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Thursday February 18, 7:01 am Eastern Time
Company Press Release
SOURCE: Level 3 Communications, Inc.
Level 3 Communications Reports Fourth Quarter 1998 Results
Results Reflect Accelerated Network Construction Schedule
Communications Services Being Offered in 19 Cities
OMAHA, Neb., Feb. 18 /PRNewswire/ -- Level 3 Communications, Inc.
(Nasdaq: LVLT - news) today announced fourth quarter 1998 results,
reporting consolidated revenues of $96 million. Revenue for the full year 1998 totaled $392 million.
The net loss for the quarter was $35 million, or $0.11 a share. This includes a net pre-tax gain of $116 million related to certain company investments, which principally represents a pre-tax gain of $90 million from the sale of the company's interests in Cable Michigan, Inc. (Nasdaq: CABL - news), gains recognized in connection with issuances of stock by RCN Corporation, and other asset dispositions. The net loss also includes a $20 million charge for third party software and associated development costs. Full year 1998 earnings of $730 million, or $2.42 a share, include a $608 million gain attributable to the discontinued construction operations. This gain was distributed to the former Class C shareholders at the March 31, 1998, separation of Level 3 from the Kiewit Construction Group. The 1998 net loss from continuing operations was $202 million, or $0.67 per share.
''In 1998, we focused on building our communications business, and we are very pleased with the progress we've made,'' said James Q. Crowe, president and chief executive officer of Level 3. ''We remain on track with our strategic plan, and, in fact, have accelerated our network construction schedule. Moreover, we're currently offering service to customers in 19 cities in the U.S. and Europe.''
''During the year we achieved a number of significant strategic, operational and financial milestones, which will allow us to proceed rapidly with the implementation of our strategic plan during 1999,'' said Crowe.
Fourth Quarter Financial Highlights
Since the company's current business plan represents a significant expansion of its communications and information services business, and a change from its previous business direction, year over year comparisons to previous quarters may not serve as a meaningful indication of the company's results or future financial performance.
Communications and Information Services Revenue: Communications and
information services revenue was $42 million, a 50 percent increase over 1997 fourth quarter revenue of $28 million. The year over year increase was primarily a result of the inclusion of revenue from the acquisitions completed during 1998 -- XCOM Technologies, Inc.; GeoNet Communications, Inc.; and miknet Internet Based Services GmbH. The fourth quarter also included revenue from new communications services that were launched in 10 U.S. cities at the end of the third quarter 1998.
Other Revenue: Other revenue of $54 million includes $50 million from coal mining, a 14 percent decrease over fourth quarter 1997 coal revenue of $58 million. The decrease was due to an acceleration of customer shipments in earlier quarters of 1998. Full year 1998 coal revenue of $228 million was slightly ahead of full year 1997 revenue of $222 million.
General and Administrative:
Employee Related Expenses: Total general and administrative (G&A)
expenses for the quarter were $117 million, an increase of 388 percent over the fourth quarter 1997 G&A expenses of $24 million. Fourth quarter 1998 results include approximately $84 million in G&A expenses associated with the expansion of the communications business, including expected additions in personnel. The company added 300 employees to the communications business during the fourth quarter, bringing the total number of employees for Level 3 Communications, Inc. to approximately 2,200.
Additional employee related expenses in the fourth quarter include $16
million of stock based compensation expense. During the second quarter
1998, Level 3 introduced its Outperform Stock Option program, which requires the company's stock to outperform the S&P 500 before the options have any value to an employee. These expenses are accounted for in accordance with SFAS No. 123, ''Accounting For Stock-Based
Compensation.''
Software Development: Approximately $20 million was charged against
fourth quarter earnings for third party software and associated
development costs. The charge was in accordance with new accounting
rules (Statement of Position 98-1), which changed the allocation allowances of items that can be expensed or capitalized for internally developed software.
R&D Write-Off: On April 23, 1998, the company completed the acquisition of
XCOM Technologies, a privately held company that developed certain
components necessary for the company to develop an interface between
its Internet Protocol (IP) based network and the public switched telephone network (PSTN).
The company accounted for this transaction, valued at $154 million, as a purchase. Of the total purchase price, $115 million was attributed to acquired in-process research and development, and was taken as a
nondeductible charge to earnings in the second quarter of 1998.
In October 1998, the Securities and Exchange Commission (SEC) issued new guidelines, which are applied retroactively, for valuing acquired research and development. The company believes its accounting for the acquisition was made in accordance with generally accepted accounting principles and established appraisal practices at the time of the acquisition. However, due to the significance of the charge relative to the total value of the acquisition, the company plans to meet with the SEC to review the facts and assumptions. It is possible that the SEC will require the company to restate its results. A reduction of any portion of this write-off would result in increased earnings per share for Level 3 for 1998 and increased goodwill associated with the XCOM transaction, which is amortized over five years.
Sale of Cable Michigan Interests: On November 10, 1998, the company
announced the completion of the sale of Cable Michigan to Avalon Cable
of Michigan, Inc. The company received approximately $129 million in cash, resulting in a gain of approximately $90 million.
Capital Expenditures: Capital expenditures of property, plant and
equipment for the quarter were $501 million, up from $265 million in the third quarter 1998. The significant increase was due to the acceleration of construction for both the intercity and certain local networks in the U.S. and Europe. Full year capital expenditures totaled $910 million for 1998.
Debt Offering: On December 2, 1998, Level 3 completed the sale of $833
million principal amount at maturity of 10.5 percent senior discount notes in a transaction that was exempt from registration under the Securities Act of 1933. The company intends to use the net proceeds of the offering, which were approximately $486 million, to accelerate the implementation of the business plan.
Subsequent Events: In January 1999, Level 3 acquired BusinessNet Limited, a
leading London based Internet Service Provider (ISP). This acquisition
accelerated Level 3's entry into the UK market as BusinessNet had an
established market focus on the financial and professional services
community, specifically through its IntraCity(TM) network, which offers access to financial and other Internet Protocol (IP) oriented services.
Operational Highlights for the Quarter
Communications Services Being Offered in 19 U.S. and International Cities: At the end of the fourth quarter, the company was offering services in 17 U.S. cities, and one international city (Frankfurt, Germany). The company began offering services in London in January 1999, bringing the current total to 19 cities.
Current services are being offered using a combination of Level 3 network equipment and facilities connected with leased capacity. This leased capacity will be displaced as the Level 3 network becomes operational. Due to increased demand for its IP based services, Level 3 announced an agreement with IXC Communications on December 18, 1998, to lease capacity over approximately 7,400 route miles on its network. This capacity agreement is in addition to a previous capacity agreement signed with Frontier Corporation.
U.S. Intercity Network Construction Schedule Accelerated: The company has expanded the scope of its intercity network build and accelerated its completion schedule. During the quarter, the company:
-- Signed turnkey agreements for construction of a portion of the
intercity network through Canada. The agreements provide all
necessary rights-of-way along Canadian Pacific Railways lines and a
multiconduit network for an approximate 750 mile loop. The routes
from Albany, NY, to Montreal are being constructed by Mi-Link, LLC, a
subsidiary of Michels Pipeline. The routes from Montreal to Buffalo, NY,
via Toronto are being constructed by Worldwide Fiber, Inc.
-- Added approximately 1,000 miles to the planned U.S. intercity
network, bringing the total routes to approximately 16,000 miles.
-- Signed a license agreement with Norfolk Southern Corporation,
providing Level 3 rights-of-way access to 1,200 miles of rail routes east
of the Mississippi. The signing of this agreement brings the total Level 3
intercity rights-of-way acquired to 14,400 miles, or 93 percent of the
total required to complete the U.S. intercity network.
-- Increased the number of conduits Level 3 is deploying on its entire
intercity network to 10, up from earlier projections of six to eight. This
followed extensive feasibility testing to insure the increase would not
affect the network's quality or completion schedule. On high traffic
routes, Level 3 plans to install an additional two conduits for a total of
12. The additional conduits provide a way for Level 3 to ''future proof''
its network at a low incremental cost. Additionally, spare conduits in
excess of Level 3's requirements may be made available to other
parties, with the proceeds used to lower overall network expenses.
At the end of the fourth quarter, approximately 400 miles of the intercity
network were completed -- compared with a previously targeted total of
100 miles -- with approximately 800 miles under construction. The company
has accelerated its current 1999 intercity network completion schedule by
more than 50 percent, with the number of miles expected to be completed
now totaling 6,500, up from 4,000 miles.
U.S. Local Network Construction Underway: At the end of the quarter, local
network development was underway in 25 U.S. cities. In January 1999, the
first loops of local networks became operational in three cities -- Dallas,
Denver and Seattle -- with construction of loops in five additional cities
expected to be completed in the second quarter of this year.
European Network Construction Underway: Level 3 has been granted Public
Telecommunications Operator (PTO) and National and International
Facilities licenses in the UK, France, Germany and the Netherlands. National
and International facilities licenses have also been granted in Belgium.
Technical space has been secured for gateway sites in Paris, Amsterdam
and Frankfurt, with a 75,000 square foot gateway site currently operational
in London. Design and development of local city networks and the
Pan-European network are currently underway in five countries. The network
rollout schedule is included herein as Attachment 2.
IP Voice Product Development: On November 16, 1998, Level 3 and BellCore
announced the merger of their respective specifications for a new protocol
designed to bridge between the current circuit based PSTN and emerging IP
technology based networks.
The merged specification, called the Media Gateway Control Protocol
(MGCP), represents a combination of the Internet Protocol Device Control
(IPDC) specification -- developed by a consortium formed by Level 3 and
made up of leading communications hardware and software companies --
and the Simple Gateway Control Protocol (SGCP), developed by Bellcore
and Cisco Systems. The MGCP specification is available without a fee to
service providers and hardware and software vendors interested in
implementing it in their networks and equipment.
Development of the MGCP specification was a significant step toward Level
3's goal of providing customers with the best of both the traditional PSTN and
the newer IP technology networks. Such integration will enable customers to
benefit from the lower cost of IP network services, including voice and fax,
without modifying existing telephone and fax equipment or dialing access
codes. Level 3 plans to use MGCP in the development of its own network
and envisions many next-generation IP telephony service providers soon
requiring this functionality in their own networks.
During the quarter, Level 3 announced the formation of the Packet
Multimedia Carrier Coalition, a coalition of 15 telecommunications service
providers dedicated to the rapid establishment of additional protocols
required to bridge between the PSTN and IP based networks.
At Level 3's Analyst and Investor conference, on February 2, 1999, the
company provided a demonstration of its IP based voice service, which
seamlessly integrates Level 3's IP network with the PSTN, unlike other service
providers that require ''double dialing.'' The company plans to begin
commercial testing of its IP voice service in select markets in the second
quarter of 1999.
About Level 3 Communications, Inc.
Level 3 Communications, Inc., is a communications and information services
company that is building the first international network optimized for Internet
Protocol technology. The Level 3 network will combine local and long
distance networks, connecting customers end-to-end across the U.S. and in
Europe and Asia. The company expects to complete the U.S. intercity
portion of the network during the first quarter of 2001. In the interim, Level 3
has leased a national network over which it began to offer services in the
third quarter of 1998. Level 3 will provide a full range of communications
services, including local, long distance, international and Internet services.
Level 3's common stock is traded on The Nasdaq National Market (U.S.)
under the symbol LVLT. Its World Wide Web address is www.Level3.com.
The statements made by Level 3 in this press release may be forward looking
in nature. Actual results may differ materially from those projected in
forward looking statements. Level 3 believes that its primary risk factors
include, but are not limited to: substantial capital requirements;
development of effective internal processes and systems; the ability to
attract and retain high quality employees; changes in the overall economy;
technology; the number and size of competitors in its markets; law and
regulatory policy; and the mix of products and services offered in its target
markets. Additional information concerning these and other potential
important factors can be found within Level 3's filings with the U.S. Securities
and Exchange Commission. Statements in this release should be evaluated
in light of these important factors.
Attachment 1
LEVEL 3 COMMUNICATIONS, INC.
Consolidated Condensed Statements of Operations
(Unaudited)
Three Months Ended Twelve Months Ended
December 31, December 31,
(dollars in millions) 1998 1997 1998 1997
Revenue
Communications &
Information Services $ 42 $ 28 $144 $95
Other 54 62 248 237
Total Revenue 96 90 392 332
Costs and Expenses
Operating Expenses 61 46 199 163
Depreciation and
Amortization 31 5 55 20
General and
Administrative 117 24 293 85
Stock-Based Compensation
Expense, net 16 21 39 21
Write-off In Process
Research and Development -- -- 115 --
Total Costs and
Expenses 225 96 701 289
Income (Loss) from
Operations (129) (6) (309) 43
Other Income
(Expense), net 97 (10) 82 (8)
Income (Loss) before
Income Taxes and
Discontinued Operations (32) (16) (227) 35
Income Tax (Provision)
Benefit (3) 65 25 48
Income (Loss) from
Continuing Operations (35) 49 (202) 83
Discontinued Operations
Gain on Separation of
Construction Operations -- -- 608 --
Energy, net of
income taxes -- 47 324 10
Discontinued Construction
Operations -- 71 -- 155
Income (Loss) from
Discontinued Operations -- 118 932 165
Net Earnings (Loss)
Level 3
Communications, Inc. (35) 96 730 93
Discontinued Construction
Operations -- 71 -- 155
Total Net Earnings
(Loss) $(35) $167 $730 $248
Earnings (Loss) per Share
Continuing Operations
Basic $(0.11) $0.18 $(0.67) $0.33
Diluted $(0.11) $0.18 $(0.67) $0.33
Net Earnings (Loss)
Basic $(0.11) $0.63 $2.42 $0.99
Diluted $(0.11) $0.63 $2.42 $0.99
Net Earnings (Loss)
excluding gain on
separation of
Construction Operations
Basic $(0.11) $0.36 $0.40 $0.37
Diluted $(0.11) $0.36 $0.40 $0.37
Weighted Average
Shares Outstanding
(in thousands)
Basic 307,463 262,449 301,976 249,293
Diluted 307,463 263,528 301,976 250,372
Attachment 2
Performance Metrics
In order to monitor the progress of the network build-out, Level 3 has
developed operating and construction metrics. These benchmarks will be
reported every quarter to help Level 3 stockholders and the investment
community monitor the company's performance and anticipate future
progress. This set of benchmarks is for Phases 1 and 2, which includes 25 U.S.
city networks, the 16,000 mile U.S. intercity network, 6 International city
networks, and a 2,000 mile Pan-European network. Level 3 plans to have
operations in approximately 50 U.S. and 21 international cities overall.
Definitions:
-- Markets in Service -- Type I -- the number of local markets where
Level 3 has an operational gateway site, and a salesforce offering
products over leased or owned facilities.
-- Markets in Service -- Type II -- the number of cities where Level 3 has
accelerated market entry. Each of these markets has a smaller
operational gateway facility and a salesforce. The accelerated
market entry precedes funding for the local network build.
-- Markets with Fiber Networks -- number of local markets where Level
3 is able to offer services over owned networks.
-- Intercity Rights-of-Way Miles -- number of intercity miles where
rights-of-way agreements are secured. Rights-of-way agreements are
required for Level 3 to build the intercity network.
-- Intercity Route Miles Under Construction -- number of intercity miles
being constructed. A segment is considered to be ''under
construction'' when the contractor is mobilized.
-- Intercity Route Miles Completed -- number of intercity route miles
with completed conduits installed.
Construction Rollout Schedule For International Network
(Prefunded Portions)
1999 2000
Metric 1st Q 2nd Q 3rd Q 4th Q 1st Half 2nd Half
Est. Est. Est. Est. Est. Est.
Markets In
Service Type I 1 2 4 5 6 6
Markets In
Service Type II 1 1 1 1 1 1
Markets With
Fiber Networks -- -- 1 3 4 5
International intercity network development work was just initiated. The first
loop of approximately 2,000 miles is projected to be completed by year-
end 2000.
Construction Rollout Schedule For Prefunded U.S. Portions of Network
(Numbers in parenthesis ( ) represent the schedule previously announced
for 3Q 1998.)
1998
Metric 2ndQ 3rdQ 4thQ
Actual Actual Actual
Markets In Service
Type I 0 10 15
Markets In Service
Type II 0 0 2
Markets with
Fiber Networks 0 0 0
Intercity Rights-
of-Way 9,000 10,500 14,400
(11,500)
Intercity Route
Miles Under Construction 0 175 850
(500)
Intercity Route
Miles Completed 0 0 410
(100)
1999
Metric 1stQ 2ndQ 3rdQ 4thQ
Est. Est. Est. Est.
Markets In Service
Type I 15 19 23 25
Markets In Service
Type II 2 2 2 2
Markets with
Fiber Networks 3 8 15 20
Intercity Rights-
of-Way 15,000 16,000 16,000 16,000
(15,000) (15,000) (15,000) (15,000)
Intercity Route Miles
Under Construction 3,000 7,000 7,500 7,500
(3,000) (7,000) (10,500) (10,500)
Intercity Route
Miles Completed 600 1,100 3,500 6,500
(350) (600) (1,100) (4,000)
2000 2001
Metric 1st Half 2nd Half 1stQ
Est. Est. Est.
Markets In Service
Type I 25 25 25
Markets In Service
Type II 10 24 25
Markets with
Fiber Networks 23 25 25
Intercity Rights-
of-Way 16,000 16,000 16,000
(15,000) (15,000) (15,000)
Intercity Route Miles
Under Construction 5,500 2,000 0
(6,500) (2,500) 0
Intercity Route
Miles Completed 9,500 14,000 16,000
(8,500) (12,500) (15,000)
SOURCE: Level 3 Communications, Inc. |
