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Level 3 Communications, Inc.
1025 Eldorado Boulevard
Broomfield, CO 80021
www.Level3.com
NEWS RELEASE
FOR IMMEDIATE RELEASE
Level 3 Contacts:
Media: Josh Howell Investors: Robin Miller
720/888-2517 720/888-2518
Paul Lonnegren
720/888-6099
LEVEL 3 REPORTS FIRST QUARTER RESULTS AND UPDATES PROJECTIONS
Communications Cash Revenue Grows to Record $657 Million
Communications GAAP Revenue Increases 297 percent to $385 Million
from the First Quarter 2000
Level 3 Reaffirms or Increases EBITDA, Adjusted EBITDA,
and Free Cash Flow Projections
and Adjusts Revenue Forecast
North American Intercity Network Now Operational
BROOMFIELD, CO, April 18, 2001 - Level 3 Communications, Inc. (Nasdaq:LVLT)
today announced its first quarter 2001 results. Communications cash revenue for
the quarter was $657 million. Consolidated revenue for the quarter was $449
million, compared with $177 million for the same period last year. The net loss
for the quarter was $535 million, or $1.45 per share. Excluding charges for
stock-based compensation expenses of $77 million, net loss for the quarter was
$1.25 per share.
"It was another strong quarter for us," said James Q. Crowe, CEO of Level 3.
"Our communications revenue and customer base continues to grow, and we are
focused on making Level 3 the leading provider of broadband communications
services. We are carefully monitoring the macroeconomic and industry
environments, and while we are not immune to their effects, we are taking steps
to further strengthen our strong financial position, which remains a competitive
advantage."
"It is important to note that despite adjusting our projections for revenue, we
are reaffirming our previous projections for EBITDA, Adjusted EBITDA and free
cash flow, based on prudent management of network expenses, operating expenses
and capital expenditures. As a result, we continue to maintain a position of
financial strength and a fully funded plan with an adequate cushion," said
Crowe.
First Quarter Financial Highlights Communications Cash Revenue and GAAP Revenue:
Communications cash revenue for the first quarter was $657 million.
Communications cash revenue is defined as communications revenue plus changes in
cash deferred revenue. Communications cash revenue reflects upfront cash
received for dark fiber and other capacity sales that are recognized as GAAP
revenue over the life of the contract, generally ranging from 5-20 years.
Communications GAAP revenue for first quarter 2001 was $385 million, a 297
percent increase over the same period last year. The increase was a result of
growth in both existing customers as well as new customer contracts.
Included in total communications revenue was $193 million of services revenue,
plus $155 million of non-recurring revenue from dark fiber sales, and $37
million attributable to reciprocal compensation. Excluding revenue from
reciprocal compensation and the one-time sale of transatlantic capacity during
the fourth quarter of 2000, quarter over quarter services revenue growth was
approximately 12 percent.
With the recent announcement of an agreement with BellSouth Telecommunications
(NYSE:BLS), the company has negotiated rates for exchange of local and Internet
Service Provider (ISP) bound traffic in 34 states. "Our reciprocal compensation
agreements now cover nearly all of the areas where Level 3 provides local
service," said Kevin O'Hara, president and chief operating officer of Level 3.
"These agreements provide substantial stability and financial predictability
concerning an issue over which much of the industry is in turmoil. Pursuant to
the Telecommunications Act, the BellSouth agreement has been filed with the
appropriate state commissions."
At the end of the quarter, the company had approximately 2,975 customers - an 11
percent increase in the number of customers since the end of the fourth quarter
2000. Approximately 75 percent of the customer base currently purchases more
than one Level 3 service.
Other Revenue: Other revenue of $64 million for the first quarter included $33
million from (i)Structure and $25 million from coal mining, versus (i)Structure
revenue of $26 million and coal mining revenue of $48 million for the same
period last year.
Expenses Cost of Revenue: Consolidated cost of revenue for first quarter 2001
was $268 million, representing a 106 percent increase from the first quarter
2000 and a 14 percent decrease from the fourth quarter 2000. Gross margin for
the communications business was 42 percent for the quarter, up from five percent
for the same period last year. "Our ability to migrate customer traffic from
leased facilities to our own network well ahead of schedule is a major reason
why our gross margins have markedly improved," said O'Hara.
Selling, General and Administrative Expenses (SG&A): SG&A expenses for the
quarter were $295 million, compared to $188 million for the same period last
year. Total SG&A was three percent higher than fourth quarter 2000, including a
one-time charge of approximately $10 million during the first quarter related to
the company's previously announced workforce reduction.
Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) and
Adjusted EBITDA: Consolidated EBITDA, excluding stock-based compensation
expense, was negative $114 million for the first quarter, compared to negative
$141 million for the same period last year. Consolidated Adjusted EBITDA was
positive $240 million for the first quarter. Consolidated Adjusted EBITDA is
defined as Consolidated EBITDA plus change in cash deferred revenue and
excluding non-cash cost of goods sold associated with certain capacity sales and
dark fiber contracts. "We consider Consolidated Adjusted EBITDA to be a material
indicator of the company's financial strength," said Sureel Choksi, chief
financial officer of Level 3.
Stock-Based Compensation Expense: The company recognized $77 million in
stock-based compensation expense during the quarter. The OSO Program represents
the principal component of the company's stock-based compensation. This expense
is accounted for in accordance with SFAS No. 123, "Accounting For Stock-Based
Compensation." Level 3 expenses the value of OSOs and its other stock-based
compensation over the respective vesting period. This approach is in contrast to
the current practice of most corporations under which conventional stock options
are not accounted for as an expense on the income statement.
Under Level 3's plan, OSOs are issued quarterly to all employees, with the value
of the options indexed to the performance of the company's common stock relative
to the performance of the Standard & Poor's 500 (S&P 500) Index. The company
believes that this program better aligns Level 3 employees' and stockholders'
interests by basing stock option value on the company's ability to outperform
the S&P 500. Further, as the OSO awards are granted quarterly at the then
current market price, the company believes the program continues to provide a
significant performance incentive, even in an environment where the company's
stock price is volatile.
Depreciation and Amortization: Depreciation and amortization expenses for the
quarter were $239 million, a 172 percent increase over the same period last
year. These charges reflect the significant increase in capital spending to
support the growth of the communications business.
Capital Expenditures: Capital expenditures for property, plant and equipment
were $1.2 billion for the quarter, reflecting continuing buildout of the
company's global network.
Network and Operating Highlights North American and European Intercity Network:
Level 3's intercity network in North America and Europe is now operational and
the company has migrated approximately 50 percent of the customer traffic over
to its own network from the existing leased network.
The company lit over 4,900 miles since the beginning of the year, bringing the
total lit miles on the North American intercity network to over 14,900, which
represents more than 93 percent of the total miles. A fiber network is
considered to be "lit" when electronics are installed, thereby enabling the
network to carry customer traffic.
Level 3's North American intercity network consists of eight rings, all of which
are lit and operational, with either owned or leased wavelengths. These eight
rings include 69 individual segments, of which 65 are currently lit and
operational on Level 3's own network.
"We expect to have approximately 95 percent of the customer traffic migrated
over by the end of May," said O'Hara. "This shows the substantial progress we
have made since the completion of our network last quarter, and we continue to
be ahead of our original schedule. The benefit of this expense reduction is
visible in our improving gross margins."
New Markets and Local Fiber Networks in Service: At the end of the first
quarter, Level 3 offered services in 65 markets; 54 North American markets, nine
European markets and two Asian markets. The five new markets in service added
during the quarter were Richmond, Charlotte, Raleigh, Pittsburgh and Princeton.
At the end of the first quarter, markets with Level 3 local fiber networks
totaled 33, including 26 in the U.S. and seven in Europe.
To date, the company has secured approximately 6.1 million square feet of data
center, transmission and technical space around the world and has pre-funded the
acquisition of another 400,000 square feet. Approximately 3.0 million square
feet of this space is built out globally as of the end of the first quarter. The
company will continue to build out finished technical space in accordance with
customer demand.
Business Outlook "In light of the continuing weakness in the economy, we have
conducted a detailed review of the company's backlog of existing business, sales
and proposal flow, capital expenditures and operating expense projections," said
Choksi. "In addition, we have assessed the effects of the current condition of
the capital markets on our existing customer backlog of revenue and on our order
flow. Our revised financial projections are consistent with the more difficult
environment in which certain of our customers are operating."
Revised Financial Projections Communications Cash and GAAP Revenue:
Communications cash revenue is expected to grow to approximately $2.3 to $2.4
billion in 2001 versus the previous estimate of $2.4 to $2.6 billion, and $3.1
to $3.3 billion in 2002 versus the previous estimate of $3.4 to 3.6 billion.
Level 3 expects communications GAAP revenue in 2001 of $1.4 to $1.5 billion, an
approximate 70 percent increase from last year, down from the earlier projection
of $1.7 billion. Of the $1.4 to $1.5 billion, approximately $280 million is
expected to come from non-recurring dark fiber sales and $135 million from
reciprocal compensation. In 2002, communications GAAP revenue is expected to be
$2.3 to $2.5 billion, down from the previous estimate of $2.9 billion.
In 2001, excluding non-recurring dark fiber sales, transport is expected to
generate 45-50 percent of communications revenue, IP and colocation 20-25
percent, and softswitch enabled services - including reciprocal compensation -
25-30 percent.
As a result of reduced demand for colocation space, the company expects
colocation revenues to be lower than previous projections. This is partially
offset by continued strong growth in transport services, which as a result
increases as a percentage of the total.
Level 3 had backlog of approximately $5.3 billion as of quarter end, compared to
year-end 2000 backlog of $5.1 billion. Backlog is defined as total
communications revenue from signed contracts that have not been provisioned, as
well as current revenue run-rate. The company's updated revenue projections are
based on a detailed assessment of this backlog, taking into account changes in
customer credit quality and financial condition.
Level 3 expects communications cash revenue for the second quarter of 2001 of
approximately $575 million and communications GAAP revenue of approximately $330
million. Approximately $235 million of this revenue is expected to come from
services revenue with the balance from reciprocal compensation and non-recurring
dark fiber sales. "It is important to note that recurring services revenue
growth is expected to accelerate quarter over quarter from 12 percent last
quarter to approximately 22 percent this coming quarter," said Choksi. "At the
same time, total communications cash revenue and communications GAAP revenue are
projected to decline quarter over quarter due to higher non-recurring dark fiber
revenue during the first quarter versus the second quarter."
Level 3 expects communications GAAP revenue to grow at a compounded annual
percentage rate in the mid-50s and communications cash revenue to grow at a
compounded annual percentage rate in the mid-40s between 2000 and 2005.
Information Services and Other Revenue: Total information services and other
revenue estimates are unchanged at approximately $220 million for both 2001 and
2002.
Gross Margin: The gross margin for the communications business is expected to
increase to approximately 52 percent for 2001, two percent higher than previous
estimates and 60 percent for 2002, five percent higher than previous estimates.
Consolidated gross margin is expected to be approximately 49 percent in 2001 and
58 percent in 2002.
Selling, General and Administrative Expenses (SG&A): Consolidated SG&A expenses
for the year 2001 are expected to be approximately 69 percent of total revenues
and decrease to approximately 48 percent of total revenues in 2002, versus
previous projections of 65 percent and 48 percent, respectively.
EBITDA and Adjusted EBITDA: The company expects to turn consolidated EBITDA
positive, on a run-rate basis, excluding stock-based compensation, during the
fourth quarter 2001. For 2001, the company expects negative EBITDA of
approximately $330 million and $200 to $250 million of positive EBITDA in 2002,
an increase compared to previous projections. The company expects Consolidated
Adjusted EBITDA to be approximately $700 million for the year 2001, at the high
end of the company's previous forecast, and $1.0 billion to $1.1 billion for
2002, which is $250 million higher than previously forecasted.
Earnings Per Share: The company expects the net loss in 2001 to be approximately
$7.25 per share, an improvement of $0.25 per share versus the previous
projection of $7.50 per share.
Capital Expenditures: The company expects capital expenditures to be $3.3 to
$3.4 billion in 2001 versus previous projections of $3.4 billion. 2002 capital
expenditures are expected to be $2.0 to $2.4 billion versus previous projections
of $2.0 to $2.5 billion. Capital expenditures estimates for 2001 reflect the
deferral of certain capital projects, including construction of Ring 3 of Level
3's pan-European network, an increase in the cost of the North American
intercity network due to environmental and permitting requirements, other costs
as well as an expected decrease in success-based capital expenditures.
Free Cash Flow Breakeven: Taking into account the factors discussed in this
press release, the company expects to achieve free cash flow breakeven in late
2003 versus the previous projection of free cash flow breakeven in the first
half of 2004; and remains prefunded in accordance with its updated business
plan.
"Overall, this has been another strong quarter for us in a difficult market,"
said Crowe. "We've exceeded our cash and GAAP communications revenue projection
for the quarter, and feel comfortable with our revised forecast of approximately
60 to 75 percent communications revenue growth year over year. Moreover, we now
expect to reach free cash flow breakeven earlier than previously announced. We
continue to analyze the market conditions, and will take appropriate and prudent
measures to leverage our financial strength and competitive position."
About Level 3 Communications
Level 3 (Nasdaq:LVLT) is a global communications and information services
company offering a wide selection of services including IP services, broadband
transport services, colocation services, and the industry's first Softswitch
based services. Level 3 offers services primarily to communications intensive
companies, which deliver their services over the Level 3 Network. Its Web
address is www.Level3.com.
Some of the statements made by Level 3 in this press release are forward-looking
in nature. Actual results may differ materially from those projected in
forward-looking statements. Level 3 believes that its primary risk factors
include, but are not limited to: substantial capital requirements; development
of effective internal processes and systems; the ability to attract and retain
high quality employees; changes in the overall economy; technology; the number
and size of competitors in its markets; law and regulatory policy; and the mix
of products and services offered in the company's target markets. 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 release should be evaluated in light of these important factors.
Attachment 1
LEVEL 3 COMMUNICATIONS, INC.
Consolidated Condensed Statements of Operations
(Unaudited)
Three Months Ended
March 31,
(dollars in millions) 2001 2000
Revenue:
Communications and Information Services $ 418 $ 123
Other 31 54
Total Revenue 449 177
Costs and Expenses:
Cost of Revenue 268 130
Depreciation and Amortization 239 88
Selling, General and Administrative 295 188
Stock-Based Compensation 77 48
Total Costs and Expenses 879 454
Loss from Operations (430) (277)
Other Expense, net (105) (3)
Loss before Income Taxes (535) (280)
Income Tax Benefit - 9
Net Loss $ (535) $ (271)
Loss per Share:
Net Loss:
Basic and Diluted $ (1.45) $ (0.77)
Weighted Average Shares Outstanding
(in thousands):
Basic and Diluted 367,810 350,285
Attachment 2
LEVEL 3 COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Condensed Balance Sheets
(unaudited)
March 31, December 31,
(dollars in millions) 2001 2000
Assets
Current Assets
Cash and cash equivalents $ 1,505 $ 1,269
Marketable securities 2,301 2,742
Restricted securities 149 202
Accounts receivable, less allowances of $36 and $33, respectively 721 617
Income taxes receivable 25 67
Other 123 148
Total Current Assets 4,824 5,045
Property, Plant and Equipment, net 10,179 9,383
Investments 117 146
Other Assets, net 336 345
$ 15,456 $ 14,919
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable $ 1,558 $ 1,511
Current portion of long-term debt 8 7
Accrued payroll and employee benefits 99 90
Accrued interest 103 124
Deferred revenue 95 68
Other 158 147
Total Current Liabilities 2,021 1,947
Long-Term Debt, less current portion 7,961 7,318
Deferred Revenue 977 652
Accrued Reclamation Costs 94 94
Other Liabilities 347 359
Stockholders' Equity 4,056 4,549
$ 15,456 $ 14,919
Attachment 3
Executive Officer Intended Transfers of Company Securities
The company has a policy that generally requires the members of its board of
directors and members of senior management that are "executive officers" for
purposes of the SEC's Section 16 rules to pre-announce their intention to make
transfers of the company's securities in the permitted period following each
earnings release, which policy the company reviews annually. In addition, this
policy applies only to an intent to transfer shares not previously announced,
and does not apply to certain transfers for estate planning purposes.
The following schedule shows the individuals that have expressed a current
intent to transfer, during the period, the maximum number of shares they propose
to transfer and the percentage of their holdings, that the intended transfer
amount represents.
None of the individuals are required to dispose of shares and the listed
individuals may choose to sell fewer, or none, of the shares described, but will
not, when combined with shares previously preannounced but not yet transferred,
sell more during the period. An individual's ultimate decision to transfer
shares of common stock will be made in compliance with applicable federal
securities laws.
Name and Title No. of Shares Percentage (1)
John F. Waters, Jr.
Group Vice President 10,000 3%
(1) The percentage is derived by dividing (a) the number of shares that the
individual may transfer plus the number of shares previously preannounced but
not yet transferred by (b) the individual's total shares of the Company's common
stock held and all other shares that may be acquired in the future through the
exercise of vested options, including outperform stock options.