Level 3 Communications' CEO Discusses Q3 2011 Results - Earnings Call Transcript

Level 3 Communications (LVLT)

Q3 2011 Earnings Call

November 02, 2011 10:00 am ET

Executives

James Crowe - Chief Executive Officer and Director

Jeffrey K. Storey - President and Chief Operating Officer

Sunit S. Patel - Chief Financial Officer and Executive Vice President

Valerie Finberg - VP of IR

Analysts

Colby Synesael - Cowen and Company, LLC, Research Division

Christopher M. Larsen - Piper Jaffray Companies, Research Division

Donna Jaegers - D.A. Davidson & Co., Research Division

Timothy K. Horan - Oppenheimer & Co. Inc., Research Division

Michael Rollins - Citigroup Inc, Research Division

Michael J. Funk - BofA Merrill Lynch, Research Division

Simon Flannery - Morgan Stanley, Research Division

David Michael Dixon - FBR Capital Markets & Co., Research Division

Frank G. Louthan - Raymond James & Associates, Inc., Research Division

Presentation

Operator

Good day, and welcome to the Level 3 Communications Incorporated's Third Quarter 2011 Earnings Conference Call. Today's call is being recorded. At this time, I'd like to turn the conference over to Valerie Finberg, Vice President of Investor Relations. Please go ahead.

Valerie Finberg

Thank you, Jessica. Good morning, everyone, and thank you for joining us for the Level 3 Communications Third Quarter 2011 Earnings Call. With us on the call today are Jim Crowe, Chief Executive Officer; Jeff Storey, President and Chief Operating Officer; Sunit Patel, Executive Vice President and Chief Financial Officer; and John Kritzmacher, CFO of Global Crossing.

Before we get started, as a reminder, our press release, supplementary information and the presentation slides that accompany this call are all available on the Level 3 website at www.level3.com in the Investor Relations section on the Quarterly Financials page. Unless otherwise noted in the press release, presentation slides or in our remarks on this call, the results presented are for Level 3 Communications only. As such, unless otherwise specifically noted, the results that we are discussing today do not include results for Global Crossing Ltd.

We need to cover our Safe Harbor statement, which can be found on Page 2 of our 3Q '11 earnings presentation, and that says that information on this call and in the presentation contain financial estimates and other forward-looking statements that are subject to risks and uncertainties. Actual risks 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 measure and the most comparable GAAP financial measures are available in the press release, which is posted on our website at www.level3.com.

I will now turn the call over to Jim.

James Crowe

Thanks, Valerie. As is our normal practice, we're going to start with Sunit Patel, who will discuss financial results for the quarter and the general outlook for the year. Jeff Storey will then provide an operational update including segment results and will provide an update on the status of integration, planning and implementation. I'll provide a summary and some context, and then we'll open it up to questions. Sunit?

Sunit S. Patel

Thank you, Jim, and good morning, everyone. I'll start off by noting that, since the Global Crossing transaction closed only about 4 weeks ago and after the end of the third quarter, my comments today mostly pertain to Level 3 only. However, I'll also touch on the highlights of Global Crossing's results a bit later.

Turning to Slide 3 of our presentation for an overview of third quarter results. We had a good quarter and saw improvement in Core Network Services revenue growth again with 2% sequential CNS revenue growth and 7% year-over-year growth on a as-reported and on a constant currency basis. Communications adjusted EBITDA increased 6% sequentially and 14% year-over-year, excluding costs associated with the Global Crossing transaction.

Turning to the detailed results for the third quarter on Slide 4. We saw sequential and year-over-year growth in Core Network Services revenue across all of our customer channels. Our Core Network Services sales grew 8% sequentially. Core Network Services revenue from wholesale was up 1% sequentially, driven by growth primarily from our cable and carrier customers. Large enterprise and federal and our mid-market channels both showed strong performance this quarter with 3% sequential CNS services revenue growth.

European CNS revenue increased by 5% sequentially on a constant currency basis and increased 3% as reported. Year-over-year, CNS revenue growth for Europe was 7% on a constant currency basis and 12% on an as-reported basis. Our CDN revenue grew 9% sequentially. Year-over-year, CDN services revenue increased more than 110% and represents over 2% of our CNS revenue.

Also, voice services revenue was $152 million this quarter compared to $151 million in the second quarter. We expect continued volatility in wholesale voice services revenue since we manage these services for margin contribution versus revenue growth.

At the bottom of Slide 4, for the third quarter of 2011, our total CNS revenue churn was approximately 1.3% compared to 1.5% in the second quarter of 2011.

Turning to Slide 5. Gross margin as a percent of revenue improved to 63.1% compared to 62% in the second quarter of 2011 primarily as a result of growth in high-margin Core Network Services revenue and continued network expense savings.

Communications SG&A expenses increased slightly this quarter sequentially primarily due to seasonally high utility costs, increase sales and sales-related headcount, partially offset by continued expense management. We incurred $11 million in expenses associated with the Global Crossing transaction compared to $8 million in the second quarter. We'll continue to provide updates on transaction and integration costs as they are incurred.

Read the rest of this transcript for free on seekingalpha.com

More from Stocks

Flashback Friday: Amazon, Chip Stocks, Memorial Day

Flashback Friday: Amazon, Chip Stocks, Memorial Day

Week Ahead: Wall Street Looks to Jobs Report as North Korea Meeting Less Certain

Week Ahead: Wall Street Looks to Jobs Report as North Korea Meeting Less Certain

Dow and S&P 500 Decline, Energy Shares Fall as U.S. Crude Oil Slides 4%

Dow and S&P 500 Decline, Energy Shares Fall as U.S. Crude Oil Slides 4%

Replay: Jim Cramer on the Markets, 10-Year Yield, Oil Prices and Foot Locker

Replay: Jim Cramer on the Markets, 10-Year Yield, Oil Prices and Foot Locker

UAW Officially Files Complaint on Tesla Thanks to CEO Elon Musk

UAW Officially Files Complaint on Tesla Thanks to CEO Elon Musk