Level 3 Communications, Inc. ( LVLT) Q3 2010 Earnings Call Transcript October 28, 2010 10:00 am ET Executives Valerie Finberg – IR Jim Crowe – CEO Sunit Patel – EVP and CFO Jeff Storey – President and COO Buddy Miller –Vice Chairman Robin Grey – Corporate Treasurer Analysts Frank Louthan – Raymond James Colby Synesael – Cowen & Co. Scott Coleman – Goldman Sachs Donna Jaegers – D.A. Davidson Ana Goshko – Bank of America-Merrill Lynch Michael Funk – Bank of America-Merrill Lynch Chris Larsen – Piper Jaffray David Sharret – Barclays Capital Kevin Quinn – Goldman Sachs Presentation Operator
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 Web site at www.level3.com.I will now turn the call over to Jim. Jim? Jim Crowe Yes, good morning. I’ve got a respiratory ailment, which may result in intermittent laryngitis. If it hits me during the call, Sunit and Jeff will pick up, but don’t be surprised if that occurs. In accordance with our normal practice, Sunit will discuss financial results for the quarter and an outlook. Jeff will discuss operational matters, including segment results. I will provide some context and a summary, and we’ll then open it up for questions. Sunit? Sunit Patel Thank you, Jim and good morning, everyone. I’ll start with a few quick comments on the quarter. These third quarter highlights are on slide three of our presentation. Core Network Services revenue grew 1% sequentially and 2% year-over-year on a constant currency basis. Total Communications revenue also grew sequentially. That growth along with our richer revenue margin mix declines in cost of revenue and expense reductions drove gross margins and adjusted EBITDA margin improvement. Consolidated adjusted EBITDA increased, compared to both the prior and year earlier quarter. I am pleased with the year-to-date adjusted EBITDA increases we have been able to realize. The benefit of increases in CNS revenue together with our high operating leverage is evidenced by the approximately $18 million improvement in annualized Communications adjusted EBITDA from the first quarter of 2010 to the third quarter of 2010, excluding the $7 million asset sale in the first quarter of this year. Third quarter Core Network Services sales held up consistent with second quarter sales when taking into consideration difficult summer seasonality. However, we did see a continued increase in mid-market sales. We also saw another improvement in churn sequentially and we saw an increase in customer installation.
Capital expenditures increased during the quarter, as we continued to invest for On-Net CNS revenue growth. The increase was primarily in support for more On-Net customer contracts, wavelength, CDN and broadcast network upgrades, together with increases in our network equipment inventory levels to improve installation intervals.Turning to the detailed results for the third quarter on slide four, Core Network Services revenue was $707 million up 1% sequentially. We saw revenue growth in all of our four customer facing groups. Core Network Services revenue from wholesale was up slightly relative to the prior quarter, large enterprise and federal grew 1% and mid-market revenue increased 1%. European Core Network Services revenue grew 3% sequentially on a constant currency basis and 6% on an as reported basis. From a product perspective compared to the prior quarter, we saw revenue growth in three or four product categories, transform infrastructure and data services. Voice services revenue declined sequentially, primarily as a result of declines in Enterprise Voice services. This shift to a higher margin revenue mix contributed to gross margin increases on a dollar and percentage basis. Notably our CDNs revenue were up 11% sequentially in the quarter. Also Voice services revenues was $161 million this quarter, compared to $163 million in the second quarter of 2010, and $159 million in the third quarter of last year. As we have said previously, we expect from continued volatility in Wholesale Voice services revenue as we manage for margin contributions versus revenue growth. Turning to slide five, we saw a decline in cost of revenue and our gross margin improved to 60.6% this quarter compared to 59.9% in the second quarter of 2010 and 59% in the third quarter of 2009. The improvement in gross margin is a result of high margin On-Net CNS revenue growth, a decrease in lower margin Voice and private line services and continued network optimization. Read the rest of this transcript for free on seekingalpha.com