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3Q13 Earnings Presentation

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3Q13 Earnings Presentation

3Q13 Earnings Presentation

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  • 1. Third Quarter 2013 Results October 30, 2013 © 2013 Level 3 Communications, LLC. All Rights Reserved. Level 3, Level 3 Communications, and the Level 3 Logo are either registered service marks or service marks of Level 3 Communications, LLC and/or one of its Affiliates in the United States and/or other countries. Level 3 services are provided by wholly owned subsidiaries of Level 3 Communications, Inc. Any other service names, product names, company names or logos included herein are the trademarks or service marks of their respective owners.
  • 2. Cautionary Statement Some statements made in this presentation are forward-looking in nature and are based on management's current expectations or beliefs. These forward-looking statements are not a guarantee of performance and are subject to a number of uncertainties and other factors, many of which are outside Level 3's control, which could cause actual events to differ materially from those expressed or implied by the statements. Important factors that could prevent Level 3 from achieving its stated goals include, but are not limited to, the company's ability to: successfully integrate the Global Crossing acquisition or otherwise realize the anticipated benefits thereof; manage risks associated with continued uncertainty in the global economy; maintain and increase traffic on its network; develop and maintain effective business support systems; manage system and network failures or disruptions; avert the breach of its network and computer system security measures; develop new services that meet customer demands and generate acceptable margins; defend intellectual property and proprietary rights; manage the future expansion or adaptation of its network to remain competitive; manage continued or accelerated decreases in market pricing for communications services; obtain capacity for its network from other providers and interconnect its network with other networks on favorable terms; attract and retain qualified management and other personnel; successfully integrate future acquisitions; effectively manage political, legal, regulatory, foreign currency and other risks it is exposed to due to its substantial international operations; mitigate its exposure to contingent liabilities; and meet all of the terms and conditions of its debt obligations. Additional information concerning these and other important factors can be found within Level 3's filings with the Securities and Exchange Commission. Statements in this presentation should be evaluated in light of these important factors. Level 3 is under no obligation to, and expressly disclaims any such obligation to, update or alter its forward-looking statements, whether as a result of new information, future events, or otherwise. Issued on October 30, 2013 2
  • 3. Third Quarter Financial Summary  CNS revenue grew 2.9% YoY on a constant currency basis  Enterprise CNS revenue grew 7.4% YoY on a constant currency basis  CNS sales orders continued to grow on a YoY basis  Year to date, excluding severance charges, Adjusted EBITDA grew 13% compared to the first three quarters in 2012  The company refinanced approximately $2.6 billion of debt resulting in $23.5 million in annualized net cash interest savings(1) (1) Includes both $1.4 billion in the third quarter 2013 and $1.2 billion in the fourth quarter 2013 Issued on October 30, 2013 3
  • 4. Core Network Services Revenue CNS revenue grew to $1.397 billion or 2.9% YoY on a constant currency basis CNS By Region CNS By Customer Type 13% 35% 16% 65% 71%  Enterprise CNS grew 7.4% YoY on a constant currency basis:  7.8% YoY from North America  8.7% YoY from EMEA(1) North America EMEA Latin America Enterprise Total Enterprise CNS Revenue Wholesale ($ in Millions)  13.1% YoY from Latin America  CNS revenue churn(2) decreased to 1.4% from 1.5% in 2Q13 (1) Excludes EMEA UK Government (2) Level 3 measures revenue churn as disconnects of Core Network Services monthly recurring revenue as a percent of Core Network Services revenue. This calculation excludes usage. Also included in the churn calculations are customers who are disconnecting existing service, but are replacing their old service with new, generally higher speed services Issued on October 30, 2013 4
  • 5. Level 3 Gross Margin / SG&A Gross Margin ($ in millions) Gross Margin percentage improved YoY $949 $961 60.6% 61.2% 2Q13 $948 3Q13 in 3Q13. Expansion was driven by:  Higher margin CNS revenue growth  Optimization initiatives 59.6% 3Q12 GM $ GM % SG&A expenses(1) declined by 4.2% YoY, excluding severance charges in 3Q13 and 3Q12 SG&A(1)(2) ($ in millions) $570 $549 35.1% (1) SG&A excludes non-cash compensation (2) SG&A excludes $30 million, $13 million and $6 million of severance charges in 3Q13, 2Q13, and 3Q12, respectively Issued on October 30, 2013 3Q12 SG&A 34.8% 2Q13 35.8% $546 3Q13 SG&A % revenue 5
  • 6. Level 3 Adjusted EBITDA and Capital Expenditures Adjusted EBITDA Adjusted EBITDA(1) was $415 million for 3Q13  Year to date, excluding severance charges, Adjusted EBITDA grew 13% to $1.204 billion compared to $1.066 billion for the first three quarters in 2012 ($ in millions) $400 $378 25.6% 23.8% 3Q12 Excluding severance charges, Adjusted EBITDA margin expanded to 26.4% from 23.8% in 3Q12 (1) 2Q13 Adj EBITDA $415 26.4% 3Q13 Adj EBITDA % of Revenue Capital Expenditures $227 ($ in millions) $208 $194 Year to date, capital expenditures represent approximately 12% of total revenue (1) Adjusted EBITDA excludes $30 million, $13 million, and $6 million of severance charges in 3Q13, 2Q13, and 3Q12, respectively Issued on October 30, 2013 3Q12 2Q13 3Q13 6
  • 7. Level 3 Cash Flow Unlevered Cash Flow – Rolling 4 Quarters ($ in millions)  On a rolling four quarter basis, Unlevered Cash Flow improved by $11 million from 2Q13 to 3Q13  Free Cash Flow was negative $90 million, compared to negative $157 million in 3Q12 $594 $583 $542 1Q13  Expect net cash interest expense to decrease by $46 million in 4Q13 to $132 million 2Q13 3Q13 Free Cash Flow – Rolling 4 Quarters ($ in millions) ($42)  On a rolling four quarter basis, Free Cash Flow improved by $67 million from 2Q13 to 3Q13 Issued on October 30, 2013 ($114) 1Q13 ($109) 2Q13 3Q13 7
  • 8. Debt Maturity Profile  The company completed the refinancing of approximately $2.6 billion in capital market transactions during and after the close of the quarter(1)  Expect a loss on the $1.2 billion term-loan refinancing of $10 million or $0.04 per share in 4Q13  Expect $23.5 million in annualized net cash interest expense savings from all three refinancing transactions  Total debt as of September 30, 2013 of $8.6 billion  Cash on hand as of September 30, 2013 of $507 million  Net Debt to Adjusted EBITDA ratio was 5.2x  Target leverage ratio of 3x-5x  Average interest rate improved to 7.1% from 7.4% in 2Q13 $3,420 $3,471 2019 2020 Pro forma Sept 30, 2013 ($ in Millions) $775 $640 $201 2013 2014 Issued on October 30, 2013 2015 2016 2017 2018 Note: Maturity chart excludes capital leases and other debt of approximately $91 million (1) Includes both $1.4 billion in the third quarter 2013 and $1.2 billion in the fourth quarter 2013 8
  • 9. Business Outlook  Generally expect sequential CNS revenue growth to be stronger compared to 2012  Expect low double-digit EBITDA growth for the full year 2013 compared to the full year 2012, excluding the total of $40 million of severance charges incurred in 2Q13 and 3Q13  Expect stronger sequential growth in Adjusted EBITDA, compared to $415 million in the third quarter, excluding severance charges  Capital expenditures expected to be approximately 12% of total revenue  Expect Free Cash Flow to be positive for the full year 2013, excluding 2013 interest rate swap payments of $45 million  Expect GAAP interest expense to be approximately $665 million and net cash interest to be approximately $645 million for the full year 2013  Depreciation and Amortization expected to be approximately $800 million for the full year 2013 Issued on October 30, 2013 9
  • 10. Appendix Issued on October 30, 2013 10
  • 11. Revenue by Region 3Q12 2Q13 3Q13 3Q13/ 3Q12 %Change Constant Currency 3Q13/ 2Q13 %Change Constant Currency 3Q13 % CNS CNS Revenue ($ in millions) North America Wholesale Enterprise $ $ $ 963 386 577 $ $ $ 970 367 603 $ $ $ 987 365 622 2.5 % (5.3)% 7.8 % 1.8 % (0.6)% 3.3 % 71 % 26 % 45 % EMEA Wholesale Enterprise UK Government $ $ $ $ 223 87 94 42 $ $ $ $ 220 88 99 33 $ $ $ $ 222 88 102 32 (0.9)% (1.8)% 8.7 % (20.6)% 0.1 % (1.8)% 3.1 % (4.0)% 16 6 8 2 Latin America Wholesale Enterprise $ $ $ 179 40 139 $ $ $ 189 40 149 $ $ $ 188 39 149 10.0 % (0.7)% 13.1 % 2.9 % (1.3)% 4.1 % 13 % 3% 10 % Total Wholesale Enterprise (1) $ 1,365 $ 513 $ 852 $ 1,379 $ 495 $ 884 $ 1,397 $ 492 $ 905 2.9 % (4.4)% 7.4 % 1.7 % (0.8)% 3.1 % 100 % 35 % 65 % Total CNS Wholesale Voice Services and Other Revenue Total Revenue $ 1,365 $ 1,379 $ 1,397 2.9 % 1.7 % $ 225 $ 1,590 $ 186 $ 1,565 $ 172 $ 1,569 (23.5)% (0.8)% (7.4)% 0.6 % % % % % (1) Includes EMEA UK Government Issued on October 30, 2013 © Level 3 Communications, Inc. All Rights Reserved. 11
  • 12. Services Revenue LEVEL 3 COMMUNICATIONS SUMMARY $ in Millions Core Network Services Revenue Colocation and Datacenter Services Transport and Fiber IP and Data Services Voice Services (local and enterprise) Total Core Network Services 3Q12 $ 139 $ 491 $ 502 $ 233 $ 1,365 2Q13 $ 145 $ 488 $ 514 $ 232 $ 1,379 3Q13 $ 144 $ 491 $ 528 $ 234 $ 1,397 Wholesale Voice Services and Other $ $ $ Total Revenue $ 1,590 225 186 $ 1,565 38% 3Q13/ 2Q13 %Change 3.6 % —% 5.2 % 0.4 % 2.3 % (0.7)% 0.6 % 2.7 % 0.9 % 1.3 % 172 (23.6)% $ 1,569 (1.3)% 3Q13 % CNS (7.5)% 0.3 % 10% 3Q13 Percent of CNS Revenue by Service Type 3Q13/ 3Q12 %Change 10 35 38 17 100 % % % % % Data Center and Colocation Services 17% Voice Services (Local and Enterprise) Transport & Fiber IP and Data Services 35% Issued on October 30, 2013 © Level 3 Communications, Inc. All Rights Reserved. 12
  • 13. Non-GAAP Reconciliation Issued on October 30, 2013 13
  • 14. Schedule To Reconcile To Non-GAAP Financial Metrics Pursuant to Regulation G, the company is hereby providing definitions of non-GAAP financial metrics and reconciliations to the most directly comparable GAAP measures. The following describes and reconciles those financial measures as reported under accounting principles generally accepted in the United States (GAAP) with those financial measures as adjusted by the items detailed below. These calculations are not prepared in accordance with GAAP and should not be viewed as alternatives to GAAP. In keeping with its historical financial reporting practices, the company believes that the supplemental presentation of these calculations provides meaningful non-GAAP financial measures to help investors understand and compare business trends among different reporting periods on a consistent basis. In addition, measures referred to as being calculated “on a constant currency basis” or "in constant currency terms" are non-GAAP metrics intended to present the relevant information assuming a constant exchange rate between the two periods being compared. Such metrics are calculated by applying the currency exchange rates used in the preparation of the prior period financial results to the subsequent period results. Issued on October 30, 2013 14
  • 15. Schedule To Reconcile To Non-GAAP Financial Metrics Consolidated Revenue is defined as total revenue from the Consolidated Statements of Operations. Core Network Services Revenue includes revenue from colocation and datacenter services, transport and fiber, IP and data services, and voice services (local and enterprise). Gross Margin ($) is defined as total revenue less cost of revenue from the Consolidated Statements of Operations. Gross Margin (%) is defined as gross margin ($) divided by total revenue. Management believes that gross margin is a relevant metric to provide to investors, as it is a metric that management uses to measure the margin available to the company after it pays third party network services costs; in essence, a measure of the efficiency of the company’s network. Adjusted EBITDA is defined as net income (loss) from the Consolidated Statements of Operations before income taxes, total other income (expense), non-cash impairment charges, depreciation and amortization and non-cash stock compensation expense. Adjusted EBITDA Margin is defined as Adjusted EBITDA divided by total revenue. Issued on October 30, 2013 15
  • 16. Schedule To Reconcile To Non-GAAP Financial Metrics Management believes that Adjusted EBITDA and Adjusted EBITDA Margin are relevant and useful metrics to provide to investors, as they are an important part of the company’s internal reporting and are key measures used by Management to evaluate profitability and operating performance of the company and to make resource allocation decisions. Management believes such measures are especially important in a capital-intensive industry such as telecommunications. Management also uses Adjusted EBITDA and Adjusted EBITDA Margin to compare the company’s performance to that of its competitors and to eliminate certain non-cash and non-operating items in order to consistently measure from period to period its ability to fund capital expenditures, fund growth, service debt and determine bonuses. Adjusted EBITDA excludes non-cash impairment charges and non-cash stock compensation expense because of the non-cash nature of these items. Adjusted EBITDA also excludes interest income, interest expense and income taxes because these items are associated with the company’s capitalization and tax structures. Adjusted EBITDA also excludes depreciation and amortization expense because these non-cash expenses primarily reflect the impact of historical capital investments, as opposed to the cash impacts of capital expenditures made in recent periods, which may be evaluated through cash flow measures. Adjusted EBITDA excludes the gain (or loss) on extinguishment of debt and other, net because these items are not related to the primary operations of the company. There are limitations to using Adjusted EBITDA as a financial measure, including the difficulty associated with comparing companies that use similar performance measures whose calculations may differ from the company’s calculations. Additionally, this financial measure does not include certain significant items such as interest income, interest expense, income taxes, depreciation and amortization, non-cash impairment charges, non-cash stock compensation expense, the gain (or loss) on extinguishment of debt and net other income (expense). Adjusted EBITDA and Adjusted EBITDA Margin should not be considered a substitute for other measures of financial performance reported in accordance with GAAP. Issued on October 30, 2013 16
  • 17. Schedule To Reconcile To Non-GAAP Financial Metrics Debt is defined as total gross debt, including capital leases from the Consolidated Balance Sheet. Net Debt to Last Twelve Months (LTM) Adjusted EBITDA Ratio is defined as debt, reduced by cash and cash equivalents and divided by LTM Adjusted EBITDA. Issued on October 30, 2013 17
  • 18. Schedule To Reconcile To Non-GAAP Financial Metrics Unlevered Cash Flow is defined as net cash provided by (used in) operating activities less capital expenditures, plus cash interest paid and less interest income all as disclosed in the Consolidated Statements of Cash Flows or the Consolidated Statements of Operations. Management believes that Unlevered Cash Flow is a relevant metric to provide to investors, as it is an indicator of the operational strength and performance of the company and, measured over time, provides management and investors with a sense of the underlying business’ growth pattern and ability to generate cash. Unlevered Cash Flow excludes cash used for acquisitions and debt service and the impact of exchange rate changes on cash and cash equivalents balances. There are material limitations to using Unlevered Cash Flow to measure the company’s cash performance as it excludes certain material items such as payments on and repurchases of longterm debt, interest income, cash interest expense and cash used to fund acquisitions. Comparisons of Level 3’s Unlevered Cash Flow to that of some of its competitors may be of limited usefulness since Level 3 does not currently pay a significant amount of income taxes due to net operating losses, and therefore, generates higher cash flow than a comparable business that does pay income taxes. Additionally, this financial measure is subject to variability quarter over quarter as a result of the timing of payments related to accounts receivable and accounts payable and capital expenditures. Unlevered Cash Flow should not be used as a substitute for net change in cash and cash equivalents in the Consolidated Statements of Cash Flows. Issued on October 30, 2013 18
  • 19. Schedule To Reconcile To Non-GAAP Financial Metrics Free Cash Flow is defined as net cash provided by (used in) operating activities less capital expenditures as disclosed in the Consolidated Statements of Cash Flows. Management believes that Free Cash Flow is a relevant metric to provide to investors, as it is an indicator of the company’s ability to generate cash to service its debt. Free Cash Flow excludes cash used for acquisitions, principal repayments and the impact of exchange rate changes on cash and cash equivalents balances. There are material limitations to using Free Cash Flow to measure the company’s performance as it excludes certain material items such as principal payments on and repurchases of long-term debt and cash used to fund acquisitions. Comparisons of Level 3’s Free Cash Flow to that of some of its competitors may be of limited usefulness since Level 3 does not currently pay a significant amount of income taxes due to net operating losses, and therefore, generates higher cash flow than a comparable business that does pay income taxes. Additionally, this financial measure is subject to variability quarter over quarter as a result of the timing of payments related to interest expense, accounts receivable and accounts payable and capital expenditures. Free Cash Flow should not be used as a substitute for net change in cash and cash equivalents on the Consolidated Statements of Cash Flows. Issued on October 30, 2013 19
  • 20. Schedule To Reconcile To Non-GAAP Financial Metrics LEVEL 3 COMMUNICATIONS SUMMARY FINANCIAL RESULTS $ in Millions (unaudited) 3Q12 2Q13 3Q13 Core Network Services Wholesale Voice Services and Other Total Revenue $ 1,365 $ 225 $ 1,590 $ 1,379 $ 186 $ 1,565 $ 1,397 $ 172 $ 1,569 Adjusted EBITDA (1) Capital Expenditures Unlevered Cash Flow (1) Free Cash Flow (1) $ $ $ $ $ $ $ $ $ $ $ $ Gross Margin Adjusted EBITDA Margin (1) 372 227 77 (157) 59.6 % 23.4 % 387 208 153 8 60.6 % 24.7 % 385 194 88 (90) 61.2 % 24.5 % (1)    See schedule of non-GAAP metrics for definition and reconciliation to GAAP measures. Issued on October 30, 2013 20
  • 21. Schedule To Reconcile To Non-GAAP Financial Metrics Level 3 Communications, Inc and Consolidated Subsidiaries Adjusted EBITDA 2012 Q3 ($ in millions) Consolidated Net Loss Income Tax Expense Total Other Expense Depreciation and Amortization Expense Non-cash Compensation Expense Consolidated Adjusted EBITDA Severance charges Adjusted EBITDA excluding severance charges YTD Adjusted EBITDA excluding severance charges Consolidated Revenue Adjusted EBITDA Margin Issued on October 30, 2013 $ 2013 Q2 (166) 13 291 $ Q3 (24) 11 153 $ (21) 14 159 185 199 203 49 48 30 $ 372 6 $ 387 13 $ 385 30 $ 378 $ 400 $ 415 $ 1,066 $ 789 $ 1,204 $ 1,590 $ 1,565 $ 1,569 23.4 % 24.7 % 24.5 % 21
  • 22. Schedule To Reconcile To Non-GAAP Financial Metrics Level 3 Communications, Inc and Consolidated Subsidiaries Cash Flows ($ in millions) Net Cash Provided by Operating Activities Capital Expenditures Free Cash Flow Cash Interest Paid Interest Income Unlevered Cash Flow Issued on October 30, 2013 Q2 $ $ $ 183 $ (180) 3 $ 110 (1) 112 $ 2012 Q3 70 $ (227) (157) $ 234 — 77 $ Q4 400 (198) 202 123 — 325 Q1 $ $ $ 7 $ (169) (162) $ 190 — 28 $ 2013 Q2 216 $ (208) 8 $ 145 — 153 $ Q3 104 (194) (90) 178 — 88 Rolling Four Quarter Basis 2013 Q1 Q2 Q3 $ $ $ 660 $ (774) (114) $ 657 (1) 542 $ 693 $ (802) (109) $ 692 — 583 $ 727 (769) (42) 636 — 594 22
  • 23. Schedule To Reconcile To Non-GAAP Financial Metrics Level 3 Communications, Inc and Consolidated Subsidiaries Net Debt to LTM Adjusted EBITDA ratio as of September 30, 2013 ($ in millions) Debt $ Cash and Cash Equivalents 8,598 (507) Net Debt $ 8,091 LTM Adjusted EBITDA $ 1,565 Net Debt to LTM Adjusted EBITDA Ratio Issued on October 30, 2013 5.2 23