Communications Cash Revenue of $642 Million
Communications Services Revenue of $230 Million Increases 19 Percent from First Quarter
BROOMFIELD, Colo., July 18, 2001 - Level 3 Communications, Inc. (Nasdaq:LVLT) today announced its second quarter 2001 results. Communications cash revenue for the quarter was $642 million. Consolidated revenue for the quarter was $389 million, compared with $234 million for the same period last year. The net loss for the quarter, excluding one-time charges of $136 million, was $595 million, or $1.62 per share. Including one-time charges of $136 million, net loss for the quarter was $731 million, or $1.99 per share.
"With the completion of our network during the first half of 2001, we are sharpening our focus on sales and operations," said James Q. Crowe, CEO of Level 3. "We are pleased with the success we have had in focusing our sales force on the top 300 global users of bandwidth. We continue to make progress in attracting high-quality customers who are using Level 3's network for critical communications services."
Second Quarter Financial Highlights Communications Cash Revenue and GAAP Revenue: Communications cash revenue for the second quarter was $642 million. Communications cash revenue is defined as communications GAAP revenue plus changes in cash deferred revenue. Communications cash revenue reflects up-front cash received for dark fiber and other capacity sales that are recognized as GAAP revenue over the life of the contract, generally ranging from five to 20 years. Communications GAAP revenue for second quarter 2001 was $331 million, a 116 percent increase over the same period last year. The increase was a result of growth in both existing customers as well as new customer contracts. Included in communications GAAP revenue was $230 million of communications services revenue, plus $61 million of non-recurring revenue from dark fiber sales, and $40 million attributable to reciprocal compensation. Communications revenue, excluding non-recurring dark fiber revenue, increased 17 percent to $270 million from $230 million last quarter. At the end of the quarter, the company had approximately 2,275 customers - down from a reported 2,975 as of the end of the first quarter. This revised total results from a combination of new customer accounts signed during the quarter, minus customer disconnects as well as a one-time reduction resulting from a consolidation of multiple subsidiaries of parent corporations into single customer accounts. Approximately 75 percent of the customer base currently purchases more than one Level 3 service.
Recently announced customer agreements include those with Microsoft, Verizon, Yahoo!, France Telecom, BT, China Unicom, NTL, EarthLink, and Time Warner Telecom. Other Revenue: Other revenue of $58 million for the second quarter included $31 million from (i)Structure and $21 million from coal mining, versus (i)Structure revenue of $28 million and coal mining revenue of $48 million for the same period last year. Expenses Cost of Revenue: Consolidated cost of revenue for second quarter 2001 was $211 million, representing a 37 percent increase from the second quarter 2000 and a 21 percent decrease from the first quarter 2001. Gross margin for the communications business was 47 percent for the quarter, up from 25 percent for the same period last year and up from 42 percent for the first quarter. "Our ability to migrate customer traffic from leased facilities to our own network ahead of schedule is a major reason why our gross margins have markedly improved," said Kevin O'Hara, president and COO of Level 3.
Selling, General and Administrative Expenses (SG&A): SG&A expenses, excluding one-time charges relating to previously announced restructuring and impairment costs of $101 million, were $260 million for the second quarter, compared to $285 million, excluding $10 million of restructuring charges, last quarter and $200 million for the same period last year. Including one-time charges, SG&A expenses were $361 million for the second quarter. EBITDA and Adjusted EBITDA: Consolidated EBITDA, excluding stock-based compensation expense and one-time charges associated with previously announced restructuring and impairment costs, was negative $82 million for the second quarter, compared to negative $120 million for the same period last year. Including one-time cash charges of $40 million, Consolidated EBITDA was negative $122 million. Consolidated Adjusted EBITDA was positive $238 million for the second quarter, including a $40 million one-time charge for the restructuring announced in June 2001. Consolidated Adjusted EBITDA is defined as Consolidated EBITDA plus the change in cash deferred revenue and excluding non-cash cost of goods sold associated with certain capacity sales and dark fiber contracts. Stock-Based Compensation Expense: The company recognized $85 million in stock-based compensation expense during the quarter. The company's 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 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.
Further, as the OSO awards are granted quarterly at the then current market price, the company believes the program continues to provide a significant performance incentive, even in an environment where the company's stock price is volatile. Depreciation and Amortization: Depreciation and amortization expenses for the quarter were $329 million, a 137 percent increase over the same period last year. These charges reflect the capital spending to support the growth of the communications business as well as a previously announced one-time charge of $35 million related to asset impairments.
Capital Expenditures: Capital expenditures for property, plant and equipment were $772 million for the quarter, declining from $1.2 billion during the first quarter. This expected reduction in capital expenditures reflects a shift to success-based capital expenditures, the completion of the network, and the company's cost management initiatives. Network Highlights North American and European Intercity Network: Level 3's intercity network in North America and Europe is now operational and, as previously announced, the company has migrated approximately 95 percent of the customer traffic over to its own network from the existing leased network. The company has lit 15,257 miles on the North American intercity network, which represents more than 96 percent of the total miles. A fiber network is considered to be "lit" when electronics are installed and operational, thereby enabling the network to carry customer traffic. Level 3's North American intercity network consists of eight rings, all of which are lit and operational, with either owned or leased wavelengths. These eight rings include 69 individual segments, of which 66 are currently lit and operational on Level 3's own network. All previously disclosed environmental restrictions with respect to the completion of the final intercity segments have been lifted, and the final construction of the remaining segments is underway.
New Markets and Local Fiber Networks in Service: At the end of the second quarter, Level 3 offered services in 67 markets, consisting of 56 North American markets, nine European markets and two Asian markets. During the second quarter, three additional markets were completed with Level 3 local fiber. Markets with local fiber networks now total 36, consisting of 27 in North America and nine in Europe. The new markets with local fiber are Munich, Hamburg, and Portland. Level 3 now has over 2,125 local route miles built in North America and Europe, and 1,535 of those route miles are lit. Additionally, the company has constructed more than 700,000 local fiber miles to date. Business Outlook Level 3 expects communications cash revenue for the third quarter of 2001 of $400 million and communications GAAP revenue of $280 million. Approximately $230 million of the communications GAAP revenue is expected to come from services revenue, approximately $25 million from reciprocal compensation and the balance from non-recurring dark fiber sales. The company is reaffirming the financial projections provided on June 18, 2001, which are summarized in the attached Financial Projections Table.
Backlog: Level 3 defines backlog as contracted sales that have not been provisioned plus current revenue run rate, net of estimated churn. The company had backlog of $4.6 billion as of the end of the second quarter, compared to $5.3 billion as of the end of the previous quarter. The decrease of $700 million quarter over quarter is a result of the combination of the following: 1) new sales closed during the second quarter; 2) a reduction in the backlog associated with revenue recognized during the quarter; 3) the removal from the backlog of signed contracts associated with financially distressed customers; and 4) the previously announced renegotiation of the XO Communications dark fiber and conduit agreements. The company is currently reviewing its methodology for calculating backlog and may, in the future, revise its disclosure in order to provide improved indicators of future revenue growth. Free Cash Flow Breakeven: The company expects to achieve free cash flow breakeven in early 2004. The company remains prefunded with an adequate cushion in accordance with its current business outlook.
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.
