Exhibit 99.1
Level 3's Strategy
- - Original premise of Level 3's business plan remains in effect today
- - Adapt assets, network, service and prices to the rapidly changing
environment
- - Seek to achieve substantial market share in horizontal market segments
while maintaining industry leading margins
- - Prefund business with expected cash requirements to free cash flow
breakeven with appropriate cushion
The Past
- - Adapted to the changing environment and the capital markets
- - Reduced debt through cash and equity transactions
- - Focused on efficiencies by reducing network, operating and capital expenses
- - Revised customer strategy to focus on high-bandwidth, credit-worthy users
- - Capitalized on industry consolidation opportunities such as McLeod,
Allegiance, ICG and Genuity
The Future
- - Leverage Level 3's unique network and operational capabilities
- - Focus on sales to financially solid companies with existing demand
- - Grow high margin revenues by:
- Developing new services which leverage existing assets and targets
large, existing markets
- Opportunistically pursue consolidation opportunities
- - Maintain financial strength and fully funded position
Leverage The Unique Level 3 Network
- - 72 North American markets in service
- - 19,000 mile North American intercity network
- - 20 European markets in service
- - 3,600 mile Pan European network
- - Over 3.0 million square feet of technical space, including colocation
facilities, built out
- - Sufficient undersea capacity
Current Service Offerings
Softswitch Services - 42% of Communications Revenue (1)
Managed Modem
Voice Services
IP & Data Services - 26% of Communications Revenue (1)
Dedicated Internet Access
(3)Flex Data Services
Security & VPN
DSL Aggregation
Transport and Infrastructure Services - 32% of Communications Revenue (1)
Wavelengths
Colocation
Private Line
Fiber Services
Transatlantic & Backhaul
Technical Support
(1) Percentages are based on first quarter 2004 Communications GAAP revenue of
$389 million
New Service Initiatives
- - Focus on existing, large markets where customers are buying services today
- - Maintain industry leading margins
- - Leverage existing network and operational capabilities
- - Distribution channels include system integrators, VARs, CLECs and ISPs
- Comprehensive suite of carrier quality Voice-over-IP Services
- Wholesale, SME-oriented and Consumer-oriented
- Toll free, conferencing, LD termination and enhanced local
- Large enterprise voice targeted for 2005
- New Transport Services
- (3) Hub Private Line
- Technical field support services
- Metro Ethernet and optical wave
- New Data Services
- National Ethernet service
- ATM and Frame Relay emulation in 3Q04
- IP/VPN launch planned for 4Q04
Level 3's US Addressable Market Has Nearly Tripled
Over 100 New Sales People Added
Graphic:
Previously Addressable Market (1)
$34B
Softswitch Services
IP & Data Services
Transport & Infrastructure
Currently Addressable Market (1)
$100B
Softswitch Services
IP & Data Services
Transport & Infrastructure
(1) Company estimates - U.S. only
Our Customer Strategy Is Working
Customers include
- - 4 largest ISPs
- - 6 largest cable MSOs
- - All 4 RBOCs
- - Major IXCs
- - Major cellular providers
- - Major PTTs
- - Major satellite companies
Graphic: customer logos
Level 3 Margins Are Evidence Of Competitive Strength
- - Level 3's gross margins lead the industry by a substantial margin
- - Level 3 has superior Adjusted OIBDA margins with expected incremental
margins of 60% to 70%
Adjusted
Gross OIBDA
Margin Margin
Level 3 79% 30%
AT&T 44% 22%
Sprint GMG 45% 18%
MCI 36% 5%
WilTel 19% 7%
Global Crossing 31% 2%
Notes
1. Level 3, AT&T, and Sprint GMG stats for 1Q04
2. MCI and Global Crossing stats for 4Q03
3. WilTel's gross margin for 9 months ended 9/30/03, Adjusted OIBDA margin for
fiscal 2003
4. Sources: Companies' SEC Filings
Level 3 Has Significant Operating Leverage
Simplified Model Assumptions
- - Revenue growth of 5% to 25% a year
- - Incremental OIBDA margin of 65%
- - Base capital expenditures of $100 million a year
- - Incremental CapEx of $ .45 per $1.00 of incremental revenue
- - IS Group generates $30 MM of unlevered CF per year
- - Additional $20 million of working capital per year
Not a projection; for illustrative purposes only.
Communications Adjusted OIBDA
Simplified Model Output
Graphic: Line graph showing rates of increases in Communications Adjusted OIBDA
in $ millions on left axis and years 2004, 2005, 2006, 2007 and 2008 across
bottom axis for Annual Revenue Growth at 5%, 10%, 15%, 20% and 25% rates of
growth.
Not a projection; for illustrative purposes only
Information Services
- - Information Services business includes the Software Spectrum and
(i)Structure subsidiaries
- - Previously announced restructuring efforts complete
- - Focus on growing cash flow
Annual Communications Revenue Growth
- - Level 3 is well positioned for future demand and incremental consolidation
opportunities
- - Expected decline in high single-digit percentage range in 2004 primarily
from managed modem business
- Excludes termination and acquisition revenue
- - Growth in latter 2004 from new services
Graphic: Line graph showing annual communications revenue growth actual results
from 2000 $0.9 billion, 2001 $1.3 billion, 2002 $1.1 billion and 2003 $1.6
billion with year 2002 having note (1) and year 2003 having note (2)
(1) 2002 decline in Communications Revenue was due to a $288 million reduction
in upfront dark fiber revenue partially offset by growth in Communications
Services Revenue.
(2) Excludes $294M in one-time termination and settlement revenue from XO
Communications received in 1Q03.
Consolidated Adjusted OIBDA
Simplified Definition Of Revenue, Less Cost of Revenue, Less SG&A Expense
- - Improvements to Consolidated Adjusted OIBDA and Adjusted OIBDA Margin due
to increased revenue, acquired revenue and cost containment
- - 2004 Consolidated Adjusted OIBDA projected to be generally consistent with
2003
Graphic: Bar graph showing Consolidated Adjusted OIBDA at ($482 million) for
2000, ($300 million) for 2001, $351 million for 2002 and $463 million for 2003
with note (1). Line graph presented showing trend line in communications
adjusted OIBDA margins for years 2000 to and including 2003.
(1) Excludes $294M in one-time termination and settlement revenue
Consolidated Free Cash Flow
Simplified Definition Of Unlevered Cash Flow Less Cash Interest
- - Consolidated FCF is Adjusted OIBDA less capital expenditures plus or minus
the change in working capital less net cash interest
- - Level 3 was Consolidated FCF positive for second half of 2003
- - 2004 Consolidated FCF projected to be negative $180 - $200 million
- - Return to positive FCF trend after Q204
Graphic: Bar graph showing consolidated free cash flow of ($4,540 million) for
2000, ($2,184 million) for 2001, ($434 million) for 2002, ($139 million) for
2003 and ($190 million) estimate for 2004 with note (1)
(1) Represents mid-point of 2004 guidance
Table:
Q104 Consolidated
Free Cash Flow
Net Cash Provided By Operating Activities $8
Gross Capital Expenditures ($52)
Release of Capital Expenditure Accruals $4
Total ($40)
Debt Maturity Schedule
- - Book value of debt outstanding is approx. $5.4 billion
- - Debt outstanding decreased by approx. $1.1 billion in 2003(1) and expected
to decrease by over $200 million in Q204
- - Level 3 has no significant maturities until 2008
($ millions)(1) 2004 2005 2006 2007 2008 2009 2010 2011+
Bank Debt $0 $0 $0 $0 $0 $0 $0 $0
High Yield Debt(2) 0 0 0 0 2,365 362 1,599 795
Mortgages/other 0 119 0 0 0 0 0 0
Total Annual Debt Repayment $0 $119 $0 $0 $2,365 $362 $1,599 $795
(1) Excludes $269MM of capital leases outstanding as of March 31st that were
assumed in Genuity acquisition.
(2) At maturity, all deferred pay coupon bonds have accreted to face amount.
Second Quarter 2004 Projections
- - Communications revenue of $375 - $395 million
- Includes benefit of revenue from ICG acquisition offset by lower
managed modem revenue on existing business and termination and
settlement revenue
- - Consolidated Adjusted OIBDA of $80 - $90 million
- Includes $21 million cost of revenue increase from integration of ICG
acquisition and migration of Allegiance managed modem ports to Level 3
network
- - Reduce debt by over $200 million primarily related to capital leases
- - Use of cash will increase quarter-over-quarter primarily due to ICG
acquisition, higher network expenses and termination payment for Allegiance
vendor agreement, timing of cash interest expense payments and increased
capital expenditures
(1) In accordance with recent SEC guidelines, the company has renamed Earnings
Before Interest, Taxes, Depreciation and Amortization (EBITDA) as Adjusted
Operating Income Before Depreciation and Amortization (Adjusted OIBDA).
Summary
- - Unique network and operational capabilities
- - Focused on sales to financially solid companies with existing demand
- - Industry leading margins
- - Opportunistically pursuing consolidation opportunities
- - Introducing new high-margin IP, voice and data services aimed at large
existing markets
- - Financially solid with cash on hand of approximately $1.1 billion
Schedule To Reconcile Non-GAAP Financial Metrics
Pursuant to Regulation G, the company is hereby providing a reconciliation of
non-GAAP financial metrics to the most directly comparable GAAP measure.
The following reconciliation of non-GAAP financial measures to GAAP measures
include forward-looking statements with respect to the information identified as
guidance. Level 3 has made a number of assumptions, which may or may not prove
to be correct, in preparing the guidance. We caution you that these
forward-looking statements are only predictions, which are subject to risks and
uncertainties including technological uncertainty, financial variations, changes
in the regulatory environment, industry growth and trend predictions. Please see
the company's Annual Report on Form 10-K for a description of risks and
uncertainties.
The ranges provided for the GAAP measures that are part of the reconciliation of
non-GAAP forward-looking measures are in no way meant to indicate that the
company expects or is implicitly providing guidance on those GAAP measures. In
order to reconcile the non-GAAP guidance ranges to GAAP measures, the company
has to use ranges for the GAAP measures that arithmetically add up to the
non-GAAP guidance measures. While the company feels reasonably comfortable about
the non-GAAP guidance measures, it fully expects that the ranges used for the
GAAP measures will vary from actual results.
Schedule To Reconcile To Non-GAAP Financial Metrics
Communications Gross Margin ($) is defined as communications revenue less
communications cost of revenue from the consolidated condensed statements of
operations.
Cost of Revenue for the communications business includes leased capacity,
right-of-way costs, access charges and other third party circuit costs directly
attributable to the network, as well as costs of assets sold pursuant to
sales-type leases.
Communications Gross Margin (%) is defined as communications gross margin ($)
divided by communications revenue. Management believes that communications gross
margin is a relevant metric to provide to investors, as it is a metric that
management uses to measure the margin available to the company after it pays
third party network services costs; in essence, a measure of the efficiency of
the company's network.
COMMUNICATIONS GROSS MARGIN ($ in millions) 1Q04
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Communications Revenue $389
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Communications Cost of Revenue $81
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Communications Gross Margin ($) $308
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Communications Gross Margin (%) 79%
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Schedule To Reconcile Non-GAAP Financial Metrics
Adjusted OIBDA Margin (%) is defined as Adjusted OIBDA divided by Consolidated
Revenue.
Communications Adjusted OIBDA Margin( (%) is defined as Communications Adjusted
OIBDA divided by Communications Revenue.
Management believes that Adjusted OIBDA and Communications Adjusted OIBDA
margins are relevant and useful metrics to provide to investors, as they are an
important part of the company's internal reporting and are indicators of
profitability and operating performance, especially in a capital-intensive
industry such as telecommunications. Management also uses Adjusted OIBDA and
Communications Adjusted OIBDA margins to compare the company's performance to
that of its competitors.
Schedule to Reconcile Non-GAAP Financial Metrics
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COMMUNICATIONS ADJUSTED OIBDA MARGIN
($ in millions) 1Q04
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Communications Revenue $389
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Communications Adjusted OIBDA $116
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Communications Adjusted OIBDA Margin 30%
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COMMUNICATIONS ADJUSTED OIBDA MARGINS 2000 2001 2002 2003
($ in millions)
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Net Income (Loss) ($1,353) ($4,975) ($1,099) ($1,114)
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(Income) Loss from Discontinued Operations $48 $605 - ($12)
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Income Tax (Benefit) Expense ($49) - ($118) -
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Other (Income)/Expense ($3) ($596) $373 $697
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Operating Income/(Loss) ($1,357) ($4,966) ($844) ($429)
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Depreciation and Amortization Expense $548 $1,096 $768 $792
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Non-cash Compensation Expense $228 $303 $175 $78
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Non-cash Restructuring and Impairment - $3,245 $182 -
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Communications Adjusted OIBDA ($581) ($322) $281 $441
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Communications Revenue $857 $1,298 $1,101 $1,653
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Communications Adjusted OIBDA Margin (%) (68%) (25%) 26% 27%
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(1) Excludes $294M in one-time termination and settlement revenue from XO
Communications received in 1Q03
Schedule to Reconcile to Non-GAAP Financial Metrics
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CONSOLIDATED ADJUSTED OIBDA 2000 2001 2002 2003
($ in millions)
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Net Earnings/(Loss) ($1,455) ($4,978) ($858) ($711)
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(Income)/Loss from Discontinued Operations $48 $605 ($2) ($5)
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Cumulative Effect of Change in Accounting - - - ($5)
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Income Tax (Benefit)/Loss ($49) - ($121) ($50)
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Plus Other (Income)/Loss $159 ($608) $168 $615
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Operating Income/(Loss) ($1,297) ($4,981) ($813) ($156)
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Plus Depreciation and Amortization Expense $579 $1,122 $801 $827
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Plus Non-cash Compensation Expense $236 $314 $181 $86
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Plus Non-cash Restructuring and Impairment - $3,245 $182 -
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Consolidated Adjusted OIBDA ($482) ($300) $351 $757
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Consolidated Revenue $1,184 $1,533 $3,111 $4,026
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(1) Excludes $294M in one-time termination and settlement revenue from XO
Communications received in 1Q03
Schedule To Reconcile To Non-GAAP Financial Metrics
Unlevered Cash Flow is defined as net cash (used in) provided by operating
activities less capital expenditures offset by release of capital expenditure
accruals, and adding back cash interest paid, less interest income as disclosed
in the consolidated condensed statements of cash flows or the consolidated
condensed statement of operations. Management believes that unlevered cash flow
is a relevant metric to provide to investors, as it is an indicator of the
operational strength and performance of the company and, over time, provides
management and investors with a sense of the growth pattern of the business.
Consolidated Free Cash Flow is defined as net cash (used in) provided by
operating activities less capital expenditures offset by release of capital
expenditure accruals as disclosed in the consolidated condensed statements of
cash flows. Management believes that consolidated free cash flow is a relevant
metric to provide to investors, as it is an indicator of the company's ability
to generate cash to service its debt.
Schedule To Reconcile To Non-GAAP Financial Metrics
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CONSOLIDATED UNLEVERED CASH FLOW
($ in millions) 2003
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Net Cash Provided by Continuing Operations $24
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Gross Capital Expenditures ($191)
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Release of Capital Expenditure Accruals $28
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Cash Interest Paid $394
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Interest Income ($18)
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Total $237
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CONSOLIDATED FREE CASH FLOW 2000 2001 2002 2003
($ in millions) Consolidated Free Consolidated Free Consolidated Free Consolidated Free
Cash Flow Cash Flow Cash Flow Cash Flow
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Net Cash Provided by (Used in) Continuing Operations $1,036 $141 ($431) $24
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Gross Capital Expenditures ($5,576) ($2,325) ($218) ($191)
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Release of Capital Expenditure Accruals -- -- $215 $28
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Total ($4,540) ($2,184) ($434) ($139)
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Schedule To Reconcile To Non-GAAP Financial Metrics
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CONSOLIDATED FREE CASH FLOW Three Months Ended
($ in millions) March 31, 2004
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Net Cash Provided by Continuing Operations $8
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Gross Capital Expenditures ($52)
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Release of Capital Expenditure Accruals $4
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Total ($40)
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PROJECTED CONSOLIDATED FREE CASH FLOW
Twelve months Ended December 31, 2004
($ in millions) Consolidated Range
Low High
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Net Cash Provided by Continuing Operations $70 $100
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Gross Capital Expenditures ($254) ($304)
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Release of Capital Expenditure Accruals $4 $4
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Total ($180) ($200)
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