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To: Softechie who wrote (1124)	4/18/2001 11:51:19 PM
From: Softechie	Read Replies (1) \| Respond to of 2155

DJ Level 3 -3: Completion Of Network Means Higher Margins 18 Apr 18:01 Level 3 Chief Executive Crowe said in the conference call Wednesday that the "big news" of the first quarter was the company's completion of all eight rings of its intercity network in the U.S. About 95% of the company's customer traffic is expected to be on its own network by May. That is important because its profit margins are higher on its own network, meaning cash flow as measured by EBITDA will be higher too. Chief Financial Officer Choksi said that the company has "reached an inflection point on EBITDA" and expects significant improvement. Level 3 raised its guidance on earnings per share as well as EBITDA. It now is projecting a 2001 net loss of $7.25 a share, a narrower loss than the previous guidance of $7.50 a share. But Tucker Anthony analyst Tom Friedberg said the stock was down Wednesday because investors are paying more attention to the lower revenue guidance. He noted that Level 3 can become more profitable faster by scaling back in certain areas. Epoch Partners senior analyst Mark Langner agreed that "in a lot of ways, people are looking at growth of revenues as the key number," and in that respect Level 3 provided lower guidance Wednesday. In addition, Langner said, Level 3 executives recently had been firm about reiterating previous guidance, so the Wednesday revision was a surprise. He thinks the stock fall is due in part to analysts imputing more of a risk to the stock, and thus more of a discount in calculating a value for discounted future cash flows. But Langner said the Wednesday results don't change his long-term view of the company. "We continue to believe this will be a long-term winner," he said. Langner said he had not heard of any rumors about Level 3 problems with bank covenants. The conference call comments regarding no violation of bank covenants under the company's new revenue and cash flow projections probably were made in the context of a troubled telecom industry, he said. Some telecommunications companies have had problems with their bank covenants, he said. And if the problems get bad enough, the banks can force a company into bankruptcy by turning off funding. Kaufman Brothers managing director Vik Grover pointed to Level 3's more cautious approach to its backlog as an important aspect of the results Tuesday. "They have scrubbed the backlog to kind of cleanse it of dubious customers (due to liquidity problems)," Grover said. The scrubbing gives Level 3's revenue guidance more credibility, he said. The company's backlog was $5.3 billion at the end of the first quarter, versus $5.1 billion at the end of the year, with "backlog" defined as total communications revenue from signed contracts that have not been provisioned, as well as current revenue run-rate. "Backlog is up. We have a lower expected value of the backlog," Crowe said. He said Level 3 is being more conservative about how much of the backlog is expected to be turned into revenue. Executives on the conference call didn't specify particular companies that have been "scrubbed" out of the revenue projections. But Grover noted there are uncertainties about XO Communications Inc. (XOXO), and its ability to follow through on deals with Level 3. Last year, XO committed to buy intercity and intracity dark fiber (fiber-optic capacity without the necessary electronics to make it work) in some European cities from Level 3 for $163 million. Grover said about a month ago, when Level 3 was trading at $16 a share, he moved it to a strong buy rating from accumulate because he sees strong long-term potential for the stock. In the wake of Wednesday's results, he said, he is reiterating his strong buy rating. As more international standards are worked out for communicating over the Internet, services over the Internet will take off and demand for Level 3's broadband communications networks in the U.S. and abroad will increase, Grover said. And more competition in local telephone service will open up the local-loop bottleneck, leading to more demand for Level 3 services, he added. Level 3 stock is "very undervalued," Grover said, noting that consolidated adjusted EBITDA is expected to increase rapidly, to between $1.0 billion and $1.1 billion in 2002 from $700 million in 2001. He has a $59 12-month price target on the stock. Level 3 reported first-quarter consolidated revenue of $449 million, versus $177 million for the year-ago quarter. It posted a net loss of $1.45 a share, versus a loss of 77 cents a share a year ago. Level 3's shares closed Wednesday down $1.88, or 12.6%, at $13.02 on volume of 35.2 million shares, compared with average daily volume of 6.7 million shares. -By Tom Locke, Dow Jones Newswires; 303-293-9294; tom.locke@dowjones.com (END) DOW JONES NEWS 04-18-01 06:01 PM