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Level 3 Communications, Inc. (NYSE:LVLT)

Q4 2009 Earnings Call

February 10, 2010 10:00 am ET

Executives

Valerie Finberg - VP of IR

Jim Crowe - CEO

Jeff Storey - President & COO

Buddy Miller - Vice Chairman

Sunit Patel - EVP & CFO

Analysts

Winston Len - Goldman Sachs

Tim Horan - Oppenheimer

Colby Synesael - Kaufman Bros

Michael Funk - Bank of America/Merrill Lynch

Simon Flannery - Morgan Stanley

Ana Goshko - Banc of America

Donna Jaegers - D.A. Davidson

Jonathan Schildkraut - Jefferies

Operator

Good day and welcome to the Level 3 Communications Incorporated fourth quarter 2009 earnings conference call. Today’s conference is being recorded. At this time I would like to turn the conference over to Valerie Finberg, Vice President of Investor Relations. Please go ahead.

Valerie Finberg

Thank you, Jessica. Good morning everyone and thank you for joining us for the Level 3 Communications fourth quarter and full year 2009 earnings call. With us on the call today are Jim Crowe, Chief Executive Officer; Jeff Storey, President and Chief Operating Officer; Buddy Miller Vice Chairman and Sunit Patel, Executive Vice President and Chief Financial Officer.

Before we get started I wanted to mention that in addition to the press release and financial exhibits our presentation summarizing our results which Sunit and Jeff will be referring to in their remarks is available on our website at www.level3.com on the investor relations home page. To view this presentation from the investor relations home page click on the link titled 4Q09 Earnings Presentation. Also available on the website is a supplemental schedule containing current and historical financial information in excel format.

I need to cover our safe harbor statement which can be found on page two of our 4Q09 earnings presentation and that says that information in this call and in the presentation contains financial estimates and other forward-looking statements that are subject to risks and uncertainties. Actual results may vary significantly from those statements. A discussion of factors that may affect future results is contained in Level 3’s filings with the Securities and Exchange Commission.

Finally, please note that on today’s call we will be referring to certain non-GAAP financial measures. Reconciliations between the non-GAAP financial measures in the most comparable GAAP financial measures are available in the press release which is posted on our website in the Investor Relations Section.

With that I'll now turn the call over to Jim.

Jim Crowe

Thank you, Valerie. In accordance with our past practices, Sunit will begin with a discussion of financial results for the quarter and the general outlook for 2010. Jeff Storey will discuss operational matters including segment results. We will then open it up for Q&A. Sunit?

Sunit Patel

Thank you, Jim, and good morning everyone. Before I review our detailed results, I'll start with some of the key points on slide three to five of our presentation. We had a good quarter with sequential revenue growth for core network services. Also voice and total communications revenue, we also generated a positive free cash flow for both the fourth quarter of 2009 and for the full-year of 2009. We continue to make progress on the balance sheet by buying back debt and refinancing some of our 2013 maturities.

Turning to the detailed results for the fourth quarter on slide four. Core network services revenue grew 1% sequentially to $706 million in the fourth quarter of 2009 from $701 million in the third quarter of 2009. This marks an improvement from the 1% sequential decline from the second quarter to the third quarter of 2009, the 3% sequential decline from the first quarter to the second quarter of 2009, and from the 7% sequential decline from the fourth quarter of 2008 to the first quarter of 2009.

While as part of this growth was a result of typical seasonally strong fourth quarter performance. In certain areas of the business, we continue to see slight improvements in both sales and churn. Also Wholesale Voice services revenue was $162 million this quarter compared to $158 million in the third quarter of 2009 and $181 million in the fourth quarter of last year.

As we’ve indicated previously, we do expect volatility in Wholesale Voice services revenue as we managed for margin contribution versus revenue growth. The breakdown of Core Network Services revenue by market group was $348 million for wholesome markets or 49% of revenue, $199 million for business markets or 28% of revenue, $86 million for content markets or 12% of revenue and $72 million for Europe, 11% of revenue. Excluding the SVC contract our top ten customers represented 26% of communications revenue compared to 27% last year.

Turning to Core Network Services revenue by customer category, our wholesale markets revenue grew 2% sequentially in the fourth quarter of 2009 a continued improvement compared to sequential growth of 1% in the third quarter. Business markets revenues declined sequentially by 2% this quarter an improvement from the 4% sequential decline we saw in the prior quarter. For content markets revenue increased 6% sequentially in the fourth quarter of 2009 due to difficulties now that we see in the Vyvx broadcast business and usage growth in CDN services.

Our European markets revenue decreased 3% to $73 million in the fourth quarter of 2009 compared to $75 million in the third quarter of 2009. In constant currency terms European revenues declined 4% sequentially in the fourth quarter of 2009 compared to a 3% decline the prior quarter. The sequential comparisons for Europe should improve beginning next quarter and we expect sequential revenue growth to resume over the course of 2010. We continue to make investments in Europe to extend the geographic reach of our network, add more buildings on that and expand our colocation business.

Jeff will provide additional color on our performance for the quarter in each of our market groups. Other communications revenue was $38 million in the quarter. The sequential decline was less than what we've seen in recent quarters on an annual basis. We expect to see ongoing declines in other communications revenues similar to what we've seen over the past two years. The communications deferred revenue balance was $902 million at the end of the fourth quarter of 2009 compared to $880 million at the end of the third quarter of 2009, and $887 million at the end of the fourth quarter of 2008.

As an introduction to slide five, we typically evaluate our revenue reporting once a year to reflect changes in the way certain customers are classified within customer segments, and to provide more insight into reported revenue.

In our fourth quarter earnings release, we have provided the revenue breakdown by both the way we've been reporting historically and by the new format, we expect to report in 2010. For comparability, we've also provided the third quarter revenue in the new format. In addition, as a supplemental disclosure on our Investor Relations website, we've provided our revenue by service or product guide and categorized by infrastructure which includes five brand colocation, transport, data services, local and enterprise voice and wholesale voice.

As you can see on slide five, instead of using the WMG, BMG, CMG and EMG categories as we had in the past, we will be discussing Core Network Services revenues in terms of wholesale, large enterprise and federal, mid-market and Europe. Also revenues includes revenues from international and domestic carriers, cable companies, voice service providers and the last majority of former content customers and wireless companies. Large enterprise customers generally the Fortune 300 plus certain larger former CMG customers, mid-market is medium enterprises outside the Fortune 300. Small regional service providers in some state governments.

Our European revenue category is unchanged. If you look at Core Network Services revenue wholesale and large enterprise and federal revenue increased sequentially primarily driven by higher sales and lower churn. Mid-market decreased as churn continued to operate sales. European revenue decreased primarily due to pricing pressure on high speed IP.

Turning to slide six, gross margin was 60.2% this quarter compared to 59% in the third quarter of 2009 and 60% in the fourth quarter of 2008. Communications SG&A expense excluding non-cash compensation and restructuring charges was $328 million, an increase from $316 million in the third quarter of 2009. While utility expenses decreased as expected during the quarter we incurred high employee compensation and related costs in the fourth quarter 2009 as we continue to ramp up our sales force. In addition, we increased bonus accruals during the quarter. However compared to fourth quarter 2008 SG&A of $348 million, which excludes $64 million of benefits from the fourth quarter 2008 adjustment SG&A declined by 6%.

Turning to slide seven, consolidated adjusted EBITDA was $217 million in the fourth quarter of 2009 an increase compared to $213 million in the third quarter of 2009 but a decline compared to $271 million in the fourth quarter of 2008 which excludes the benefits of the fourth quarter 2008 adjustment. The sequential increase in adjusted EBITDA was primarily a result of improved gross margins offset by higher SG&A during the quarter. Communications adjusted EBITDA margins was 23.8% in the fourth quarter of 2009 roughly unchanged from 23.9% in the prior quarter and down from 26.3% in the fourth quarter of 2008 which excludes the benefit of the fourth quarter of 2008 adjustment.

At the bottom of slide seven, capital expenditures was $80 million in the fourth quarter of 2009 compared to $75 million for the third quarter of 2009, and $107 million for the fourth quarter of 2008.

Turning to slide eight, unlevered cash flow was $218 million in the fourth quarter of 2009 compared to $152 million for the third quarter of 2009 and $251 million in the fourth quarter of 2008. For the full year 2009, unlevered cash flow improved to $559 million compared to $480 million for the full-year 2008. Free cash flow was positive $97 million for the fourth quarter of 2009 compared to the $9 million for the third quarter of 2009 and $124 million for the fourth quarter of 2008. For the full-year 2009, we generated $44 million of positive free cash flow compared to a negative $36 million for the full-year 2008.

Turning to slide nine, we've completed the insurance of the total of $275 million of 7% convertible senior notes due in 2015. And we repurchased approximately $73 million of total maturities coming due in 2010, 2011 and 2012. after the close of the quarter, we complete the private issuance of $640 million of 10% senior notes due 2013 as of December 31, 2009 had $836 million of cash.

Depreciation and amortization expense was $236 million in the fourth quarter of 2009 compared to $229 million in the third quarter of 2009 and $224 million in the fourth quarter of 2008. Depreciation was slightly higher than anticipated primarily due to increased expense in the fourth quarter of 2009 associated with a full business. Going forward, we will not be providing specific revenue and EBITDA guidance metrics for 2010. Rather we will focus on providing commentary on our various customer groups and directional financial trends when we report quarterly results. In addition starting this quarter we’ve also provided more detail on our revenues.

Looking at the fiscal quarter of 2010, we expect to see the seasonal patterns that are typical for us in the first quarter; the first is around free cash flow. Consistent with previous years during the first quarter, working capital is a use of cash due to annual bonus payments pre-payments on maintenance contracts, property and payroll tax payments and increases in day sales outstanding on our receivables.

Additionally, in the first quarter with over use of cash of approximately $20 million related to a settlement associated with previous discontinued operations. The second trend to note for the first quarter of 2010 is the reversal of the strong fourth quarter seasonal revenue performance in our Vyvx broadcast business.

Given the liability management transactions we completed last year and in January of this year, we now expect GAAP interest expense of approximately $585 million and net cash interest expense of approximately $525 million for the full year 2010. We expect the first and third quarters of 2010 to be slightly higher in terms of net cash interest expense. While 2009 was a tough year our sequential revenue performance did improve over the course of the year. In 2010, we are adding to our sales force and increasing our capital expenditures. We remain cautious in the near term but feel we are moving in the right direction on multiple fronts to drive sustained revenue growth for the long-term.

With that I will turn the call over to Jeff.

Jeff Storey

Thank you, Sunit. Good morning everyone. We ended 2009 on a very good note with sequential growth in both total CNS revenue payment sales from monthly recurring revenue, in addition churn for the company continued to decline for the third straight quarter.

Making it easier for our customers to do business with Level 3 and improving the overall customer satisfaction were the key focus in 2009. Our employees work very hard and we see the results of this intense focus on the customer and the significant improvement in our customer satisfaction scores. Enhancements to our sales processor including systems, additions to our order entry team and further development of our service portal have improved the ease of doing business with Level 3 for wholesale and retail customers alike. Additionally, our efforts in these areas have reduced the administrative burden on the sales team allowing them to spend more time interacting with customers and growing the business.

In the fourth quarter, our service delivery results continued to improve on the progress we made throughout 2009. Over the past couple of years, service delivery also known as provisioning has at times constrained our ability to grow. That is no longer the case. For our customers with new service installed, we conduct bi-monthly customer satisfaction surveys for service delivery. We're pleased with our improvement.

The number of customers rating satisfied or very satisfied improved with each subsequent survey through the year. Comparing the November, December survey results to the January, February survey, we saw a 70% improvement for the whole company. Within our mid-market group, arguably the most difficult segment to support, our customer satisfaction with service delivery improved almost 150% and our performance is now very competitive with the rest of the market. In fact, our service delivery capabilities are once again a positive differentiation. In 2010, we will continue to enhance all areas of our customer interaction with Level 3 with the goal of providing the best customers experience in the industry.

Before I turn to results of the customer facing groups, Sunit mentioned we are changing the external revenue disclosures to reflect the way we operate internally and better identify customer trends. Today’s remarks are based on the external disclosures we used in 2009. Our wholesale group delivered another quarter of revenue growth with 2% sequential CNS growth compared to third quarter. Growth was driven primarily by the wireless federal and cable verticals. In addition to revenue, we also saw sequential growth in sales for wholesale markets led by sales in the cable and federal verticals and in fact the federal team had a record month in recurring revenue sales in December.

The announcement at Monday of our [wind] providing the US Geological Survey with CDN services is an example of our success in this market and demonstrates our expanding capabilities with CDN products. We also see opportunities to support wireless customers requirements to increase network capacity in support of growth for wireless data. Our mutual provider status and nationwide metro footprint positioned us well with wireless operators. As an example of our success in this area, as our announcement in December to support Clearwire's nation-wide 4G WiMAX network.

Overall we feel good about the revenue performance in wholesale although we do expect to see pressure as our largest customers in the group continue to implement self serve initiatives. That said we certainly don’t expect to see the level of network grooming that occurred in late 2008 and early 2009. For our business markets group, although we saw sequential decline in CNS revenue of 2% during the quarter, we also saw reduction in the size of the decline. Importantly, we saw growth in large enterprise customers revenues with strong growth from our financial services customers. Sales to large enterprise customers continues to grow steadily. For the mid-market customers, we continued to see positive signs from the local markets we launched last year as a part of our Level 3 local program.

As I've reported previously, the first five markets experienced sales growth in the third quarter of 50% sequentially and 78% when compared to the first quarter. In the fourth quarter, sales in these markets increased again by 30% sequentially and 130% when compared to Q1. However, for the overall mid-market customer base, disconnects continued outpacing new installs. This lower seasonal usage and general pressure on enterprise voice were the major factors in the sequential decline in BMG revenue.

We expect the pressure on enterprise voice to continue. While our churn within mid-markets has been unacceptably high. We're encouraged by the results we've seen with our local marketing launches. I would like to take a minute to provide an update on the initiatives in this area. Referring to slide ten in the investor presentation, I mentioned in the third quarter, we plan to launch into a total of 31 markets by the end of 2009. We've completed those launches and have grouped them into 15 general manager territories. All in all we've hired 23 general managers. By the end of 2010, we should have fully launched in this 23 territories covering more than 75 individual markets.

In each of our local markets, we're focused on leveraging our existing on-net buildings, our fiber plant reach and our low cost off net access network. These launches do not require significant capital investment, but we have invested in expanding the local network reaching capacity, but little less than $10 million in 2009.

Our strategy for 2010 is to build on the successes we saw in 2009. We're encouraged by our results so far. I'd like to give you an example of how our service improvements and local focus have helped us deliver excellent customer service to one of our mid market enterprise customers. Sanborn Maps, a digital mapping company in Colorado Springs have been using three different providers to satisfy their voice and data need that had limited capacity at their site. Historically, they provide a digital mapping imagery to their customers by shipping hard drives. When they won a contract of the large search company, they required at least a ten-fold increase in capacity to provide this data online. Level 3 was able to deliver a single connection with a net capacity to satisfy the current demand and allow room for growth.

Since the time of the original sale, Sanborn has consolidated all of their telecommunications needs to Level 3 and we are now providing Voice over IP and MPLS based virtual private network services. Our team is assisting them and looking at new markets so they can now reach with an online presence that would have been too expensive or too complicated to address through hard drive shipment.

By consolidating to the single vendor, and upgrading their bandwidth capabilities they’ve not only reduced their total telecommunications costs, but have also reduced their direct labor costs and increased the speed at which they can complete projects opening up now markets and new opportunities.

Within our Content Markets Group, we experienced 6% sequential CNS revenue growth largely due to the seasonal pickup in broadcast revenues. We also saw growth from our largest customers in the Content Markets Group supporting their increase in demand for bandwidth. Pricing continues to be a factor particularly for CBN and high-speed IT services as we saw negative effect on revenue from price compression.

Turning to Super Bowl for the 21 consecutive year, Level 3 continues to lead within the media and entertainment business, continually innovating and bringing new services to the market, this year’s broadcast was flawlessly carried in an uncompressed high definition format over the Level 3 network. The first time ever for an event of this magnitude.

As I mentioned in last quarter's call, our European business is facing continued pricing pressure, price reductions primarily for existing high speed IT customers led to a 4% sequential decline in revenue on constant currency basis. This decline is almost exclusively pricing as our disconnect rate with European customers is within the expected range. While high speed IT is approximately 9% of our communications revenue company wide, it's more than 30% for our European Markets Group and has a significant effect on that group's results. We do continue to make progress with content customers in Europe expanding our Vyvx capabilities and expanding traditional locations throughout the continent.

Turning to pricing and demand, my pricing comments remain largely unchanged for the fourth quarter. Generally, pricing for transport and infrastructure services remains relatively stable while we continue to see pricing pressure for IT and CDN service. With few exceptions, the demand environment is healthy driven by ongoing growth and wireless data, federal initiatives, video over the internet and increases in the overall bandwidth needs of enterprises and consumers.

We do continue to see demand pressure and enterprise voice, wholesale voice and to some extent, legacy private lines related to carrier grooming initiatives. In summary, 2009 has been a year where we dramatically improved the customer experience, stabilized our wholesale business, improved our large enterprise and government capabilities and launched our local initiatives. As a result, we saw an increase in monthly recurring revenue sales and an increase in total CNS revenue in the fourth quarter.

For 2010, we're very focused on growing the business and will continue investing in additional [quarter bearing] headcount and striving to provide the best customer experience in the industry. With that, I'll turn the call back over to Jim

Jim Crowe

Thanks Jeff. Operator let’s go to Q&A would you describe the process please.

Question-and-Answer Session

Operator

Thank you. The question-and-answer session will be conducted electronically. (Operator instructions). Our first question comes from Jason Armstrong with Goldman Sachs.

Winston Len - Goldman Sachs

Good morning this is actually Winston Len on for Jason. So in terms of the outlook, can you talk a little bit about the expected increases spending for 2010 may be give it some thoughts around how many people you expect to add and what's the typical quarter for each of them. And then may be in terms of the CapEx investment can you give us some idea of the magnitude expected here. Thanks.

Sunit Patel

I will talk about just generally in terms of SG&A and CapEx and Jeff can talk about sales quarter but as we mentioned in our press release adding sales people during the course of the year will increase our OpEx slightly compared to last year so not a big change you know in the scheme of our overall expenses you know our sales force is roughly about 450 plus going to 500 plus but so its not big in the scheme of things but certainly big in terms of the percentage increase of the sales force. So I will let Jeff talk about the quarters.

The CapEx we are not providing any specific guidance, our CapEx is the responsive more to specific customer opportunities and expansion opportunities. So generally I think CapEx will go up some this year and will provide more specifics as we report results every quarter.

Jeff Storey

With respect to individual quotas, it doesn’t do much good to talk about them on an average basis because we have a variety of different types of sales people some are on inside sales, some are direct, some are wholesale, some are BMG. So it doesn’t do any, do very much good to talk in averages. I'll say that we're very focused on increasing our sales coverage which has to do with adding the sales reps that Sunit mentioned, but also continually improving our sales productivity. And we've made a number of strides in 2009 to ensure that we have our sales force out in the market selling, so that we continually improve our productivity per sales rep.

Jim Crowe

I would just add that if you look over the course of last couple of quarters going forward, we're adding 20%, 25% to the total number of sales force, so it's significant that perhaps more significant is something Jeff touched on and has several quarters. We're aligning the sales force to the way our customers buy and particular the mid-market customers buy, make the buy decision locally, so we're deploying the majority of the ads in individual cities. We're adding to the WMG sales force, a smaller amount.

With respect to quotas. Again, I'd echo what Jeff said, but if you think in terms of mid to higher thousands of dollars for a mid-market sales force, a salesperson you would be correct and then depending on the accounts double that maybe a little higher for the wholesale and large enterprise accounts, you wouldn't be all that far off. Past that, we consider that a proprietary data wouldn't go any further.

Operator, next question?

Operator

We will move now to Oppenheimer with Tim Horan.

Tim Horan - Oppenheimer

Good morning, guys. Thanks two questions. Sunit, can you just go through the first quarter and full year what the EBITDA trends are versus the fourth quarter. Are you giving guidance for the full year and increasing expenses versus the fourth quarter or versus the full year '09? And then I just had a quick follow-up for Jim.

Sunit Patel

Yeah I mean I think the comments we made on the call its about all we want to say is with respect to any specific guidance I think you have seen more and more of that with several other carriers. The guidance on expenses increasing, I think we're seeing year-over-year, but I think it's also true from fourth quarter run rate expenses will go up with addition of sales people. So I think that’s about all we can say at this point and then we will report more as we report every quarter.

Tim Horan - Oppenheimer

That was helpful. Jim, could you talk about what you think the appetite is out there for consolidation, restructuring of in this sector with the high yield spreads being as tight as they've been in a long time that would seem to be a bottleneck right now in terms of getting capital. Just curious on your thoughts on the appetite for other players in the sector? Thanks.

Jim Crowe

Well I think your comment on financing is more or less accurate. Obviously there’s some volatility that market like most markets but I would say in general and we’ve made the same comment for several quarters now the recognition that further consolidation will occur broadly, I think is as strong as its been in quite a while through a good portion of 2009 in no small part because people were repricing risk in our industry and every industry, the bid ask spreads tended to be pretty wide. Sellers remembered better days, buyers were remembered yesterday, and as a result there were a fair number, some publicly reported processes, but not a lot of consummation. I think as the market adjusts the different multiples, different fuse of risk, the activity levels going to remain high and I would expect to see more deals get done as was always the case in M&A though. There is a limited number of people who have to get together and say yes, and it's hard to predict. That would be a general comment.

Sunit Patel

And then to your question on financing; I mean generally, the fixed income markets have seen a lot of recovery, so we don't see that as a problem with respect to any industry consolidation meaning availability of that capital to make a transaction out.

Operator

We will hear now from Colby Synesael with Kaufman Bros.

Colby Synesael - Kaufman Bros

Thanks for taking my questions. I have two of them. One, you guys highlighted quarter-over-quarter bookings growth, sales were up. Can you specify what segments? And then also, how much of wholesale quarter-over-quarter growth do you think was seasonal? That was obviously one of the better performing segments in the quarter. Thank you.

Jim Crowe

In terms of segment growth, I'll make a couple of general comments and Jeff could amplify if he chooses. Three quarters of our business is customers who connect a server with an application or a content at one end of variety of access networks, wireless at the other, and that's your wholesale group and in general that wasn’t all that seasonal, that was just something a trend that we’ve mentioned for a while networks were being run harder and harder that is with less margin and safety and when I use the term network everyone will recognize that can cover everything from virtual networks to those who buy some basic components and add services like private lines and waves.

So there’s a broad range of what people call their networks but all of them, not all but a good number of customers simply put off purchases for quite a period of time that dynamic was well discussed by Jeff Storey and several of the conference calls and we see all sorts of evidence that demand has continued to grow, capacity hasn’t kept pace and now people are beginning to purchase and that will take some time and there’s inertia in the system, that is purchased intervals, there’s installed intervals but we do think that accounts for the wholesale part. The seasonality is more in the broadcast CMG business where the fourth quarter is often seasonally strong.

Jeff Storey

And in particular I mentioned that in our wholesale markets group the sales force federal and cable were out in those markets. So the seasonality of it not so much in wholesale mostly in CMG would broadcast.

Colby Synesael - Kaufman Bros

So may be just to simplify the question in terms of the bookings was that more on the wholesale or you saw an up tick on the quarter-over-quarter basis or was that more on the business side of things.

Sunit Patel

Well sales were slightly up across the board in the U.S. our enterprise business side was comparable to the fourth, to the third quarter and sales. And so the wholesale picked up a little faster than the business side.

Colby Synesael - Kaufman Bros

Thank you.

Jim Crowe

And two different dynamics there, as we've said repeatedly on the wholesale side and I think large enterprise might fit in this category, that has more to do with the restraint on the part of customers to augmenting networks versus the underlining demand they see. With respect to mid-market enterprise, we've said that with 2%, 3% of the market improvements in that area, have far more to do with the deployment of local management sales force and the continuing improvement in our customer satisfaction service delivery.

As Jeff said, that was the area perhaps most impacted by the problems we had and that's the area that we need to make the most gains to make sure we deliver a great customer experience.

Operator

We will hear now from David Dixon with FBR Capital Markets.

Jim Crowe

Operator, doesn’t sound like David is there. You might want to go to the next.

Operator

We will move now to Michael Funk with Bank of America/Merrill Lynch.

Michael Funk - Bank of America/Merrill Lynch

Great. Thank you for taking the question. I appreciate the additional disclosure this quarter on the customer segments. If we can just focus for one minute on the large enterprise in federal and some of the improvements you noted there. I wonder if you could break out the improvement by say new customer win, increased share of spending at each customer or just overall spending increases. Because in the context of industry as a whole, it appears like you did out perform carriers like AT&T and Verizon which noted some weakness in this area. Second along the same line of questioning, for the mid market, I'm curious what portion of the slowdown or the churn offsetting sales was due more to maybe some seasonal or rollout factors of the sales force versus any customer contraction or pull back in broad spending.

Jim Crowe

With respect to your first question on the wholesale side there are some exceptions but generally speaking we sell to a set customers who are buying on a regular basis we have account keys and in general those customers buy from a limited number of suppliers the key is to have more than your fair share. So it would be as a generality, it’s a gross generality, we are not adding or losing customers, its what share of their spend do we get when we talk about wireless cable customers.

With regard to large enterprise there’s an area I think where I am not sure that we have and I don’t think we would break out the difference between new names and older but we would tend to have more new names there than we do in the wholesale.

With respect to mid-market, if I understood your question correctly, we believe that managing turn has more to do with how we go to market that is effectively providing the local experience on a national and in fact global platform, and how the service enables the way in which we respond if there are any issues. Then it does any macro or seasonal effects.

Michael Funk - Bank of America/Merrill Lynch

Is that to say the churn is more customer losses to competitors versus business contraction?

Jim Crowe

The answer is yes, but it's a combination of churn which is I think largely behind us where we deliberately churned out some customers that we simply weren’t, they were too small or had other issues where we didn't feel they were suitable for us, and some churn associated with our own delivery issues, but I want to emphasize a good portion of the decline had to do with enterprise voice. And as Jeff said enterprise voice was down and accounted for a reasonable percentage of the decline that is an exception to what I said earlier about the economy. Voice usage is proportional to employees and if you have a significant increase in unemployment, you're going to have a decrease in voice usage.

Operator

We will take a question now from Morgan Stanley with Simon Flannery.

Simon Flannery - Morgan Stanley

Thank you very much. Good morning. You talked on a couple of occasions about some high speed IP pricing pressure. Can you just talk a little bit more detail about that, and is that a significant change from Q3 or earlier in the year? Is there sort of a change in the competitive dynamic in some of the markets driving pricing there and elsewhere. And then I think you talked in the past about some of the opportunity around fiber to the tower, I'd be happy if you could update us on your plans for '10 there. Thanks.

Jim Crowe

With respect to the high speed IP I think Jeff you’ve mentioned that two or three quarters in a row.

Jeff Storey

Yeah there’s no change in what we see the pricing pressure still exists but there’s no real difference between the third quarter and the fourth quarter.

Jim Crowe

So just for those who may not have followed this closely starting at the beginning second quarter I think something like that of last year, we noted that for 90% of our products demand was and pricing we considered healthy for high speed IP which previously had seen a price decline coupled with a demand increase that was healthy that is prices declined more rapidly than other products but demand went up 2.5 times the rate of price declines so that dynamic changed and became unhealthy with pricing declines largely offsetting unit increases. That is the dynamic we are discussing.

I want to emphasize 90% of our products continue to have good pricing and good demand. High speed IP for a variety of reasons has been an exception and as Jeff said a good part of that’s in Europe which way simply be a lag versus what happened in the US and I mean I will make a forward-looking statement here, we would say that the current price decreases are not sustainable and will therefore reverse at some point.

Simon Flannery - Morgan Stanley

Okay. Thank you. And on the fiber to the tower?

Jim Crowe

Yeah. The story there is largely the same as we've discussed. There are a percentage of towers that is fairly small that justify fiber on a standalone basis. To put some numbers around it, if a carrier had a 100 megawatts of traffic at a tower, that's a fairly substantial amount of demand, there is three point something carriers on average per tower, so 300 meg for a pretty good size tower at [6DS 3s] that's not a whole lot of traffic and the terms that we deal with and there are neighborhoods with broadband to the home that have orders of magnitude more traffic.

What has everyone's attention and has spilled out in the public of course is the screen that rapid unit growth has placed on the wireless network and naturally carriers are working hard to fix that issue and are encouraging people to try to build the towers. We would say it’s the exception that justifies a standalone fiber build not the rule. We've said all along the defensible approach does not isolate towers, but to recognize that in any given area, towers are simply parts of a larger set of traffic aggregation points, towers, cable head ends, bell central offices, DSO aggregation points, large enterprise buildings, medium multi-tenant buildings et cetera and incorporate all of those demand sets in your build plans.

When Sunit mentioned that we expected to increase investment in CapEx, that's part of the area we are talking about is addressing more and more points of traffic aggregation. So to sum it up and I know this is the subject of a lot of topical discussion in the industry and on investors we would say it makes much more sense to talk about all of the demand in an area and how you need it than it does to isolate towers separately from the other kinds of demand.

Operator

We will move now to Ana Goshko with Banc of America.

Ana Goshko - Banc of America

Thanks very much for taking the question. I had a few questions around the decision not to provide any annual guidance parameters any longer. For initial feedback, I'm finding it a little unsettling not to have some just general broad directional parameters on things like revenue, EBITDA and free cash flow. As you may infer, people could jump to the conclusion either that you don't have great visibility into those metrics or that you have visibility and you don't like how it looks so you're not disclosing it right now. One, again just what's your thinking behind not providing even broad directional parameters. And two, what is your level of visibility into things like revenue, EBITDA and free cash flow right now, especially versus how it's been for you historically.

Jim Crowe

Well a couple of comments, first, there isn’t any new news in our approach this quarter I think if you check back several quarters and in many public venues we’ve said over and over again that we plan consistent with peers to provide less quarterly guidance. We have talked a lot about that and we’ve discussed it with our large constituent shareholders and have general agreement, that's the right approach.

Second, I think if you look at Sunit's comments, Jeff's comments and the press release, you will find a level of forward-looking trend line guidance that's consistent with the rest of the industry. Sunit made specific remarks about cash flow, CapEx, OpEx at revenue looking forward over the next quarter and Jeff talked about segment trends and product trends, so I think summing up this isn’t any change from what we said we would do several quarters ago, so it shouldn't be viewed as some commentary on the next quarter or two.

And second, I think looking through within; we said you will find plenty of general trend line guidance.

Ana Goshko - Banc of America

Jim, just on that point, maybe it's just me and I need to go back through all of the commentary and put it all together. But I really listening to this call, I don't really have a sense of whether you believe you will have revenue growth on a year-over-year basis or EBITDA is going to be stable this year or whether you believe you'll be free cash flow positive neutral or negative.

Jim Crowe

Well, you're getting back into providing specific metric guidance which is precisely what we said we weren’t going to do.

Sunit Patel

And I think just deployed from historical context, if you go back a little out six years, you will see that every year we've been providing less and less guidance and also I think if you even go back to the remarks we made at the BOA conference as recently as December where we spent time talking about this one, I think we made the same point. So this is more progressional of what's been happening over the last five or six years, and more interestingly, I think if you look at people reporting, due to more recently our peers are seeing similar direction.

And I think to counter balance that we have made the decision as you’ve seen in our fourth quarter report we are providing more disclosure with respect to actual results that we’ve reported on and hopefully that provides additional insight and I think that we will continue to look at our business to see where we can provide additional disclosure around reported results like in mid-market its one area that we are looking at to see how we can provide additional disclosure. So hopefully all of that will be helpful as we report every quarter.

Operator

We will take a question now from Donna Jaegers with. D.A. Davidson.

Donna Jaegers - D.A. Davidson

Hi I just had a question if you could give a little more color on what’s going on with your CDN business and with Vyvx. Obviously you said pricing is very aggressive in the CDN business but are you growing revenues there or and what’s happening with the Vyvx.

Jim Crowe

Well Vyvx looks for those who don’t track it closely. Vyvx is a brand at service where we move content live generally content from the venue so a stadium place where the academy awards might be held or a news event back to the production studios over our network. And we generally have our own facilities at each of these venues. We are the market leader and it is a steady business that has a seasonal component that we’ve discussed at peaks in the fourth quarter. We also introduced the CDN business where we combine bandwidth and storage to move generally media content video over the network. We've said for a while that all of these services are going to end up converging that we called IP and the internet just as a matter of math are going to become one large content distribution network.

There is lots of estimates, but we would say on our own network an excess of 70% of the traffic is already video. So specifically yes, CDN is growing. It is converging with IP and the differences are becoming less and less as we continue to view that as a trend that will change, and Jeff who is something of an expert to Vyvx having many years experience may want to address what happens with it, but I suspect the answer is the same in all converges. Jeff?

Jeff Storey

And I agree it all converges and we have a very good position in the media and entertainment industry. We believe that our job is to distribute and move information around and Vyvx has a set of products, think vehicle for doing that and CDN has a set of products, it's a vehicle for doing that and we see long-term convergence over those things, and that our role is to make sure that the products fit the applications.

Donna Jaegers - D.A. Davidson

I was just curious, given the new break down doesn't include any content markets. I know with Vyvx, you work with Fox and all of the large broadcasters. How did that business, can you give us a little color on how that business melted into large enterprise and mid market? Because I'm assuming those are the two markets that got broken up into.

Sunit Patel

I think the Vyvx business largely ends up in the wholesale segment and the CDN business is kind of in three places its in Europe its in wholesale and it will be a large enterprise and federal so the CDN product if you like will be spread out among the three places. Vyvx is in wholesale.

Jeff Storey

I also want to make clear that our Vyvx business has a dedicated sales force as a dedicated unit serving that market and while we view the customers in Vyvx very similar the wholesale and hence the reporting of the content market group inside of wholesale for future disclosures and it doesn’t change the way that we address the market or the way that we are serving our customers.

Donna Jaegers - D.A. Davidson

So, I had the understanding that Vyvx under WilTel it used to be an $80 million to $100 million business. If you look at the gap between wholesale that you guys report on the old basis and wholesale on a new basis, there's $5 million difference. Is Vyvx really going into wholesale or is my perception of Vyvx has it shrunk over the years because of pricing?

Sunit Patel

Yeah its all going into wholesale remember that federal is pulling, is being moved out of wholesale into a large enterprise.

Jim Crowe

It is not shrinking right. And again the way we would view it and in our reporting is consistent we are trying to align as every company does internal management the way we approach customers and external reporting the way we view it Vyvx IP and CDN converge into a data service over time and that’s the way we plan to report it the advantage we have with Vyvx doesn’t come necessarily from what happens once it hits the network which is converging to IP. It’s the large number of physical locations where we uniquely have a presence, branded presence at stadiums at live venues across the U.S. and regardless to whether that traffic moves in the form of IP or Ethernet or any other format, that physical presence is a very big advantage.

Operator

We will move now to Jonathan Schildkraut with Jefferies.

Jonathan Schildkraut - Jefferies

Thank you. Most of my questions have been asked and answered. But I would like to spend maybe a minute, Jeff, if you could talk about some of the timing to install with the sales ramp in terms of bookings. When might we expect to see some of that flow into the P&L results? Also, give us a little bit more color on churn and what you expect. I know that going back maybe a few quarters, even into the third quarter, there was a good bit of churn that had a little bit to go with the company's own performance. Historically, I think that Jim indicated that that churn was slowing down. If we put together those two things, should we see a back half ramp in terms of revenue growth for 2010? Thanks.

Jeff Storey

I'll talk about the timing to install and churn and that you draw conclusions about revenue ramps, but with respect to timing of our installs, I said earlier in the remarks that our service delivery is not an impediment to our ability to grow meaning that when we get a circuit in, we get it turned up. We're largely performing within the standard intervals that we quote to our customers.

We could give our customers firm commitment dates, when we're going to turn up circuits and were largely performing within those. So from a service delivery perspective we want to continue to improve. We're always striving to improve, but we're meeting the needs of the market, meeting the needs of our customer and in fact differentiating ourselves from our competitors by our service delivery result.

With respect to churn in the comments I talked about several different types of churn we have seen among our largest customers in the wholesale market group self served phenomenon that will probably continue but we don’t expect it to be near what we saw at the end of 2008 or 2009. Within business market and large enterprise mid market enterprise I think Jim’s comments are exactly right we have very low market share and we are focused on attacking those markets and growing the business.

Our churn in those areas a little bit of it is related to the economy from usage in voice services that the businesses scale up and scale down to meet their work force but the rest of it is how it’s going to be addressed by how we attack the market. By having sales coverage, by having our sales people talking to the customer by continuously improving our customer experience, so as delivery service management, billing across the board.

So my expectation is those things that we’ve been working hard on 2009 will continue to have the positive impact in 2010. We saw that in the fourth quarter with slight productions in churn.

Operator

We will take a question now from Frank Louthan with Raymond James.

Unidentified Analyst

This is Jason present for Frank. Good morning. A couple quick questions. I was wondering if you could talk a little bit about from the traffic patterns you're seeing internet traffic in Q4, and how similar are those been in Q3? Any major changes there? And second, may be a little bit more on the outlook for Vyvx, given the Olympics, the mid-term elections and the World Cup, and maybe some qualitative comments on the direction of Vyvx would be great. Thanks.

Jim Crowe

We will talk about traffic, The specific answer to your question is there is no major changes in IP traffic patterns broadly speaking, and on a more general basis as we've said a number of times, the term IP traffic, internet and growth in units is very poorly defined, and I encourage any one of the analyst on the call to come up with some standard definitions, we would sure support it, there is none. To some IP traffic means transit which excludes peering to others and you have to include data center to data center, there is a great deal of substitution among products and there is no standard.

On a broad basis, we would say internet growth continues driven by substitution for I would say disintermediation of other channels that were used to deliver media wound up to online delivery. And we just continue to expect something in the 50% to 60% unit growth and that we think is generally consistent when others that we're aware of.

Unidentified Analyst

Great. Thanks. And on the outlook for Vyvx?

Jeff Storey

If you look at Vyvx we talked about the seasonality of the fourth quarter results that we see a pickup at the end of the year in Vyvx traditionally we saw that this year. If you look, think about the Olympics and mid-term elections, those are good things for Vyvx summer Olympics are better than the winter Olympics and Presidential elections are better than mid-term elections, but those are good events for.

Jim Crowe

That’s not a political comment.

Jeff Storey

It’s a business comment yearly but those are good things for Vyvx. Vyvx is a very solid business for us and we think we would provide tremendous value to our customers that we have, we have a product that meets their needs, is reliable, dependable and it’s a solid business for us.

Jim Crowe

Just one last comment and we will wrap it up if you think about the value of content the essence of CDN is to take a long tale and make it available locally based on smarter algorithms about what people want to look at, that is the content and by definition if you are going to in effect store it you can introduce some amount of delay so the assumption is the content whether it gets there 10 minutes ago or an hour ago or an hour from now is less important than it would be available when somebody wants to see it, which is decoupled from when its made or generated.

Live traffic on the other hand has an enormous value and nobody wants to watch the Super Bowl tomorrow, they want to watch it live, the same is true, a great deal of what we carry not just live venue but events we carry some of the most the premium content like American Idol, the damn thing with stars couple of examples, Vyvx puts us in a position regardless of where the individual formats and protocols go to continue to have a poll position with a very high value content. Alright thanks for listening and that ends the conference call.

Operator

This concludes today's Level 3 Communications Incorporated fourth quarter 2009 earnings conference call. Thank you for your attending and have a good day.

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