2Q13 Earnings Presentation

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2Q13 Earnings Presentation

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2Q13 Earnings Presentation

  1. 1. Second Quarter 2013 Results July 31, 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. 2. 2Issued on July 31, 2013 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.
  3. 3. 3Issued on July 31, 2013 Second Quarter Financial Summary  Enterprise CNS revenue grew 7.1% YoY, excluding UK Government revenue and on a constant currency basis  CNS sales orders grew on a YoY and QoQ basis  Adjusted EBITDA grew 12% YoY, excluding the severance charges in both 2Q13 and 2Q12  Expect stronger CNS revenue performance in the second half of the year
  4. 4. 4Issued on July 31, 2013 Core Network Services Revenue (1) 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 CNS By Region CNS By Customer Type Total Enterprise CNS Revenue ($ in Millions) 70% 16% 14% North America EMEA Latin America 64% 36% Enterprise Wholesale CNS revenue grew 2.4% YoY and 0.9% QoQ on a constant currency basis  Growth primarily driven by enterprise customers  5.1% YoY from North America  9.4% YoY from EMEA  14.4% YoY from Latin America  CNS revenue churn(1) decreased to 1.5% from 1.6% in 1Q13 $844 $852 $871 $871 $884 2Q12 3Q12 4Q12 1Q13 2Q13
  5. 5. 5Issued on July 31, 2013 $585 $562 $562 36.9% 35.6% 35.9% 2Q12 1Q13 2Q13 SG&A SG&A % revenue Level 3 Gross Margin / SG&A Gross Margin ($ in millions) SG&A(1)(2) ($ in millions) (1) SG&A excludes non-cash compensation (2) SG&A included $13 million, $3 million and $4 million of severance charges in 2Q13, 1Q13 and 2Q12, respectively Gross Margin percentage increased to 60.6% in 2Q13 from 59.1% in 2Q12 Margin expansion was driven by:  Higher margin CNS revenue growth  Optimization initiatives SG&A expenses(1) declined by 5.5% YoY, excluding severance charges in 2Q13 and 2Q12 $938 $948 $949 59.1% 60.1% 60.6% 2Q12 1Q13 2Q13 GM $ GM %
  6. 6. 6Issued on July 31, 2013 Adjusted EBITDA(1) was $387 million for 2Q13  Adjusted EBITDA grew 12% YoY to $400 million, excluding severance charges in 2Q13 and 2Q12 Excluding severance charges, Adjusted EBITDA margin expanded to 25.6% from 22.5% in 2Q12 Year to date, capital expenditures represent 12% of total revenue Level 3 Adjusted EBITDA and Capital Expenditures (1) Adjusted EBITDA included $13 million, $3 million and $4 million of severance charges in 2Q13, 1Q13 and 2Q12, respectively Capital Expenditures ($ in millions) Adjusted EBITDA ($ in millions) $180 $169 $208 2Q12 1Q13 2Q13 (1) $353 $386 $387 22.3% 24.5% 24.7% 2Q12 1Q13 2Q13 Adj EBITDA Adj EBITDA % of Revenue
  7. 7. 7Issued on July 31, 2013 Level 3 Cash Flow Unlevered Cash Flow – Rolling 4 Quarters ($ in millions)  On a rolling four quarter basis, Unlevered Cash Flow improved by $41 million from 1Q13 to 2Q13  Free Cash Flow was positive $8 million, compared to positive $3 million in 2Q12  Results driven by lower net cash interest expense and improved working capital  On a rolling four quarter basis, Free Cash Flow improved by $5 million from 1Q13 to 2Q13 Free Cash Flow – Rolling 4 Quarters ($ in millions) ($165) ($114) ($109) 4Q12 1Q13 2Q13 $528 $542 $583 4Q12 1Q13 2Q13
  8. 8. 8Issued on July 31, 2013 Debt Maturity Profile  Total Debt as of June 30, 2013 of $8.6 billion  Cash on hand as of June 30, 2013 of $596 million  Net Debt to Adjusted EBITDA ratio improved to 5.1x from 5.5x in 2Q12  Target leverage ratio of 3x-5x  Average interest rate of 7.4% As of June 30, 2013 Note: Maturity chart excludes capital leases and other debt of approximately $73 million as well as $6 million per year of amortization due on the Tranche B 2016 Term Loan $775 $797 $640 $4,620 $1,675 2013 2014 2015 2016 2017 2018 2019 2020
  9. 9. 9Issued on July 31, 2013 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 executive management severance charges of $10 million incurred in the 2Q13  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 $800 million for the full year 2013
  10. 10. 10Issued on July 31, 2013 Appendix
  11. 11. 11Issued on July 31, 2013 © Level 3 Communications, Inc. All Rights Reserved. Revenue by Region 2Q12 1Q13 2Q13 2Q13/ 2Q12 %Change Constant Currency 2Q13/ 1Q13 %Change Constant Currency 2Q13 % CNS CNS Revenue ($ in millions) North America 956$ 967$ 970$ 1.4% 0.3% 70% Wholesale 382$ 372$ 367$ (4.0%) (1.5%) 26% Enterprise 574$ 595$ 603$ 5.1% 1.3% 44% EMEA 228$ 223$ 220$ (1.8%) (0.1%) 16% Wholesale 94$ 89$ 88$ (4.9%) 0.5% 7% Enterprise 91$ 97$ 99$ 9.4% 3.0% 7% UK Government 43$ 37$ 33$ (19.0%) (9.3%) 2% Latin America 173$ 182$ 189$ 13.5% 5.6% 14% Wholesale 37$ 40$ 40$ 10.3% 2.8% 3% Enterprise 136$ 142$ 149$ 14.4% 6.4% 11% Total 1,357$ 1,372$ 1,379$ 2.4% 0.9% 100% Wholesale 513$ 501$ 495$ (3.1%) (0.8%) 36% Enterprise (1) 844$ 871$ 884$ 5.8% 1.9% 64% Total CNS 1,357$ 1,372$ 1,379$ 2.4% 0.9% Wholesale Voice Services and Other Revenue 229$ 205$ 186$ (18.8%) (8.9%) Total Revenue 1,586$ 1,577$ 1,565$ (0.6%) (0.4%) (1) Includes EMEA UK Government Revenue.
  12. 12. 12Issued on July 31, 2013 © Level 3 Communications, Inc. All Rights Reserved. Services Revenue 2Q13 Percent of CNS Revenue by Service Type 11% 17% 35% 37% Colocation and Datacenter Services Voice Services (Local and Enterprise) Transport & Fiber IP and Data Services LEVEL 3 COMMUNICATIONS SUMMARY FINANCIAL RESULTS $ in Millions Core Network Services Revenue 2Q12 1Q13 2Q13 2Q13/ 2Q12 %Change 2Q13/ 1Q13 %Change 2Q13 % CNS Colocation and Datacenter Services $139 $142 $145 4% 2% 11% Transport and Fiber $485 $484 $488 1% 1% 35% IP and Data Services $497 $510 $514 3% 1% 37% Voice Services (local and enterprise) $236 $236 $232 (2%) (2%) 17% Total Core Network Services 1,357 1,372 1,379 2% 1% Wholesale Voice Services and Other 229 205 186 (19%) (9%) Total Revenue $1,586 $1,577 $1,565 (1%) (1%)
  13. 13. 13Issued on July 31, 2013 Non-GAAP Reconciliation
  14. 14. 14Issued on July 31, 2013 Schedule To Reconcile To Non-GAAP Financial Metrics Pursuant to Regulation G, the company is hereby providing definitions of non-GAAP financial metrics and reconciliations to the most directly comparable GAAP measures. The following describes and reconciles those financial measures as reported under accounting principles generally accepted in the United States (GAAP) with those financial measures as adjusted by the items detailed below and presented in the accompanying news release. These calculations are not prepared in accordance with GAAP and should not be viewed as alternatives to GAAP. In keeping with its historical financial reporting practices, the company believes that the supplemental presentation of these calculations provides meaningful non-GAAP financial measures to help investors understand and compare business trends among different reporting periods on a consistent basis. In addition, measures referred to in the accompanying news release as being calculated “on a constant currency basis” or "in constant currency terms" are non-GAAP metrics intended to present the relevant information assuming a constant exchange rate between the two periods being compared. Such metrics are calculated by applying the currency exchange rates used in the preparation of the prior period financial results to the subsequent period results.
  15. 15. 15Issued on July 31, 2013 Schedule To Reconcile To Non-GAAP Financial Metrics Consolidated Revenue is defined as total revenue from the Consolidated Statements of Operations. Core Network Services Revenue includes revenue from colocation and datacenter services, transport and fiber, IP and data services, and voice services (local and enterprise). Gross Margin ($) 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.
  16. 16. 16Issued on July 31, 2013 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.
  17. 17. 17Issued on July 31, 2013 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.
  18. 18. 18Issued on July 31, 2013 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 long-term 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.
  19. 19. 19Issued on July 31, 2013 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.
  20. 20. 20Issued on July 31, 2013 LEVEL 3 COMMUNICATIONS SUMMARY FINANCIAL RESULTS $ in Millions (unaudited) 2Q12 1Q13 2Q13 Core Network Services 1,357$ 1,372$ 1,379$ Wholesale Voice Services and Other 229 205 186 Total Revenue 1,586 1,577 1,565 Adjusted EBITDA (1) $353 $386 $387 Capital Expenditures $180 $169 $208 Unlevered Cash Flow (1) $112 $28 $153 Free Cash Flow (1) $3 ($162) $8 Gross Margin 59.1% 60.1% 60.6% Adjusted EBITDA Margin (1) 22.3% 24.5% 24.7% (1)    See schedule of non-GAAP metrics for definition and reconciliation to GAAP measures. Schedule To Reconcile To Non-GAAP Financial Metrics
  21. 21. 21Issued on July 31, 2013 Schedule To Reconcile To Non-GAAP Financial Metrics Level 3 Communications, Inc and Consolidated Subsidiaries Adjusted EBITDA ($ in millions) Q2 Q3 Q4 Q1 Q2 Consolidated Net Loss (62)$ (166)$ (56)$ (78)$ (24)$ Income tax expense 8 13 13 14 11 Total other expense 187 291 231 219 153 Depreciation and amortization expense 191 185 186 194 199 Non-cash compensation expense 29 49 33 37 48 Consolidated Adjusted EBITDA 353$ 372$ 407$ 386$ 387$ Consolidated Revenue 1,586$ 1,590$ 1,614$ 1,577$ 1,565$ Adjusted EBITDA Margin 22.3% 23.4% 25.2% 24.5% 24.7% 2012 2013
  22. 22. 22Issued on July 31, 2013 Schedule To Reconcile To Non-GAAP Financial Metrics Level 3 Communications, Inc and Consolidated Subsidiaries Cash Flows 2012 ($ in millions) Q2 Q3 Q4 Q1 Q2 Q4 Q1 Q2 Net Cash Provided by Operating Activities 183$ 70$ 400$ 7$ 216$ 578$ 660$ 693$ Capital Expenditures (180) (227) (198) (169) (208) (743) (774) (802) Free Cash Flow 3$ (157)$ 202$ (162)$ 8$ (165)$ (114)$ (109)$ Cash Interest Paid 110 234 123 190 145 695 657 692 Interest Income (1) - - - - (2) (1) - Unlevered Cash Flow 112$ 77$ 325$ 28$ 153$ 528$ 542$ 583$ Rolling Four Quarter Basis 2012 2013 2013
  23. 23. 23Issued on July 31, 2013 Schedule To Reconcile To Non-GAAP Financial Metrics Level 3 Communications, Inc and Consolidated Subsidiaries Net Debt to LTM Adjusted EBITDA ratio as of June 30 ($ in millions) 2013 2012 Debt 8,580$ 8,486$ Cash and Cash Equivalents (596) (733) Net Debt 7,984$ 7,753$ LTM Adjusted EBITDA(1) 1,552$ 1,412$ Net Debt to LTM Adjusted EBITDA Ratio 5.1 5.5 (1) Q2 2012 based on Annualized Adjusted EBITDA

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