Customer Base Grows to 2,400; a 20% Increase in Third Quarter and 85% Increase Year to Date
BROOMFIELD, COLORADO, October 18, 2000 – Level 3 Communications, Inc. (Nasdaq: LVLT) today announced its third quarter 2000 results.
Consolidated revenue for the quarter was $341 million. The net loss for the quarter was $351 million, or $.96 per share. Included in the company's results is a gain of $22 million relating to sale of the company's 50 percent interest in Walnut Creek Mining Company. Excluding this non-operating gain, the net loss for the quarter was $373 million, or $1.02 per share.
The results for the quarter also include a $61 million non-cash charge, primarily related to the company's Outperform Stock Option Program. Excluding this charge and the gain on sale of non-core assets, the net loss for the quarter was $.85 per share. "I am pleased that we have experienced another solid quarter," said James Q. Crowe, CEO of Level 3. "The strong revenue growth is evidence of the continuing demand for our services, and I am particularly pleased with the quality and breadth of our customer base."
Third Quarter Financial Highlights Communications and Information Services Revenue:
Communications and information services revenue for third quarter 2000 was $285 million, a 313 percent increase over 1999 third quarter revenue of $69 million. The year-over-year increase was a result of significant growth in the communications business. Total communications revenue was $255 million for the quarter, a 608 percent increase over 1999 third quarter communications revenue of $36 million, and a 67 percent increase over second quarter 2000 communications revenue of $153 million.
Included in total communications revenue was $101 million of non-recurring revenue from dark fiber sales. Also included in total communications revenue for the quarter was $18 million attributable to reciprocal compensation. Level 3's customer base continues to increase rapidly. At the end of the quarter, the company had approximately 2,400 customers - a 20 percent increase in the number of customers since the end of the second quarter 2000. Over 75 percent of the customer base currently purchases more than one Level 3 service.
Communications Services Currently Offered in 47 U.S., European and Asian Markets:
At the end of the quarter, the company offered communications services in 41 U.S., five European markets and one Asian market. Level 3 announced the launch of two new Global IP services during the quarter.
(3)CrossRoads is a service offered in North America, Europe, and Asia for customers that are located in a
Level 3 Gateway. This Internet access and transport service can lower bandwidth costs for customers by as much as 50 percent using Destination Sensitive Billing, the industry's first pricing based on the destination of Internet traffic, rather than traditional flat rate pricing. For customers not located in a Level 3 Gateway, Level 3 launched (3)CrossRoads EPOP (Ethernet Point of Presence), a service offered in North America and Europe that gives customers high-speed Ethernet Internet access with economic benefits similar to (3)CrossRoads.
Other Revenue:
Other revenue of $56 million for the third quarter included $50 million from coal mining, versus third quarter 1999 coal mining revenue of $60 million. Full year 2000 coal revenue is expected to be approximately 10 percent less than full year 1999 coal revenue due to reduced shipments under long-term coal contracts in 2000 and the sale of the company's 50 percent interest in Walnut Creek Mining Company during the third quarter. Expenses:
Cost of Revenue:
The cost of revenue for third quarter 2000 was $199 million, representing a 99 percent increase over third quarter 1999 cost of revenue of $100 million. The year-over-year increase in the cost of revenue was primarily a result of an increase in leased network costs and costs associated with dark fiber sales. Consolidated gross margin was 42 percent for the quarter, up from 34 percent in the second quarter. Gross margin for the communications business was 38 percent for the quarter, up from 25 percent in the second quarter. Communications gross margin was significantly higher than previous quarters as a result of one time contracts.
"As previously announced, we expect full year gross margin for the communications business to be 25 percent in 2000," said Sureel Choksi, Chief Financial Officer of Level 3.
Selling, General and Administrative Expenses (SG&A):
SG&A expenses for the quarter were $237 million, a 71 percent increase over third quarter 1999 SG&A expenses of $139 million. This increase primarily results from the company's addition of over 2,200 employees during the past 12 months. The company added approximately 900 employees to the communications business during the third quarter, bringing the total number of Level 3 employees to approximately 5,900.
Stock-Based Compensation Expense:
The company recognized $61 million in stock-based compensation expense during the quarter. The Outperform Stock Option (OSO) Program represents the principal component of the company's stock-based compensation. This expense is accounted for in accordance with SFAS No. 123, "Accounting For Stock-Based Compensation." Level 3 expenses the value of OSOs and its other stock-based compensation over the respective vesting period. This approach is in contrast to the current practice of most corporations under which conventional stock options are not accounted for as an expense on the income statement. Under Level 3's plan, OSOs are issued quarterly to all employees, with the exercise price indexed to the performance of the company's common stock relative to the performance of the Standard & Poor's 500 (S&P 500) Index.
The company believes that this program aligns Level 3 employees and stockholders interests by basing stock option value on the company's ability to outperform the S&P 500.
Depreciation and Amortization:
Depreciation and amortization expenses for the quarter were $164 million, a 160 percent increase from the third quarter 1999 depreciation and amortization expenses of $63 million. These charges reflect the significant increase in capital spending to support the growth of the communications business.
Capital Expenditures:
Capital expenditures for property, plant and equipment were $1.4 billion for the quarter and $4.5 billion year to date. 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. Total capital expenditures for 2000 are expected to be approximately $6.3 billion as previously announced.
Network Development Highlights for the Quarter U.S. and European Intercity Network Construction Ahead of Schedule:
Conduit installation is now complete on 96 percent of the total planned U.S. intercity network, bringing total miles of conduit construction completed to 15,198. As previously announced, Level 3 advanced the construction completion date of this portion of the network by more than three months, and now expects construction of the U.S. intercity multi-conduit network to be substantially completed by the end of fourth quarter 2000.
The company also installed an additional 4,100 miles of fiber optic cable during the quarter, bringing the total intercity route miles with fiber installed to approximately 13,300 miles. Conduit installation is now complete on 100 percent of Ring 1 and Ring 2 of the European intercity network, bringing total miles of conduit construction completed to approximately 3,600. Ring 1 of the European intercity network connects London, Amsterdam, Frankfurt, Paris and Brussels. Ring 2 connects Frankfurt, Dusseldorf, Hamburg, Berlin and Munich.
Second Cable To Be Pulled Through Network:
As a result of continued strong demand for services, Level 3 announced during the third quarter the deployment of a new generation of fiber in the second conduit of its U.S. intercity network Level 3 plans to begin installing this fiber in the first quarter of 2001 and expects to be substantially complete by the end of 2001.
Ring 1 of European Intercity Network Lit and Carrying Customer Traffic:
Ring 1 of the European intercity network is 100 percent lit and is currently carrying customer traffic. During the third quarter, Level 3 lit 375 miles on its U.S. intercity network, bringing the total network miles lit to approximately 2,875. A fiber network is considered to be "lit" when electronics are installed, thereby enabling the network to carry customer traffic.
New Gateways and Local Fiber Networks in Service:
At the end of the third quarter, Level 3 had operational Gateways in 41 U.S. markets, five European markets and one Asian market. The four markets added during the quarter were Hong Kong, Memphis, Salt Lake City and El Paso.
To date, the company has secured approximately 5.5 million square feet of data center space around the world and has pre-funded the acquisition of another 1.0 million square feet. At the end of the third quarter, markets with Level 3 local fiber networks totaled 31 – 26 in the U.S. and five in Europe.
Construction of Transatlantic Cable System Complete:
The previously announced 1.28 terabit cable system is construction complete. The company expects to begin offering service over this facility during the fourth quarter.
"Overall, it was another strong quarter for us," said James Q. Crowe. "We remain ahead of schedule on the construction of our network, which we expect to substantially complete in the fourth quarter. And, we continue to initiate service in new markets in the U.S., Europe and Asia."
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.
