Financial and Business Highlights
- Consolidated Revenue of $1.09 billion
- Net Loss of $33 million, or $0.02 per share
- Consolidated Adjusted EBITDA grows 30 percent year over year to $251 million
- Year over year Core Communications Services revenue growth of 9 percent
- Company generated positive Free Cash Flow of $4 million
- Company expects to generate positive Free Cash Flow for the remainder of 2008
- Company closes sale of Vyvx advertising distribution business for $129 million
- Company continues to improve service activation and delivery
- Project Unity deployment remains on track
BROOMFIELD, Colo., July 24 /PRNewswire-FirstCall/ -- Level 3
Communications, Inc. (Nasdaq: LVLT) today reported strong second quarter
results. Consolidated revenue was $1.09 billion for the second quarter 2008,
an increase of 4 percent compared to $1.05 billion for the second quarter
2007. First quarter 2008 consolidated revenue was $1.09 billion.
'Our strong second quarter results reflect Core Network Services growth
and our continued focus on reducing network costs and operating expenses,'
said James Crowe, president and CEO of Level 3. 'We generated positive Free
Cash Flow and now expect to be Free Cash Flow positive for the remainder of
the year. And as previously announced, we expect to be Free Cash Flow positive
for the full year 2009.'
The net loss for the second quarter 2008 was $33 million, or $0.02 per
share, including a $96 million, or $.06 per share gain on the sale of the
company's Vyvx advertising distribution business. This compares to a net loss
of $202 million, or $0.13 per share for the second quarter 2007 and a net loss
of $181 million, or $0.12 per share for the first quarter 2008.
Consolidated Adjusted EBITDA(1) was $251 million in the second quarter
2008, a 30 percent increase from $193 million for the second quarter 2007.
Consolidated Adjusted EBITDA for the first quarter 2008 was $211 million.
Core Revenue Growth and Cost Improvements Drive Substantial Improvement to
Consolidated Adjusted EBITDA
Metric Second Quarter Second Quarter
($ in millions) 2008 Results 2007 Results
Core Communications Revenue $972 $888
Other Communications Revenue $46 $71
SBC Contract Services Revenue $54 $76
Total Communications Revenue $1,072 $1,035
Other Revenue $18 $17
Total Consolidated Revenue $1,090 $1,052
Consolidated Adjusted EBITDA (*)(**) $251 $193
Capital Expenditures $106 $170
Unlevered Cash Flow (**) $126 $(64)
Free Cash Flow (**) $4 $(141)
Communications Gross Margin (**) 58.8% 57.8%
Communications Adjusted EBITDA Margin (**) 23.6% 18.7%
* Consolidated Adjusted EBITDA for the second quarter 2008 excludes $20
million in non-cash compensation expense and includes $4 million of
cash restructuring charges. Consolidated Adjusted EBITDA for the second
quarter 2007 excludes $24 million in non-cash compensation expense and
$1 million in non-cash impairment charges and includes $1 million of
cash restructuring charges
** See schedule of non-GAAP metrics for definition and reconciliation to
GAAP measures
Communications Business Results
Revenue
Total Communications revenue for the second quarter 2008 was $1.07
billion, a 4 percent increase from $1.04 billion in the second quarter 2007.
Total Communications revenue was $1.07 billion in the first quarter 2008.
Core Communications Services
Core Communications Services revenue, which includes Core Network Services
and Wholesale Voice Services, was $972 million in the second quarter 2008, an
increase of 9 percent over $888 million in the second quarter 2007. Core
Communications Services revenue was $958 million in the first quarter 2008.
Second quarter 2008 Core Network Services revenue was $797 million, compared
to $735 million in the second quarter 2007. Second quarter 2008 Wholesale
Voice Services revenue was $175 million, an increase of 14 percent compared to
the second quarter 2007. Wholesale Voice Services revenue was $184 million in
the first quarter 2008.
Communications
Revenue Quarter ended Quarter ended Percent Quarter ended
($ in millions) June 30, 2008 June 30, 2007 Change March 31, 2008
Core Network Services $797 $735 8% $774
Wholesale Voice Services $175 $153 14% $184
Total Core Communications
Services $972 $888 9% $958
Other Communications
Services $46 $71 (35)% $51
SBC Contract Services $54 $76 (29)% $57
Total Communications
Revenue $1,072 $1,035 4% $1,066
During the second quarter, the company completed an analysis of its
deferred revenue accounts and determined that deferred revenue of
approximately $12 million should have been recognized as revenue in prior
years. The effect on each separate prior period was not material. Accordingly,
the company recognized $12 million of revenue (non-cash) in the second quarter
2008, in Core Network Services, primarily affecting the Wholesale Markets
Group.
Also during the quarter, the company completed the sale of the Vyvx
advertising distribution business. Second quarter 2008 revenue includes
approximately $6 million in Vyvx advertising distribution business revenue, or
about two months of revenue. Vyvx advertising distribution revenue was
approximately $7 million and $9 million for the second quarter 2007 and first
quarter 2008, respectively.
Excluding revenue from the Vyvx advertising distribution business for all
periods and the benefit of the $12 million deferred revenue change, second
quarter 2008 Core Communications Services revenue grew 8 percent, compared to
the second quarter 2007 and 1 percent compared to the first quarter 2008.
Similarly, Core Network Services revenue grew 7 percent from the second
quarter 2007 and 2 percent from the first quarter 2008. This growth was
primarily due to increased demand for transport and infrastructure services.
Financial Results
excluding the
benefit of Deferred
Revenue Change and Quarter Quarter Quarter
Vyvx Advertising ended ended ended
Distribution Business June 30, June 30, Percent March 31, Percent
($ in millions) 2008 2007 Change 2008(1) Change
Core Network Services $779 $728 7% $765 2%
Wholesale Voice Services $175 $153 14% $184 (5)%
Total Core Communications
Services $954 $881 8% $949 1%
Total Communications
Revenue $1,054 $1,028 3% $1,057 0%
Consolidated Adjusted
EBITDA(1) $237 $191 24% $207 NA
(1) Consolidated Adjusted EBITDA for the first quarter 2008 includes a $5
million one-time benefit from the company's coal-mining operations
Core Network Services includes revenue from transport and infrastructure,
IP and data services, local and enterprise voice services and Vyvx broadcast
services. These services have incremental gross margins of approximately 80
percent. Customers in each of the company's four market groups buy across the
Core Network Services portfolio. During the second quarter, the company signed
a large multi-year nationwide long haul and metro agreement with a Content
Markets Group customer.
Wholesale Voice Services includes revenue from long distance voice
services, including domestic voice termination, international voice
termination and toll free services, which are purchased by customers primarily
in the Wholesale and European market groups. These services have incremental
gross margins of approximately 30 percent. As previously indicated, the
company manages Wholesale Voice Services for gross margin and as a result,
revenue is expected to be volatile quarter to quarter.
Core Communications Services revenue by market group was:
Percent of Second
Core Communications Second Quarter Total First
Services Revenue Quarter Core Communications Quarter
($ in millions) 2008 Services Revenue 2008
Wholesale Markets Group $548 56% $541
Business Markets Group $241 25% $240
Content Markets Group $100 10% $100
European Markets Group $83 9% $77
Total Core Communications Services
Revenue $972 100% $958
Year over year growth was led by the European Markets Group and Content
Markets Group, with both groups seeing strong demand from customers moving
video and other large file size content over the Internet.
Other Communications Services
Other Communications Services revenue declined 35 percent to $46 million
compared to $71 million in the second quarter 2007. Expected declines in
managed modem services were the reason for the decrease. First quarter 2008
Other Communications Services revenue was $51 million.
SBC Contract Services
SBC Contract Services revenue was $54 million in the second quarter 2008,
a 29 percent decline compared to the year earlier quarter revenue of $76
million. First quarter 2008 SBC Contract Services revenue was $57 million.
As previously disclosed, SBC announced its intention to migrate the
services provided under the agreement to its own network facilities in
accordance with terms previously negotiated by WilTel Communications, LLC
(WilTel), a company subsequently acquired by Level 3. Under the terms of this
agreement, SBC agreed to pay WilTel a minimum amount of gross margin
regardless of the actual revenue generated under the agreement.
As of the end of the second quarter 2008, the customer satisfied the gross
margin commitment for the agreement. Accordingly, beginning in the third
quarter 2008, revenue attributable to the SBC contract will be reported as
Other Communications Services revenue, and the SBC Contract Services category
will be eliminated.
Deferred Revenue
Communications deferred revenue was $932 million at the end of the second
quarter 2008, compared to $951 million at the end of the second quarter 2007.
Deferred revenue at the end of the first quarter 2008 was $927 million.
Cost of Revenue
Communications cost of revenue for the second quarter 2008 was $442
million, versus $437 million in the second quarter 2007. Cost of revenue was
$459 million in the first quarter 2008.
Communications Gross Margin was $630 million, or 58.8 percent in the
second quarter 2008, compared to $598 million, or 57.8 percent in the second
quarter 2007. For the first quarter 2008, Communications Gross Margin was $607
million or 56.9 percent.
Selling, General and Administrative (SG&A) Expense
Communications SG&A expense, including non-cash compensation expense, was
$393 million for the second quarter 2008, versus $427 million for the second
quarter 2007 and $418 million for the first quarter 2008. Communications SG&A
includes non-cash compensation expense of $20 million, $24 million, and $23
million for the second quarter 2008, second quarter 2007 and first quarter
2008, respectively.
Excluding non-cash compensation expense, Communications SG&A was $373
million in the second quarter 2008, a 7 percent decline compared to $403
million in the second quarter 2007 and a 6 percent decline compared to $395
million in the first quarter 2008.
Adjusted EBITDA
Adjusted EBITDA for the communications business was $253 million for the
second quarter 2008, a 30 percent increase compared to $194 million for the
second quarter 2007.
