across Europe and Asia," said Crowe.
Operational Highlights for the Quarter
During the second quarter, Level 3 announced an agreement with Burlington Northern and Santa Fe Railway Company. This agreement, along with an earlier agreement with the Union Pacific Railroad Company, grants
Level 3 rights of way to construct more than 9,000 miles west of the Mississippi, connecting as many as 26 major U.S. cities with the planned IP-based national network. Also during the quarter, Level 3 announced the formation of a new technical advisory council (TAC) with a charter to develop a set of technical standards to provide a bridge between current circuit-based public telephone networks and emerging IP-based networks. The TAC brings together leading communications hardware and software companies from across the industry. Founding members of the TAC include 3Com Corporation, Alcatel Telecom, Ascend Communications, Cisco Systems, Ericsson, Level 3 Communications, Lucent Technologies, Nortel (Northern Telecom), Selsius Systems, Stratus Computer, Tekelec, and Vertical Networks. In less than 60 days, the TAC developed new protocols and submitted them to the appropriate standards bodies. The new protocols are currently under review for both national and international approval.
"The proposed standards are intended to allow seamless integration of the traditional telephone networks and the new IP networks," said Crowe. "Such integration will enable customers to benefit from the lower cost of IP network services, including voice and fax, without modifying existing telephone and fax equipment or dialing access codes."
Construction Commences on Both Intercity and Local Networks
As announced during the quarter, construction of the 15,000 mile intercity or long distance portion of the network is being managed by Peter Kiewit Sons', Inc. Construction of the intercity network began upon signing of the contract. Construction has also begun on local intracity networks in the U.S. According to Level 3's strategic plan, construction of the network is divided into five phases. Each phase is designed to be fully operable and able to generate positive free cash flow on its own. The company is currently pre-funded for the first two phases. Phases 1 and 2 include the completion of local networks in 25 U.S. cities, 9,000 miles of intercity network in the U.S., six European cities and 2,000 Pan European miles. The cost sharing agreement with INTERNEXT will provide a substantial portion of the funding required to finish the construction of the entire 15,000 mile U.S. intercity network, which was previously included in Phase 3.
Performance Metrics Defined
In order to monitor the progress of the network build-out, Level 3 has developed operating and construction metrics. These benchmarks will be reported every quarter to help Level 3 stockholders and the investment community monitor the company's performance and anticipate future progress. A chart defining the metrics and an incremental construction rollout schedule is attached to this release. This first set of benchmarks is for Phases 1 and 2 of the U.S. local build and through completion of the intercity build. The company is in the process of developing comparable metrics for the international portion of the network and anticipates providing them once construction has begun in Europe.
Communications Products To Be Offered By End of Third Quarter
Level 3 plans to begin offering advanced IP-based services at the end of the third quarter. As previously announced, the company has agreements to lease capacity over 8,300 miles of Frontier Corporation's national network. Leasing capacity allows Level 3 to begin to offer services, build a customer base and move the traffic over to its own networks as they are built. The company expects to have a sales force in 10 U.S. cities by the end of the third quarter and in an additional five U.S. cities by the end of the year.
Outlook
"During the quarter, we have seen an increasing number of major communications companies announce plans to rebuild their networks based on packet switching technologies. This underscores our firmly held view that the industry is undergoing a fundamental change from 100-year-old circuit switching to newer packet switching – a superior technology. The shift is being driven by simple economics," said Crowe. "Our plan is aimed squarely at the opportunity that is being created by this shift to the newer packet switching technology."
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.
