B of A Conference: Level 3 Hears Fears of Bandwidth Glut

Its CEO counters that the company will win because of its market share.
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SAN FRANCISCO -- Commanding one of the biggest network-building projects on the planet,

Level 3 Communications

(LVLT)

President and CEO James Crowe can't get away from the question of whether there's a bandwidth glut.

Still, Crowe tried to steer around that issue Monday before more than 240 investors crammed into a 216-seat conference room at the

Banc of America Securities Investment Conference

here. Instead, he talked about Level 3's ability to emerge as a leader regardless of what happens to the market, because its expansion will leave it with such a big market share.

But with network capacity, also known as bandwidth, headed the way of pork bellies to the commodities market, some investors were looking for a little more than tough talk from Level 3.

"Capacity is a commodity, and whatever Level 3 is offering today will be undercut by the next company that comes along with cheaper and faster equipment and lower-cost capacity," said Naohisa Murakami, a money manager with

Schachter Capital Management

, on hand for Crowe's presentation.

It appears Murakami -- who holds no Level 3 -- wasn't alone in his pessimism. Level 3 shares fell $4.69, or 6.3%, to $69.88 Monday. They're nearly 50% off their spring high.

Level 3 is a new-generation, nationwide fiber-optic network that sells capacity, or bandwidth, to other phone and Internet service providers. It competes with the likes of

Williams Communications

(WCG) - Get Report

,

Qwest

(Q)

and

Enron

(ENE)

.

The questions Crowe said he most often hears from investors is how the company will turn the corner from a cash-spending network builder to a cash-making service provider, and how quickly it can offset the cost of constructing a 14,200-mile network. In other words, how will Level 3 survive the price war it helped create?

To answer that, Crowe invited investors to use their imagination a bit and think about Level 3 as a technology company, not a utility. Consider Level 3 as an

Intel

if you will. Crowe said Level 3 is the central technology between the components that help build networks and the users who make calls and pull down Web pages.

"Futures markets

where commodities trade have never applied to technology companies," said Crowe, in the lobby outside the conference hall before his presentation.

Oddly, Level 3 has always said if bandwidth got into a pricing war, its strength would be more apparent. Level 3 has touted the notion that it was building a low-cost network with an abundance of fiber-optic capacity. Now that notion is being put to the test.

"He's always cheered for large drops in bandwidth pricing," said Anthony Gifford, a fund manager for

Chase Fleming Asset Management

. "Now I think it's coming down a lot faster than he may have been ready to afford. I don't think his network is quite ready for it." (Gifford doesn't hold Level 3 shares.)

Among a dozen bandwidth providers, Level 3 had the second-lowest amount of capacity up and running as of last year, according to

J.P. Morgan

.

But fundamentally, Level 3 seemingly has the right pieces in place as the price squeeze comes down, says Level 3 perma-bull Andrew Hamerling, who follows the company as an analyst for

Banc of America Securities

.

Hamerling, who rates Level 3 a strong buy, said the company is better positioned than the old-line network operators, and it's involved with nearly all the major Internet service providers and independent local phone companies, including

NextLink

(NXLK)

,

Allegiance

(ALGX)

and

Time Warner Telecom

(TWTC)

. (Banc of America has no banking ties to Level 3.)

Level 3 also has $6.5 billion in cash and another $1 billion or more available, and Crowe said the company's capital expenditures will peak this year. The company expects to have $1.7 billion in revenue next year, more than double the $718 million it took in for the 12 months ended June 30.

"We are seeing a sorting-out process," said Crowe, referring to the state-of-the-network provider industry. "The more access to capital you have, the better off you are."

And if bandwidth continues to get real cheap, at least Level 3 has some booty to fall back on.