Wholesale/transport services

Level 3: Integration Has Us Poised to Grow

Despite posting its first quarterly loss after six straight profitable quarters, Level 3 Communications is successfully integrating its tw telecom acquisition and increasing its enterprise revenues faster than its rivals, executives said this week on the carrier's quarterly earnings call. (See Level 3 Posts Q2 Loss on One-Time Items.)

Some of the specific results Level 3 Communications Inc. (NYSE: LVLT) reported were affected by one-time items -- the loss itself was the result of the cost of debt restructuring. But CEO Jeff Storey's overall message to analysts was clear and consistent: Level 3 is focused on integration of its products, network technologies and operations systems on a global basis, to benefit both its employees and its customers, and is on track to meet its goals in that department.

And despite making "massive changes to its sales organizations and its product portfolio," sales rose for the second quarter of this year in comparison to the second-quarter sales of last year for both Level 3 and tw telecom, he said. Core network service revenues for enterprise customers were up 7% in North America and 6% overall, and as analysts on the call noted, those results compare to single-digit declines in overall business service revenues for AT&T Inc. (NYSE: T) and Verizon Communications Inc. (NYSE: VZ).

That means that after this year of transition, as Storey calls it, Level 3 believes it is poised to see significant revenue growth in its business service products.

"We are pleased but not satisfied," he said. "I believe we can do more to make it easier for the sale force to cross-sell, upsell and improve overall productivity."

The move marks the final stage of Level 3's shift from being considered a massive transport and wholesale operator to a company that delivers enterprise services primarily, alongside its other businesses. Wholesale revenues this quarter benefited from some one-time settlements to grow, but are expected to be flat to down going forward, said Sunit Patel, EVP and CFO at Level 3. Central to the enterprise sales effort is capitalizing on what Storey is now calling "the largest SDN deployment in our industry" -- something Google and AT&T among others might debate -- to deliver "a differentiated customer experience." That builds on tw telecom's Dynamic Capacity capabilities and Level 3's own networks to deliver a network-on-demand service well-suited to the growing demands of cloud services and video delivery. (See Level 3: Analytics Unlocks SDN Potential.)

In addition, Level 3 intends to expand services such as its managed security offerings as part of the upsell, bolstered by this quarter's acquisition of Black Lotus. (See Level 3 Elevates Security With Black Lotus.)

Take a closer look at Ethernet service strategies in our Ethernet services section here on Light Reading.

The growth efforts might not be reflected in the kind of year-over-year growth rates in the second half of the year, Patel said, because of the incremental impact of last year's major contracts with Starbucks and the US federal government. But both he and Storey positioned Level 3 as poised for core network services growth.

Storey said Level 3 has successfully integrated sales staffs of the two companies in North America. They can now sell one set of products on one network using a unified customer interface, with similar integration plans this year in EMEA and next year across its Latin America footprint. In EMEA, the company is also focused on expanding its footprint specifically in the UK, France, Germany and Benelux, he said

"We standardized on a single Ethernet platform, and by platform I mean the product definitions, network to deploy those products and the systems to support them," he said. "We have completed our rollout of our new Ethernet platform in North American and we will have it completed in EMEA by the end of the year and in Lat-Am in 2016."

The high value of the US dollar and soft macroeconomic conditions in both of those regions is depressing Level 3's revenue growth there, Storey and Patel told analysts. On a "constant currency" basis, the carrier's EMEA business grew 4.9% this year, however.

Level 3's content delivery business saw revenue declines this year as well, but that is expected to change, based on an increased investment in capacity and CDN infrastructure, and the series of interconnection agreements the company is signing that will eliminate congestion at peering points, Storey said.

— Carol Wilson, Editor-at-Large, Light Reading

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