Level 3 Communications (LVLT)
Q1 2010 Earnings Call
May 06, 2010 11:00 am ET
Valerie Finberg - VP of IR
James Crowe - Chief Executive Officer and Director
Jeffrey Storey - President and Chief Operating Officer
Sunit Patel - Chief Financial Officer and Executive Vice President
Charles Miller - Vice Chairman, Executive Vice President and Chairman of information Services Group
Ana Goshko - Banc of America
Donna Jaegers - D.A. Davidson & Co.
Michael McCormack - JP Morgan Chase & Co
Simon Flannery - Morgan Stanley
Previous Statements by LVLT
» Level 3 Communications, Inc. Q4 2009 Earnings Call Transcript
» Level 3 Communications, Inc. Q3 2009 Earnings Call Transcript
» Level 3 Communications, Inc. Q2 2009 Earnings Call Transcript
Good day, and welcome to the Level 3 Communications, Inc. First Quarter 2010 Earnings Conference Call. [Operator Instructions] At this time, I'd like to turn the conference over to Valerie Finberg, Vice President of Investor Relations. Please go ahead.
Thank you, Jessica. Good morning, everyone, and thank you for joining us for the Level 3 Communications First Quarter 2010 Earnings Call. With us on the call today are Jim Crowe, Chief Executive Officer; Jeff Storey, President and Chief Operating Officer; Buddy Miller, Vice Chairman; and Sunit Patel, Executive Vice President and Chief Financial Officer.
Before we get started, as a reminder, our press release, supplementary schedules and presentation slides that accompany this call are all available on the Investor Relations section of the Level 3 website at www.level3.com. I need to cover our Safe Harbor statement, which can be found on Page 2 of our 1Q10 earnings presentation. And that says that, information in this call and in the presentation contain financial estimates and other forward-looking statements that are subject to risks and uncertainties. Actual results may vary significantly from those statements. A discussion of factors that may affect future results is contained in Level 3's filings with the Securities and Exchange Commission. Finally, please note that on today's call, we will be referring to certain non-GAAP financial measures. Reconciliations between the non-GAAP financial measures and the most comparable GAAP financial measures are available in the press release, which is posted on our website in the Investor Relations section. I will now turn the call over to Jim.
Thanks, Valerie. As is our norm in our prepared remarks, Sunit Patel will discuss financial results for the quarter; Jeff Storey will discuss operational matters, including segment results; I'll pick it up, provide a brief summary; and then we'll take questions. Sunit?
Thank you, Jim. Before I review our detailed results, I wanted to give you a brief overview of the quarter as summarized on Slide 3 of our presentation. Our revenue base has stabilized over the past two quarters. We had a good quarter in terms of sales and churn improvements. After a period of declining Core Network Services revenue from late 2008 and most of last year, followed by two quarters of stable revenue on a normalized basis for the fourth quarter of 2009 and the first quarter of 2010, we expect Core Network Services revenue to grow sequentially over the course of 2010. We continue to improve our debt maturity profile and now have $38 million in maturities for the rest of 2010, and $196 million in maturities in December of 2011.
Turning to the results for the first quarter on Slide 5. Core Network Services revenue declined 1% sequentially to $701 million in the first quarter of 2010 from $706 million in the fourth quarter of 2009. Core Network Services revenue from our wholesale customers declined by 3% sequentially, primarily due to seasonality in the broadcast business and a decline in revenue from carrier customers, largely from lower inflation, offset by a $7 million asset sale during the quarter. Adjusting for these three factors, wholesale Core Network Services revenue was down 3% sequentially, which represents a much improved performance from a year ago when wholesale CNS declined 7% sequentially.
Going forward, we expect much better sequential performance from wholesale. Large Enterprise and Federal delivered another strong quarter of growth of 5% sequentially. Midmarket saw stable revenue performance. On a combined basis, these large and midsized Enterprise customers now represent over 40% of our total CNS revenue and we expect this percentage to grow over time. Core Network Services revenue from our European customers declined sequentially by 3% as reported but, assuming costs and currency, grew 3%. Traffic continues to grow in Europe, partially offset by continued IP pricing pressure. Also, Voice Services revenue was $165 million this quarter compared to $162 million in the fourth quarter of 2009 and $171 million in the first quarter of last year. As we've indicated previously, we do expect quarter-to-quarter volatility in Wholesale Voice Services revenue, since we've managed for a margin contribution versus revenue growth.
Turning to Slide 6. Gross margin was 58.8% this quarter compared to 60.2% in the fourth quarter of 2009 and 59.5% in the first quarter of 2009. The sequential decline in gross margin percentage is primarily a result of a revenue mix shift and lower render discounts and settlements in the first quarter of 2010. We remain focused on optimization of network expense. Going forward, we expect our gross margin will increasingly be driven by high margin CNS revenue growth.
Communications SG&A expense excluding non-cash compensation and restructuring charges was $327 million, a slight decline from $328 million in the fourth quarter of 2009. We increased our sales force by almost 10% in the first quarter. Since the beginning of the second half of 2009, we've increased the sales force by about 14%. Jeff will have more to say about this in his remarks. We continue to manage our SG&A expense tightly in all other areas.