Level 3: Promises growth after '05 decline

During the company's fourth-quarter earnings report this morning, Level 3 Communications projected its core communications services to grow faster in 2006 than its other communication services decline.

Chief Executive Officer James Crowe touched on what he believes is the most fundamental question facing the company: whether it can generate enough growth from its so-called "core services"--which include transport and infrastructure, voice and wholesale IP and data--to pay the debt due in 2008. Crowe maintained the company can do that and more. First, he pointed out that the company's recent debt exchange has cut in half the amount of debt due in 2008. He also projected revenue from the company's core services to grow 20% organically in 2006 after growing 18% in 2005. That growth, he pointed out, comes on top of--not as a result of--the added revenue from the company's recent acquisitions of WilTel Communications and Progress Telecom.

"The [revenue] base is larger because of the acquisitions, but the growth is new sales to customers," Crowe said.

In 2007, that growth will accelerate beyond 20%, he said, yielding an adjusted OIBDA (operating income before depreciation and amortization) between $650 million and $700 million, a 73% to 86% improvement over 2005.

"Given our current growth rates in transport and IP and wholesale voice, together with the growth we expect from price improvements and subscriber-oriented VoIP, we believe we can not only manage our debt but create real value," Crowe said.

The percentage of VoIP services that are subscriber-based "continues to be small," Chief Financial Officer Sunit Patel said, a fact that did not diminish Crowe's optimism.

"When you're in the early part of a new and exciting service, the early part of the S curve is hard to predict," Crowe said, adding that the same has been true of all new services, including DSL and cable modem service. "Once you get onto the steep part of the curve, though, it moves very quickly. We're moving toward the steep part of the curve."

Though the company expects AT&T to migrate traffic formerly sent by SBC through the WilTel network onto its own backbone over time, Level 3 still expects revenue from the SBC-WilTel contract to contribute about $1 billion in revenue to Level 3 in 2006.

Revenue from core communications grew 8% sequentially in the fourth quarter to $249 million. The biggest contributor, the transport and infrastructure segment, also grew the most sequentially at 11%. Voice revenue grew 6% in the quarter to $33 million. And IP and data services grew 4% to $70 million. Revenue from the company's managed modem business declined 9% to $88 million, and that from DSL dropped from $17 million to zero.

Level 3 also reported a flattening of closing prices for IP and transport services in 2005, including modest increases in transport prices.

The company reported a net loss of $169 million, or $0.24 per share, for the fourth quarter and a net loss of $0.91 per share for the year 2005. Though the quarterly loss was a 17% improvement, the full-year loss was 36% wider than in 2004.

The company's adjusted OIBDA was up 6% in the quarter, to $98 million, but down less than 1% for the year, to $509 million.