Level 3 sees signs of rebound

Despite a drop in revenue in the first quarter of 2009, Level 3 Communications is seeing signs that its business is already bouncing back, Chief Executive Officer James Crowe told industry analysts in announcing first-quarter results today.

The volume of orders trended up at the end of the quarter, Crowe said, and there are signs that Internet service providers buying capacity from Level 3 are now having to expand that capacity to meet growing consumer demand, particularly for Internet video.

“Roughly two-thirds, or 70% of our business is created by underlying consumer demand for broadband to the home ,” Crowe said. “In addition, there is wireless data adoption, which is smaller but increasing at a rapid rate. We serve that demand through our wholesale customers. That’s the driver of our content markets activities. We have seen no reduction in that underlying demand, if anything the adoption of Internet video is growing. You can only run networks’ so hot before you begin to purchase again. We don’t have any special views into the macroeconomic issues, but we are seeing signs that our customers are going to need to start buying again.”

Level 3 advised analysts that there would still be pressures on its revenues in the second quarter but expects them to be less than in the first quarter. The company also will trim 150 jobs in the second quarter to reduce its cost. But Crowe said Level 3 also is hiring, adding sales people in local markets as part of its strategy to build up its competitive local exchange carrier business reaching mid-sized enterprise customers.

Crowe said Level 3’s two largest wholesale customers, AT&T and Verizon, had both moved traffic off Level 3’s network and onto their own networks at a faster pace than in the past, probably due to the economic downturn, Crowe said. “This wasn’t unexpected,” he added. “We’ve known for some time they were going to consolidate traffic onto their network. The timing may be affected by the economic situation.”

Service providers that are “net purchasers” of network capacity, particularly in the metro network area, are likely getting squeezed by price increases in those areas, Crowe said, but Level 3 is a net seller of such facilities, given its metro acquisitions.

While not commenting directly on questions about Qwest’s potential sale of its wholesale network, Buddy Miller, chief strategy office for Level 3, did say he expects further consolidation in the industry.

“We believe that consolidation has more room to go,” Miller said. “One of the factors is the metro facility squeeze that Jim expounded on earlier. In the backbone, there are enough out-of-pocket cost savings taking traffic from two networks putting onto one – to drive consolidation. We have participated in that part of consolidation.”

Level 3 will “continue to look at it and be a part of it,” Miller said.

Chief Financial Officer Sunit Patel said the $220 million Level 3 raised this month positions the company through 2010 at the very least. “The cash we have on hand essentially lets us, even without any free cash flow, take care of debt maturities through 2009, 2010 and a reasonable chunk of 2011. With the cash we will generate, we think we can work our way through end of 2011. So we don’t need to raise capital this year or next year, but we are always conservative in maintaining a high level of liquidity.”