Broomfileld, Colorado – (The Hosting News) – May 14, 2008 – Colocation, VoIP, and Internet backbone company, Level 3 Communications, has reported consolidated revenue of $1.09 billion for the first quarter 2008, an increase of 3 percent from $1.06 billion for the first quarter of 2007.
As of March 31, 2008, the company had cash and marketable securities of approximately $540 million. Fourth quarter 2007 consolidated revenue was $1.10 billion. The year over year growth rate for Core Communications Services revenue was 10 percent. The net loss for the first quarter 2008 was $181 million, or $0.12 per share, compared to a net loss of $647 million, or $0.44 per share for the first quarter 2007. In the first quarter 2007, excluding a loss on the extinguishment of debt of $427 million, the net loss would have been $220 million, or $0.15 per share. The net loss for the fourth quarter 2007 was $91 million, or $0.06 per share.
Consolidated Adjusted EBITDA(1) was $211 million in the first quarter 2008, an increase of 24 percent from $170 million for the first quarter 2007. Consolidated Adjusted EBITDA for the fourth quarter 2007 was $246 million.
James Q. Crowe, President and CEO of Level 3 noted, ”Over the last several quarters, a growing number of telecommunications industry participants have noted the growth in the demand for optical and IP services. We certainly benefited from that trend during the quarter, driven by growth in the delivery of video and other media over the Internet. Additionally, the pricing environment for our Core Communications Services continued to be positive.
”From an operational perspective, we believe we have substantially increased available installation capacity, which was previously a significant constraint on our ability to meet market demand for our services. With these operational improvements, we believe that we are on track to meet our two primary goals for 2008 Ã¢â‚¬â€œ to reach free cash flow breakeven on a run rate basis during 2008, and to increase our sales and installations to rates that match customer demand for our services. With respect to the first goal, our performance has exceeded our earlier expectations and we expect to be free cash flow breakeven for the remaining three quarters of this year.”
Consolidated Adjusted EBITDA for the first quarter 2008 and 2007 excludes $23 million and $24 million in non-cash compensation expense and includes $7 million and $4 million of cash restructuring charges respectively.
Communications revenue for the first quarter 2008 was $1.07 billion, a 3 percent increase from $1.04 billion in the first quarter 2007. In the fourth quarter 2007, Communications revenue was $1.08 billion.
Core Communications Services revenue, which includes Core Network Services and Wholesale Voice Services, was $958 million in the first quarter 2008, an increase of 10 percent over $870 million in the first quarter 2007. Fourth quarter 2007 Core Communications Services revenue was $955 million.
Core Network Services revenue increased by 8 percent from the first quarter 2007, primarily from increased demand for IP and optical services across the business. Wholesale Voice Services revenue increased by 23 percent from the first quarter 2007, primarily due to growth from cable and wireless customers.
Other Communications Services revenue declined 39 percent to $51 million compared to $84 million in the first quarter 2007 as a result of expected declines in managed modem services. For the fourth quarter 2007, Other Communications Services revenue was $56 million.
SBC Contract Services revenue was $57 million in the first quarter 2008, a 31 percent decline compared to the year earlier quarter revenue of $83 million. Fourth quarter 2007 SBC Contract Services revenue was $73 million, which included a $16 million quality of service bonus, the last such bonus for which the company was eligible.
As previously disclosed, SBC announced its intention to migrate the services provided under the agreement to its own network facilities in accordance with terms previously negotiated by WilTel Communications, LLC (WilTel), a company subsequently acquired by Level 3. Under the terms of this agreement, SBC agreed to pay WilTel a minimum amount of gross margin regardless of the actual revenue generated under the contract. Accordingly, while the company expects future SBC Contract Services revenue will be difficult to predict, the gross margin contribution over time is fixed.
As of the end of the first quarter, there was approximately $15 million of gross margin commitment remaining on the contract. The company expects the gross margin commitment to be met in the second quarter 2008 and will evaluate the approach to external revenue reporting under this agreement going forward once the commitment is satisfied.
Communications deferred revenue decreased to $918 million at the end of the first quarter 2008, compared to $939 million at the end of the first quarter 2007 and $929 million at the end of the fourth quarter 2007.
Communications cost of revenue for the first quarter 2008 increased to $459 million, versus $450 million in the first quarter 2007 and $444 million in the previous quarter.
Communications Gross Margin was $607 million, or 56.9 percent in the first quarter 2008, compared to $587 million, or 56.6 percent in the first quarter 2007. For the fourth quarter 2007, Communications Gross Margin was $640 million or 59.0 percent. The fourth quarter gross margin had the benefit of the $16 million SBC performance bonus.
Sunit Patel, Executive Vice President and CFO of Level 3 remarked, ”Actual gross margins in coming quarters will largely be determined by the mix of Core Network Services revenue and Wholesale Voice Services revenue. Core Network Services revenue has incremental gross margins of approximately 80 percent and Wholesale Voice Services revenue has incremental gross margins of approximately 30 percent. Over the course of the year, we expect to benefit from the growth of higher margin Core Network Services revenue and network optimization.”
Communications SG and A expense, including non-cash compensation expense, was $418 million for the first quarter 2008, versus $439 million for the first quarter 2007 and $439 million for the fourth quarter 2007. Communications SG and A includes $23 million, $24 million and $50 million for the first quarter 2008, first quarter 2007 and fourth quarter 2007, respectively, of non-cash compensation expense.
Excluding non-cash compensation expense, Communications SG and A was $395 million in the first quarter 2008, a 5 percent decline compared to $415 million in the first quarter 2007. Fourth quarter 2007 Communications SG and A, excluding non-cash compensation expense, was $389 million, which included a $21 million reduction in incentive-based compensation expense.
Adjusted EBITDA for the communications business was $205 million for the first quarter 2008, a 22 percent increase compared to $168 million for the first quarter 2007. Fourth quarter 2007 Communications Adjusted EBITDA was $246 million. Communications Adjusted EBITDA margin was 19.3 percent in the first quarter 2008, versus 16.2 percent in the first quarter 2007 and 22.7 percent in the previous quarter. Communications Adjusted EBITDA excludes non-cash compensation expense and includes severance and restructuring charges related to integration activities of $7 million, $4 million and $5 million for the first quarter 2008, first quarter 2007 and fourth quarter 2007, respectively.
The company’s other businesses consist primarily of coal mining operations. During the first quarter 2008, the company recognized $6 million in Adjusted EBITDA from other businesses, compared to $2 million in the first quarter 2007 and zero in the fourth quarter 2007. The increase in Adjusted EBITDA was primarily the result of a buyout agreement with one of the coal customers, providing a one-time benefit of $5 million during the quarter.
During the first quarter 2008, Unlevered Cash Flow(1) was negative $21 million, versus negative $69 million in the first quarter 2007 and positive $146 million for the previous quarter. Consolidated Free Cash Flow for the first quarter 2008 was negative $160 million, versus negative $248 million for the first quarter 2007 and positive $41 million for the fourth quarter 2007.
Mr. Patel continued, ”As expected, our cash flow losses widened during the quarter resulting from negative fluctuations in working capital due to annual bonus payments, declines in payables due to a decline in capital expenditures, prepayments on maintenance contracts, interest payments and property tax payments. For the remaining three quarters of the year, we expect to be free cash flow breakeven on a cumulative basis. Additionally, as we previously disclosed, we expect to be free cash flow positive for the full year 2009.”
The company made several improvements to the service activation processes during the quarter and installed more Core Network Services compared to the previous quarter.
The company also made progress in the implementation of its Project Unity initiative, which remains on schedule. By the end of 2008, Unity processes and systems are expected to support activation of approximately half of the company’s order volume, and approximately two thirds of Core Network Services revenue. This increase in operational efficiency, combined with ongoing process improvements, is expected to further increase overall installation capacity over the coming quarters.
Mr. Patel added, ”Our sales funnel growth continues to point to strong sales momentum for the first half of the year. Sales and installs increased in the first quarter and we are aggressively hiring new salespeople to address the strong demand we are seeing in the market. Our installation capacity increased in the quarter, and we expect to continue to increase capacity throughout 2008. We are reaffirming our projection that Core Communications Services revenue will grow 8 to 13 percent for the full year 2008.
”In addition, we expect Consolidated Adjusted EBITDA to increase throughout 2008 as a result of Core Communications Services revenue growth, combined with improvements in gross margin and continued reductions in operating expenses. We are reiterating our 2008 Consolidated Adjusted EBITDA guidance of $950 million to $1.10 billion.”
Mr. Crowe remarked, ”Our sales and installation rates increased during the first quarter and we expect that positive trend to continue throughout 2008. Our financial results for the first quarter and the overall healthy pricing and demand environment give us increasing confidence in our 2008 business outlook, and our ability to be free cash flow breakeven in aggregate for the remaining three quarters of 2008.
”Importantly, we believe our actions over the past six months have greatly improved our customers’ experience and that our extensive end-to-end network, coupled with our broad service portfolio, makes us the alternative provider of choice for high bandwidth needs.”
The company will post an investor presentation that summarizes the financial and operational progress for the first quarter 2008 on its web site.
Level 3 Communications, Inc., an international communications company, operates one of the largest Internet backbones in the world. Through its customers, Level 3 is the primary provider of Internet connectivity for millions of broadband subscribers. The company provides a comprehensive suite of services over its broadband fiber optic network including Internet Protocol (IP) services, broadband transport and infrastructure services, colocation services, voice services and voice over IP services. The services are designed to provide building blocks that enable Level 3’s customers to meet growing demands for advanced communications solutions.The principal components offered by Level 3’s VoIP Enhanced Local service include network trunking, local telephone numbers, local number portability, the safety of E-911, operator assistance, caller ID, directory listings, and directory assistance. The service is designed to allow Level 3 customers to retain the flexibility to manage and control end-user features without the difficulties of implementing complex interconnection arrangements.
For more information about Level 3, please visit: www.level3.com.