Level 3 Communications, Inc. (NASDAQ: LVLT) reported consolidated revenue of $942 million for the second quarter 2009, compared to consolidated revenue of $1.09 billion for the second quarter 2008.
The net loss for the second quarter 2009 was $134 million, or ($0.08) per share, compared to a net loss of $42 million, or ($0.03) per share for the second quarter 2008, which included a gain of $96 million from the sale of the company’s Vyvx advertising distribution business. The net loss for the first quarter 2009 was $132 million, or ($0.08) per share.
Consolidated Adjusted EBITDA was $229 million in the second quarter 2009, compared to $251 million in the second quarter 2008. Consolidated Adjusted EBITDA was $250 million in the first quarter 2009.
“The economy continued to be challenging in the second quarter for wireline service providers,” said James Crowe, CEO of Level 3. “As expected, sequential revenue pressure continued in the second quarter, although at a significantly moderated rate. We did see improvements in sales and churn, however, they were not as much as we expected. We continue to manage our costs aggressively, and for the fifth consecutive quarter, we were able to reduce our operating expenses, and year over year, we improved both our Gross Margin and Adjusted EBITDA Margin percentages. In addition, we completed several liability management transactions, which further strengthened our balance sheet.”
Financial Results
| Metric ($ in millions) |
Second Quarter 2009 | Second Quarter 2008 | First Quarter 2009 |
|
Revenue Core Communications Services(1)
|
$877
|
$954
|
$899
|
|
Other Communications Services
|
$49
|
$100
|
$63
|
|
Total Communications Revenue(1)
|
$926
|
$1,054
|
$962
|
|
Other Revenue
|
$16
|
$18
|
$18
|
|
Total Consolidated Revenue(1)
|
$942
|
$1,072
|
$980
|
|
Consolidated Adjusted EBITDA(2)(3)
|
$229
|
$239
|
$250
|
|
Capital Expenditures
|
$80
|
$106
|
$78
|
|
Unlevered Cash Flow(2)
|
$146
|
$126
|
$43
|
|
Free Cash Flow(2)
|
$20
|
$4
|
$(82)
|
|
Communications Gross Margin(2)(3)
|
59.1%
|
58.3%
|
59.5%
|
|
Communications Adjusted EBITDA Margin(2)(3)
|
24.8%
|
22.7%
|
25.9%
|
- Excludes second quarter 2008 revenue of $6 million from the Vyvx Advertising Distribution business, which was sold on June 5, 2008 and $12 million of deferred revenue recognized as revenue during the second quarter 2008 that should have been recognized as revenue in prior years.
- See schedule of non-GAAP metrics for definition and reconciliation to GAAP measures.
- Second quarter 2008 Consolidated Adjusted EBITDA, Communications Gross Margin, and Communications Adjusted EBITDA margin exclude $12 million of deferred revenue recognized as revenue during the second quarter 2008 that should have been recognized as revenue in prior years.
Communications Business
Revenue
Total Communications Revenue for the second quarter 2009 was $926 million, versus a normalized $1.05 billion for the second quarter 2008. Total Communications Revenue for the first quarter 2009 was $962 million.
| Communications Revenue ($ in millions) |
Second Quarter 2009 | Normalized Second Quarter 2008(1) | Percent Change |
|
Core Network Services
|
$707
|
$779
|
(9)%
|
|
Wholesale Voice Services
|
$170
|
$175
|
(3)%
|
|
Total Core Communications Services
|
$877
|
$954
|
(8)%
|
|
Other Communications Services
|
$49
|
$100
|
(51)%
|
|
Total Communications Revenue
|
$926
|
$1,054
|
(12)%
|
- For purposes of this press release, “Normalized Second Quarter 2008″ excludes second quarter 2008 revenue of $6 million from the Vyvx Advertising Distribution business, which was sold on June 5, 2008 and $12 million of deferred revenue recognized as revenue during the second quarter 2008 that should have been recognized as revenue in prior years.
Core Communications Services
Core Communications Services revenue, which includes Core Network Services and Wholesale Voice Services, was $877 million in the second quarter 2009, an 8 percent decrease compared to Normalized Core Communications Services revenue of $954 million in the second quarter 2008.
Core Communications Services revenue by market group was:
| Core Communications Services Revenue ($ in millions) |
Second Quarter 2009 | Normalized Second Quarter 2008(1) | Percent Change | First Quarter 2009 | Percent Change |
|
Wholesale Markets
|
$495
|
$537
|
(8%)
|
$513
|
(4%)
|
|
Business Markets
|
$218
|
$240
|
(9%)
|
$223
|
(2%)
|
|
Content Markets
|
$82
|
$94
|
(13%)
|
$85
|
(4%)
|
|
European Markets
|
$82
|
$83
|
(1%)
|
$78
|
5%
|
|
Total Core Communications Services Revenue
|
$877
|
$954
|
(8%)
|
$899
|
(2%)
|
- For purposes of this press release, “Normalized Second Quarter 2008″ excludes second quarter 2008 revenue of $6 million from the Vyvx Advertising Distribution business, which was sold on June 5, 2008 and $12 million of deferred revenue recognized as revenue during the second quarter 2008 that should have been recognized as revenue in prior years.
Core Network Services revenue by market group was:
| Core Network Services Revenue ($ in millions) |
Second Quarter 2009 | Normalized Second Quarter 2008(1) | Percent Change | First Quarter 2009 | Percent Change |
|
Wholesale Markets
|
$340
|
$377
|
(10%)
|
$358
|
(5%)
|
|
Business Markets
|
$212
|
$235
|
(10%)
|
$216
|
(2%)
|
|
Content Markets
|
$82
|
$93
|
(12%)
|
$85
|
(4%)
|
|
European Markets
|
$73
|
$74
|
(1%)
|
$70
|
4%
|
|
Total Core Network Services Revenue
|
$707
|
$779
|
(9%)
|
$729
|
(3%)
|
- For purposes of this press release, “Normalized Second Quarter 2008″ excludes second quarter 2008 revenue of $6 million from the Vyvx Advertising Distribution business, which was sold on June 5, 2008 and $12 million of deferred revenue recognized as revenue during the second quarter 2008 that should have been recognized as revenue in prior years.
During the quarter, the company announced a number of new customer agreements including a major multinational customer, Fox Entertainment Group, Internet Billboard, Iusacell, and the U.S. Coast Guard.
Deferred Revenue
The communications deferred revenue balance was $905 million at the end of the second quarter 2009, compared to $932 million at the end of the second quarter 2008 and $868 million at the end of the first quarter 2009.
Cost of Revenue
Communications cost of revenue for the second quarter 2009 decreased to $379 million, versus $442 million in the second quarter 2008. Communications cost of revenue was $390 million in the first quarter 2009.
Communications gross margin was 59.1 percent for the second quarter 2009, compared to 58.3 percent in the second quarter 2008, excluding the second quarter 2008 deferred revenue adjustment. Communications gross margin was 59.5 percent in the first quarter 2009.
Selling, General and Administrative Expenses (SG&A)
Communications SG&A expenses, including non-cash compensation expense, decreased to $320 million for the second quarter 2009, compared to $393 million for the second quarter 2008. SG&A expenses were $338 million for the first quarter 2009.
Excluding non-cash compensation expense, Communications SG&A was $311 million in the second quarter 2009, a 17 percent improvement compared to $373 million in the second quarter 2008. First quarter 2009 Communications SG&A, excluding non-cash compensation expense was $322 million. Communications SG&A expense includes $9 million, $20 million, and $16 million of non-cash compensation expense for the second quarter 2009, second quarter 2008, and first quarter 2009, respectively.
Adjusted EBITDA
Communications Adjusted EBITDA was $230 million for the second quarter 2009, compared to $241 million for the second quarter 2008, excluding the second quarter 2008 deferred revenue adjustment. First quarter 2009 Communications Adjusted EBITDA was $249 million.
Communications Adjusted EBITDA margin improved to 24.8 percent for the second quarter 2009, versus 22.7 percent for the second quarter 2008, excluding the second quarter 2008 deferred revenue adjustment. Communications Adjusted EBITDA margin was 25.9 percent in the first quarter 2009.
Communications Adjusted EBITDA excludes non-cash compensation expense and includes severance and restructuring charges. Severance and restructuring charges were $6 million for the second quarter 2009, $4 million for the second quarter 2008 and $1 million for the first quarter 2009.
Consolidated Cash Flow and Liquidity
During the second quarter 2009, Unlevered Cash Flow improved to $146 million, compared to $126 million for the second quarter 2008 and $43 million in the first quarter 2009.
Consolidated Free Cash Flow improved to $20 million for the second quarter 2009, compared to $4 million for the second quarter 2008 and negative $82 million for the first quarter 2009.
During the second quarter of 2009, the company’s wholly owned subsidiary, Level 3 Financing, Inc., closed its $280 million senior secured Tranche B Term Loan.
The company also completed a debt exchange agreement with an institutional investor to exchange a combination of $78 million in cash and $200 million of its 7% Convertible Senior Notes due 2015, for $142 million aggregate principal amount of its 6% Convertible Subordinated Notes due 2010 and $140 million aggregate principal amount of its 2.875% Convertible Senior Notes due 2010.
In addition, during the second quarter the company repurchased a total of $314 million of debt for $281 million of cash on hand including an early redemption of approximately $13 million of the remaining 11.5% Senior Notes due 2010, at par.
As a result, excluding capital leases and commercial mortgages, at the end of the second quarter 2009 the company had approximately $55 million of principal amount of debt due in 2009, $168 million in 2010, $461 million in 2011 and $301 million in 2012.
As of June 30, 2009, the company had cash and cash equivalents of approximately $630 million.
Outlook
“We noted last quarter that while we remained cautious, we expected our revenue base to stabilize and that core communications services revenue pressure would moderate, which is what occurred in the second quarter,” said Sunit Patel, CFO of Level 3.
“Sales and churn did improve, but not as much as we had expected. In particular, a number of our large telecom and enterprise customers continue to manage their costs aggressively and to defer purchases of network capacity. More broadly, we have not yet seen a return to the historical levels of purchases necessary to accommodate underlying, longer term growth in demand.”
“As a result, we are updating our Consolidated Adjusted EBITDA guidance to $900 million to $950 million and expect to be Free Cash Flow positive for the remainder of 2009 in the aggregate, but approximately Free Cash Flow neutral for the full year 2009. While we expect revenue performance to improve as it did in the second quarter, we still expect to see overall revenue pressure for the second half of the year.”
As a result of the liability management transactions completed during the quarter, the company expects GAAP interest expense of approximately $600 million and Net Cash Interest Expense of approximately $515 million for the full year 2009.
Summary
“We remain focused on continuing to execute in the market and providing outstanding service to our customers,” said Crowe. “We believe our combination of metro and intercity facilities and advanced IP and optical services remain a significant differentiator.”
“While the economic environment remains challenging, our rate of revenue decline was approximately one third of the first quarter and as the economy improves, we expect to return to positive revenue growth.”
Conference Call and Web Site Information
Level 3 will hold a conference call to discuss the company’s second quarter results at 10 a.m. EDT today. To join the call, please dial 888-481-2845 or 719-457-1512, passcode 6227843. A live broadcast of the call can also be heard on Level 3’s Web site at www.level3.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://www.level3.com/investor_relations/index.html.
An audio replay of the call will be available until 11:59 p.m. EDT on Saturday, Aug. 8, 2009, by dialing 888-203-1112 or 719-457-0820, access code 6227843. The archived webcast of the second quarter conference call together with the press release, financial statements, earnings presentation and non-GAAP reconciliations may also be accessed at http://www.level3.com/investor_relations/index.html. 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.
Level 3 Communications, Level 3, the red 3D brackets and the Level 3 Communications logo are registered service marks of Level 3 Communications, LLC and/or its affiliates in the United States and/or other countries. Level 3 services are provided by wholly owned subsidiaries of Level 3 Communications, Inc. Any other service, product or company names recited herein are trademarks or service marks of their respective owners.
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 company’s ability to: successfully integrate acquisitions; increase the volume of traffic on the network; defend intellectual property and proprietary rights; develop new products and services that meet customer demands and generate acceptable margins; successfully complete commercial testing of new technology and information systems to support new products and services; 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.
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