04-02-2016, 05:07 #1
[EN] Cable will have a tough time competing with ILECs for large business customers
Level 3 says cable companies' limited resources make it tough to compete in enterprise services
February 3, 2016 | By Sean Buckley
Level 3 Communications sees cable operators as a growing threat in the business space it serves -- as well as a potential ally for special access -- but said their geographic nature and lack of experience means they will have a tough time competing with ILECs for large business customers.
In an FCC filing, Level 3 said that while cable operators like Comcast Business (NASDAQ: CMCSA) and Charter (NASDAQ: CHTR) are making progress in serving medium-sized businesses within their respective territories, their networks don't reach nearly the amount of buildings ILECs have on their network.
"The incumbent LECs have significant advantages over their competitors because, among other things, their networks reach virtually every commercial building in their respective territories, and their large and diverse legacy customer bases give them economies of scale and scope that competitive LECs cannot come close to achieving," Level 3 said. "The competitive LECs' and cable companies' networks reach only a small minority of commercial buildings."
The service provider's comments to the FCC come as the regulator begins to review the special access service data from the ILECs and other providers it collected.
Cable operators have made strides in rolling out fiber-based Ethernet in the markets they operate in but they face limitations in serving large multi-site enterprises that typically span multiple geographies and regions.
"Cable companies participate in dedicated services markets where they offer Ethernet-based and DSn-based dedicated services over fiber optic facilities," Level 3 said. "However, they have explained that their ability to compete with the incumbent LECs is somewhat limited, especially with respect to multi-location enterprise customers with complex needs."
But network reach is only one issue that limits cable operators in serving large multi-site enterprise customers.
Large ILECs like AT&T (NYSE: T) and Verizon (NYSE: VZ) have established long-term relationships and have requisite experience in building out not only networks to them but developing a broader solution sets. ILECs also have the experience to work with service provider partners outside of the regions to offer guaranteed SLAs.
Comcast Business' new Enterprise division, for instance, will target Fortune 1000 business customers through established External-Network to Network Interconnection (E-NNI) agreements with other cable providers. The cable MSO has wholesale agreements with other cable companies including Charter, Time Warner Cable, Cox, Cablevision, and Mediacom, and it acquired Contingent Network Services.
"Comcast's recent creation of a new unit to target Fortune 1000 businesses does not appear to support the conclusion that cable companies have overcome these longstanding limitations," Level 3 said. "Comcast plans to target these businesses using a "partner model."
- see the FCC filing (PDF)
04-02-2016, 11:40 #2
Level 3 Finishes Off a Year of Integration and Enterprise Growth
Full Year 2015 Highlights
- Grew Core Network Services revenue by 5.3 percent for the full year 2015, on a pro forma and constant currency basis
- Grew Enterprise Core Network Services revenue by 7.2 percent for the full year 2015, on a pro forma and constant currency basis
- Grew Adjusted EBITDA by 16 percent for the full year 2015, compared to the company's outlook of 15 to 17 percent
- Generated Free Cash Flow of $658 million for the full year 2015, which excludes accelerated cash interest payments of $32 million related to capital markets activity in the fourth quarter 2015, and was above the company's outlook range of $600 to $650 million
- Achieved approximately $216 million of annualized run-rate Adjusted EBITDA synergies since the close of the tw telecom transaction, exceeding the company's outlook of $140 million by the end of the first quarter 2016 and a total of $200 million[/h] BROOMFIELD, Colo., Feb. 4, 2016 /PRNewswire/ -- Level 3 Communications, Inc. (LVLT) today reported results for the quarter and full year ending December 31, 2015.
"Our 2015 results demonstrate Level 3's solid execution and performance," said Jeff Storey, president and CEO of Level 3. "Demand for bandwidth remains strong and the proliferation of connected devices continues. These demand drivers are creating an enterprise networking opportunity that is well suited for the depth, scale and reach of Level 3's global network and capabilities. We believe we are well positioned to continue to take enterprise market share."
Total revenue was $2.053 billion for the fourth quarter 2015, compared to $2.052 billion for the fourth quarter 2014 and $8.229 billion for the full year 2015 compared to $8.123 billion for the full year 2014. The full year 2015 and the full year 2014 results include nine months and twelve months of results from the company's Venezuelan subsidiary's operations, respectively. The full year 2014 results are presented on a pro forma basis assuming the tw telecom acquisition took place on January 1, 2014.
In the fourth quarter 2015, the company generated net income of $3.323 billion and basic earnings per share of $9.33. This includes a non-cash benefit to the fourth quarter Income Tax Expense of approximately $3.3 billion related to the release of the company's valuation allowance against U.S. federal and state deferred tax assets, an expense of $151 million for the provision for income taxes after the release of the valuation allowance and a charge of $55 million on the modification and extinguishment of debt. Excluding all of these items, basic earnings per share were $0.53 for the fourth quarter 2015. Net loss per share was $0.24 for the fourth quarter 2014 on a pro forma basis.
($ in millions)
Fourth Quarter 2015 Fourth Quarter 2014 Pro Forma(1)(2) Full Year 2015(3) Full Year 2014 Pro Forma(1)(2) Core Network Services Revenue(4) $1,943 $1,918 $7,757 $7,552 Wholesale Voice Services and Other Revenue $110 $134 $472 $571 Total Revenue $2,053 $2,052 $8,229 $8,123 Network Access Costs $708 $732 $2,833 $2,894 Network Access Margin 65.5% 64.3% 65.6% 64.4% Network Related Expenses (NRE) (5) $337 $364 $1,403 $1,432 Selling, General and Administrative Expenses (SG&A)(5) $323 $332 $1,323 $1,355 Non-cash Compensation Expense $49 $93 $141 $168 Adjusted EBITDA(6)(7) $681 $469 $2,638 $2,271 Adjusted EBITDA Margin(6)(7) 33.2% 22.9% 32.1% 28.0% Capital Expenditures $330 $346 $1,229 $1,255 Unlevered Cash Flow(7) $399 $213 $1,293 $911 Free Cash Flow(7)(8) $226 ($9) $626 $183 Net Income (Loss) $3,323 ($80) $3,433 $149 Net Income (Loss) per Common Share-Basic $9.33 ($0.24) $9.71 $0.44
(1) References to "pro forma" figures assume the tw telecom acquisition took place on January 1, 2014. (2) The reported fourth quarter 2014 and full year 2014 results include the company's Venezuelan subsidiary's operations. (3) The reported full year 2015 results include nine months of results from the company's Venezuelan subsidiary's operations. (4) The reported fourth quarter 2014 and full year 2014 results have been adjusted to reflect changes made to customer assignments between the wholesale and enterprise channels as of the beginning of 2015. (5) Excludes non-cash compensation expense and integration-related expenses. (6) Includes tw telecom acquisition related expenses of $4 million for the fourth quarter 2015, $32 million for the full year 2015, $156 million for the fourth quarter 2014 and $172 million for the full year 2014. (7) See schedule of non-GAAP metrics for definitions and reconciliation to GAAP measures. (8) Includes accelerated cash interest payments of $32 million related to the capital markets transaction completed in the fourth quarter 2015.
04-02-2016, 11:50 #3
Core Network Services (CNS) Revenue
($ in millions)
Fourth Quarter 2015 Fourth Quarter 2014 Pro Forma(1)(2) Percent
2015 Pro Forma(1)(3)
Full Year 2014 Pro Forma(1)(4) Percent
North America $1,571 $1,505 5% $6,208 $5,867 6% Wholesale $425 $425 -% $1,734 $1,706 2% Enterprise $1,146 $1,080 6% $4,474 $4,161 8% EMEA $212 $221 1% $835 $902 -% Wholesale $69 $75 -% $275 $326 (7%) Enterprise $118 $118 3% $457 $461 6% UK Government $25 $28 (8%) $103 $115 (4%) Latin America $160 $171 8% $642 $696 7% Wholesale $35 $37 4% $139 $147 7% Enterprise $125 $134 10% $503 $549 7% Total CNS Revenue $1,943 $1,897 4% $7,685 $7,465 5% Wholesale $529 $537 -% $2,148 $2,179 1% Enterprise $1,414 $1,360 6% $5,537 $5,286 7%
(1) References to "pro forma" figures assume the tw telecom acquisition and the deconsolidation of the company's Venezuelan subsidiary's operations took place on January 1, 2014. (2) Excludes total revenue from the company's Venezuelan subsidiary's operations of $21 million for the fourth quarter 2014. (3) Excludes total revenue from the company's Venezuelan subsidiary's operations of $25 million for the third quarter 2015, $24 million for the second quarter 2015, and $23 million for the first quarter 2015. (4) Excludes total revenue from the company's Venezuelan subsidiary's operations of $87 million for the full year 2014.
CNS Revenue was $1.943 billion in the fourth quarter 2015, increasing 4.4 percent year-over-year on a pro forma and constant currency basis compared to the fourth quarter 2014. For the full year 2015, CNS Revenue was $7.685 billion, which grew 5.3 percent on a pro forma and constant currency basis compared to the full year 2014.
The deferred revenue balance was $1.244 billion at the end of the fourth quarter 2015, compared to $1.208 billion at the end of the fourth quarter 2014.
For the fourth quarter 2015, Adjusted EBITDA was $681 million, including integration-related expenses of $4 million. For the fourth quarter 2014, Adjusted EBITDA on a pro forma basis was $469 million, which included tw telecom transaction and integration-related expenses of $156 million.
For the full year 2015, Adjusted EBITDA was $2.638 billion, including integration-related expenses of $32 million, an increase of 16 percent from the starting point of $2.271 billion for the full year 2014, on a pro forma basis, which includes $172 million of transaction and integration-related expenses.
Capital Market Transactions and Liquidity
On December 13, 2015, the company redeemed $900 million aggregate principal amount of Level 3 Financing, Inc.'s 8.625% Senior Notes due 2020. To fund the redemption of these notes, Level 3 Financing used the net proceeds, along with cash on hand, from the issuance of its 5.375% Senior Notes due 2024.
The loss on extinguishment and modification of debt as a result of this transaction and related redemption was $55 million.
As of December 31, 2015, the company had cash and cash equivalents of $854 million.
Release of Deferred Tax Valuation Allowance
With the continued expectation of generating income before taxes in the U.S., the company released a significant portion of its valuation allowance against its net U.S. and state deferred tax asset position in the fourth quarter 2015. The release of the valuation allowance in the fourth quarter benefitted Income Tax Expense and Net Income by approximately $3.3 billion.
The company's estimated Federal net operating loss carryforward (NOL) position was $9.9 billion as of December 31, 2015.
"In 2015, we met or exceeded our key outlook measures for the year," said Sunit Patel, executive vice president and CFO of Level 3. "Even with the tw telecom integration, global currency pressures driven by macroeconomic headwinds and the deconsolidation of our Venezuelan subsidiary last quarter, we had good momentum which drove revenue growth and strong profit performance for the year. We also refinanced $4.9 billion of our debt during 2015, resulting in over $110 million of annualized cash interest expense savings, positioning us well for 2016 and beyond.
"As we look to 2016, from a revenue perspective, we expect both total revenue and Core Network Services revenue growth, excluding UK Government revenue, to be stronger in 2016 compared to 2015, on a constant currency basis.
"We expect full year 2016 Adjusted EBITDA to grow 9 to 12 percent from a starting point of $2.592 billion, which excludes the three quarters of Adjusted EBITDA results from our Venezuelan subsidiary's operations. For the full year 2016, we expect to generate Free Cash Flow of $1.0 to $1.1 billion."
Metrics 2015 2016 Outlook Results Outlook Adjusted EBITDA YoY growth of 15% - 17%(1) 16% YoY growth of 9% - 12%(2) Free Cash Flow $600 - $650 million $658 million $1.0 - $1.1 billion
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For the full year 2016, the company also expects:
- GAAP interest expense of approximately $570 million
- Net cash interest expense of approximately $520 million
- Capital expenditures of approximately 15 percent of total revenue
- Depreciation and amortization of approximately $1.230 billion
- Full year income tax rate of approximately 30 percent
- Cash income tax expense of approximately $40 million
- Non-cash compensation expense of approximately $130 million
04-02-2016, 11:51 #4
Level 3 posted its fourth quarter 2016 earnings this morning, earning $3.323B, or $9.33 per share. Most of that staggering number, of course, came from a non-cash benefit due to the recognition for tax purposes that the vast pile of net operating losses they have racked up over the years now appear likely to find some use. Looking past that, revenues were flat as enterprise growth was offset by currency headwinds in Latin America, and earnings per share were roughly in-line.