Thursday, July 21, 2005
Financial Highlights
Business Highlights
BROOMFIELD, Colo., July 21, 2005 – Level 3 Communications, Inc. (Nasdaq:LVLT) reported consolidated revenue of $910 million for the second quarter 2005 compared to $1.01 billion for the first quarter 2005. Communications revenue was $371 million in the second quarter versus $510 million for the previous quarter, which included $129 million in termination revenue. Information services revenue was $520 million compared to $483 million for the previous quarter.
The net loss for the second quarter 2005 was $188 million, or $0.27 per share, compared to $77 million or $0.11 per share the previous quarter. Included in the first quarter 2005 net loss was a $15 million cash restructuring charge associated with the reduction in workforce completed during the first quarter. Consolidated Adjusted OIBDA(1) was $115 million in the second quarter 2005 compared to previously provided projections of $75 million to $95 million and compares to $209 million for the previous quarter.
“We exceeded our revenue projections this quarter primarily as a result of growth in our core transport and IP businesses and higher reciprocal compensation,” said James Q. Crowe, CEO of Level 3. “The growth in our core services came primarily from continued customer demand as well as our continued focus on pricing discipline, which is proving beneficial to us.”
Second Quarter Financial Results
| Metric ($ in millions) |
Second Quarter Actuals | Second Quarter Projections (1) |
| Communications Services Revenue (2) (excluding termination and settlement revenue) |
$340 | |
| Reciprocal Compensation | $29 | |
| Termination Revenue | $2 | |
| Communications Revenue | $371 | $350-$370 |
| Information Services Revenue | $520 | |
| Other Revenue | $19 | |
| Consolidated Revenue | $910 | |
| Consolidated Adjusted OIBDA (3)(4) | $115 | $75-$95 |
| Capital Expenditures (5) | $85 | |
| Unlevered Cash Flow (4) | $3 | |
| Free Cash Flow (4) | ($96) | |
| Communications Gross Margin (4) | 70% |
(1) Projections issued April 26, 2005
(2) Communications Services Revenue is GAAP communications revenue minus reciprocal compensation revenue
(3) Consolidated Adjusted OIBDA excludes $10 million in stock-based compensation expense and $4 million of non-cash impairment charges
(4) See schedule of non-GAAP metrics for definition and reconciliation to GAAP measures
(5) Gross capital expenditures were $88 million for the quarter and accrual reversals were $3 million
Communications Business
Revenue
Communications revenue for the second quarter 2005 was $371 million versus $510 million for the previous quarter. Total communications revenue for the second quarter included $342 million of communications services revenue and $29 million of reciprocal compensation revenue compared to $482 million and $28 million in the first quarter.
Included in communications services revenue was $2 million and $129 million of termination revenue for the second and first quarters, respectively.
Communications services revenue excluding termination revenue decreased by $13 million quarter over quarter primarily due to expected declines in DSL aggregation revenue and managed modem revenue. Additionally, revenue from the company’s wholesale voice business declined as a result of one customer’s decision to reduce voice termination traffic. These declines in revenue were partially offset by an increase in revenue from the company’s transport, wholesale IP, and other wholesale and consumer voice services.
| Communications Revenue ($ in millions) |
Quarter Ended June 30, 2005 |
Quarter Ended March 31, 2005 |
Dollar Change |
| Transport and Infrastructure | $122 | $119 | $3 |
| IP & Data Services (excluding DSL) | $66 | $64 | $2 |
| Voice | $25 | $26 | ($1) |
| Managed Modem | $103 | $107 | ($4) |
| DSL | $24 | $37 | ($13) |
| Communications Services Revenue | $340 | $353 | ($13) |
| Reciprocal Compensation | $29 | $28 | $1 |
| Termination Revenue | $2 | $129 | ($127) |
| Communications Revenue | $371 | $510 | ($139) |
The communications deferred revenue balance was $879 million in the second quarter compared to $881 million in the first quarter.
Cost of Revenue
Communications cost of revenue for the second quarter 2005 was $110 million versus $116 million for the previous quarter. Communications gross margin(1) was 70 percent for the second quarter compared to 77 percent in the first quarter. The decline in communications gross margin is primarily attributable to the decrease in termination revenue offset partially by improvements in cost of revenue.
Selling, General and Administrative Expenses (SG&A)
Communications SG&A expenses were $182 million for the second quarter 2005 versus $188 million for the previous quarter. SG&A expenses improved in the second quarter primarily due to lower employee-related costs. SG&A expenses for the second quarter include a $2 million property tax benefit and $9 million of non-cash stock compensation expense. First quarter SG&A expenses included $10 million of non-cash stock compensation expense.
Adjusted Operating Income Before Depreciation and Amortization (OIBDA)
Adjusted OIBDA(1) for the communications business decreased to $88 million for the second quarter 2005 from $201 million for the previous quarter as a result of a decrease in termination and communications services revenue, partially offset by reductions in the cost of revenue and operating expenses. First quarter Adjusted OIBDA included $15 million of cash severance costs associated with the reduction in workforce completed in the first quarter 2005.
Communications Adjusted OIBDA margin(1) was 24 percent for the second quarter 2005 versus 39 percent in the previous quarter. Communications Adjusted OIBDA excludes a $4 million non-cash asset impairment charge and non-cash stock compensation expense of $9 million in the second quarter and $10 million in the first 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 $520 million for the second quarter 2005. This compares to revenue of $483 million for the previous quarter and $503 million for the same period last year. Adjusted OIBDA(1) for the information services business was $15 million for the second quarter, which excludes $1 million in non-cash stock compensation expense, compared to Adjusted OIBDA of $7 million in the previous quarter, excluding $1 million in non-cash stock compensation expense. For the same period last year, Adjusted OIBDA was $11 million, excluding $1 million in non-cash stock compensation expense.
Software Spectrum Selected by EDS for U.S. Navy Contract
In early July, Software Spectrum was selected by EDS to supply software and licensing to the U.S. Navy. The agreement, expected to close in the third quarter, is a one-year contract valued at approximately $40 million with additional one-year renewal options.
“We are pleased with the performance of our information services business in the second quarter and in particular, the award of this significant contract,” said Charles C. Miller, vice chairman of Level 3. “Given the large size of the contract and associated working capital requirements, the company expects this agreement to be a use of working capital in 2005 and a source thereafter.”
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 $19 million and $12 million, respectively, in the second quarter 2005, compared to $17 million and $1 million for the previous quarter. Included in Adjusted OIBDA in the second quarter is an $11 million benefit related to favorable resolution of certain coal production tax issues, favorable settlement of an obligation to provide insurance for employees of the company’s former packaging business and the receipt of insurance proceeds reimbursing the company for payments made to settle environmental litigation.
Consolidated Cash Flow and Liquidity
During the second quarter 2005, Unlevered Cash Flow(1) was positive $3 million versus negative $53 million during the first quarter. Consolidated Free Cash Flow for the second quarter was negative $96 million, versus negative $127 million for the previous quarter.
“The company’s negative Consolidated Free Cash Flow improved in the second quarter primarily as a result of expected lower working capital needs in the information services business and a decrease in cash used in operations,” said Sunit Patel, CFO of Level 3.
As of June 30, 2005, the company had cash and marketable securities of approximately $1.3 billion compared to approximately $1.5 billion at March 31, 2005 pro forma for Level 3’s offering of $880 million aggregate principal amount of 10% Convertible Senior Notes due 2011 completed in April 2005.
As part of an anticipated refinancing, at the end of the second quarter, the company repaid at maturity the outstanding balance on its headquarters mortgage in the amount of $116 million. Level 3 is continuing to evaluate the potential refinancing of part of this debt, which will be subject to receipt of favorable terms and conditions.
Operations Update
During the quarter, Level 3’s core transport and IP services continued to see growth and demand primarily from cable operators, content providers, wireless providers and other key customer segments. Average traffic volume on Level 3’s Internet backbone now exceeds 3.0 petabytes per day. The company also continued to see growth in subscribers for its consumer and enterprise oriented VoIP services.
“Growth in demand for our core transport and IP businesses is coming from customers looking for reliable, high-performance and complex network solutions,” said Kevin O’Hara, president and COO of Level 3. “We are seeing strong demand for nationwide solutions in our transport, infrastructure and wholesale Internet access businesses. As a result, we continue to make ongoing investments in our network and business processes that will further improve our low cost position and enable us to continue serving as an integral part of our customers’ business operations.”
Demand for E-911 solutions increased during the quarter as a result of the FCC’s recent decision requiring VoIP providers to offer E-911 functionality to end users. As previously announced, Level 3’s consumer voice offerings are E-911 enabled and the company plans to introduce an E-911 network solution for other voice providers to build into their offerings. In addition, the company plans to expand its E-911 coverage to over 70 percent of U.S. households by the end of 2005, from approximately 66 percent today.
“We made significant efforts over the last eighteen months to deploy a robust E-911 platform serving most of the country,” said O’Hara. “As a result of that investment, Level 3 enjoys the leadership position as a provider of E-911 network services for Voice-over-IP service providers across the U.S.”
Business Outlook
“We believe our customers continue to value the solutions we offer in the marketplace,” said Crowe. “Our strategic decision earlier this year to increase our focus on pricing discipline is beginning to show positive results for us.
“For the latter half of 2005 we expect to see continued growth in our core transport and wholesale IP services. We expect our voice business to grow based on consumer and business VoIP adoption and continued market launches. Our DSL aggregation contract with Verizon has expired, and we expect the migration to be complete during the third quarter resulting in little to no DSL aggregation revenue beyond the third quarter.”
Full Year 2005 Projections
Third Quarter 2005
| Metric ($ in millions) |
Third Quarter Projections | Full Year 2005 Projections |
| Communications Revenue | $345 to $365 | 4 percent to 7 percent decline |
| Consolidated Adjusted OIBDA | $75 to $95 | N/A |
| Communications Adjusted OIBDA Margin | N/A | Mid-20 percent range |
| Negative Consolidated Free Cash Flow | N/A | $350 to $380 |
Summary
“Level 3 continues to invest for growth to support our customers’ needs and to further improve our low-cost position. We continue to upgrade our network, drive further process efficiencies, deploy new technologies and expand the reach of our capabilities,” Crowe said. “We believe that our strong cash balance and liquidity position give us the flexibility to take advantage of opportunities as they arise.”
Conference Call and Web site Information
Level 3 will hold a conference call to discuss the company’s second quarter results at 10:00 a.m. Eastern Time today. To join the call, please dial 612-288-0329. 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 786218.
An archived webcast of the second quarter conference call together with the press release, financial statements, historical financial supplement and non-GAAP reconciliations may also be accessed at http://www.level3.com/.
View Q2-05 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.
