Level 3 Communications' CEO Discusses Q4 2011 Results - Earnings Call Transcript

Level 3 Communications (LVLT)

Q4 2011 Earnings Call

February 08, 2012 9:00 am ET


Valerie Finberg -

James Crowe - Chief Executive Officer and Director

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

Jeffrey K. Storey - President and Chief Operating Officer

Charles C. Miller - Vice Chairman, Executive Vice President and Director


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

Michael J. Funk - BofA Merrill Lynch, Research Division

Simon Flannery - Morgan Stanley, Research Division

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

Colby Synesael - Cowen and Company, LLC, Research Division

Romeo A. Reyes - Jefferies & Company, Inc., Research Division



Ladies and gentlemen, thank you for standing by, and welcome to the Level 3 Communications Fourth Quarter and Full Year 2011 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded, Wednesday, February 8, 2012. I would now like to turn the conference over to Valerie Finberg, Vice President of Investor Relations. Please go ahead.

Valerie Finberg

Thank you, Frank. Good morning, everyone, and thank you for joining us for the Level 3 Communications Fourth Quarter and Full Year 2011 Earnings Call. With us on the call today are Jim Crowe, Chief Executive Officer; Jeff Storey, President and Chief Operating Officer; Sunit Patel, Chief Financial Officer; and our Vice Chairman, Buddy Miller.

Before we get started, as a reminder, our press release and the presentation slides that accompany this call, as well as our detailed supplemental schedules, are all available on the Level 3 website in the Investor Relations section on the Quarterly Financials page.

I need to cover our Safe Harbor statement, which can be found on Page 2 of our 4Q '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 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 measure and the most comparable GAAP financial measures are available in the press release, which is posted on our website at www.level3.com.

With that, I'll turn the call over to Jim.

James Crowe

Thanks, Valerie. As is our normal custom, in our prepared remarks, we'll start with our Chief Financial Officer, Sunit Patel, who will discuss results for the quarter and the year and provide an outlook for 2012. Jeff Storey will take over and discuss operational and matters including segment results, pricing trends, status of integration. I'll provide some strategic commentary, and then we'll open it up for questions. Sunit?

Sunit S. Patel

Thank you, Jim, and good morning, everyone. Before I review the details, I'd like to start on Slide 3, with some highlights of the combined company and our performance for the quarter. Our quality and diversification revenue base improved significantly with the combination with Global Crossing. By now we have about $6.3 billion in annual revenues, with 62% of the revenues from enterprise customers, and we expect that percentage to grow in the future.

By comparison, in 2010, only about 40% of Level 3's revenues were from enterprise customers. About 71% of our CNS revenue are from the U.S., 17% from EMEA and 12% from Latin America. Our credit profile improved sharply as we reduced net debt to adjusted EBITDA from about 7x at the end of 2010 to less than 6x at the end of 2011. On a standalone basis, Level 3 had a great year. We grew CNS revenues every quarter throughout the year, with sharp improvement in the fourth quarter, and grew adjusted EBITDA 13% for the full year 2010 (sic) [ 2011 ], excluding the effects of the Global Crossing acquisition.

Turning to Slide 4 of our presentation for an overview of Level 3 standalone fourth quarter results, we ended the year on a strong note. Please keep in mind that all -- in all of the results in my discussion here exclude the effects of intercompany eliminations and purchase price -- purchase accounting adjustments with Global Crossing and acquisition-related costs.

Core Network Services revenue grew by 2.6% sequentially and 7.9% year-over-year on a constant currency basis. Adjusted EBITDA increased sequentially and 15% year-over-year. We had a great quarter for free cash flow, generating $103 million of positive free cash flow.

For Global Crossing, on a constant currency basis, Invest and Grow revenues declined 1% sequentially and increased 3% year-over-year. Sequential declines were a result of expected declines in U.K. government revenues. Excluding U.K. government revenues, Invest and Grow revenues were roughly flat sequentially. Invest and Grow revenues for GC Impsat grew 2% sequentially with particular strength from enterprise customers.

We continued to improve our maturity profile and liquidity position through transactions during the quarter and earlier this year.

Turning to the detailed results for the fourth quarter on Slide 5. Level 3, on a standalone basis, saw a sequential and year-over-year growth in Core Network Services revenue across all of our customer channels. Our CDN revenue grew 14% sequentially compared to 9% in the prior quarter. Compared to the fourth quarter in 2010, CDN revenue grew 91%. With our larger revenue base, CDN services revenue now represent 1.6% of our CNS revenue. Also, Voice Services revenue was $144 million this quarter compared to $152 million in the third quarter. As we are continuing to manage our combined Wholesale Voice platform for margin growth, we expect continued volatility in Wholesale Voice Services revenue going forward.

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