Level 3 Q2 2007

Level 3 Reports Second Quarter 2007 Results
  • Consolidated Revenue of $1.052 billion
  • Net Loss of $202 million, or $0.13 per share
  • Consolidated Adjusted EBITDA of $193 million
  • Completed acquisition of Servecast Limited, a provider of live and on-demand video management and streaming services in July 2007

Level 3 Communications, Inc. (NASDAQ: LVLT) reported consolidated revenue of $1.052 billion for the second quarter 2007, compared to consolidated revenue of $1.056 billion for the first quarter 2007.

The net loss for the second quarter 2007 was $202 million, or $0.13 per share, compared to a net loss of $647 million, or $0.44 per share, for the previous quarter. Included in the net loss for the first quarter 2007 was a $427 million loss or $0.29 per share on the extinguishment or refinancing of long-term debt.

“While we have a great deal of work remaining, we made good progress on our overall integration of acquired companies,” said James Q. Crowe, CEO of Level 3. “We are pleased with the continued positive operating environment in terms of demand and importantly, our efforts from integration and continued cost savings resulted in improved profitability and growth in Consolidated Adjusted EBITDA.”

Consolidated Adjusted EBITDA(1) was $193 million in the second quarter 2007, compared to $170 million for the first quarter 2007.

Second Quarter 2007 Financial Results

 

Metric
($ in millions)
Revenue

Consolidated
Second Quarter
Results

Second Quarter Projections(1)

Core Communications Services $888 $890-$910
Other Communications Services   $71 $65-$70
SBC Contract Services $76 $45-$65
Total Communications Revenue $1,035 $1,000-$1,045
Other Revenue $17
Total Consolidated Revenue $1,052
Consolidated Adjusted EBITDA (2)(3) $193 $180-$200
Capital Expenditures $170
Unlevered Cash Flow (3) $(64)
Free Cash Flow (3) $(141)
Communications Gross Margin (3) 58%
Communications Adjusted EBITDA Margin (3) 19%
  • Projections issued April 26, 2007.
  • Consolidated Adjusted EBITDA excludes $24 million in non-cash compensation expense and $1 million in non-cash impairment charges and includes $1 million of cash restructuring charges for the second quarter 2007.
  • See schedule of non-GAAP metrics for definition and reconciliation to GAAP measures.

Communications Business
Revenue
Total Communications Revenue for the second quarter 2007 decreased slightly to $1.035 billion, versus $1.037 billion for the previous quarter. An $18 million increase in Core Communications Services revenue in the quarter was offset by a $20 million decline in Other Communications Services revenue and SBC Contract Services revenue. The company recognized $2 million in termination revenue in its Core Communications Services revenue during the second quarter 2007, compared to less than $1 million in termination revenue during the first quarter 2007.

Communications Revenue
($ in millions)

Quarter ended  June 30, 2007

Quarter ended March 31, 2007

Percent
Change

Transport and Infrastructure

$420

$406

3%

IP and Data

$143

$144

(<1%)

Voice

$292

$289

1%

Vyvx

$33

$31

6%

Total Core Communications Services

$888

$870

2%

 

 

 

Other Communications Services

$71

$84

 (15%)

 

 

 

SBC Contract Services

$76

$83

(8%)

 

 

 

Total Communications Revenue

$1,035

$1,037

(<1%)

Core Communications Services
Core Communications Services revenue increased quarter over quarter by 2 percent. The increase was due primarily to the growth in long-haul transport services and Vyvx broadcast services.  IP and Data revenue declined primarily as a result of the implementation of new prices under a contract renewal by the company’s largest high-speed IP customer.

Core Communications Services revenue increased in the Business Markets Group, Content Markets Group and European Markets Group, as a result of continued customer demand.  The Wholesale Markets Group had lower than expected Core Communications Services revenue primarily due to longer than expected service activation times and lower than expected wholesale voice revenues.

In the second quarter 2007, the percent of Core Communications Services revenue by each market group was as follows:

  • Wholesale Markets Group – 56 percent
  • Business Markets Group – 27 percent
  • Content Markets Group – 10 percent
  • European Markets Group – 7 percent

Other Communications Services
Other Communications Services revenue declined by 15 percent to $71 million during the quarter, primarily as a result of expected declines in managed modem services.

SBC Contract Services
SBC Contract Services revenue declined by 8 percent to $76 million quarter over quarter.
 
Deferred Revenue
The communications deferred revenue balance increased to $943 million at the end of the second quarter 2007, compared to $939 million at the end of the first quarter 2007 as a result of indefeasible right of use (IRU) sales during the quarter.

Cost of Revenue
Communications cost of revenue for the second quarter 2007 decreased to $437 million, versus $450 million in the previous quarter. Cost of revenue decreased during the quarter primarily due to the benefit of ongoing optimization and integration efforts.

Communications Gross Margin(1) was 58 percent for the second quarter 2007, versus 57 percent for the first quarter 2007. The increase in communications gross margin is primarily attributable to lower third-party facilities expenses resulting from completed integration activities to date.

Selling, General and Administrative (SG&A) Expenses
Communications SG&A expenses were $427 million for the second quarter 2007, versus $439 million for the previous quarter. Both the second quarter 2007 and first quarter 2007 Communications SG&A expenses include $24 million of non-cash compensation expense. SG&A expenses decreased in the second quarter 2007 primarily due to a decrease in headcount related to completed planned integration activities.

Communications Adjusted EBITDA
Communications Adjusted EBITDA(1) increased to $194 million for the second quarter 2007, compared to $168 million for the previous quarter. Communications Adjusted EBITDA increased in the period primarily due to SG&A and cost of revenue synergies being realized from completed integration efforts and the growth in Core Communications Services revenue, partially offset by declines in Other Communications Services and SBC Contract Services revenues.

Second quarter 2007 Communications Adjusted EBITDA excludes $24 million of non-cash compensation expense and $1 million of non-cash impairment charges and includes a $1 million restructuring charge associated with reductions in workforce as part of the company’s integration efforts. First quarter 2007 Communications Adjusted EBITDA excludes $24 million of non-cash compensation expense and includes a $4 million restructuring charge related to integration.
 
Consolidated Cash Flow and Liquidity
During the second quarter 2007, Unlevered Cash Flow(1) was negative $64 million, versus  negative $69 million for the previous quarter. Consolidated Free Cash Flow(1)  for the second quarter 2007 was negative $141 million, versus negative $248 million for the previous quarter, resulting primarily from a decrease in net cash interest expense partially offset by higher capital expenditures. Net cash interest expense for the second quarter 2007 was $77 million.

Working capital was a use of cash in the quarter, primarily from a reduction in accounts payable and an increase in accounts receivable as days sales outstanding (DSO) increased during the quarter.

As of June 30, 2007, the company had cash and marketable securities of approximately $807 million.

Integration and Operating Environment Update

Corporate Transactions
Acquisitions
On July 11, 2007, Level 3 acquired Servecast, a Dublin, Ireland provider of live and on-demand video management and streaming services for broadband and mobile platforms, expanding the company’s content delivery network capabilities.  The company paid approximately $45 million in cash consideration. This is a strategic capabilities acquisition that does not require the type of physical integration associated with the larger, previously announced metro and backbone transactions.

Business Outlook
“In the third quarter, we expect to see accelerated growth in Core Communications Services revenue and expect to have resolved some of the operational challenges that dampened Core Communications Services revenue growth in the second quarter,” said Sunit Patel, CFO of Level 3. “We expect that this growth should accelerate again in the fourth quarter as we see the benefit of strong sales and seasonality. Growth in Core Communications Services revenue, from the first quarter to fourth quarter, on an annualized basis is still expected to be approximately 17 percent.

“We believe that we will see further expansion in gross margins and Communications Adjusted EBITDA margins as network and operating expenses from integration efforts decrease and synergies increase in the latter half of 2007.  We are projecting Consolidated Adjusted EBITDA to increase to $210-230 million for the third quarter.  We remain confident in projected year-over-year trends, and are reaffirming our full year 2007 guidance as well as full year 2008 Consolidated Adjusted EBITDA guidance of $1.15 billion to $1.3 billion.”

Metric
($ in millions)

Third
Quarter 2007 Projections

2007 Full Year Projections
Core Communications Services Revenue $905-925 $3,600-3,800
Other Communications Services Revenue $60-65 $245-285
SBC Contract Services Revenue $40-60 $180-220
Total Communications Revenue $1,005-1,050 $4,025-4,305
Consolidated Adjusted EBITDA $210-230 $860-920
Consolidated Capital Expenditures N/A $600-650
Net Cash Interest Expense (1) N/A $500
  • 2007 full year includes approximately $45 million in interest income.

Summary
“We are on track to deliver synergies from our acquisitions as expected, and we believe our competitive advantages and position in the marketplace are being recognized by our customers,” said Crowe. “As a result, we saw strong sales momentum throughout the quarter, and demand for our services continues to grow across multiple market segments.

“While service activation challenges remain, we have a well developed plan to substantially improve these processes.  We continue to expect significant growth in Core Communications Services revenue throughout 2007. Longer term, both market fundamentals and our competitive position continue to improve.”

Conference Call and Web Site Information
Level 3 will hold a conference call to discuss the company’s second quarter results at 10 a.m. EDT today. To join the call, please dial 612-288-0337. A live broadcast of the call can also be heard on Level 3’s Web site at http://www.level3.com/investor_relations/presentations_events/conference_calls/q0207report.html.  An audio replay of the call will be accessible until 11:59 p.m. EDT on Thursday, August 9, 2007 by dialing 320-365-3844; access code 877643. An archived webcast of the second quarter conference call together with the press release, financial statements and non-GAAP reconciliations may also be accessed at http://www.level3.com/investor_relations/index.html.

View Q2-2007 Financial Statements

View Schedule to Reconcile to non-GAAP Financial Metric

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