Level 3 Communications (LVLT) Q1 2010 Earnings Call May 06, 2010 11:00 am ET Executives 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 Analysts Ana Goshko - Banc of America Donna Jaegers - D.A. Davidson & Co. Mike Ciaccia Michael McCormack - JP Morgan Chase & Co Simon Flannery - Morgan Stanley Presentation Operator
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James CroweThanks, 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? Sunit Patel 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. Read the rest of this transcript for free on seekingalpha.com