Continued Strong Core Communications Services Organic Growth
Company Expects Significant Communications Revenue and
Consolidated Adjusted OIBDA Growth in 2007
Financial and Business Highlights
BROOMFIELD, Colo., February 8, 2007 - Level 3 Communications, Inc. (Nasdaq: LVLT) reported consolidated revenue of $846 million for the fourth quarter 2006, compared to consolidated revenue of $875 million for the third quarter 2006. For the full year 2006, consolidated revenue was $3.38 billion, compared to $1.72 billion in 2005.
The net loss for the fourth quarter 2006 was $237 million, or $0.20 per share, compared to a net loss of $138 million, or $0.12 per share, for the previous quarter. Included in the net loss for the fourth quarter was a $54 million loss on the extinguishment of debt, or $0.05 per share. Included in the net loss for the third quarter was a gain of $33 million associated with the sale of Software Spectrum, or $0.03 per share.
“Level 3 had a strong fourth quarter,” said James Q. Crowe, CEO of Level 3. “Organic core revenue growth was 8 percent during the quarter and 25 percent annualized for the full year 2006, which excludes the benefits of acquisition and termination revenue. This growth is a result of ongoing customer demand and a healthy industry operating environment. We expect these positive trends to continue in 2007.”
Consolidated Adjusted OIBDA(1) defined as Adjusted Operating Income Before Depreciation and Amortization was $189 million in the fourth quarter 2006, compared to $176 million for the third quarter 2006. Consolidated Adjusted OIBDA for 2006 was $682 million, compared to $471 million in 2005.
Fourth Quarter 2006 and Full Year 2006 and 2005 Financial Results
| Metric
Revenue |
Consolidated |
Fourth Quarter 2006 Projections(1) |
Consolidated Full Year 2006 Results |
Full Year 2006 Projections(1) |
Consolidated Full Year 2005 Results |
|
Core Communications Services(2) |
$619 |
$595 - $605 |
$1,973 |
$1,950- $1,960 |
$962 |
|
Other Communications Services |
$95 |
$90 - $95 |
$445 |
$440 - $445 |
$658 |
|
SBC Contract Services |
$116 |
$100 - $130 |
$893 |
$875 - $905 |
$25 |
|
Total Communications Revenue |
$830 |
$785 - $830 |
$3,311 |
$3,265 - $3,310 |
$1,645 |
|
Other Revenue |
$16 |
$67 |
$74 | ||
|
Total Consolidated Revenue |
$846 |
$3,378 |
$1,719 | ||
|
Consolidated Adjusted OIBDA (3) (4) |
$189 |
$180 - $200 |
$682 |
$670 - $690 |
$471 |
|
Capital Expenditures |
$141 |
$392 |
$390 - $410 |
$300 | |
|
Unlevered Cash Flow (4) |
$65 |
$324 |
$(2) | ||
|
Free Cash Flow (4) |
$(29) |
$(171) |
$(418) | ||
|
Communications Gross Margin (4) |
63% |
56% |
72% | ||
|
Communications Adjusted OIBDA Margin (4) |
22% |
~23% |
20% |
~21% |
28% |
Communications Business
Revenue
Communications revenue for the fourth quarter 2006 was $830 million, versus $858 million for the previous quarter. Communications revenue decreased as a result of declines in Other Communications Services revenue and SBC Contract Services. The company recognized $8 million in termination revenue during the fourth quarter 2006 and less than $1 million in termination revenue during the third quarter 2006.
Communications revenue for 2006 was $3.31 billion, compared to $1.6 billion in 2005.
| Communications Revenue ($ in millions) | Fourth Quarter 2006 (1) | Third Quarter 2006 (2) |
Percent Change |
Full Year 2006 | Full Year 2005 |
|
Transport and Infrastructure |
$315 |
$284 |
11% |
$1,014 |
$653 |
|
IP and Data |
$92 |
$78 |
18% |
$301 |
$186 |
|
Voice |
$178 |
$153 |
16% |
$536 |
$120 |
|
Vyvx |
$34 |
$29 |
17% |
$122 |
$3 |
|
Total Core Communications Services |
$619 |
$544 |
14% |
$1,973 |
$962 |
|
Other Communications Services |
$95 |
$107 |
(11%) |
$445 |
$658 |
|
SBC Contract Services |
$116 |
$207 |
(44%) |
$893 |
$25 |
|
Total Communications Revenue |
$830 |
$858 |
(3%) |
$3,311 |
$1,645 |
Core Communications Services
Core Communications Services revenue, which includes transport and infrastructure, IP and Data, Voice and Vyvx, increased quarter over quarter by 14 percent due to 8 percent organic growth in core communications services and the benefit of a full quarter’s revenue from the acquisitions of TelCove and Looking Glass Networks. Organic growth came from the company’s voice services, transport and infrastructure services, seasonal growth in Vyvx revenue and growth in IP services, and excludes termination revenue of $8 million. All organic growth calculations exclude revenue associated with new contracts or with the expansion of existing contracts from companies that were acquired in 2006.
For the full year 2006, Core Communications Services revenue was approximately $2.0 billion, an increase of 105 percent from 2005. Growth was primarily due to acquisition revenue and organic growth in the company’s core communications services.
Other Communications Services
Other Communications Services revenue declined 11 percent to $95 million during the quarter as a result of expected declines in managed modem and managed services.
SBC Contract Services
SBC Contract Services declined by 44 percent to $116 million from the previous quarter, and includes a $12.5 million quality of service performance bonus for the year that was earned in the fourth quarter. As previously disclosed, SBC intends to migrate the services provided under the agreement to its own network facilities in accordance with terms previously negotiated by WilTel. Under the terms of this agreement, SBC agreed to pay WilTel a minimum amount of gross margin regardless of the actual revenue generated under the contract, of which $67 million remains outstanding through 2007 and an additional $75 million for 2008 through 2009.
Deferred Revenue
The communications deferred revenue balance was $895 million at the end of the fourth quarter 2006, compared to $896 million at the end of the third quarter. Amortization of revenue from existing customer contracts was offset by new IRU sales during the quarter.
Cost of Revenue
Communications cost of revenue for the fourth quarter 2006 declined to $311 million, versus $368 million in the previous quarter. Cost of revenue decreased during the quarter primarily due to lower expenses associated with SBC Contract Services revenue, partially offset by increases from a full quarter of costs associated with TelCove and Looking Glass.
Communications gross margin(1) was 63 percent for the fourth quarter, versus 57 percent for the third quarter. The increase in communications gross margin is primarily attributable to the higher margin revenue from TelCove and Looking Glass for a full quarter, a reduction in lower margin SBC Contract Services revenue and the benefit of the SBC contract services performance bonus.
For the full year 2006, communications cost of revenue was $1.5 billion.
Selling, General and Administrative Expenses (SG&A)
Communications SG&A expenses were $365 million for the fourth quarter 2006, versus $333 million for the previous quarter. The fourth and third quarter 2006 Communications SG&A expenses include $32 million and $18 million, respectively, of non-cash compensation expense. SG&A expenses increased in the fourth quarter primarily due to a full quarter of expenses associated with TelCove and Looking Glass. The company also accelerated integration-related expenses associated with 2006 acquisitions. The company expects the benefits of this acceleration will result in improved efficiency over the course of 2007.
Communications SG&A expenses were $1.3 billion for 2006, versus $761 million for 2005. SG&A expenses increased during 2006 due to additional headcount and other expenses as a result of the acquisition of WilTel Communications, Progress Telecom, ICG Communications, Looking Glass Networks and TelCove.
Adjusted OIBDA
Adjusted OIBDA(1) for the communications business increased to $186 million for the fourth quarter 2006, compared to $174 million for the previous quarter.
Communications Adjusted OIBDA margin(1) was 22 percent for the fourth quarter 2006, versus 20 percent in the previous quarter.
Fourth quarter Communications Adjusted OIBDA excludes $32 million of non-cash compensation expense. Third quarter Communications Adjusted OIBDA includes $1 million in cash restructuring charges associated with reductions in workforce resulting from the integration of acquired businesses and excludes a $1 million non-cash asset impairment charge and $18 million of non-cash compensation expense.
Communications Adjusted OIBDA increased to $677 million in 2006, compared to $458 million for 2005.
Consolidated Cash Flow and Liquidity
During the fourth quarter 2006, Unlevered Cash Flow(1) was positive $65 million, versus positive $121 million for the previous quarter. This decrease was a result of increased capital expenditures and working capital timing. Consolidated Free Cash Flow for the fourth quarter was negative $29 million, versus negative $64 million for the previous quarter.
For the full year 2006, unlevered cash flow was positive $324 million compared to negative $2 million in 2005, and consolidated free cash flow was negative $171 million in 2006 compared to negative $418 million last year. Consolidated capital expenditures for the company totaled $392 million for the full year 2006.
As of December 31, 2006, the company had cash and marketable securities of approximately $1.9 billion. Pro forma for the Broadwing and SAVVIS Content Delivery Network (CDN) business acquisition transactions completed in January 2007, the company had cash and marketable securities of approximately $1.3 billion, including cash acquired.
Corporate Transactions
Acquisitions
On January 3, 2007, Level 3 completed the purchase of Broadwing Corporation. Under the terms of the agreement, Level 3 paid Broadwing stockholders $8.18 of cash plus 1.3411 shares of Level 3 common stock for each share of Broadwing common stock outstanding at closing. In total, Level 3 paid approximately $744 million of cash and issued approximately 122 million shares of common stock.
On January 23, 2007, Level 3 closed on the purchase of SAVVIS’s CDN business. Level 3 paid $132.5 million in cash to acquire certain assets, including network elements, customer contracts and intellectual property used in SAVVIS’s CDN business.
Integration Update
“During 2006, we successfully completed the majority of the WilTel integration,” said Kevin O’Hara, president and COO of Level 3. “We also made significant progress with our ICG, Looking Glass, Progress and TelCove integrations. We expect to complete the majority of the integration work for our 2006 acquisitions by the end of 2007. We have begun the integration of Broadwing and are looking forward to the opportunity to further expand in the enterprise market with the Broadwing portfolio of business services.”
Capital Markets Activity
The company is also announcing that its wholly owned subsidiary, Level 3 Financing, Inc. is seeking to refinance its $730 million amended and restated senior secured credit agreement. The company is seeking, among other things, to increase principal to $1 billion, reduce the interest rate payable under the agreement, and extend the maturity from 2011 to 2014.
During the fourth quarter, Level 3 Financing repurchased $497 million of its outstanding 10.75% Senior Notes due 2011 and amended the indenture pursuant to which those senior notes were issued. Level 3 Financing also completed two separate private offerings of $600 million and $650 million aggregate principal amount of 9.25% Senior Notes due 2014.
In January 2007, in two separate transactions, Level 3 announced exchanges of $605 million in aggregate principal amount outstanding of its 10% Convertible Senior Notes due 2011 for approximately 196.8 million shares of Level 3’s common stock. The company expects to reduce interest expense in 2007 by $58 million as a result of these exchanges. The company expects to recognize a $177 million loss associated with these exchanges in the first quarter 2007.
“As evidenced by the transactions we conducted in January of this year, we intend to continue pursuing refinancing efforts to lower our interest expense,” said Sunit S. Patel, CFO of Level 3.
2007 Business Outlook
Based on 2006 results and the acquisition of Broadwing, Level 3 has updated its projections for 2007 and is providing certain projections for 2008. For the first quarter 2007, the company projects total communications revenue of $1.0 billion to $1.045 billion and consolidated adjusted OIBDA of $150 million to $170 million, compared to total communications revenue of $830 million and Consolidated Adjusted OIBDA of $189 million in the fourth quarter of 2006. The decline in Consolidated Adjusted OIBDA from the fourth quarter 2006 to the first quarter 2007 reflects the absence of the SBC quality of service payment of $12.5 million and termination revenue of $8 million, an expected decline in Other Revenue and SBC Contract Services revenue, and integration expenses associated with the company’s acquisitions, including Broadwing. In addition, Consolidated Adjusted OIBDA includes the benefit of increased revenue from the Broadwing acquisition and expected organic growth in core services.
“As the company previously disclosed, growth in Level 3 Core Communications Services revenue was projected to grow more than 20 percent annually, the metro acquisitions would grow 10 to 12 percent annually, and Broadwing was growing at 4 to 5 percent annually,” said Patel. “On a revenue weighted basis, this would imply a 15 percent annual growth rate for core services. During 2007, we now expect to see growth in our Core Communication Services revenue of approximately 17 percent. We believe this increase is an indication of the potential created by selling a broad range of advanced services over an integrated metro and long distance backbone network.”
| Metric
($ in millions) |
FirstQuarter 2007 Projections | 2007 Full Year Projections |
|
Core Communications Services revenue |
$860-$880 |
$3,600-$3,800 |
|
Other Communications Services revenue |
$80-$85 |
$245-$285 |
|
SBC Contract Services |
$60-$80 |
$180-$220 |
|
Total Communications Revenue |
$1,000-$1,045 |
$4,025-$4,305 |
|
Consolidated Adjusted OIBDA |
$150-$170 |
$860-$920 |
|
Consolidated Capital Expenditures |
N/A |
$600-$650 |
|
Net Cash Interest Expense (1) |
N/A |
$545 |
“Consolidated Adjusted OIBDA was $682 million in 2006,” said Patel. “We expect Consolidated Adjusted OIBDA to increase to $860 million to $920 million in 2007. The company’s Consolidated Adjusted OIBDA projection for 2007 includes integration costs associated with the Broadwing and SAVVIS CDN business acquisitions of approximately $80 million in operating expenses, $20 million in network expenses and $75 million to $100 million in capital expenditures. The company expects to reduce headcount in 2007 as part of its integration efforts by approximately 1,000, which will result in about a $120 million reduction in annualized operating expenses. In addition, during 2007, Level 3 expects to reduce network expenses by approximately $80 million on an annualized basis.
“After 2007, we expect the substantial majority of integration related costs will be behind us and that we will have reduced network and operating expenses by about $200 million on an annualized basis. In addition, we expect the strong revenue growth we have been experiencing will continue. As a result, we expect Consolidated Adjusted OIBDA to increase to $1.15 billion to $1.3 billion in 2008.”
Financial Disclosure
Beginning with its first quarter 2007 results, and in line with industry practices, the company will report Communications Adjusted EBITDA and Consolidated Adjusted EBITDA, replacing the current Adjusted OIBDA metrics. The calculation of Adjusted EBITDA will be completed with the same methodology as the calculation used for Adjusted OIBDA.
Summary
“We are pleased with the continued demand we are seeing from our customers, and we believe our performance this quarter continues to demonstrate that our business and industry dynamics are strong,” said Crowe. “Our acquisition strategy over the past 18 months has added to the improved results we have experienced in our core communications business, and positions us well for the future. We remain focused on integration and execution of our business plan.”
Level 3 will hold an analyst and investor conference in New York City on March 14, 2007. Presentations are scheduled to begin at 8:30 a.m. EST. The meeting will be webcast in a listen-only mode. Additional information will be available on Level 3’s Web site on February 14, 2007.
Conference Call and Web Site InformationLevel 3 will hold a conference call to discuss the company’s fourth quarter results at 10 a.m. EST today. To join the call, please dial 612-332-0107. A live broadcast of the call can also be heard on Level 3’s Web site at www.level3.com/investor_relations/index.html. An audio replay of the call will be accessible on the company’s Web site or by dialing 320-365-3844; access code858124. An archived webcast of the fourth quarter conference call together with the press release, financial statements and non-GAAP reconciliations may also be accessed at www.level3.com/investor_relations/index.html.
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.
