Level 3 Is Still Plagued by Cash Questions - TheStreet

Level 3


, the struggling phone company cum software reseller, has convinced a few big bond buyers to throw it more rope as it tries to hoist itself out of the telecom quicksand.

The Broomfield, Colo., fiber optic network operator sold $500 million in convertible bonds to a group of investors led by Bill Miller's Legg Mason funds,

Berkshire Hathaway

(BRK.A) - Get Report

and Longleaf Partners. The vote of confidence and cash infusion helped push Level 3 shares up as much as 80% in early trading Monday. The shares have since retreated a bit, but they're still up 62% to $4.69.

But some analysts and investors aren't as willing to bet the house on a Level 3 revival. While the company recently completed two acquisitions of software resellers, helping to triple its revenue and

keep the company in the good graces of its lenders, Level 3 will still need to bolster its cash flow one way or another. And cash flow hasn't been an easy commodity to find in telecom recently.


It seems that with two-thirds of its revenue coming from paper-thin software resale margins, and the other third coming from a rather slippery wholesale phone service, Level 3's bottom line isn't quite as solid as the company's ample top line would suggest. Over the past 12 months Level 3 lost more than $3 for every $1 in sales it brought in. Even with recent progress the company's cash burn remains substantial: For the first quarter ended March 31, Level 3 lost $220 million from continuing operations on revenue of $386 million.

In a research note issued Monday, Merrill Lynch analyst Adam Quinton reiterated his sell rating on Level 3, citing the challenges Level 3 faces from a continued dependence on other people's money to keep the company running.

"We believe that the company will struggle to generate sufficient

earnings before interest, taxes, depreciation and amortization by 2005 to cover its approximately $800 million a year capex and interest expense," wrote Quinton.

Though Level 3 has $1.5 billion in cash and investments on hand to pay the bills, a whopping $6 billion in debt comes due starting in 2005 through 2010. Consequently, the company will have to pull off what's been seemingly impossible in telecom: moving boatloads of highly profitable traffic on the Net.

A Level 3 spokesman says the company is "fully funded" and that the "new capital increases Level 3's cash cushion and allows the company to take advantage of opportunities in a consolidating market."

Tough Crowd

But as WorldCom's


accounting scandal fairly attests, even the leading players have difficulty making money by running networks in a price-obsessed environment. Only by fudging nearly $4 billion in expenses over the last five quarters was WorldCom, long seen as the gold standard in providing data services to big business, able to pass itself off as profitable.

And speaking of quicksand, a company that at one point seemed to have a fighting chance at spinning optical fiber to gold -- Level 3's crosstown rival



-- is now exploring ways to stanch the flow of red ink from its own optical network. Among the options, according to one person familiar with the planning, would be to shutter the "classic Qwest" broadband business and focus exclusively on the core US West local phone service. That would mark a stunning departure from the strategy ex-CEO Joe Nacchio so forcefully advocated until recently.

Some people are clearly betting on Level 3 to be the last new-era telco standing. But given the shakiness of the ground around it, that may be a tough wager.