Competitor Insight #43.2007: Level 3 Communications, Inc

Despite debt load, recent acquisitions show promise

Publication Date	August 2007
Publisher	IE Market Research
Product Type	Report
Pages	18
ISBN Number	not applicable
Product Code	IEM00173

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Summary

This market research report on Level 3 provides a comprehensive analysis and review of its 2Q07 strategies, operational and financial metrics. The report covers the key strategic issues facing the company and provides forecasts on its operations, notably we analyze in-depth recent acquisitions and how they combine with the firm's existing debt load to influence its ability to sustain growth. We devote extensive coverage to Level 3's financial performance and forecasts, highlighting expected 3Q07 results.

Content

Strategic Outlook
- Level 3 metro strategy enhances positioning
- Industry consolidation positive, likely to continue
- Common themes: volume growth, selective price stability
  - Volume growth should remain robust while prices stabilizes
  - Risks relating to supply & demand and revenue mix enough to dampen positive mood, however
- Risks to our thesis are centered on Level 3's revenue drivers, namely pricing for backbone capacity
- Revenues from competitors may be "at risk"
- Integration risk, potential for more deals
Operational Summary & Forecasts
- Broadband additions slow in 2Q07
- Strategically consistent with recent actions
- AOL migration to broadband a slight negative
- Sold software reseller business for $287 million cash
- Acquisitions accretive, diversify revenues
  - The acquisitions have increased Level 3's revenue stream on top of its highly fixed operating cost structure and its highly leveraged capital structure
- Metro business has higher free cash flow margin
- Revenue diversification and reducing existing costs
- Potential upside on SG&A synergies
Financial Summary & Forecasts
- Disappointing core results, integration slips
- Lowering estimates
- Estimates
- Valuation
- Level 3 rationalizing: telecom space, balance sheet
- Transaction deleveraging, FCF accretive in 2008
- Further deleveraging, accretive in 2008
Figures:
- Table 1: Level 3 Communications segment and metro business margins
- Table 2: 2007 estimates comparison
- Table 3: Level 3 actual versus IEMR estimates
- Table 4: Core communications actual versus IEMR estimates
- Table 5: Level 3 balance sheet 2006 - 2009E
- Table 6: Level statement cash flows 2006 - 2009E
- Table A1: Key income statement data (Dec) 2005 - 2009E
- Table A2: Key income statement data (Dec) 2005 - 2009E