Level 3 Reports Fourth Quarter and Full Year 2012 Results
Fourth Quarter and Full Year 2012 Highlights
· Grew Core Network Services (CNS) revenue for the fourth quarter 2012 by 1.8 percent sequentially and 4.7 percent year-over-year, on a constant currency basis
· Grew fourth quarter 2012 Enterprise CNS revenue by 2.2 percent sequentially and 7.8 percent year-over-year, on a constant currency basis
· Adjusted EBITDA was $407 million for the fourth quarter 2012. Excluding a $27 million net benefit from special items recognized in the fourth quarter 2012, Adjusted EBITDA grew 18 percent for the full year 2012 compared to the full year 2011 pro forma
· Generated $202 million of positive Free Cash Flow in the fourth quarter 2012 and $48 million of positive Free Cash Flow for quarters two through four of 2012
· Capital expenditures were $743 million for the full year 2012, approximately 12 percent of total revenue
BROOMFIELD, Colo., Feb. 12, 2013 — Level 3 Communications, Inc. (NYSE: LVLT) reported total revenue of $1.614 billion for the fourth quarter 2012, compared to $1.590 billion for the third quarter 2012 and $1.579 billion for the fourth quarter 2011. For the full year 2012, total revenue was $6.376 billion, compared to $6.318 billion pro forma for the full year 2011.
The net loss for the fourth quarter 2012 was $0.16 per share, excluding a loss on the extinguishment of debt of $0.23 per share and a benefit from special items recognized in the fourth quarter 2012 of $0.13 per share. The net loss for the fourth quarter 2012 was $0.26 per share prior to excluding the effects of the loss on extinguishment of debt and the benefit from the special items. The net loss for the fourth quarter 2012 was $56 million, compared to a net loss of $166 million for the third quarter 2012 and a net loss of $163 million for the fourth quarter 2011.
Adjusted EBITDA was $407 million in the fourth quarter 2012, and included a $27 million net benefit from a non-cash reduction in asset retirement obligations (ARO) of $47 million, partially offset by severance and related charges of $20 million. This compared to $372 million in the third quarter 2012 and $271 million in the fourth quarter 2011. For the full year 2012, excluding the net benefit recognized in the fourth quarter 2012, Adjusted EBITDA was up 18 percent compared to the full year 2011 pro forma.
“Level 3 continued to grow revenue in the fourth quarter, and we see the opportunity to improve revenue growth in 2013,” said James Crowe, CEO of Level 3. “We made good progress with integration throughout 2012, invested in the business for future growth, and firmed up our balance sheet with over $4.5 billion of capital markets transactions last year, positioning us well for 2013.”
Financial Results
Metric($ in millions) | Fourth Quarter 2012 | Third Quarter 2012 | Fourth Quarter 2011 | Full Year 2012 | Full Year 2011, Pro Forma(3) |
Core Network Services Revenue | $1,424 | $1,395 | $1,368 | $5,587 | $5,418 |
Wholesale Voice Services and Other Revenue | $190 | $195 | $211 | $789 | $900 |
Total Revenue | $1,614 | $1,590 | $1,579 | $6,376 | $6,318 |
Adjusted EBITDA(1) | $407 | $372 | $271 | $1,459 | $1,216 |
Capital Expenditures | $198 | $227 | $148 | $743 | $624 |
Unlevered Cash Flow(1) | $325 | $77 | $202 | $528 | $508 |
Free Cash Flow(1) | $202 | ($157) | $41 | ($165) | ($202) |
Gross Margin(1) | 59.4% | 59.6% | 58.2% | 59.2% | 58.0% |
Adjusted EBITDA Margin(1) | 25.2% | 23.4% | 17.2% | 22.9% | 19.2% |
Net Loss(2) | $56 | $166 | $235 | $422 | $875 |
Net Loss per Share(2) | $0.26 | $0.76 | $1.15 | $1.96 | $4.28 |
(1) See schedule of non-GAAP metrics for definition and reconciliation to GAAP measures.
(2) Net loss excludes the results attributable to the discontinued coal business in the fourth quarter 2011.
(3) References to “pro forma” figures assume the Global Crossing acquisition took place on January 1, 2011.
Revenue
Revenue($ in millions) | Fourth Quarter 2012 | Third Quarter 2012 | PercentChange, Constant Currency | Fourth Quarter 2011 | PercentChange, Constant Currency | Full Year 2012 | Full Year 2011 Pro Forma (1)(3) | PercentChange As Reported (4) |
North America | $1,024 | $1,008 | 1% | $976 | 5% | $4,026 | $3,828 | 5% |
Wholesale | $388 | $381 | 2% | $388 | – | $1,532 | $1,555 | (2%) |
Enterprise | $636 | $627 | 1% | $588 | 8% | $2,494 | $2,273 | 10% |
EMEA | $217 | $210 | 1% | $224 | (3%) | $860 | $924 | (7%) |
Wholesale | $88 | $89 | (3%) | $94 | (6%) | $360 | $392 | (8%) |
Enterprise | $87 | $80 | 5% | $80 | 9% | $327 | $310 | 6% |
UK Government | $42 | $41 | –% | $50 | (17%) | $173 | $222 | (22%) |
Latin America | $183 | $177 | 5% | $168 | 14% | $701 | $666 | 5% |
Wholesale | $37 | $36 | 6% | $35 | 11% | $140 | $151 | (7%) |
Enterprise | $146 | $141 | 4% | $133 | 15% | $561 | $515 | 9% |
Total CNS Revenue | $1,424 | $1,395 | 2% | $1,368 | 5% | $5,587 | $5,418 | 3% |
Wholesale | $513 | $506 | 1% | $517 | –% | $2,032 | $2,098 | (3%) |
Enterprise(2) | $911 | $889 | 2% | $851 | 8% | $3,555 | $3,320 | 7% |
(1) See schedule of non-GAAP metrics for definition and reconciliation to GAAP measures.
(2) Includes EMEA UK Government
(3) References to “pro forma” figures assume the Global Crossing acquisition took place on January 1, 2011.
(4) As Reported comparison measures current period results against pro forma results from full year 2011
Core Network Services Revenue
Core Network Services (CNS) revenue grew sequentially to $1.424 billion in the fourth quarter 2012, increasing approximately 1.8 percent on a constant currency basis.
“CNS revenue performance strengthened this quarter as expected, with overall CNS revenue growth on a constant currency basis of 1.8 percent sequentially and 4.7 percent year-over-year,” said Sunit Patel, executive vice president and CFO of Level 3. “In particular, on a constant currency basis, global CNS enterprise revenue growth improved this quarter, growing 2.2 percent sequentially, up from 1.5 percent sequential growth in the third quarter 2012, and growing 7.8 percent year-over-year.”
For the full year 2012, CNS revenue grew to $5.587 billion, compared to $5.418 billion for full year 2011 pro forma.
Deferred Revenue
The deferred revenue balance was $1.138 billion at the end of the fourth quarter 2012, compared to $1.101 billion at the end of the third quarter 2012 and $1.149 billion at the end of the fourth quarter 2011.
Cost of Revenue
Cost of revenue for the fourth quarter 2012 was $655 million, compared to $642 million in the third quarter 2012 and $660 million in the fourth quarter 2011. For the full year 2012, cost of revenue decreased to $2.602 billion, compared to $2.655 billion for the full year 2011 pro forma.
For the fourth quarter 2012, gross margin was 59.4 percent, compared to 59.6 percent for the third quarter 2012 and 58.2 percent for the fourth quarter 2011.
Gross margin increased to 59.2 percent for the full year 2012, compared to 58.0 percent for the full year 2011 pro forma.
Selling, General and Administrative (SG&A) Expenses
Excluding non-cash compensation expense, SG&A expenses were $552 million for the fourth quarter 2012, which included a $47 million benefit from a reduction in the estimated cost of asset retirement obligations (ARO) under real estate leases and right-of-way agreements and a $20 million charge for severance and related expenses. SG&A expenses were $576 million in the third quarter 2012 and $648 million in the fourth quarter 2011.
SG&A expenses, including non-cash compensation expense, were $585 million for the fourth quarter 2012, compared to $625 million in the third quarter 2012 and $681 million in the fourth quarter 2011. Non-cash compensation expense was $33 million, $49 million and $33 million for the fourth quarter 2012, the third quarter 2012 and the fourth quarter 2011, respectively.
For the full year 2012, excluding non-cash compensation expense, SG&A was $2.315 billion, compared to $2.447 billion for the full year 2011 pro forma.
Adjusted EBITDA
For the fourth quarter 2012, Adjusted EBITDA was $407 million, which included the $27 million net benefit of the ARO adjustment and offsetting severance charges incurred during the quarter. Also in the fourth quarter 2012, the company recognized higher than expected healthcare costs, entered into a settlement to resolve a longstanding dispute with a large carrier, and was affected by Superstorm Sandy for a total of approximately $15 million.
Adjusted EBITDA was $372 million in the third quarter 2012 and $271 million in the fourth quarter 2011.
For the full year 2012, Adjusted EBITDA was $1.459 billion. Excluding the $27 million net benefit from special items recognized in the fourth quarter 2012, Adjusted EBITDA grew 18 percent compared to the full year 2011 pro forma.
Adjusted EBITDA margin was 23.5 percent excluding the special items, compared to 23.4 percent for the third quarter 2012 and 17.2 percent in the fourth quarter 2011.
For the full year 2012, Adjusted EBITDA margin was 22.5 percent excluding the special items, compared to 19.2 percent for the full year 2011 pro forma.
Cash Flow and Capital Markets Transactions
During the fourth quarter 2012, Unlevered Cash Flow was $325 million, compared to $77 million for the third quarter 2012 and $202 million for the fourth quarter 2011.
Free Cash Flow was positive $202 million for the fourth quarter 2012, compared to negative $157 million in the third quarter 2012, and positive $41 million for the fourth quarter 2011.
For the full year 2012, Unlevered Cash Flow was $528 million, compared to $508 million in 2011 pro forma. Free Cash Flow was negative $165 million for the full year 2012, compared to negative $202 million for the full year 2011 pro forma.
Capital expenditures were $198 million for the fourth quarter 2012, compared to $227 million for the third quarter 2012 and $148 million for the fourth quarter 2011. For the full year 2012, capital expenditures were $743 million, approximately 12 percent of total revenue, compared to $624 million for the full year 2011 pro forma.
In Oct. 2012, Level 3 Financing refinanced its existing $650 million Tranche B II and $550 million Tranche B III Term Loans, each maturing in 2018, through the creation of a new Tranche B-II 2019 Term Loan of $1.2 billion, maturing in 2019. The company recognized a loss of $50 million in the fourth quarter 2012 as a result of this transaction.
As of December 31, 2012, the company had cash of approximately $979 million.
Integration Update
“In 2012, we took a deliberate and careful approach in bringing Global Crossing and Level 3 together to ensure we maintained the excellent customer service capabilities we’ve worked hard to build over the last several years,” said Jeff Storey, President and COO of Level 3. “We completed several milestones in support of a unified customer experience in 2012, and our customer satisfaction scores improved over the course of last year.”
“With the progress we made throughout the year and the additional milestones we reached in the fourth quarter, we felt comfortable taking additional cost reduction actions in the fourth quarter, reducing our workforce by approximately 4 percent and beginning the process to exit office locations. At the same time, we made investments for growth by increasing our sales force, putting additional customer buildings on-net throughout our global footprint, and launching additional capabilities to our Managed Services, Managed Security and Professional Services product offerings.”
“As we look to 2013, we remain focused on revenue growth in all regions, and continuing to drive additional cost efficiencies throughout the business.”
2013 Business Outlook
“Overall for 2013, we expect to see stronger sequential CNS revenue growth and continued double digit Adjusted EBITDA growth,” said Patel.
“For the first quarter 2013, we expect to see a slight decline in CNS revenue on a sequential basis, due to the typical reversal in the seasonally strong fourth quarter revenue. Adjusting for the special items in the fourth quarter, with the expected decline in CNS revenue and increase in payroll taxes, we expect Adjusted EBITDA to be roughly flat in the first quarter 2013 compared to the fourth quarter 2012.”
“For the remainder of 2013, we generally expect sequential CNS revenue growth to be stronger compared to 2012. We expect low double digit percentage growth in Adjusted EBITDA, compared to full year 2012 reported Adjusted EBITDA of $1.459 billion. We expect to be Free Cash Flow positive for the full year, excluding interest rate swap obligations.”
“GAAP interest expense is expected to be approximately $665 million, and net cash interest expense is expected to be approximately $645 million for the full year 2013. Capital expenditures are expected to be approximately 12 percent of total revenue for the full year 2013. Depreciation and Amortization is expected to be approximately $770 million for the full year 2013.”
“Consistent with previous years, we expect a heavier use of cash in the first quarter 2013, primarily due to higher sequential cash interest expense, which is expected to be approximately $70 million greater in the first quarter 2013 compared to the fourth quarter 2012, as well as our annual bonus payments and other working capital requirements.”
2013 Revenue Reporting
“At the beginning of each year, we assess our reporting to ensure our external disclosure best reflects the business,” said Patel. “We are maintaining our current reporting categories in 2013, but making some adjustments between current geographic and channel reporting categories.”
“To conform Global Crossing reporting to a consistent basis across the company, we have reallocated revenue to more accurately reflect the revenue attribution by region. In the fourth quarter 2012 pro forma for this change, $12 million of CNS revenue from North America would have been reported in our other two regions, with $11 million reported in EMEA and $1 million reported in Latin America.”
“Additionally, we made some minor customer channel changes, and reallocated CNS voice services revenue of about $33 million attributable to our reseller channel to Wholesale Voice Services and Other revenue.”
Pro forma for these changes for the third and fourth quarter 2012, Core Network Services revenue was:
CNS Revenue(1)($ in millions) | Fourth Quarter 2012 | Third Quarter 2012 | PercentChange,As Reported | Percent Change, Constant Currency |
North America | $979 | $963 | 2% | 2% |
Wholesale | $392 | $386 | 2% | 2% |
Enterprise | $587 | $577 | 2% | 1% |
EMEA | $228 | $223 | 2% | 1% |
Wholesale | $87 | $87 | –% | (3%) |
Enterprise | $99 | $94 | 5% | 4% |
UK Government | $42 | $42 | –% | -% |
Latin America | $184 | $179 | 3% | 4% |
Wholesale | $41 | $40 | 3% | 4% |
Enterprise | $143 | $139 | 3% | 4% |
Total CNS Revenue | $1,391 | $1,365 | 2% | 2% |
Wholesale | $520 | $513 | 1% | 1% |
Enterprise(2) | $871 | $852 | 2% | 2% |
Wholesale Voice Services and Other Revenue | $223 | $225 | (1%) | (1%) |
Total Revenue | $1,614 | $1,590 | 2% | 1% |
(1) Results for previous quarters and the full year 2012 in this format can be found in the “Supplemental Schedule” on the Level 3 Investor Relations website
(2) Includes EMEA UK Government Revenue
CNS Services Revenue(1)($ in millions) | Fourth Quarter 2012 | Third Quarter 2012 | PercentChange,As Reported |
Colocation and Datacenter Services | $145 | $139 | 4% |
Transport & Fiber | $494 | $491 | 1% |
IP and Data Services | $512 | $502 | 2% |
Voice Services (local and enterprise) | $240 | $233 | 3% |
Total CNS Revenue | $1,391 | $1,365 | 2% |
(1) Results for previous quarters and the full year 2012 in this format can be found in the “Supplemental Schedule” on the Level 3 Investor Relations website
The pro forma reporting for these changes for the full year 2012 by quarter is provided in the supplemental schedules on the Investor Relations section of the Level 3 website.
Conference Call and Web Site Information
Level 3 will hold a conference call to discuss the company’s fourth quarter and full year 2012 results today at 9 a.m. ET. The conference call will be broadcast live on Level 3’s Investor Relations website at http://lvlt.client.shareholder.com/events.cfm. Additional information regarding the fourth quarter and full year 2012 results, including the presentation that management will review on the conference call, will be available on Level 3’s Investor Relations website. If you are unable to join the call via the Web, the call can be accessed live at 1 877-283-5145 (U.S. Domestic) or 1 312-281-1200 (International). Questions can also be sent to Investor.Relations@Level3.com.
The call will be archived and available on Level 3’s Investor Relations website or can be accessed as an audio replay starting at 2 p.m. ET on Feb. 12 until midnight ET on March 15. The replay can be accessed by dialing 1 800-633-8284 (U.S. Domestic) or 1 402-977-9140 (International), conference code 21645117.
For additional information, please call 720-888-2502.
About Level 3 Communications
Level 3 Communications, Inc. (NYSE: LVLT) provides local, national and global communications services to enterprise, government and carrier customers. Level 3’s comprehensive portfolio of secure, managed solutions includes fiber and infrastructure solutions; IP-based voice and data communications; wide-area Ethernet services; video and content distribution; data center and cloud-based solutions. Level 3 serves customers in more than 450 markets in 45 countries over a global services platform anchored by owned fiber networks on three continents and connected by extensive undersea facilities. For more information, please visit www.level3.com
Website Access to Company Information
Level 3 maintains a corporate website at www.level3.com, and you can find additional information about the company through the Investors pages on that website at http:// http://lvlt.client.shareholder.com/. Level 3 uses its website as a channel of distribution of important information about the company. Level 3 routinely posts financial and other important information regarding the company and its business, financial condition and operations on the Investor Relations web pages.
