Level 3 Poised as CDN Powerhouse Despite $181M Loss

Level 3 Communications Inc. seems to have made the right decision by adding content delivery network (CDN) services to its portfolio. Even though the carrier remains unprofitable by a long shot, it’s becoming a new media powerhouse as the CDN group consistently tacks on 10 percent or higher growth to the bottom line.

In the first quarter of 2008, CDN contributed $100 million – albeit $5 million less than the previous quarter – to Level 3’s overall sales of $1.09 billion, the company reported on Wednesday.

The wholesale division still provides Level 3’s largest source of revenue – it brought in 57 percent, or $541 million, of Level 3’s sales in the three months ending March 31. The enterprise group followed with 25 percent, or $240 million, in sales; content with 10 percent; and the European markets unit with 8 percent, or $77 million.

“Demand remains strong, especially for content delivery,” said James Crowe, president and CEO of Level 3, in a conference call with analysts.

Indeed, Level 3’s sales were 3.4 percent above the same period a year ago. That news, along with other improved outlooks from the company, helped push the company’s stocks to its biggest gains since July 2002. Shares jumped 22.3 percent, closing at $2.91. That number didn’t come close to the 52-week high of $6.42, but the activity signaled investors’ approval over Level 3’s results.

Of course, that doesn’t mean Wall Street is overlooking the carrier’s continued losses. Level 3 is $181 million in the red; compared to the first quarter 2007 losses of $647 million, though, that’s a vast improvement.

It wasn’t just market demand that boosted Level 3’s sales and, therefore, investors’ confidence. The carrier also, at long last, tackled the installation backlog that had piled up from acquisition after acquisition. Lag times had gotten so long, and orders so lost, that some indirect sales partners stopped working with Level 3. Relief came in the first quarter when Level 3 added resources and started requiring more complete provisioning descriptions, Crowe explained. The problems are mostly – but not completely – fixed, he said.

“There were bottlenecks in our service activation process that we could have and should have prevented,” said Crowe.

Level 3 is trying to keep history from repeating itself. The carrier has developed a new order entry system called Unity. Crowe said Unity will handle “two-thirds of high-margin revenue” by year’s end. Much of those sales likely will come from the 500 new reps Level 3 plans to hire by June.

Level 3 will absorb a larger sales force even as it keeps its current executive roster intact. Kevin O’Hara, co-founder and former president and COO, resigned in March with little explanation from Level 3. Neil Hobbs took over as COO and Crowe assumed the title of president. Crowe on Wednesday responded to analysts’ inquiries about O’Hara’s abrupt departure.

“We shook hands and he left,” Crowe said. “We had differing points of view about organizational matters and how to approach fixing problems.”

A CDN executive also stepped down, citing personal reasons. Crowe said he expects no other executive disruptions.

Now, amid day-to-day operations, Level 3 is looking to make its name as a top CDN provider. In March, it signed a long-term patent cross-licensing agreement with IBM – and bought 20 patents from the conglomerate, according to various media reports. Level 3 already owns more than 80 CDN patents and has another 50 pending.

But Level 3 isn’t just making deals – it’s also defending its rights in court. In January, the company sued rival Limelight Networks for patent infringement.

“We are very comfortable that we have the rights to the current and future intellectual property that we need to conduct our content delivery network,” Crowe said. Fighting for CDN rights “is going to be an increasingly important battleground,” he added.

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