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Level 3 Earnings Disappoint

Excluding dark fiber sales, growth disappeared -- and so did customers. What's management excited about?

July 18, 2001

3 Min Read
Level 3 Earnings Disappoint

Level 3 Communications Inc. (Nasdaq: LVLT) reported second-quarter earnings Wednesday before the opening bell, and the results didn’t exactly bring Wall Street to its feet.

The reported net loss for the quarter, excluding one-time charges of $136 million, was $595 million, or $1.62 per share. Including one- time charges of $136 million, net loss for the quarter was $731 million, or $1.99 per share. Analysts had expected a larger loss in the $2.04 range, according to First Call.

After reporting, Level 3 shares were trading down 0.15 (3.74%) to 3.86. Shares of Level 3 are down 87 percent this year (see Level 3 Reports Earnings).

What disappointed investors? The company announced a larger loss, slower growth in IP services revenue, fewer customers, and missed a key internal growth target.

The company reported communications GAAP (generally accepted accounting principles) revenues (which excludes dark fiber and one-time capacity sales) of $331 million for the quarter, up 129 percent over the same period one year ago. But IP and colocation revenues rose a scant 5 percent from the previous quarter, as customer disconnections continued to plague this business.

Included in the communications GAAP revenue number was $61 million in dark fiber sales and $40 million in reciprocal compensation. Without these non-recurring items, communications revenue was $230 million, which actually trailed management’s internal forecast of $235 million. The company also reported a 24 percent drop in customers to 2,275 from 2,975, and a 14 percent decrease in backlog from the first quarter.

Despite the results, management was upbeat regarding the company’s funding situation and capital spending outlook. “We have available liquidity of $3.8 billion comprised of $3.2 billion in cash and $650 million in available credit,” commented CEO James Crowe on the conference call.

Despite its comfort with overall liquidity, management expects future capital spending initiatives to be increasingly “success-based,” or dependent on future revenues and profits. About two thirds of future capital expenditures are expected to be “success based,” in coming quarters. Beyond 2001, this percentage could rise to the 80 percent level.

Management announced its third-quarter guidance of $280 million in communications GAAP revenues, which would represent a 15 percent decline from the second quarter. For the fourth quarter, communications GAAP revenues are expected to be $304 million, a 9 percent increase from the current Q3 estimate.

Some analysts, as well as the market itself, reflected skepticism about the company’s rosy prognosis. For example, Adam Quinton, an analyst with Merrill Lynch & Co. Inc., wrote in a report that growth estimates seemed optimistic.

“The company expects an approx. 60 percent increase in cash and 50% GAAP revenues in 2002E from the current run rate,” wrote Quinton. “We see this as challenging, especially in light of unexciting sequential revenue profile in 2001. We note customer numbers fell 24% Q/Q and the backlog was down 13% Q/Q at $4.6B."

Management was upbeat regarding its near-term outlook as well, citing improved customer credit quality and higher gross margins. The company also said it has nearly completed its network expansion and remains comfortable with its metro footprint. But based on the tone of the questions in the Q&A following the converence call, it was clear that analysts were becoming increasingly dubious about these forecasts.

— Christopher P. Bulkey, Research Analyst, and R. Scott Raynovich, Executive Editor, Light Reading

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