First Quarter Financial Highlights
- Continued sequential improvement in sales and churn
- Consolidated Revenue of $910 million
- Consolidated Adjusted EBITDA of $200 million
Level 3 Communications, Inc. (NASDAQ: LVLT) reported consolidated revenue of $910 million for the first quarter 2010, compared to consolidated revenue of $924 million for the fourth quarter 2009 and $980 million for the first quarter 2009.
The net loss for the first quarter 2010 was $238 million, or $0.14 per share. Excluding a loss of $54 million, or $0.03 per share on the extinguishment of debt, the net loss was $184 million, or $0.11 per share. The net loss for the fourth quarter 2009 was $182 million, or $0.11 per share, and $132 million or $0.08 per share for the first quarter 2009.
Consolidated Adjusted EBITDA was $200 million in the first quarter 2010, compared to $217 million in the fourth quarter 2009 and $250 million in the first quarter 2009.
“We are encouraged by the positive improvement we’ve seen this year for both sales and churn” said James Crowe, CEO of Level 3. “Ongoing broadband demand is providing sales opportunities across the company. And our continued improvements in customer experience are paying off, contributing to a decline in disconnects. We remain focused on execution, and will continue our disciplined approach to increasing our investments to take advantage of these market opportunities.”
Financial Results
| Metric ($ in millions) | First Quarter 2010 | Fourth Quarter 2009 | First Quarter 2009 |
| Total Communications Revenue | $900 | $906 | $962 |
| Other Revenue | $10 | $18 | $18 |
| Total Consolidated Revenue | $910 | $924 | $980 |
| Consolidated Adjusted EBITDA(1) | $200 | $217 | $250 |
| Capital Expenditures | $82 | $80 | $78 |
| Unlevered Cash Flow(1) | $51 | $218 | $43 |
| Free Cash Flow(1) | ($90) | $97 | ($82) |
| Communications Gross Margin(1) | 58.8% | 60.2% | 59.5% |
| Communications Adjusted EBITDA Margin(1) | 22.4% | 23.8% | 25.9% |
- See schedule of non-GAAP metrics for definition and reconciliation to GAAP measures.
Communications Business
Revenue
Total Communications Revenue for the first quarter 2010 was $900 million, compared to $906 million for the fourth quarter 2009. Total Communications Revenue for the first quarter 2009 was $962 million.
| Communications Revenue ($ in millions) | First Quarter 2010 | Fourth Quarter 2009 | Percent Change | First Quarter 2009 | Percent Change |
| Wholesale | $343 | $353 | (3%) | $362 | (5%) |
| Large Enterprise and Federal | $136 | $129 | 5% | $131 | 4% |
| Mid-Market | $151 | $151 | – | $165 | (8%) |
| Europe | $71 | $73 | (3%) | $70 | 1% |
| Core Network Services | $701 | $706 | (1%) | $728 | (4%) |
| Wholesale Voice Services | $165 | $162 | 2% | $171 | (4%) |
| Other Communications Services | $34 | $38 | (11%) | $63 | (46%) |
| Total Communications Services | $900 | $906 | (1%) | $962 | (6%) |
Core Network Services
Core Network Services revenue was $701 million in the first quarter 2010, a decline of approximately 1 percent compared to $706 million in the fourth quarter 2009.
“We were particularly encouraged by the growth in Large Enterprise and Federal revenues,” said Sunit Patel, executive vice president and CFO of Level 3. “Mid-market revenues, which have been declining since 2007, are now stabilizing.
“We were pleased to see a return to sequential revenue growth on a constant currency basis for our European business. While European revenues declined on an as-reported basis, assuming constant currency, European revenues increased 3 percent.
“Our Wholesale revenues declined this quarter due to expected seasonality in the Vyvx broadcast business and a decline in inter-carrier compensation, partially offset by an asset sale of approximately $7 million.
“On a normalized basis, accounting for seasonality, inter-carrier compensation, the effects of foreign exchange, and the asset sale during the quarter, our Core Network Services revenue was down slightly, which represents a much improved performance from a year ago.”
Deferred Revenue
The communications deferred revenue balance was $880 million at the end of the first quarter 2010, compared to $902 million at the end of the fourth quarter 2009 and $868 million at the end of the first quarter 2009.
Cost of Revenue
Communications cost of revenue increased to $371 million in the first quarter 2010, from $361 million in the fourth quarter 2009, largely due to favorable vendor discounts and settlements in the fourth quarter 2009 and the revenue mix shift in the current quarter. Communications cost of revenue was $390 million in the first quarter 2009.
Communications gross margin was 58.8 percent for the first quarter 2010, compared to 60.2 percent in the fourth quarter 2009. Communications gross margin was 59.5 percent in the first quarter 2009.
Selling, General and Administrative Expenses (SG&A)
Excluding non-cash compensation expense, Communications SG&A was $327 million in the first quarter 2010, compared to $328 million in the fourth quarter 2009 and $322 million in the first quarter 2009.
Communications SG&A expenses, including non-cash compensation expense declined to $343 million for the first quarter 2010, from $352 million for the fourth quarter 2009. SG&A expenses were $338 million for the first quarter 2009. Non-cash compensation expense was $16 million, $24 million, and $16 million for the first quarter 2010, fourth quarter 2009, and first quarter 2009, respectively.
Adjusted EBITDA
Communications Adjusted EBITDA was $202 million for the first quarter 2010, compared to $216 million for the fourth quarter 2009. First quarter 2009 Communications Adjusted EBITDA was $249 million.
Communications Adjusted EBITDA margin was 22.4 percent for the first quarter 2010, compared to 23.8 percent for the fourth quarter 2009 and 25.9 percent in the first quarter 2009.
Communications Adjusted EBITDA excludes non-cash compensation expense and includes restructuring charges. For the first quarter 2010, the company incurred less than $1 million of restructuring charges. For the fourth quarter and first quarter 2009, restructuring charges were $1 million.
Consolidated Cash Flow and Liquidity
During the first quarter 2010, Unlevered Cash Flow was $51 million, versus $218 million in the fourth quarter 2009, and $43 million for the first quarter 2009.
Consolidated Free Cash Flow was negative $90 million for the first quarter 2010, or $63 million, excluding approximately $27 million related to a settlement and other payments for previously discontinued operations not associated with the Communications business.
During the quarter, the company repaid, at maturity, the remaining $111 million aggregate principal amount of its 6% Convertible Subordinated Notes due 2010 and repurchased approximately $8 million of debt due in 2010 and 2011.
As previously disclosed, Level 3 Financing, Inc. issued $640 million aggregate principal amount of its 10% Senior Notes due 2018, and retired its 12.25% Senior Notes due 2013 during the first quarter 2010. As a result, the company recorded a $54 million loss on the extinguishment of debt during the first quarter 2010.
On April 27, 2010, the company issued a notice to redeem the remaining $172 million aggregate principal amount of its 10% Convertible Senior Notes due 2011. These notes will be redeemed effective May 27, 2010. As a result, the company expects to recognize a $4 million loss on extinguishment of debt in the second quarter 2010.
The company continues to expect Net Cash Interest Expense of approximately $525 million and GAAP Cash Interest Expense of $585 million for the full year 2010.
As of March 31, 2010, the company had cash and cash equivalents of approximately $639 million.
Business Outlook
“We saw several positive signs in the overall health of our business this quarter,” said Patel. “Our Core Network Services sales orders were up by more than 15 percent in the first quarter compared to the fourth quarter. We believe that churn will continue to show improvement for the rest of the year. Backing out the $7 million asset sale in the first quarter, we expect Core Network Services revenue to grow sequentially for the rest of 2010.
“With the exception of typical utility cost fluctuations, we expect SG&A to remain relatively flat for the remainder of the year. Based on the opportunities we see now to profitably grow our revenues, as we mentioned last quarter, we are expecting capital expenditures to increase in 2010 compared to 2009. Given that, we expect to be Free Cash Flow negative for the full year 2010. Consistent with prior years, we expect Free Cash Flow performance to improve for the remainder of the year.
Summary
“We are beginning to see both the benefit of improvements we have made in our customer experience over the last couple of years and the recovering economy,” said Crowe. “Our sales and churn are improving and we expect to translate that into improving revenue growth.”
Conference Call and Web Site Information
Level 3 will hold a conference call to discuss its first quarter 2010 results today at 11:00 a.m. EDT. You may access the call at 888-211-7449 or 913-312-0677 passcode 8481809. The call also will be broadcast live on Level 3′s Web site at http://lvlt.client.shareholder.com/.
During the call, the company will review an earnings presentation that summarizes the results of the quarter. The company has also provided a supplemental schedule with historical financial results. The presentation and supplemental schedule may be accessed at http://lvlt.client.shareholder.com/results.cfm.
The call will be archived and available live on Level 3′s Web site at http://lvlt.client.shareholder.com/ or you may access an audio replay until 12 a.m. EDT on Saturday, May 15, by dialing 888-203-1112 or 719-457-0820, access code 8481809.
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.
Forward-Looking Statement
Some of the statements made in this press release are forward looking in nature. These statements are based on management’s current expectations or beliefs. These forward-looking statements are not a guarantee of performance and are subject to a number of uncertainties and other factors, many of which are outside Level 3′s control, which could cause actual events to differ materially from those expressed or implied by the statements. The most important factors that could prevent Level 3 from achieving its stated goals include, but are not limited to, the current uncertainty in the global financial markets and the global economy; disruptions in the financial markets that could affect Level 3′s ability to obtain additional financing; as well as the company’s ability to: successfully integrate acquisitions; increase the volume of traffic on the network; defend intellectual property and proprietary rights; develop effective business support systems; manage system and network failures or disruptions; develop new services that meet customer demands and generate acceptable margins; attract and retain qualified management and other personnel; and meet all of the terms and conditions of debt obligations. 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 press release should be evaluated in light of these important factors. Level 3 is under no obligation to, and expressly disclaims any such obligation to, update or alter its forward-looking statements, whether as a result of new information, future events or otherwise.
Non-GAAP 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 describes and reconciles those financial measures as reported under accounting principles generally accepted in the United States (GAAP) with those financial measures as adjusted by the items detailed below and presented in the accompanying news release. These calculations are not prepared in accordance with GAAP and should not be viewed as alternatives to GAAP. In keeping with its historical financial reporting practices, the company believes that the supplemental presentation of these calculations provides meaningful non-GAAP financial measures to help investors understand and compare business trends among different reporting periods on a consistent basis, independently of regularly reported non-cash charges and infrequent or unusual events.
Consolidated Revenue is defined as total revenue from the Consolidated Statements of Operations.
Communications Revenue is defined as communications revenue from the Consolidated Statements
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