Level 3: Sales slowdown disconnected from demand

Level 3 Communications echoed other telecom companies today in reporting recent delays in purchases among enterprise and service provider customers. And like others, the company insists it has seen no change in the underlying demand for its services, attributing the slowdown to general uncertainty regarding the broader economy.

“We believe this increase in time from identifying an opportunity to the execution of a firm order does not indicate a decrease in demand,” said James Crowe, Level 3’s chief executive officer. “If we’re right, you’ll see a one-time decrease [in revenue]. If two months ago, the sales cycle is 60 to 90 days, and now it’s 70 to 100 days, as that filters in, it doesn’t affect the overall demand or pipeline -- if we’re accurate…Our outlook is less clear than it was.”

While apparent in Level 3’s wholesale and business markets groups in the last several weeks, this sales delay is not occurring in Europe, Crowe said, and it is not occurring in the company’s content delivery networks business, whose third-quarter revenue was up 14% from a year earlier and up 4% from the previous quarter.

Revenue from the company’s business markets group was flat in the third quarter. But that’s partly the result of churn in the smaller end of Level 3’s customer base, inherited through acquisitions. Level 3 doesn’t mind that churn, however, as the company is not interested in serving businesses with less than a few thousand employees.

Revenue from Level 3’s wholesale markets group was up 7% from a year earlier. Wholesale voice revenue was up 13% from a year earlier but down 1% sequentially.

Overall, the company’s core communications and core network services revenue were up 7% and 6%, respectively, from a year earlier. And the company continues to expect to become cash-flow-positive in the fourth quarter.

Crowe’s comments today contrast with his more confident tone in July, when he said, “With respect to enterprise, we’ve seen no weakening of demand – period.” But they are more consistent with comments made yesterday by AT&T in its third-quarter earnings report, in which the carrier reported a 1.4% drop in enterprise revenue.

If the economy continues to sour, Crowe believes it could well impact Level 3 positively. Historically in such situations, businesses have travelled less and communicated more; consumers have stayed home more and consumed more digital entertainment. Though subscriber growth may ebb, unit growth should surge, he said. “If history is any guide, demand should, if anything, increase.”