Level 3 Reports Fourth Quarter and Full Year 2010 Results

Post by **Apoptosis** » Wed Feb 02, 2011 7:53 am

Expects Growth in Core Network Services Revenue and Consolidated Adjusted EBITDA in 2011

BROOMFIELD, Colo., February 02, 2011
Fourth Quarter Highlights

Consolidated Revenue increased sequentially to $921 million
Core Network Services revenue grew by 2 percent sequentially and 2 percent year-over-year
Continued Strong Communications Gross Margin and Communications EBITDA Margin performance
Consolidated Adjusted EBITDA grew by 4 percent sequentially and 4 percent year-over-year
Core Network Services sales increased in the quarter
Positive Free Cash Flow of $73 million

Level 3 Communications, Inc. (NASDAQ: LVLT) reported strong quarterly results, highlighted by growth in Core Network Services revenue and Consolidated Adjusted EBITDA, continued margin expansion, and positive Free Cash Flow in the quarter. Consolidated revenue was $921 million for the fourth quarter 2010, compared to consolidated revenue of $912 million for the third quarter 2010 and $924 million for the fourth quarter 2009. For the full year 2010, consolidated revenue was $3.65 billion, compared to $3.76 billion in 2009.

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 primarily from the release of foreign deferred tax valuation allowances. This compared to a net loss of $163 million, or $0.10 per share for the third quarter 2010, and a net loss of $182 million or $0.11 per share for the fourth quarter 2009. The net loss for the full year 2010 was $622 million, or $0.37 per share. The net loss for the full year 2009 was $618 million, or $0.38 per share.

Consolidated Adjusted EBITDA was $226 million in the fourth quarter 2010, compared to $218 million in the third quarter 2010 and $217 million in the fourth quarter 2009. For the full year 2010, Consolidated Adjusted EBITDA was $853 million, compared to $909 million for the full year 2009.

“We delivered strong fourth quarter results, building on our year-to-date momentum.” said James Crowe, CEO of Level 3. “With our continued focus on customer service and investment in the business, we saw Core Network Services revenue and sales increase sequentially. This revenue growth led to sequential gains in Consolidated Adjusted EBITDA, and we generated positive Free Cash Flow during the quarter.”
Financial Results
Metric ($ in millions) Fourth Quarter 2010 Third Quarter 2010 Fourth Quarter 2009 Full Year 2010 Full Year 2009
Communications Revenue $904 $895 $906 $3,591 $3,695
Other Revenue $17 $17 $18 $60 $67
Consolidated Revenue $921 $912 $924 $3,651 $3,762
Consolidated Adjusted EBITDA(1) $226 $218 $217 $853 $909
Capital Expenditures $117 $133 $80 $436 $313
Unlevered Cash Flow(1) $183 $89 $218 $425 $559
Free Cash Flow(1) $73 ($61) $97 ($97) $44
Communications Gross Margin(1) 61.1% 60.6% 60.2% 60.1% 59.4%
Communications Adjusted EBITDA Margin(1) 24.6% 24.1% 23.8% 23.6% 24.6%

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

Communications Business
Revenue

Communications Revenue for the fourth quarter 2010 was $904 million, versus $895 million in the third quarter 2010 and $906 million for the fourth quarter 2009. Communications Revenue for the full year 2010 was $3.59 billion, compared to $3.70 billion for the full year 2009.
Communications Revenue ($ in millions) Fourth Quarter 2010 Third Quarter 2010 Percent Change Fourth Quarter 2009 Percent Change Full Year 2010 Full Year 2009 Percent Change
Wholesale $347 $343 1% $353 (2%) $1,375 $1,409 (2%)
Large Enterprise and Federal $144 $144 -- $129 12% $566 $507 12%
Mid-Market $151 $147 3% $151 -- $595 $632 (6%)
Europe $78 $73 7% $73 7% $291 $292 --
Core Network Services $720 $707 2% $706 2% $2,827 $2,840 --
Wholesale Voice Services $161 $161 -- $162 (1%) $650 $663 (2%)
Other Communications Services $23 $27 (15%) $38 (39%) $114 $192 (41%)
Communications Revenue $904 $895 1% $906 -- $3,591 $3,695 (3%)

Core Network Services revenue was $720 million in the fourth quarter 2010, an increase of 2 percent compared to $707 million in the third quarter 2010. Core Network Services revenue increased by 2 percent compared to $706 million in the fourth quarter 2009. On a constant currency basis, European revenue grew 3 percent sequentially and 12 percent year-over-year. For the full year 2010, Core Network Services revenue was $2.83 billion, compared to $2.84 billion for the full year 2009.

“We continue to execute on opportunities with our customers to grow revenue across the business,” said Sunit Patel, executive vice president and CFO of Level 3. “In the fourth quarter 2010, we saw particularly strong growth from our content, wireless and mid-market customers. We saw continued growth from our large enterprise customers, but revenues were flat sequentially for our Large Enterprise and Federal group due to the expected conclusion of a contract related to the U.S. census, which had ramped up through the earlier part of 2010.”
Deferred Revenue

The communications deferred revenue balance was $887 million at the end of the fourth quarter 2010, compared to $890 million at the end of the third quarter 2010 and $902 million at the end of the fourth quarter 2009.
Cost of Revenue

Communications cost of revenue for the fourth quarter 2010 was $352 million, compared to $353 million in the third quarter 2010 and $361 million in the fourth quarter 2009. For the full year 2010, communications cost of revenue decreased to $1.43 billion, compared to $1.50 billion for the full year 2009.

Communications gross margin increased to 61.1 percent for the fourth quarter 2010, compared to 60.6 percent for the third quarter 2010 and 60.2 percent in the fourth quarter 2009.

Communications gross margin increased to 60.1 percent for the full year 2010, compared to 59.4 percent for the full year 2009.
Selling, General and Administrative (SG&A) Expenses

Excluding non-cash compensation expense, Communications SG&A expenses were $330 million for the fourth quarter 2010, compared to $325 million in the third quarter 2010 and $328 million in the fourth quarter 2009.

Communications SG&A expenses, including non-cash compensation expense, were $347 million for the fourth quarter 2010, compared to $345 million in the third quarter 2010 and $352 million in the fourth quarter 2009. Non-cash compensation expense was $17 million, $20 million and $24 million for the fourth quarter 2010, the third quarter 2010 and the fourth quarter 2009, respectively.

For the full year 2010, excluding non-cash compensation expense, Communications SG&A expenses were $1.31 billion, compared to $1.28 billion for the full year 2009.
Adjusted EBITDA

Communications Adjusted EBITDA increased to $222 million for the fourth quarter 2010 compared to $216 million for both the third quarter 2010 and the fourth quarter 2009.

Communications Adjusted EBITDA margin improved to 24.6 percent in the fourth quarter 2010, which compares to 24.1 percent for the third quarter 2010 and 23.8 percent for the fourth quarter 2009.

Communications Adjusted EBITDA excludes non-cash compensation expense and includes restructuring charges. For the fourth quarter 2010, the company incurred less than $1 million of restructuring charges. For both the third quarter 2010 and the fourth quarter 2009, restructuring charges were $1 million.

Communications Adjusted EBITDA was $849 million for the full year 2010, compared to $910 million for the full year 2009.
Consolidated Cash Flow and Liquidity

During the fourth quarter 2010, Unlevered Cash Flow was $183 million, compared to $89 million for the third quarter 2010 and $218 million for the fourth quarter 2009.

Free Cash Flow was positive $73 million for the fourth quarter 2010, compared to negative $61 million in the third quarter 2010 and positive $97 million for the fourth quarter 2009.

For the full year 2010, Unlevered Cash Flow was $425 million compared to $559 million in 2009. Free Cash Flow was negative $97 million for the full year 2010 compared to positive $44 million for the full year 2009. Capital expenditures were $436 million for the full year 2010 compared to $313 million for the full year 2009, a result of support for customer installations, extending our reach with both prospective and customer contractual builds, network upgrades across several layers and increased inventory levels due to vendor delivery issues earlier in the year.

After the close of 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 announced the redemption of its 5.25% Convertible Senior Notes due 2011.

As of December 31, 2010, the company had cash and cash equivalents of approximately $616 million, or $709 million pro forma for the issuance of its 11.875% Senior Notes and the redemption of its 5.25% Convertible Senior Notes due 2011.
2011 Business Outlook

“While our fourth quarter is typically a seasonally strong quarter due to our Vyvx broadcast business, even with the typical drop in these revenues in the first quarter 2011, we expect Core Network Services revenue to grow slightly in the first quarter 2011,” said Patel. “We expect Consolidated Adjusted EBITDA to decline in the first quarter 2011, due to typical increases in payroll taxes, as well as increases in cost of revenue from the expiration of certain term and volume discounts.”

“As is consistent with previous years, the use of cash is heavier in the first quarter, driven by working capital uses for annual bonus payments, prepayments on maintenance contracts, property and payroll tax payments, and higher sequential cash interest expense. We also expect to recognize a non-operating loss of approximately $20 million in the first quarter due to the redemption of the 5.25% Convertible Senior Notes and exchange of the 9% Convertible Senior Discount Notes.”

“For the full year 2011, we generally expect continued Core Network Services revenue sequential growth. Consolidated Adjusted EBITDA is expected to increase in 2011 in line with Core Network Services revenue growth, given our high incremental margins.”

“In 2011, the company expects GAAP interest expense of approximately $615 million and net cash interest expense of approximately $555 million. We expect capital expenditures to be approximately 12 percent of Communications revenue, and we expect Free Cash Flow for the full year 2011 to be negative.”
Summary

“As we look forward to 2011, we are excited about the opportunities we have seen with the increasing adoption of video over the Internet and the continued strong demand for our services,” said Crowe. “We believe our full portfolio of services, our local and intercity network assets, and our focus on customer service position us well for growth, and we look forward to leveraging our solid position in the market.”
Conference Call and Web Site Information

Level 3 will hold a conference call to discuss the company’s fourth quarter and year end 2010 results at 10 a.m. ET today. To join the call, please dial 1 888-239-5354 (U.S. Domestic) or 1 913-312-0934 (International), conference code 5754294. 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.

An audio replay of the call will be available until 2 p.m. ET on Feb. 12, 2011, 1 888-203-1112 (U.S. Domestic) or 1 719-457-0820 (International), conference code 5754294. The archived webcast of the fourth quarter and year end 2010 conference call together with the press release, financial statements, earnings presentation and non-GAAP reconciliations may also be accessed at http://lvlt.client.shareholder.com.

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.