Level 3 Communications Reports First Quarter Results
quicken.com
Tuesday, April 18, 2000 06:50 AM
Continued Strong Communications Revenue Growth Across All Product Lines Construction of U.S. and European Networks Ahead of Schedule
BROOMFIELD, Colo., April 18 /PRNewswire/ -- Level 3 Communications, Inc. (Nasdaq: LVLT, news, msgs) today announced its first quarter 2000 results. Consolidated revenue for the quarter was $177 million. The net loss for the quarter was $271 million, or $0.77 per share. The per share calculation was determined giving effect to an increase in the number of shares of common stock outstanding as the result of a follow-on equity offering in February 2000.
Included in the company's results is a gain of $38 million relating to the issuance of stock by RCN Corporation (Nasdaq: RCNC, news, msgs), an equity investment of the company. Excluding this non-operating gain, the net loss for the quarter was $308 million, or $0.88 per share. The results for the quarter also include a $48 million non-cash charge, the majority of which is due to the company's Outperform Stock Option Program. Excluding this charge and the RCN gain from the reported income, the net loss for the quarter was $0.75 per share.
"A key event for Level 3 during the quarter was the successful sale of approximately $5.5 billion of debt and equity securities. With the proceeds of this offering, combined with the cash on hand and the undrawn commitments under the credit facility, Level 3 has approximately $8.6 billion of funds available at the end of the quarter. This amount substantially prefunds our business plan to free cash flow breakeven," said James Q. Crowe, president and chief executive officer of Level 3. "Through these offerings we have significantly reduced the company's overall risk and exposure to the capital markets."
First Quarter Financial Highlights
Communications and Information Services Revenue: Communications and information services revenue for first qarter 2000 was $123 million, a 167 percent increase over 1999 first quarter revenue of $46 million. The year-over-year increase was a result of significant growth in the communications business.
Total communications revenue was $97 million for the quarter, a 547 percent increase over 1999 first quarter communications revenue of $15 million. Revenue from communications services only -- excluding dark fiber sales and reciprocal compensation -- was $76 million. This represents a 58 percent increase over fourth quarter 1999 services revenue of $48 million.
Included in the total communications revenue was $13 million of non-recurring revenue from U.S. dark fiber and
transatlantic undersea contracts. Also included in total communications revenue for the quarter was $8 million
attributable to reciprocal compensation.
Communications Services Currently Offered in 35 U.S. and European Markets: The company's selection of cities
involved in network and gateway construction is primarily based on concentration of Web-centric customers. At the end of the quarter, the company was offering communications services in 30 U.S. and 5 European markets.
Level 3's customer base continues to increase rapidly. At the end of the quarter, the company had over 1,500
customers -- a 16 percent increase in the number of customers since the end of 1999. Almost 80 percent of the
customer base currently purchase more than one Level 3 product.
Other Revenue: Other revenue of $54 million for the first quarter included $48 million from coal mining, versus
first quarter 1999 coal mining revenue of $51 million. Full year coal revenue is expected to be approximately 10
percent less than 1999 coal revenue due to reduced shipments under long-term coal contracts in 2000.
Expenses:
Cost of Revenue: The cost of revenue for first quarter 2000 was $130 million, representing a 110 percent increase over first quarter 1999 cost of revenue of $62 million.
Sales, General and Administrative Expenses (SG&A): SG&A expenses for the quarter were $188 million, a 76
percent increase over first quarter 1999 SG&A expenses. This increase primarily results from the company's
addition of over 1,600 employees since the end of first quarter 1999. The company added over 450 employees to
the communications business during the quarter ending March 31, 2000, bringing the total number of Level 3
employees to approximately 4,300.
Outperform Stock Option Expense: The company recognized $48 million in stock-based compensation expense
during the quarter. The majority of this expense is due to Level 3's Outperform Stock Option (OSO) Program.
This non- cash expense is accounted for in accordance with SFAS NO. 123, "Accounting For Stock-Based Compensation." Level 3 expenses the value of OSOs over the two-year 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 to all employees quarterly, with the exercise price indexed to the
performance of the company's common stock relative to the performance of the Standard & Poor's 500 (S&P 500) Index. This program directly aligns Level 3 employees' and stockholders' interests by basing stock option value on the company's ability to outperform the S&P 500.
Depreciation and Amortization: Depreciation and amortization expenses for the quarter were $88 million, a 115 percent increase from the first quarter 1999 depreciation and amortization expenses of $41 million. These charges reflect the significant increase in capital spending to support the growth of the communications business.
Other Income - Gains from Equity Investments: Included in "Other Income" is a pre-tax gain of $38 million from
the company's equity investment in RCN. During the first quarter, RCN issued shares of their common stock in
conjunction with an exchange agreement. This reduced Level 3's ownership of RCN from 35 percent at December 31, 1999, to 33 percent at March 31, 2000, but increased the value of its proportionate share of RCN's net assets.
Capital Expenditures: Capital expenditures for property, plant and equipment were $1.3 billion for the quarter. The majority of the spending was for construction of the U.S. and European intercity networks, certain local
networks in the U.S. and Europe, and the transatlantic cable network. Total capital expenditures for 2000 are expected to be approximately $4.5 billion versus the previously announced total of $3.5 billion. This increase in rate of expenditure is the result of acceleration of the company's business plan.
Capital Raising Transactions Substantially Prefund Business Plan: In February 2000, the company received
gross proceeds of approximately $5.5 billion from the sale of common stock and debt. The company issued 23 million shares of common stock with gross proceeds of approximately $2.5 billion, $862 million in Convertible Subordinated notes, $1.4 billion in three tranches of U.S. dollar denominated debt securities, and 800 million Euros from two tranches of Euro denominated debt securities.
"As a result of this offering Level 3 has substantially prefunded the balance of its business plan to free cash flow break even," said Doug Bradbury, chief financial officer.
"We were very pleased with the market's receptivity to Level 3's objectives, and particularly pleased with the
response of the European investors to these offerings."
As announced in January, the company modified Phase 5 of the business plan and added a Phase 6. These
phases now include an additional 3.1 million square feet of global gateway and technical space -- for a global
total at completion of 6.5 million square feet -- the build-out of seven additional local markets in Europe and
Asia, the third ring of the European intercity network, and the expansion of existing local facilities. Level 3
currently expects Phase 6 will be the final pre-announced phase of the business plan and that any future
funding requirements will relate to specific initiatives and success-based capital needs.
Network Development Highlights for the Quarter
U.S. and European Intercity Network Construction Ahead of Schedule: Construction of approximately 2,500
miles of the multi-conduit U.S. intercity network was completed during the first quarter 2000, bringing the total
miles of conduit installation completed to 11,800 miles, or 74 percent of the total planned intercity network. As
previously announced, Level 3 advanced the construction completion date of this portion of the network by
more than three months, and now expects construction of the intercity multi-conduit network to be
substantially completed by the end of fourth quarter 2000.
Level 3's multi-conduit network is designed to enable new generations of fiber cable to be installed more
quickly and at lower incremental cost than traditional network designs.
The company also installed an additional 2,300 miles of fiber optic cable in the first conduit of the completed
sections of the network during the quarter, bringing the total intercity route miles with fiber installed to
approximately 5,400 miles.
Construction of the multi-conduit European intercity network is also ahead of schedule. Over 1,000 miles were
completed in the first quarter 2000, bringing the total miles of conduit installation completed to over 3,200 miles.
Ring 1 connects London, Amsterdam, Frankfurt, Paris and Brussels. Ring 2 connects Frankfurt, Dusseldorf,
Hamburg, Berlin and Munich.
Local Fiber Networks in 26 Global Markets: At the end of the first quarter, Level 3 had operational Gateways in 30 U.S. markets and five European markets. Level 3 Gateways are advanced technical facilities, which provide
colocation space for customers' equipment with links to other communications networks, and house the
company's own network equipment. The markets added during the quarter were Austin, Fort Worth and San
Antonio, Texas; and Brussels, Belgium. Additionally, at the end of the first quarter, markets with Level 3 built
local fiber networks totaled 26 -- 23 in the U.S. and 3 in Europe.
Transatlantic Cable System Underway: The four fiber pair, 1.28 terabit system announced by Level 3 in April
1999 is currently under construction and has a scheduled in-service date of September 2000. During the quarter,
Level 3 announced an agreement whereby Global Crossing Ltd (Nasdaq: GBLX, news, msgs) will acquire a 50 percent ownership interest in the cable system. Under the co-build agreement, GBLX will separately own and operate two of the four fiber pairs on this transatlantic cable.
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