Level 3 posts 1Q loss, gross margins look promising

(Telephony) Level 3 today posted first-quarter revenue and earnings per share losses that almost doubled those during the same period last year while cutting its revenue projections for 2001 and 2002.

The integrated communications services provider fell short of guidance it established in January and reaffirmed in March, but it beat Wall Street’s adjusted loss expectations by 30 cents per share.

The company posted a $535 million net loss for the quarter ending March 31, compared to a loss of $271 million for the same period last year. Basic and diluted loss per share for the first quarter was $1.45, compared to 77 cents for the first quarter 2000.

According to First Call/Thompson Financial, 19 analysts polled forecasted a loss per share of $1.75.

“We are carefully monitoring the macroeconomic and industry environments,” said Level 3 CEO James Crowe in a statement. “While we are not immune to their effects, we are taking steps to further strengthen our financial position.”

EBITDA losses, excluding stock-based compensation expense for the first quarter, were $114 million, compared to a $141 million loss during the year-ago quarter.

Looking ahead, Level 3 cut its 2001 communications revenue from $2.4 billion to $2.6 billion to $2.3 billion to $2.4 billion. For 2002, the company lowered communications revenue estimates from between $3.4 billion and $3.6 billion to a range of $3.1 billion and $3.3 billion.

While Level 3 said it expects negative EBITDA $330 million for 2001, it said it would return to positive in 2002 with an anticipated $200 million to $300 million--a $630 million swing.

The EBITDA shift can be linked to rising gross margins, which are attributable largely to Level 3 moving customers off leased lines and onto its own network, said William Klein, an equity analyst at Dresdner Kleinwort Wasserstein.

“Gross margins were 40% for the whole company and 42% in the communications segment,” Klein said. “When you look at what they’re projecting, that’s huge. This company was negative gross margin two quarters ago.”

Level 3 raised projections for its communications business gross margin to 52% for 2001 and to 60% for 2002. Consolidated gross margins are projected at 49% 2001 and 58% for 2002.

The company also said it has migrated about 50% of customer traffic in the first quarter and expects to have 95% moved by the end of May.

In mid-day Nasdaq trading, Level 3 shares were down 17.18% to $12.34. Although some financial analysts cut their ratings in the wake of the announcement, others say the move is premature and that the company is gaining momentum.

“They’ve got the funding to make it through this storm, so they’re going to get market share,” said Vik Grover, an analyst with Kaufman Bros. “The numbers are always going to be sloppy in a company that’s transitioning from a construction story to an operating story and that’s what this is; it’s under a massive transition.”