LEVEL 3 COMMUNICATIONS REPORTS FOURTH QUARTER RESULTS
Acceleration and Expansion of Business Plan Continued Strong Customer Demand Across All Product Lines
BROOMFIELD, COLORADO, February 3, 2000 – Level 3 Communications, Inc. (Nasdaq: LVLT) today announced fourth quarter 1999 results. Consolidated revenues for the quarter were $173 million. The net loss for the quarter was $191 million, or $0.56 per share.
Fourth Quarter Financial Highlights Communications and Information Services Revenue: Communications and information services revenue for fourth quarter 1999 was $121 million, a 188 percent increase over 1998 fourth quarter revenue of $42 million. The year-over-year increase was a result of significant growth in the communications business. At the end of the quarter, the company was offering communications services in 27 U.S. markets and four European markets.
On October 21, 1999, Level 3 announced that it had reached an agreement with Bell Atlantic Corporation (NYSE: BEL) that established new reciprocal compensation rates between the two local carriers. Included in communications revenue for the quarter was $16 million attributable to reciprocal compensation. This includes revenue of $11 million from the settlement of all outstanding reciprocal compensation billing issues through September 1999 together with payments for billed minutes during the quarter. Also included in communications revenue for the quarter was $26 million of revenue from both intercity and local dark fiber contracts.
Approximately 800 miles of intercity dark fiber were delivered to customers during the quarter, along with portions of several metropolitan networks. Other Revenue: Other revenue of $52 million for the fourth quarter included $49 million from coal mining, a slight decrease from fourth quarter 1998 coal mining revenue of $50 million. As expected and previously disclosed, 1999 coal revenue was approximately 10 percent less than 1998 annual revenue due to reduced shipments under long-term coal contracts in 1999. Full year 1999 coal revenue was $207 million versus $228 million in 1998.
Expenses: Cost of Revenue: The cost of revenue for fourth quarter 1999 was $117 million. This represents a 92 percent increase over the fourth quarter 1998 cost of revenue of $61 million. This increase was primarily due to the continued expansion and acceleration of the company's business plan for the communications business. Employee Related Expenses: Selling, general and administrative (SG&A) expenses for the quarter were $168 million. This represents a 44 percent increase over the fourth quarter 1998 SG&A expenses of $117 million. The company added over 300 employees to the communications business during the quarter. The total number of all Level 3 employees at the end of the quarter was approximately 3,850. The company recognized $40 million in stock-based compensation expense during the quarter.
The majority of this expense is due to Level 3's Outperform Stock Option program (OSO). Under this plan, OSOs are issued to all employees quarterly, with the exercise price indexed to the performance of the Standard & Poor's (S&P) 500 Index. This program directly aligns management's and stockholders' interests by basing stock option value on the company's ability to outperform the S&P 500. This is a non-cash expense, accounted for in accordance with SFAS No. 123, "Accounting For Stock-Based Compensation."
Depreciation and Amortization: Depreciation and amortization expenses for the quarter were $73 million, a 109 percent increase over the fourth quarter 1998 depreciation and amortization expenses of $35 million. These charges reflect the significant increase in capital spending for growth of the communications business.
Capital Expenditures: Capital expenditures for property, plant and equipment were $1.3 billion for the quarter. The majority of the spending was for construction of the U.S. and European intercity networks, certain local networks in the U.S. and Europe, and the transatlantic cable network. Capital expenditures for 1999 were $3.4 billion. This acceleration in spending is a result of faster than expected completion of network construction. Operational Highlights for the Quarter U.S. and European Network Construction Ahead of Schedule - As previously announced, Level 3 expects to complete both its U.S. and European intercity networks on or ahead of schedule.
The company has advanced its U.S. intercity network construction completion date by approximately one quarter and the U.S. intercity network is now expected to be substantially complete by the end of the fourth quarter 2000. Approximately 3,400 miles of the multi-conduit U.S. intercity network were completed during the fourth quarter 1999, bringing the total to approximately 9,300 miles, well ahead of Level 3's previously announced target for the year. Approximately 97% of the 16,000 mile U.S. intercity network is now under construction.
The company has installed approximately 3,000 miles of fiber optic cable in the first conduit of the completed sections of the network. The 4,750 mile multi-conduit European intercity network build is also ahead of schedule. Construction of the first two of three rings is currently underway. Approximately 1,200 miles were completed in the fourth quarter 1999, bringing the total miles completed to over 2,100 miles.
As previously announced, the company is sharing construction costs for the first two rings of the European network with COLT Telecom Group plc. Ring 1 connects London, Amsterdam, Frankfurt, Paris and Brussels; Ring 2 connects Frankfurt, Dusseldorf, Hamburg, Berlin and Munich. Level 3's multi-conduit network is designed to enable new generations of fiber cables to be installed much more rapidly and at lower incremental costs than traditional network designs. First U.S. Intercity Network Segment Lit - A fiber network is considered to be 'lit' when electronics are installed, thereby enabling the network to carry customer traffic. In December 1999, Level 3 announced that it was carrying customer traffic between Dallas and Houston on the first completed and lit segment of its U.S. intercity network. Communications Services Being Offered in 31 U.S. and European Markets - The company's selection of cities involved in network and gateway construction is primarily based on the concentration of Web-centric customers. Level 3 Gateways are advanced technical facilities, which provide colocation space for customers' equipment and facilities, link Level 3's network to other communications networks, and house the company's own network equipment.
At the end of the fourth quarter of 1999, Level 3 had operational Gateways in 27 U.S. markets and four European markets - Amsterdam, Frankfurt, London and Paris. Additionally, at the end of the fourth quarter of 1999, markets with local fiber networks totaled 25 versus a planned 23 markets. Of the total, 22 are in the U.S. and three are in Europe. Asian Developments - In 1999, Level 3 opened its Asia Pacific headquarters in Hong Kong and began development of its 70,000 sq. ft. Gateway there. In addition, Level 3 is currently constructing a 60,000 sq. ft. Gateway facility in Tokyo. Both Gateways are expected to be operational in the fourth quarter of 2000. The company also announced plans to build a 2.56 terabit Northern Asia undersea cable system initially connecting Hong Kong to Tokyo. Business Plan Expanded to Meet Demand for Colocation Services - As previously announced, Level 3 has experienced a higher than expected demand for its colocation services from Web-centric customers, many of whom also purchase significant amounts of other Level 3 services.
In its 31 initial Gateway facilities in the U.S. and Europe, colocation space was completely committed in an average of 10 months after completion of construction. In total, Level 3 has secured over 3.4 million square feet of Gateway space. Of this total, at the end of 1999, construction of approximately 1.3 million sq. ft. was completed. To capitalize on the colocation opportunity, Level 3 is reprioritizing and expanding the scope of its business plan. Phase 5 has been modified and now includes a significant increase in the amount of colocation space. Additionally, Phase 5 will include the development of additional local fiber facilities. Level 3 expects Phase 5 plans to require approximately $2.5 billion in funding. In addition, a Phase 6 has been added to the business plan. Phase 6 includes certain initiatives previously planned as part of Phase 5, including the build-out of additional markets in Europe and Asia and the third ring of the European intercity network. Phase 6 is anticipated to require approximately $2.5 billion in funding.
Level 3 expects that future funding requirements beyond Phase 6 will relate to specific initiatives and success-based capital (capital required to purchase and install facilities and equipment necessary to provide service to customer backlog.)
(* Softswitches are advanced software based switching systems, which enable Level 3 to provide services combining the best features of the Internet and traditional telephone networks.)
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.
