20.07.2000 – 13:00
Level 3 Reports 58% Communications Revenue Growth in Second Quarter
Year 2000 Communications Revenue Estimates Increased to $825 Million
Senior Management Promotions Announced
BROOMFIELD, Colo. (ots-PRNewswire) - Level 3 Communications, Inc. (Nasdaq: LVLT) today announced its second quarter 2000 results. Consolidated revenue for the quarter was $234 million. The net loss for the quarter was $281 million, or $0.77 per share. The per share calculation was determined giving effect to an increase in the number of shares of common stock outstanding as the result of a follow-on equity offering in February 2000.
Included in the company's results is a gain of $57 million relating to the issuance of stock by RCN Corporation (Nasdaq: RCNC), in which Level 3 has an equity investment, for RCN's acquisition of 21st Century Telecom Group, Inc. Excluding this non-operating gain, the net loss for the quarter was $338 million, or $0.92 per share.
The results for the quarter also include a $49 million non-cash charge, the greatest portion of which is due to the company's Outperform Stock Option Program. Excluding this charge and the RCN gain, the net loss for the quarter was $0.79 per share.
"Overall, it was a particularly strong quarter for us," said James Q. Crowe, CEO of Level 3. "Customer demand continues to outpace our expectations. The rate at which our revenues increased is particularly noteworthy given that we are still operating in a supply-constrained environment. As we move from services supplied over a leased network to our own facilities over the course of this year, we believe we can meet customer demand at an even more rapid rate."
Organizational Changes Announced: Level 3 announced the following organizational changes:
-- Kevin O'Hara has been named president and chief operating officer (COO), and will manage the daily operations of the company.
-- Douglas Bradbury has been named vice chairman of the Board of Directors, and will continue to oversee the strategic financial planning for the company. In addition, Bradbury has assumed global responsibility for setting policy aimed at attracting and retaining employee-owners.
-- Sureel Choksi has been appointed chief financial officer (CFO), with responsibility for managing the financial activities of the company.
-- Colin Williams, executive vice president, global services and systems, will formally retire from the company in November. Williams will continue to serve on the Executive Management Committee, the company's most senior operating committee, and to participate in setting global strategy and policy.
Level 3 is pleased to announce that Lee Jobe, formerly president, Network and Systems, for Concert, has been named President of Global Operations for Level 3, overseeing sales and operations in the U.S., Europe and Asia. Jobe will report to Kevin O'Hara. "Lee is a highly regarded leader in the industry who is known and respected for his management and operations expertise," said O'Hara. "I am particularly pleased to have someone of his caliber joining Level 3 and further strengthening our management team."
Second Quarter Financial Highlights
Company Increases Revenue Projections: Total communications revenue for 2000 is projected to be approximately $825 million versus the previously announced $750 million. Of that amount, approximately $200 million is expected to come from dark fiber sales, an amount that is unchanged from previous estimates. "Due to the strong revenue growth we are experiencing, we are increasing our estimates for communication services revenue for the year," said Bradbury.
Communications and information services revenue for second quarter 2000 was $181 million, a 242 percent increase over 1999 second quarter revenue of $53 million. The year-over-year increase was a result of significant growth in the communications business.
Total communications revenue was $153 million for the quarter, a 750 percent increase over 1999 second quarter communications revenue of $18 million, and a 58 percent increase over first quarter 2000 communications revenue. Revenue from communications services only -- excluding dark fiber sales and reciprocal compensation -- was $104 million. This represents a 37 percent increase over first quarter 2000 communications services revenue of $76 million.
Included in the total communications revenue was $35 million of non-recurring revenue from dark fiber sales. Also included in total communications revenue for the quarter was $14 million attributable to reciprocal compensation.
Level 3's customer base continues to increase rapidly. At the end of the quarter, the company had approximately 2,000 customers -- a 33 percent increase in the number of customers since the end of the first quarter 2000. Almost 80 percent of the customer base currently purchase more than one Level 3 product.
Communications Services Currently Offered in 43 U.S. and European Markets: At the end of the quarter, the company offered communications services in 38 U.S. and 5 European markets.
Other Revenue: Other revenue of $53 million for the second quarter included $48 million from coal mining, versus second quarter 1999 coal mining revenue of $47 million. Full year 2000 coal revenue is expected to be approximately 10 percent less than full year 1999 coal revenue due to reduced shipments under long-term coal contracts in 2000.
Cost of Revenue: The cost of revenue for second quarter 2000 was $154 million, representing a 90 percent increase over second quarter 1999 cost of revenue of $81 million. The year-over-year increase in the cost of revenue was primarily a result of an increase in leased network costs and costs associated with dark fiber sales.
Selling, General and Administrative Expenses (SG&A): SG&A expenses for the quarter were $200 million, a 56 percent increase over second quarter 1999 SG&A expenses of $128 million. This increase primarily results from the company's addition of 1,800 employees during the past 12 months. The company added approximately 700 employees to the communications business during the second quarter, bringing the total number of Level 3 employees to approximately 5,000.
Outperform Stock Option Expense: The company recognized $49 million in stock-based compensation expense during the quarter. The substantial majority of this expense was due to Level 3's Outperform Stock Option (OSO) Program. This non-cash expense is accounted for in accordance with SFAS NO. 123, "Accounting For Stock-Based Compensation." Level 3 expenses the value of OSOs over the two-year vesting period. This approach is in contrast to the current practice of most corporations under which conventional stock options are not accounted for as an expense on the income statement.
Under Level 3's plan, OSOs are issued quarterly to all employees, with the exercise price indexed to the performance of the company's common stock relative to the performance of the Standard & Poor's 500 (S&P 500) Index. The company believes that this program aligns Level 3 employees' and stockholders' interests by basing stock option value on the company's ability to outperform the S&P 500.
Depreciation and Amortization: Depreciation and amortization expenses for the quarter were $139 million, a 172 percent increase from the second quarter 1999 depreciation and amortization expenses of $51 million. These charges reflect the significant increase in capital spending to support the growth of the communications business.
Other Income -- Gains from Equity Investments: Included in "Other
Income" is a pre-tax gain of $57 million from the company's equity
investment in RCN. During the second quarter, RCN issued shares of
common stock in conjunction with an acquisition. This reduced Level
3's ownership of RCN from 33 percent to approximately 31 percent, but
increased the value of its proportionate share of RCN's net assets.
Capital Expenditures: Capital expenditures for property, plant and equipment were $1.7 billion for the quarter. The majority of the spending was for construction of the U.S. and European intercity networks, certain local networks in the U.S. and Europe, and the transatlantic cable network. Total capital expenditures for 2000 are expected to be approximately $6.3 billion versus the previously announced estimate of $4.5 billion. This increase in rate of expenditure is the result of the rapid build-out of Level 3's network, as well as the expansion of the business plan.
The previously announced expansion of the company's business plan includes an additional 3.1 million square feet of global gateway and technical space -- resulting in a global total at completion of 6.5 million square feet. Also included is the build-out of seven additional local markets in Europe and Asia, the third ring of the European intercity network, and the expansion of existing local facilities.
Network Development Highlights for the Quarter
U.S. and European Intercity Network Construction Ahead of Schedule: Construction of 2,431 miles of the multi-conduit U.S. intercity network was completed during the second quarter 2000, bringing the total miles of conduit installation completed to 14,231 miles, or 89 percent of the total planned intercity network. As previously announced, Level 3 advanced the construction completion date of this portion of the network by more than three months, and now expects construction of the U.S. intercity multi-conduit network to be substantially completed by the end of fourth quarter 2000.
The company also installed an additional 3,800 miles of fiber optic cable during the quarter, bringing the total intercity route miles with fiber installed to approximately 9,200 miles.
Construction of the multi-conduit European intercity network is also ahead of schedule. Over 340 miles were completed in the second quarter 2000, bringing the total miles of conduit installation completed to 3,559 miles. The installation of conduit on Ring 1, which connects London, Amsterdam, Frankfurt, Paris and Brussels, is now complete. Ring 2, which connects Frankfurt, Dusseldorf, Hamburg, Berlin and Munich, is expected to be complete by the end of the third quarter.
Level 3's multi-conduit network is designed to enable new generations of fiber cable to be installed more quickly and at lower incremental cost than traditional network designs.
Over 1,700 Miles of Intercity Network Lit: During the second quarter, Level 3 lit over 1,700 miles on its U.S. intercity network, bringing the total network miles lit to approximately 2,500. A fiber network is considered to be "lit" when electronics are installed, thereby enabling the network to carry customer traffic.
Gateways and Local Fiber Networks: At the end of the second quarter, Level 3 had operational Gateways in 38 U.S. markets and five European markets. Level 3 Gateways are advanced technical facilities, where customers can physically locate their equipment and connect directly to Level 3's broadband network. Additionally, Gateways provide direct connection to other communications networks, and can house Level 3's network equipment. The eight markets added during the quarter were Phoenix, Cleveland, Kansas City, Omaha, Louisville, Jacksonville, Wilmington and Nashville. Additionally, at the end of the second quarter, markets with Level 3 built local fiber networks totaled 31 -- 26 in the U.S. and 5 in Europe.
Transatlantic Cable System: The four fiber pair, 1.28 terabit system announced by Level 3 in April 1999 has been fabricated, and is currently being installed. The cable is currently scheduled to be in service by September 2000.
Asian Developments: Level 3 has made significant progress in the construction of Gateways in Hong Kong and Tokyo. The company has procured a landing site in Japan to bring ashore its undersea fiber optic cable linking Hong Kong and Tokyo and expects to begin offering service in the fourth quarter of this year.
Level 3 also recently announced its intention to construct Gateways in Taipei, Taiwan and Seoul, South Korea. These two markets will be connected to the rest of the company's global network via its Northern Asian undersea fiber-optic cable system. The company expects to begin offering services by the second half of 2001.
"Japan, Taiwan, South Korea and Hong Kong have about 42 million Internet users and the growth rate is extraordinary. We are excited to serve Web-centric customers in this key area of the world," said Crowe.
About Level 3 Communications
Level 3 (Nasdaq: LVLT) is a global communications and information services company offering a wide selection of IP-based services including broadband transport, colocation services, submarine transmission services and the industry's first Softswitch* based services. Level 3 offers services primarily to Web-centric companies, which deliver their services over the Level 3 Network. The Level 3 Network will include metropolitan networks in 56 U.S. markets and 21 international markets connected by an approximately 16,000 mile U.S. intercity (long-distance) network, an approximately 4,750 mile European intercity network, both transpacific and transatlantic undersea cables and 6.5 million square feet of gateway and technical space. Level 3 expects to substantially complete the U.S. and first two rings of the European intercity network by the fourth quarter of 2000. Level 3 currently offers broadband infrastructure services in 38 U.S. markets and five European markets. Its Web address is www.Level3.com.
(* Softswitches are advanced software based switching systems, which enable Level 3 to provide services combining the best features of the Internet and traditional telephone networks.)
Some of the statements made by Level 3 in this press release are forward-looking in nature. Actual results may differ materially from those projected in forward-looking statements. Level 3 believes that its primary risk factors include, but are not limited to: substantial capital requirements; development of effective internal processes and systems; the ability to attract and retain high quality employees; changes in the overall economy; technology; the number and size of competitors in its markets; law and regulatory policy; and the mix of products and services offered in the company's target markets. Additional information concerning these and other important factors can be found within Level 3's filings with the Securities and Exchange Commission. Statements in this release should be evaluated in light of these important factors.
LEVEL 3 COMMUNICATIONS, INC.
Consolidated Condensed Statements of Operations
Three Months Ended Six Months Ended
June 30, June 30,
(dollars in millions) 2000 1999 2000 1999
Information Services $181 $53 $304 $99
Other 53 53 107 109
Total Revenue 234 106 411 208
Costs and Expenses:
Cost of Revenue 154 81 284 143
Amortization 139 51 227 92
Selling, General and
Administrative 200 128 388 235
Stock-Based Compensation 49 29 97 47
Total Costs and
Expenses 542 289 996 517
Loss from Operations (308) (183) (585) (309)
Other Income, net 16 116 13 90
Loss before Income Taxes (292) (67) (572) (219)
Income Tax Benefit 11 23 20 70
Net Loss $(281) $(44) $(552) $(149)
Loss per Share:
Basic and Diluted $(0.77) $(0.13) $(1.54) $(0.45)
Basic and Diluted 365,916 339,266 358,008 327,840
Performance Metrics -- Second Quarter 2000
In order to monitor the progress of its broadband infrastructure development, Level 3 has developed several operating and construction metrics. These benchmarks will be reported every quarter to help Level 3 stockholders and the investment community track the company's performance and future progress.
This set of benchmarks is for Phases 1 through 4 of the Level 3 business plan, which includes 56 U.S. city networks, the 16,000 mile U.S. intercity network, 14 European and Asian city networks, and 3,500 miles of the European intercity network. The European intercity network includes 1,600 miles being built by COLT Telecom Group plc as part of a joint construction agreement.
Level 3 is currently substantially prefunded for all 6 phases of its business plan. The total Level 3 network includes 56 U.S. city networks; 21 European and Asian city networks; 6.5 million square feet of technical space; a 16,000 mile U.S. intercity network; a 4,750 mile European intercity network; and transatlantic, transpacific and Northern Asian undersea networks.
-- Markets in Service -- the number of local markets where Level 3 has an operational Gateway facility and offers services over leased or owned´facilities.
-- Markets with Fiber Networks -- the number of local markets where Level 3 offers services over owned networks.
-- Intercity Rights-of-Way Miles -- the number of intercity miles where rights-of-way agreements are secured. Rights-of-way agreements are required before Level 3 can build the intercity network.
-- Intercity Route Miles Under Construction and Completed -- the number of intercity miles completed plus the number of miles under construction. A segment is considered to be "under construction" when the contractor is mobilized.
-- Intercity Route Miles Completed -- the number of intercity route miles with multiple conduits installed.
Construction Rollout Schedule For U.S. Network -- Phases 1 through 4
3rd Q 4th Q 1st Q 2nd Q 3rd Q 4th Q
Actual Actual Actual Actual Actual Actual
Markets In Service
10 17 17 21 26 27
Markets with Fiber
0 0 7 11 17 22
Intercity Rights-Of-Way Miles
10,500 14,400 15,200 15,920 16,000 16,000
Construction + Completed
175 1,234 4,054 9,270 13,313 15,528
0 410 1,355 2,495 5,954 9,334
1st Q 2nd Q 3rd Q 4th Q 1st Half
Actual Actual Est. Est. Est.
Service 30 38 40 49 56
Fiber Networks 23 26 26 26 26
16,000 16,000 16,000 16,000 16,000
15,896 15,926 16,000 16,000 16,000
11,800 14,231 14,500 16,000 16,000
Construction Rollout Schedule For International Network -- Phases 1 through 4
1st Q 2nd Q 3rd Q 4th Q
Actual Actual Actual Actual
Markets In Service
1 4 4 4
Markets With Fiber Networks
0 0 1 3
Intercity Route Miles Under Construction + Completed*
0 0 1,200 3,400
Intercity Route Miles
0 0 904 2,139
1st Q 2nd Q 3rd Q 4th Q 1st Half
Actual Actual Est. Est. Est.
Markets In Service
5 5 5 9 13
Markets With Fiber Networks
3 5 5 6 10
Construction + Completed*
3,500 3,591 3,591 3,591 3,591
(3,500) (3,500) (3,500) (3,500)
Intercity Route Miles Completed*
3,219 3,559 3,591 3,591 3,591
(3,400) (3,500) (3,500) (3,500)
Numbers in parenthesis ( ) represent the previously announced schedule. * Includes Ring 1, Ring 2 (being built by COLT), and Project Yellow Backhaul.
Executive Officer Intended Transfers of Company Securities
The company has a policy that generally requires members of the company's board of directors, members of senior management that are "executive officers" for purposes of the SEC's Section 16 rules and members of senior management with the title of group vice president or higher to pre-announce their intention to make transfers of the company's securities in the permitted period following each earnings release.
The following schedule shows the individuals that have expressed a current intent to transfer, by sale, gift or otherwise, during the period, the maximum number of shares they propose to transfer and the percentage of their holdings that the intended transfer amount represents.
None of the individuals are required to dispose of shares and the listed individuals may choose to sell fewer, or none, of the shares described, but will not sell more during the period. An individual's ultimate decision to transfer shares of common stock will be made in compliance with applicable federal securities laws.
Name and Title No. of Shares Percentage(1)
Colin V.K. Williams
Executive Vice President 26,000 7%
Sureel A. Choksi
Group Vice President and CFO 5,000 4%
Daniel P. Caruso
Group Vice President 70,000 15%
Group Vice President 15,670(2) 26%
Kathleen A. Perone
Group Vice President 12,500 27%
Gail A. Smith
Group Vice President 15,670(2) 98%
Thomas C. Stortz
Group Vice President and
General Counsel 50,000(3) 10%
Group Vice President 20,000 3%
John F. Waters, Jr.
Group Vice President 30,000 9%
(1) The percentage is derived by dividing (a) the number of shares that the individual may transfer by (b) the individual's total shares of the company's common stock held and all other shares that may be acquired in the future through the exercise of vested options or Outperform Stock Options that are currently exercisable. (2) The number of shares indicated in the table represents the number of shares of common stock that are issuable upon the exercise of 5,000 Outperform Stock Options as of July 18, 2000. The actual number of shares transferred may be greater or smaller, depending upon changes in the performance of the Level 3 common stock in relation to the performance of the S&P 500 to the date of the transfer. (3) Mr. Stortz has also indicated his intention to transfer his March 2000 grant of Outperform Stock Options to a family limited partnership of which he is the sole general partner. This grant of Outperform Stock Options will not be exercisable until March 2002.
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Contact: media, Josh Howell, 720-888-2517, or Steve Ingish, 720-888-2521, or investors, Robin Miller, 720-888-2500, all of Level 3 Communications
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