Legit Reviews

May 03, 2011


First Quarter Financial Highlights

Consolidated Revenue of $929 million, an increase of 1 percent sequentially and 2 percent year-over-year
Continued Core Network Services revenue growth; 1 percent sequentially and 4 percent year-over-year
Consolidated Adjusted EBITDA of $225 million
Communications Adjusted EBITDA increased 1 percent sequentially and 11 percent year-over-year to $225 million
Net loss of $0.12 per share, or $0.09 adjusted for income tax charge and loss on debt extinguishment

Level 3 Communications, Inc. (NASDAQ: LVLT) reported consolidated revenue of $929 million for the first quarter 2011, compared to consolidated revenue of $921 million for the fourth quarter 2010 and $910 million for the first quarter 2010.

The net loss for the first quarter 2011 was $205 million, or $0.12 per share which included charges totaling $0.03 per share, for income tax expense of $27 million, primarily related to deferred tax liabilities attributable to certain indefinite-lived intangible assets, and a loss of $20 million on the extinguishment of debt. The net loss for the fourth quarter 2010 was $52 million, or $0.03 per share, which included an income tax benefit of $93 million, or $0.06 per share. For the first quarter 2010, the net loss was $238 million or $0.14 per share, which included a loss on the extinguishment of debt of $54 million, or $0.03 per share.

Consolidated Adjusted EBITDA was $225 million in the first quarter 2011, compared to $226 million in the fourth quarter 2010 and $200 million in the first quarter 2010.

“We are pleased to report a solid quarter, giving us a strong start to 2011,” said James Q. Crowe, CEO of Level 3. “We see many opportunities across our customer base to continue growing our business throughout the year. Our customers require more and more bandwidth to support the continued adoption of video over the Internet, the continued growth in wireless broadband, and the rising demand for bandwidth in the enterprise market. Our mix of network assets, our service capabilities and our focus on customer service excellence are making Level 3 a top choice for wholesale and enterprise customers in the U.S. and Europe.”

“Demand for bandwidth is becoming increasingly global in nature, which is one of the many reasons why we believe our agreement to acquire Global Crossing, announced in April, will be transformational for Level 3,” said Crowe. “We expect the strategic and financial benefits to be significant for our customers, employees and investors. Since the announcement, we have moved forward with a number of regulatory filings and have continued with integration planning as appropriate and consistent with regulatory limitations.”
Financial Results
Metric ($ in millions)


First Quarter 2011


Fourth Quarter 2010


First Quarter 2010

Total Communications Revenue


$914


$904


$900

Other Revenue


$15


$17


$10

Total Consolidated Revenue


$929


$921


$910

Consolidated Adjusted EBITDA(1)


$225


$226


$200

Capital Expenditures


$115


$117


$82

Unlevered Cash Flow(1)


$41


$183


$51

Free Cash Flow(1)


($115)


$73


($90)

Communications Gross Margin(1)


60.9%


61.1%


58.8%

Communications Adjusted EBITDA Margin(1)


24.6%


24.6%


22.4%

See schedule of non-GAAP metrics for definition and reconciliation to GAAP measures.

Communications Business
Revenue

Total Communications Revenue for the first quarter 2011 was $914 million, compared to $904 million for the fourth quarter 2010 and $900 million for the first quarter 2010.
Communications Revenue ($ in millions) First Quarter 2011 Fourth Quarter 2010 Percent Change First Quarter 2010 Percent Change

Wholesale


$351


$347


1%


$343


2%

Large Enterprise and Federal


$144


$144


--


$136


6%

Mid-Market


$155


$151


3%


$151


3%

Europe


$79


$78


1%


$71


11%

Core Network Services


$729


$720


1%


$701


4%

Wholesale Voice Services


$164


$161


2%


$165


(1%)

Other Communications Services


$21


$23


(9%)


$34


(38%)

Total Communications Services


$914


$904


1%


$900


2%
Core Network Services

Core Network Services revenue was $729 million in the first quarter 2011, an increase of approximately 1 percent compared to $720 million in the fourth quarter 2010, and an increase of approximately 4 percent compared to $701 million in the first quarter 2010. On a constant currency basis, European revenue increased slightly sequentially and increased 10 percent year-over-year.

“We are pleased to see strong sequential growth in Core Network Services revenue in a quarter that typically shows a sequential decline due to the seasonal decline in broadcast services in the first quarter,” said Sunit Patel, executive vice president and CFO of Level 3.
Deferred Revenue

The communications deferred revenue balance was $888 million at the end of the first quarter 2011, compared to $887 million at the end of the fourth quarter 2010 and $880 million at the end of the first quarter 2010.
Cost of Revenue

Communications cost of revenue was $357 million in the first quarter 2011, compared to $352 million in the fourth quarter 2010 and $371 million in the first quarter 2010.

Communications gross margin was 60.9 percent for the first quarter 2011, compared to 61.1 percent in the fourth quarter 2010. Communications gross margin was 58.8 percent in the first quarter 2010.
Selling, General and Administrative Expenses (SG&A)

Excluding non-cash compensation expense, Communications SG&A was $332 million in the first quarter 2011, compared to $330 million in the fourth quarter 2010 and $327 million in the first quarter 2010.

Communications SG&A, including non-cash compensation expense was $357 million for the first quarter 2011, compared to $347 million for the fourth quarter 2010 and $343 million for the first quarter 2010. Non-cash compensation expense was $25 million, $17 million, and $16 million for the first quarter 2011, fourth quarter 2010, and first quarter 2010, respectively.
Adjusted EBITDA

Communications Adjusted EBITDA increased to $225 million for the first quarter 2011, compared to $222 million for the fourth quarter 2010 and $202 million for the first quarter 2010.

Communications Adjusted EBITDA margin was 24.6 percent for the first quarter 2011, flat compared to 24.6 percent for the fourth quarter 2010, but an increase compared to 22.4 percent in the first quarter 2010.

Communications Adjusted EBITDA excludes non-cash compensation expense and includes restructuring charges. The company incurred less than $1 million of restructuring charges for the first quarter 2011, the fourth quarter 2010 and first quarter 2010.
Consolidated Cash Flow and Liquidity

During the first quarter 2011, Unlevered Cash Flow was $41 million, versus $183 million in the fourth quarter 2010, and $51 million for the first quarter 2010.

Consolidated Free Cash Flow was negative $115 million for the first quarter 2011, compared to positive $73 million in the fourth quarter 2010 and negative $90 million for the first quarter 2010.

The first quarter 2011 Free Cash Flow loss is due to a $45 million increase in net cash interest payments over the fourth quarter of 2010 and a $71 million use of cash for working capital within the quarter. The working capital use of cash in 2011 resulted from an increase in DSOs from about 26 days to 28 days for about a $30 million use of cash, a $25 million use of cash from bonus payments and accrued payroll, and a $10 million use of cash from an increase in prepaid expenses. The latter two items are timing-related and will be offset over the remainder of the year.

As of March 31, 2011, the company had cash and cash equivalents of approximately $1,079 million, or $616 million on a pro forma basis after the partial redemption of the company’s 9.25% Senior Notes due 2014 that was completed after the close of the first quarter 2011.
Corporate Transactions
Global Crossing

On April 11, 2011, Level 3 announced that it had entered into a definitive agreement to acquire Global Crossing Limited in a tax-free, stock-for-stock transaction. Under the terms and subject to conditions of the agreement, Global Crossing shareholders will receive 16 shares of Level 3 common stock for each share of Global Crossing common stock or preferred stock that is owned at closing. Based on Level 3’s closing stock price on April 8, 2011, the last trading day prior to the announcement of the transaction, the transaction is valued at $23.04 per Global Crossing common or preferred share, or approximately $3.0 billion, including the assumption of approximately $1.1 billion of net debt as of Dec. 31, 2010.
Financings

During the quarter, Level 3 Communications, Inc. issued $605 million aggregate principal amount of its 11.875% Senior Notes due 2019 in two separate transactions, of which $305 million was for cash, and approximately $300 million was in exchange for its 9% Convertible Senior Discount Notes due 2013. The company also redeemed in full its 5.25% Convertible Senior Notes due 2011.

Also during the quarter, Level 3 Financing, Inc. issued $500 million aggregate principal amount of its 9.375% Senior Notes due 2019. On April 4, 2011, the company completed the partial redemption of $443 million aggregate principal amount of its outstanding 9.25% Senior Notes due 2014. In the second quarter 2011, the company expects to recognize a $23 million loss on the extinguishment of debt related to the redemption of these notes.
Business Outlook

“We expect the sequential growth in Core Network Services Revenue to strengthen in the second quarter,” said Patel. “For the full year 2011, we generally expect stronger sequential revenue growth compared to 2010. Given our high incremental margins, we expect low double digit percentage growth in Consolidated Adjusted EBITDA in 2011.”

“In 2011, the company expects GAAP interest expense of approximately $625 million and net cash interest expense of approximately $555 million. We expect capital expenditures to be approximately 12 percent of Communications revenue. Free Cash Flow is expected to be roughly breakeven for the remainder of 2011 in aggregate.”

“With respect to the Global Crossing acquisition, we expect to incur some integration planning- and transaction-related costs between signing and closing, and will separately disclose those in our quarterly results,” added Patel.
Conference Call and Web Site Information

Level 3 will hold a conference call to discuss the company’s first quarter 2011 results at 10 a.m. ET today. To join the call, please dial 1 866-791-6248 (U.S. Domestic) or 1 913-312-1388 (International), conference code 9827710. A live broadcast of the call can also be heard on Level 3’s website at http://lvlt.client.shareholder.com. During the call, the company will review an earnings presentation that summarizes the financial results of the quarter. This presentation may be accessed at http://lvlt.client.shareholder.com/results.cfm.

The call will be archived and available on Level 3's Investor Relations website or can be accessed as an audio replay starting at 1 p.m. ET on May 3 until 1 p.m. ET on May 13. The replay can be accessed by dialing 1 888- 203-1112 (U.S. Domestic) or 1 719-457-0820 (International), conference code 9827710.

For additional information, please call 720-888-2502.

About Level 3 Communications
Level 3 Communications, Inc. (NASDAQ: LVLT) is a leading international provider of fiber-based communications services. Enterprise, content, wholesale and government customers rely on Level 3 to deliver services with an industry-leading combination of scalability and value over an end-to-end fiber network. Level 3 offers a portfolio of metro and long-haul services, including transport, data, Internet, content delivery and voice. For more information, visit www.level3.com.