Communications Revenue Grows to $353 Million in Fourth Quarter 2000; Increase of 292 Percent over Fourth Quarter 1999
Cumulative Dark Fiber and Related Services Contracts Now Exceed $4.1 Billion
BROOMFIELD, Colo., January 26, 2001 - Level 3 Communications, Inc. (Nasdaq: LVLT) today announced its fourth quarter 2000 results. Consolidated revenue for the quarter was $433 million. The net loss for the quarter was $552 million, or $1.50 per share. Excluding one-time non-operating charges and charges for stock-based compensation expenses, net loss for the quarter was $1.20 per share.
"It was another solid quarter and an exceptionally strong year for us," said James Q. Crowe, chief executive officer of Level 3. "We have increased our communications revenue by 292 percent fourth quarter over fourth quarter, and are poised for continuing growth. Our global network is essentially complete, and we are now positioned to leverage our unique, continuously upgradeable network."
Included in the company's results is a loss of $27 million relating to the estimated one-time restructuring charge from Commonwealth Telephone Enterprises, Inc. The company estimated the $27 million charge using the mid-point of the estimated range of the after-tax restructuring charge publicly disclosed by Commonwealth Telephone Enterprises, Inc. in December 2000. The company has an ownership interest in Commonwealth Telephone of approximately 46 percent. Excluding this non-operating loss, the net loss for the quarter was $525 million, or $1.43 per share. The results for the quarter also include an $83 million non-cash charge, primarily related to the company's Outperform Stock Option (OSO) Program. Excluding this charge and the one-time restructuring charge from Commonwealth Telephone, the net loss for the quarter was $1.20 per share.
Fourth Quarter Financial Highlights
Communications and Information Services Revenue:
Communications and information services revenue for fourth quarter 2000 was $384 million, a 217 percent increase over 1999 fourth quarter revenue of $121 million. The year-over-year increase was a result of significant growth in the communications business. Total communications revenue was $353 million for the quarter, a 292 percent increase over 1999 fourth quarter communications revenue of $90 million, and a 38 percent increase over third quarter 2000 communications revenue of $255 million. Included in total communications revenue was $71 million of non-recurring revenue from dark fiber sales and $94 million from the previously announced sale of transatlantic capacity to Viatel. Also included in total communications revenue for the quarter was $16 million attributable to reciprocal compensation. Since inception, the company has entered into cumulative contracts to sell dark fiber and related services for over $4.1 billion. Services related to dark fiber include colocation and operation and maintenance services, and represent approximately 50 percent of the value of these contracts. Of this amount, approximately $2.4 billion results from contracts signed in 2000, and the balance results from contracts signed in prior years Full year 2000 communications revenue was $858 million, exceeding the company's previously announced estimate of $825 million. Communications cash revenue was $485 million for the fourth quarter and $1.26 billion for the year 2000. Communications cash revenue is defined as communications revenue plus changes in cash deferred revenue. Communications cash revenue reflects up front cash received for dark fiber and capacity sales that are recognized as GAAP revenue over the life of the contract, typically 10-20 years. "We have exceeded our previously announced revenue forecast for the fourth quarter and the full year, as well as announced cash revenues that significantly exceed GAAP revenue," said Sureel Choksi, chief financial officer of Level 3. "We plan to provide financial guidance for both 2001 and 2002 at our investor and analyst conference in New York on January 29, 2001."
Level 3's customer base continues to increase rapidly. At the end of the quarter, the company had approximately 2,675 customers - a 12 percent increase in the number of customers since the end of the third quarter 2000 and a 103 percent increase for the year. Approximately 75 percent of the customer base currently purchases more than one Level 3 service.
Other Revenue:
Other revenue of $49 million for the fourth quarter included $44 million from coal mining, versus fourth quarter 1999 coal mining revenue of $49 million. As previously announced, full year 2000 coal revenue declined from 1999 by approximately 10 percent due to reduced shipments under long-term coal contracts and the sale of the company's 50 percent interest in Walnut Creek Mining Company during the third quarter of 2000.
Expenses:
Cost of Revenue:
The cost of revenue for fourth quarter 2000 was $311 million, representing a 166 percent increase over fourth quarter 1999 cost of revenue of $117 million. The year-over-year increase in the cost of revenue was primarily a result of an increase in leased network costs in advance of network completion, and costs associated with dark fiber sales. Consolidated gross margin was 28 percent for the quarter, down from 42 percent in the third quarter. As previously announced, the company recognized a one-time asset sale on the company's transatlantic cable and dark fiber contracts which reduced the gross margin quarter over quarter. Consolidated gross margin for the year 2000 was 33 percent, up from 30 percent in 1999. Gross margin for the communications business was 25 percent for the quarter, down from 38 percent in the third quarter. For the full year 2000, gross margin for the communications business was 27 percent, exceeding the company's previously announced estimate of 25 percent.
Selling, General and Administrative Expenses (SG&A):
SG&A expenses for the quarter were $286 million, a 70 percent increase over fourth quarter 1999 SG&A expenses of $168 million. This increase primarily results from the company's addition of more than 2,350 employees during the past 12 months. The company added approximately 300 employees to the communications business during the fourth quarter, bringing the total number of Level 3 employees to approximately 6,200.
Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) and Adjusted EBITDA:
Consolidated EBITDA, excluding stock-based compensation expense was $(164) million for the fourth quarter and $(520) million for the year 2000. Consolidated Adjusted EBITDA was $105 million for the fourth quarter and $80 million for the year. Adjusted EBITDA is defined as Consolidated EBITDA plus changes in cash deferred revenue and excluding non-cash cost of goods sold associated with certain transoceanic IRU sales and dark fiber contracts. "We are pleased to announce that Adjusted EBITDA was positive after only two full years of operations. Adjusted EBITDA is expected to grow rapidly and to represent a significant source of funding for the company's capital expenditures," said Choksi.
Stock-Based Compensation Expense:
The company recognized $83 million in stock-based compensation expense during the quarter. The 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 value of the options 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 better 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 $193 million, a 164 percent increase from the fourth quarter 1999 depreciation and amortization expenses of $73 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 $5.9 billion for the year. The company previously announced it expected to spend $6.3 billion for the year. As a result of timing differences, the remaining $400 million is expected to shift into 2001. The majority of the spending in 2000 was for construction of the U.S. and European intercity networks, certain local networks in the U.S. and Europe, and the transatlantic and pan-Asia undersea cables.
Network Development Highlights
North American Intercity Network Construction Substantially Complete:
As previously announced, conduit installation is now complete on 98 percent of the total planned North American intercity network, bringing total miles of conduit construction completed to 15,486. The company also installed an additional 1,400 miles of fiber optic cable during the quarter, bringing the total intercity route miles with fiber installed to approximately 14,700 miles. The company lit over 7,100 miles during the fourth quarter, bringing the total lit miles on the North American intercity network to more than 10,000, which represents more than 60 percent of the total miles. A fiber network is considered "lit" when electronics are installed, thereby enabling the network to carry customer traffic.
Ring 1 and Ring 2 of the European Intercity Network:
As previously announced, Ring 1 of the European intercity network is lit and currently carrying customer traffic. During the fourth quarter, Level 3 completed the installation of fiber on Ring 2, and expects to light and fully operate it during the first quarter of 2001. Major cities on Ring 1 of the European intercity network include London, Amsterdam, Frankfurt, Paris and Brussels. Major cities on Ring 2 include Frankfurt, Dusseldorf, Hamburg, Berlin and Munich.
New Markets and Local Fiber Networks in Service:
At the end of the fourth quarter, Level 3 offered services in 60 markets: 49 North American markets, nine European markets and two Asian markets. The thirteen new markets in service added during the quarter were Albany, Berlin, Buffalo, Dusseldorf, Hamburg, Hartford, Indianapolis, Las Vegas, Munich, New Orleans, Portland, Sacramento and Tokyo. To date, the company has secured approximately six million square feet of data center space around the world and has pre-funded the acquisition of another half a million square feet. Approximately 2.8 million square feet of data center space is built out globally as of the end of the fourth quarter. At the end of the fourth quarter, markets with Level 3 local fiber networks totaled 32, including 26 in the U.S. and six in Europe.
Transatlantic Cable System Complete:
As previously announced, the company's transatlantic cable system is complete and the company began offering service over this system during the fourth quarter.
Partnership Announced on Pan-Asia Cable System:
The company announced an agreement with FLAG Telecom in January of 2001 on the development of a pan-Asia submarine cable system. This agreement expands the previously announced Hong Kong to Japan undersea cable system to include connections to Korea and Taiwan. The total cost of the system is approximately $900 million. Level 3's share of the cost for this system is approximately $450 million. The Hong Kong to Japan segment is expected to be complete in the second quarter of 2001, with the Taiwan segment to follow in late 2001. The western link, connecting Hong Kong, Taiwan and Japan is expected to be ready for service in early 2002.
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.
