Tuesday, April 26, 2005
Financial Highlights
Business Highlights
BROOMFIELD, Colo., April 26, 2005 – Level 3 Communications, Inc. (Nasdaq:LVLT) reported consolidated revenue of $1.01 billion for the first quarter 2005 compared to $1.05 billion for the fourth quarter 2004. Communications revenue was $510 million in the first quarter versus $482 million for the previous quarter, and information services revenue was $483 million compared to $547 million for the seasonally high previous quarter.
The net loss for the first quarter 2005 was $77 million, or $0.11 per share, consistent with the previous quarter. Included in the net loss for the first quarter 2005 is a $15 million cash restructuring charge associated with the previously announced reduction in workforce during the quarter. Included in the fourth quarter 2004 net loss was a $50 million gain associated with the extinguishment of debt related to the company’s tender offer, a $14 million lease impairment charge, and a $9 million gain associated with the sale of certain investment securities. Consolidated Adjusted OIBDA(1) was $209 million in the first quarter 2005 compared to previously provided projections of $90 million to $110 million and compares to $174 million for the previous quarter.
“I am pleased that we were able to exceed our projections for communications revenue and Consolidated Adjusted OIBDA this quarter,” said James Q. Crowe, CEO of Level 3. “We experienced another quarter of strong IP traffic growth on our network, with average traffic per day increasing approximately 25 percent over the prior quarter.”
First Quarter Financial Results
| Metric ($ in millions) |
First Quarter Actuals | First Quarter Projections (1) |
| Communications Services Revenue (2) (excluding termination and settlement revenue) |
$353 | |
| Reciprocal Compensation | $28 | |
| Termination and Settlement Revenue | $129 | |
| Communications Revenue | $510 | $400-$420 |
| Information Services Revenue | $483 | |
| Other Revenue | $17 | |
| Consolidated Revenue | $1,010 | |
| Consolidated Adjusted OIBDA (3)(4) | $209 | $90-$110 |
| Capital Expenditures (5) | $61 | |
| Unlevered Cash Flow (4) | ($53) | |
| Free Cash Flow (4) | ($127) | |
| Communications Gross Margin (4) | 77% |
(1) Projections issued February 8, 2005
(2) Communications Services Revenue is GAAP communications revenue minus reciprocal compensation revenue
(3) Consolidated Adjusted OIBDA excludes $11 million in stock-based compensation expense
(4) See schedule of non-GAAP metrics for definition and reconciliation to GAAP measures
Communications Business
Revenue
Communications revenue for the first quarter 2005 was $510 million versus $482 million for the previous quarter. Total communications revenue for the first quarter included $482 million of communications services revenue and $28 million of reciprocal compensation revenue compared to $459 million and $23 million in the fourth quarter.
Included in communications services revenue was $129 million and $103 million of termination revenue for the first and fourth quarters, respectively. The increase in termination revenue was due to previously announced dark fiber lease agreement terminations with France Telecom and 360networks.
Communications services revenue excluding termination revenue decreased by $3 million quarter over quarter primarily due to a decrease in dark fiber amortization as a result of the termination of the two customer dark fiber lease agreements during the quarter, partially offset by an increase in voice and DSL aggregation revenue.
| Communications Revenue ($ in millions) |
Quarter Ended March 31, 2005 |
Quarter Ended December 31, 2004 |
Percent Change |
| Transport and Infrastructure | $119 | $122 | (2%) |
| Voice | $26 | $24 | 8% |
| Managed Modem | $107 | $106 | 1% |
| IP & Data Services (excluding DSL) | $64 | $68 | (6%) |
| DSL | $37 | $36 | 3% |
| Communications Services Revenue | $353 | $356 | (1%) |
| Reciprocal Compensation | $28 | $23 | 22% |
| Termination Revenue | $129 | $103 | 25% |
| Communications Revenue | $510 | $482 | 6% |
The communications deferred revenue balance decreased by $147 million during the quarter primarily as a result of the recognition of $126 million of non-cash termination revenue from deferred revenue associated with the previously announced termination of two customer dark fiber lease agreements.
Cost of Revenue
Communications cost of revenue for the first quarter 2005 was $116 million versus $120 million for the previous quarter. Communications gross margin(1) was 77 percent for the first quarter compared to 75 percent in the fourth quarter. The improvement in communications gross margin is primarily attributable to the increase in termination revenue and improvements in cost of revenue.
Selling, General and Administrative Expenses (SG&A)
Communications SG&A expenses were $188 million for the first quarter 2005 versus $208 million for the previous quarter. SG&A expenses improved in the first quarter primarily due to both lower employee-related costs and marketing costs. SG&A expenses for the first quarter include $10 million of non-cash stock compensation expense. Fourth quarter SG&A expenses included a $2 million reduction associated with property taxes and $15 million of non-cash stock compensation expense.
Adjusted Operating Income Before Depreciation and Amortization (OIBDA)
Adjusted OIBDA(1) for the communications business increased to $201 million for the first quarter 2005 from $155 million for the previous quarter as a result of an increase in termination revenue, and improvements in the cost of revenue and operating expenses. Included in Adjusted OIBDA in the first quarter is $15 million of cash severance costs associated with the reduction in workforce in the first quarter 2005. Fourth quarter Adjusted OIBDA included $14 million in lease termination costs.
Communications Adjusted OIBDA margin(1) was 39 percent for the first quarter 2005 versus 32 percent in the previous quarter. Communications Adjusted OIBDA excludes non-cash stock compensation expense of $10 million in the first quarter and $15 million in the fourth quarter.
Information Services Business
Results for the information services business include the Software Spectrum and (i)Structure subsidiaries.
Revenue and Adjusted Operating Income before Depreciation and Amortization (OIBDA)
Information services revenue was $483 million for the first quarter 2005. This compares to revenue of $547 million for the seasonally higher previous quarter and $494 million for the same period last year. Adjusted OIBDA(1) for the information services business was $7 million for the first quarter, which excludes $1 million in non-cash stock compensation expense, compared to Adjusted OIBDA of $14 million in the previous quarter, excluding $2 million in non-cash stock compensation expense. For the same period last year, Adjusted OIBDA was $11 million, which included $2 million in restructuring charges and $4 million in termination revenue.
“Our information services business continued its steady financial performance during the first quarter,” said Charles C. Miller, vice chairman of Level 3.
Other Businesses
The company’s other businesses consist primarily of coal mining operations.
Revenue and Adjusted OIBDA
Revenue and Adjusted OIBDA(1) from other businesses were $17 million and $1 million, respectively, in the first quarter 2005, compared to $26 million and $5 million for the previous quarter.
Consolidated Cash Flow and Liquidity
During the first quarter 2005, Unlevered Cash Flow(1) was negative $53 million versus positive $20 million during the fourth quarter. Consolidated Free Cash Flow for the first quarter was negative $127 million, versus negative $97 million for the previous quarter.
“The company’s negative Consolidated Free Cash Flow increased in the first quarter primarily from an increase in working capital needs associated with the expected seasonality of our information services business and certain prepaid expenses,” said Sunit Patel, CFO of Level 3.
As of March 31, 2005, the company had cash and marketable securities of $626 million compared to $782 million at December 31, 2004. Pro forma for Level 3’s recently completed offering of $880 million aggregate principal amount of 10% Convertible Senior Notes due 2011, the company had approximately $1.5 billion in cash and marketable securities at March 31, 2005.
New Customers and Service Offering Update
During the quarter, Level 3 announced new customer contracts to provide VoIP services to AOL and Adelphia and saw strong contract activity from a number of its target customers, particularly from cable operators, wireless companies and PTTs.
“We continue to see strong traffic growth on our network primarily driven by continued growth from our IP solutions and voice services,” said Kevin O’Hara, president and COO of Level 3. “We were pleased to see traffic on our IP backbone increase 25 percent this quarter, and we now carry an average of 2.7 petabytes of traffic per day on our network. This is equivalent to transmitting the entire print collection of the U.S. Library of Congress over 270 times each day.”
Business Outlook
“The competitive environment continues to remain challenging; however, we continue to see positive signs for the industry including consolidation that should prove beneficial to us in the long term,” said Crowe. “We continue to be focused on growing our business in a profitable manner rather than simply pursuing volume. We have increased our scrutiny on competitive market behavior, and while still early, we continue to believe that price compression will moderate for some of these services over the next few quarters.
“We still expect revenue from our mature services, DSL aggregation and managed modem, to decline this year as DSL contracts expire and consumers continue their migration to broadband. We expect that partially offsetting these declines will be increased revenue from other services, particularly our growth services such as voice and IP VPN. We are currently seeing growth in wholesale voice revenue from our voice termination, local inbound and toll-free services. We saw early growth in the number of consumer-oriented voice subscribers during the quarter, which we expect to continue to increase throughout 2005. As we have said previously, the timing and trend of growth is largely dependent upon market acceptance of VoIP and the success of our customers in the marketplace.”
Full Year 2005 Projections
Second Quarter 2005
| Metric ($ in millions) |
Second Quarter Projections | Full Year 2005 Projections |
| Communications Revenue | $350 to $370 | Low to high single digit percent decline |
| Consolidated Adjusted OIBDA | $75 to $95 | NA |
| Communications Adjusted OIBDA Margin | NA | Mid-20 percent range |
| Negative Consolidated Free Cash Flow | NA | $300 to $360 |
Summary
“I believe Level 3 is uniquely positioned to benefit from significant trends in the communications industry including the ongoing convergence of legacy networks and applications to the IP layer,” Crowe said. “We remain focused on investing in growth areas of our business where we see market opportunities and appropriate returns.”
Conference Call Information
Level 3 will hold a conference call to discuss the company’s first quarter results at 10:00 a.m. Eastern Time today. To join the call, please dial 612-332-0530. A live broadcast of the call can also be heard on Level 3’s Web site at http://www.level3.com/. An audio replay of the call will be accessible on the company’s Web site or by dialing 320-365-3844; access code 777502.
View Q1-05 Financial Statements
View Schedule to Reconcile to non-GAAP Financial Metrics
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.
