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Business News – Level 3 Repositions Sales Focus in $2.3 Billion Savings Plan

Posted: 08/2001

Business News

Level 3 Repositions Sales Focus in $2.3 Billion Savings Plan
By Josh Long

The global transport market demonstrated additional signs of weakness early this summer as Level 3 Communications Inc. (www.level3.com) lowered its revenue projections and announced a plan to save $2.3 billion through 2003.

Broomfield, Colo.-based Level 3 reduced its 5,900-strong workforce by 1,400 employees, or 24 percent, as part of its restructuring plan. The company made the announcements June 18.

Level 3 executives said a broader spectrum of service providers has suffered during the economic downturn than the company anticipated, resulting in declines in recurring revenue. A Level 3 spokeswoman would not comment on how much business the company has lost.

“I don’t really think the problems Level 3 is facing are all that unusual,” says Lynda Starr, vice president of U.S. carrier research at Probe Research (www.proberesearch.com). “Basically, they spent a lot of money to build a big network … and now they need to get traffic on there, and unfortunately a lot of their customers are not doing well financially.”

The company’s stock took a nosedive on the heels of the announcement, hitting a 52-week low of $5.97. In an equity research report issued June 19, Lehman Brothers (www.lehman.com) said Level 3 implemented necessary measures to conserve cash that others in the transport space may need to take in the midst of a “decimated” bandwidth sector. The report also said, the company’s risks remain high as it remains approximately $8 billion in debt and continues to burn through $700 million a quarter while relying on large dark fiber and wavelength sales.

In a national conference call, Level 3

president and CEO Jim Crowe said the wounded service providers include dot-com companies, ASPs, ISPs, DCLECs and fixed wireless providers.

Level 3 executives say the company’s sales department would focus on a more stable and narrow customer base representing 300 companies with needs for wavelengths and private-line services and specifically would target the top 40 bandwidth-centric companies. The company projects the near-term market for wavelengths and high-speed private-line services–blocks of available bandwidth designated on a network–will exceed $15 billion.

Level 3 executives add that the company has enough money to weather the economic crunch and has complied with all senior bank covenants. While the company owes $7.9 billion, it says it has $4.3 billion in cash and liquid assets as of March 31. Level 3 will owe $1.8 billion in interest payments during the next two and a half years.

Following the revised business plan, Standard & Poor’s lowered its rating on Level 3 to “negative,” citing a lagging collocation business, “poor visibility on the demand, timing and pricing for transport services and concerns regarding the company’s ability to service its heavy debt burden once its cash position is exhausted.”

Crowe says investors should remain confident.

“We are clearly focused on much more mature companies and … we are acknowledging there is some variability,” Crowe says. “Our assessment has to do with the length and depth of the slowdown, and we are focused on a whole series of contingency plans in case we are wrong. But obviously what we sell is not a discretionary service in the long term … in the information industry, and we are going to see a rebound, and we want to make sure we are well-positioned. But we are not saying our crystal ball is perfect.”

The retrenchment marked the second time Level 3 revised its revenue projections after posting its first-quarter results in April.

As part of the most recent announcement, Level 3 slashed capital expenditures this year to $3 billion, down from earlier forecasts of $3.3 billion to $3.4 billion. And the company lowered its expected 2001 generally accepted accounting principles (GAAPs) communications revenue to approximately $1.3 billion, down from earlier forecasts of $1.4 billion to $1.5 billion.

Level 3 also made other related announcements:

* Twenty percent of its recurring revenue base is at credit risk this year, and the company projects 85 percent to 90 percent of recurring revenue will derive from high-credit customers by the end of the year. Twenty percent of its dark fiber backlog is at risk.

* Level 3 expects to achieve free cash flow breakeven in early 2004, vs. an earlier projection of late 2003.

* The carrier will defer development of certain collocation facilities, but executives would not comment on specific plans. Level 3, which has built more than 3 million square feet of collocation space, operates 68 gateway data centers in 54 U.S. markets, nine in Europe and two in Asia.

* This year, excluding nonrecurring dark fiber revenue, Level 3 expects that transport services will account for 40 percent to 45 percent of revenue; IP and collocation services, 20 percent to 25 percent; and softswitch-enabled services, 30 percent to 35 percent. Softswitch-enabled services include wholesale IP voice, enhanced IP service and wholesale dial-up Internet access.

Level 3 executives also say contingency plans are in place to further reduce capital expenditures. Those plans include project deferrals and the sale of certain noncore assets.

Although the sales cycle for transport services is longer during a period of conservative spending, Crowe says service providers are burning through inventory, which will result in demand late next year.

He concedes demand for dark fiber has “softened” on intercity routes, but says companies still are interested in purchasing dark fiber in the metropolitan regions.

Level 3 would not comment on the specific length of a wavelength sales cycle nor discuss pending contract negotiations. The global carrier has migrated more than 95 percent of its traffic to its own long-haul network. Crowe says the company is progressing aggressively to move traffic onto metropolitan networks as well. Level 3 has built 26 local networks in the United States and seven in Europe.

In contrast to the CLEC sector, where hundreds of competitors are vying for market share, Probe Research’s Starr does not believe the carrier’s carrier marketplace is too congested. The global transport market can support the likes of Level 3, Global Crossing
(www.globalcrossing.com) and 360networks (www.360.net), she says.

“I think the demand will be there when the applications are there,” Starr says. “They need higher bandwidth. It is a push-pull between technology and the applications.”


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