Original Source: FD (FAIR DISCLOSURE) WIRE
. Robin Grey, Level 3 Communications, Treasurer, SVP IR . Jim Crowe, Level 3 Communications, CEO . Kevin O'Hara, Level 3 Communications, President, COO . Anna Goshko, Banc of America Securities, Analyst
. Oliver Booland, Alliance Capital Management, Analyst . David Janazzo, Merrill Lynch, Analyst . Steve Randall, Bear, Stearns & Co., Analyst . Sunit Patel, Level 3 Communications, Group VP, CFO
. Jason Armstrong, Goldman Sachs, Analyst . Anton Annex, Morgan Stanley Dean Witter, Analyst
LVLT reported that 4Q05 revenue was $362m, exceeding projections of $340-360m and full year 2005 revenue was approx. $1.61b at the lower end of projections of a decline of 4-6%. For 2006, the Co. expects Communications revenue to increase to approx. $2.95-3.15b and for 1Q06 the Co. expects Communications revenue of approx. $760-785m.
A. Key Data From Call 1. Full year 2005 revenue = approx. $1.61b at the lower end of projections of a decline of 4-6%. 2. 4Q05 revenue = $362m, exceeding projections of $340-360m. 3. 2006 expected Communications revenue = approx. $2.95-3.15b. 4. 1Q06 expected Communications revenue = approx. $760-785m.
S1. Financial Results (S.P.) 1. Note: 1. The results will exclude WilTel. 2. The Information Services group will exclude (i)Structure,
which was sold in 4Q05. 2. 4Q05 Highlights: 1. All 4Q05 and full year 2005 results exceeded previously issued projections.
1. Primarily as a result of continuing growth in the core transport, IP and voice services. 2. Revenue was $362m, exceeding projections of $340-360m primarily due to an increase of approx. $19m over 3Q05 in the Transport and Infrastructure, IP and Voice businesses.
3. Represents 8% sequential increase. 4. Growth was offset by a full qtr.'s impact from the migration of DSL aggregation subscribers off of the Co.'s network in 3Q05. 3. Revenue:
1. Managed modem revenue declined by $9m primarily from ongoing
port rationalization among ISPs as a result of dial-up
migration to [barben]. 2. Full year 2005 managed modem revenue declined by $89m vs. $132m decline in 2004. 1. Continues to expect a decline in revenue in 2006. 3. The $14m increase in Transport and Infrastructure revenue came from all of the Co.'s services, but is mostly related to strong revenue growth from dark fiber, private line and wavelength services. 4. One of the growth drivers is expected to be the delivery of services under previously awarded government contracts. 5. Voice revenue grew 6% QoverQ or $2m. 1. This is a result of an increase in the Co.'s subscriber oriented Voice-over-IP services as well as increased usage of local inbound and toll-free services. 6. IP and Data services revenue increased slightly during 4Q05 primarily due to increased growth in the IPVPN business. 1. The growth was offset by continued attrition in the legacy managed Internet access business. 7. Revenue from the high speed Internet access business was flat QoverQ as the Co. re-priced a contract with one of its largest IP customers. 1. Given the major contracts re-priced over the course of 2005 and the firming of prices along with continued volume growth the Co. is confident that this business should be a contributor to revenue growth in 2006. 8. The reciprocal compensation revenue was $24m vs. $19m in 3Q05. 9. Full year 2005 revenue was approx. $1.61b a decline of 4.6% from 2004 and at the lower end of projections of a decline of 4-6%. 10. [Communications] cost of revenue decreased by $13m in 4Q05, primarily as a result of lower DSL aggregation related costs and lower third party vendor expenses associated with the voice termination business.
4. Expenses: 1. Communications GM improved to 73% for 4Q05 vs. 69% in 3Q05. 2. Communications SG&A excluding non-cash stock based
compensation costs increased by $17m QoverQ. 1. Excluding $5m in property tax benefits in 3Q05, SG&A increased by $12m QoverQ, primarily due to increased headcount, certain IT projects and WilTel integration activities. 5. OIBDA: 1. Communications adjusted OIBDA increased by $1m QoverQ as better GM performance offset the higher SG&A expense. 2. Adjusted OIBDA margin was 23% in 4Q05 consistent with the previous qtr. 3. For full year 2005 adjusted OIBDA was $458m with a margin of 29% which exceeded projections of mid-20% range vs. 27% margin in 2004. 4. Excluding termination revenue of $133m in 2005 and $113 in 2004 communications adjusted OIBDA margins were about 22% in both years. 6. Software Spectrum: 1. Revenue was $526m for 4Q05 a decrease vs. $529m for 4Q04, primarily due to ongoing migration to agency sales offset by higher sales to corporate customers.
2. Adjusted OIBDA from the information services business was $13m
for 4Q05 an increase vs. $12m for 4Q04. 3. For full year 2005 adjusted OIBDA was $38m vs. $30m in 2004. 1. Primarily driven by higher sales volumes reflected in the GM growth. 7. Balance Sheet: 1. Consolidated CapEx in 4Q05 decreased by $24m from 3Q05 to $69m, primarily due to the completion of customer commitments
and upgrades on the Transport and [IT] network. 2. CapEx in 2005 totaled $305m. 3. Consolidated free cash flow was negative $99m during 4Q05 vs. negative $50m in 3Q05. 4. An increase in cash interest payments of $52m in 4Q05 vs. 3Q05 was partially offset by improvements in cash flows from the communications business and information services business. 5. Excluding WilTel for the (Indiscernible) (i)Structure's negative free cash flow of $8m for 2005, the Co.'s consolidated free cash flow for full year 2005 was negative $364m vs. the projection of $370-395m.
6. Since the Co. just closed the WilTel transaction on 12/23/05,
it is still completing the purchase accounting adjustments to
the balance sheet. 7. The 12/31/05 consolidated balance sheet will be included in the Co.'s 10-K filing next month.
8. Key consolidated balances specifics as of Dec. 31, include:
1. Cash and marketable securities which was $862m. 2. Long term debt which was approx. $6b.
S2. Outlook (S.P.) 1. 2006 Outlook: 1. The Co. expects Communications revenue to increase to approx. $2.95-3.15b. 1. Includes revenue from the WilTel acquisition and revenue from Progress Telecom assuming an early 2Q06 close. 2. The Co. is going to report its communications revenue in categories that reflect areas that it is investing in, core communication services, areas the Co. is managing for cash flow, other communication services, and revenue associated with the SBC WilTel contract, SBC contract services. 3. Within core communication services the Co. is expected to include and report Transport and Infrastructure, IP and Data,
Voice and [VPN]. 4. Other communication services will include managed modem and related reciprocal compensation and the legacy managed IP service business. 5. The SBC contract services component will include all of the revenues related to this contract.