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Level 3 Communications (NYSE:LVLT)

Q1 2010 Earnings Call

May 06, 2010 11:00 am ET

Executives

Valerie Finberg - VP of IR

James Crowe - Chief Executive Officer and Director

Jeffrey Storey - President and Chief Operating Officer

Sunit Patel - Chief Financial Officer and Executive Vice President

Charles Miller - Vice Chairman, Executive Vice President and Chairman of information Services Group

Analysts

Ana Goshko - Banc of America

Donna Jaegers - D.A. Davidson & Co.

Mike Ciaccia

Michael McCormack - JP Morgan Chase & Co

Simon Flannery - Morgan Stanley

Operator

Good day, and welcome to the Level 3 Communications, Inc. First Quarter 2010 Earnings Conference Call. [Operator Instructions] At this time, I'd 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 First Quarter 2010 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, as a reminder, our press release, supplementary schedules and presentation slides that accompany this call are all available on the Investor Relations section of the Level 3 website at www.level3.com. I need to cover our Safe Harbor statement, which can be found on Page 2 of our 1Q10 earnings presentation. And that says that, information in this call and in the presentation contain 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 and the most comparable GAAP financial measures are available in the press release, which is posted on our website in the Investor Relations section. I will now turn the call over to Jim.

James Crowe

Thanks, Valerie. As is our norm in our prepared remarks, Sunit Patel will discuss financial results for the quarter; Jeff Storey will discuss operational matters, including segment results; I'll pick it up, provide a brief summary; and then we'll take questions. Sunit?

Sunit Patel

Thank you, Jim. Before I review our detailed results, I wanted to give you a brief overview of the quarter as summarized on Slide 3 of our presentation. Our revenue base has stabilized over the past two quarters. We had a good quarter in terms of sales and churn improvements. After a period of declining Core Network Services revenue from late 2008 and most of last year, followed by two quarters of stable revenue on a normalized basis for the fourth quarter of 2009 and the first quarter of 2010, we expect Core Network Services revenue to grow sequentially over the course of 2010. We continue to improve our debt maturity profile and now have $38 million in maturities for the rest of 2010, and $196 million in maturities in December of 2011.

Turning to the results for the first quarter on Slide 5. Core Network Services revenue declined 1% sequentially to $701 million in the first quarter of 2010 from $706 million in the fourth quarter of 2009. Core Network Services revenue from our wholesale customers declined by 3% sequentially, primarily due to seasonality in the broadcast business and a decline in revenue from carrier customers, largely from lower inflation, offset by a $7 million asset sale during the quarter. Adjusting for these three factors, wholesale Core Network Services revenue was down 3% sequentially, which represents a much improved performance from a year ago when wholesale CNS declined 7% sequentially.

Going forward, we expect much better sequential performance from wholesale. Large Enterprise and Federal delivered another strong quarter of growth of 5% sequentially. Midmarket saw stable revenue performance. On a combined basis, these large and midsized Enterprise customers now represent over 40% of our total CNS revenue and we expect this percentage to grow over time. Core Network Services revenue from our European customers declined sequentially by 3% as reported but, assuming costs and currency, grew 3%. Traffic continues to grow in Europe, partially offset by continued IP pricing pressure. Also, Voice Services revenue was $165 million this quarter compared to $162 million in the fourth quarter of 2009 and $171 million in the first quarter of last year. As we've indicated previously, we do expect quarter-to-quarter volatility in Wholesale Voice Services revenue, since we've managed for a margin contribution versus revenue growth.

Turning to Slide 6. Gross margin was 58.8% this quarter compared to 60.2% in the fourth quarter of 2009 and 59.5% in the first quarter of 2009. The sequential decline in gross margin percentage is primarily a result of a revenue mix shift and lower render discounts and settlements in the first quarter of 2010. We remain focused on optimization of network expense. Going forward, we expect our gross margin will increasingly be driven by high margin CNS revenue growth.

Communications SG&A expense excluding non-cash compensation and restructuring charges was $327 million, a slight decline from $328 million in the fourth quarter of 2009. We increased our sales force by almost 10% in the first quarter. Since the beginning of the second half of 2009, we've increased the sales force by about 14%. Jeff will have more to say about this in his remarks. We continue to manage our SG&A expense tightly in all other areas.

Turning to Slide 7. Consolidated adjusted EBITDA was $200 million in the first quarter of 2010 compared to $217 million in the fourth quarter of 2009 and $250 million in the first quarter of 2009. Communications adjusted EBITDA was $202 million in the first quarter of 2010, $216 million in the fourth quarter of 2009 and $249 million for the first quarter of 2009. Adjusted EBITDA from other businesses was -$2 million in the first quarter and we expect that to be break even or better for the rest of 2010. Communications adjusted EBITDA margin was 22.4% in the first quarter of 2010, compared to 23.8% in the prior quarter and 25.9% in the first quarter of 2009. The change in adjusted EBITDA is primarily explained by the loss of high-margin CNS and other revenues. Going forward, we expect our adjusted EBITDA performance will also be driven by the net change in CNS and other revenues.

At the bottom of Slide 7, capital expenditures were at $82 million in the first quarter of 2009 compared to $80 million for the fourth quarter of 2009 and $78 million for the first quarter of 2009. We are increasingly seeing more customer and expansion opportunities to drive profitable revenue growth and expect capital expenditures to increase in 2010 compared to 2009.

Turning to Slide 8. Unlimited cash flow was $51 million in the first quarter of 2010, or $78 million excluding $27 million related to a previously discussed settlement and other payments for previously discontinued operations not associated with the communications business. This compares to $43 million in the first quarter of 2009 and $218 million for the fourth quarter of 2009. Our first quarter typically requires a heavy use of cash as a result of negative working capital in the quarter. The negative change

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working capital for the first quarter included incentive compensation, prepaid expenses and deferred revenue. Our Day sales outstanding for receivables improved slightly during the quarter and provided some working capital benefit. Free cash flow was -$90 million for the first quarter of 2010, or negative -$63 million excluding the $27 million in payments not related to the communications business. This compares to -$82 million for the first quarter of 2009 and positive $97 million for the fourth quarter of 2009.

Turning to Slide 9. During the quarter, we issued $640 million in aggregate principal of 10% senior notes due 2018, and paid off approximately $668 million of debt which consists of the $111 million of 6% convertible subordinated notes dated maturity, the repurchase of $7 million of debt due in 2010 and 2011 in the open market, and the $550 million 12 1/4% notes due 2013. Additionally, after the end of the quarter, we issued a redemption notice for the $172 million of the 10% Convertible Senior Notes due in 2011.

As of March 31, 2010, we had $639 million of cash. Pro forma for the 10% notes we are redeeming. Our debt maturities for the remainder of 2010 are $38 million. After that, the next maturity of $196 million is not due until December 15, 2011.

Depreciation and amortization expense was $225 million in the first quarter of 2010 compared to $236 million in the fourth quarter of 2009 and $222 million in the first quarter of 2009. We expect to have approximately $215 million to $225 million of depreciation and amortization expense per quarter for the remainder of the year.

We are pleased with the progress we made this quarter. Our sales grew sequentially and churn improved. Our sales orders were at a level we last experienced in the first half of 2008. We believe that churn will continue to show improvement for the rest of the year. We are encouraged about our business trends based on what we've seen so far in this year. As such, excluding the benefit of the $7 million asset sale in the first quarter, we expect Core Network Services revenue to grow sequentially for the rest of 2010.

Given the number of opportunities we now have to profitably grow our revenues, we expect capital expenditures to increase in 2010 compared to 2009. In addition, with the exception of typically utility costs fluctuations in SG&A, we expect operating expenses to remain relatively flat for the remainder of the year. With that, I'll turn the call over to Jeff.

Jeffrey Storey

Thank you, Sunit, and good morning, everyone. On our fourth quarter earnings call, I said that we'd be very focused on growing the business in 2010 and plan to continue investing in additional quota bearing headcount, new services and launching additional local markets. Before I review the results for the first quarter, I'd like to give you an update on the progress we're making toward these objectives.

We've increased our sales force by approximately 10% in the first quarter and expect to grow another 10% or so through the rest of the year. Although revenue doesn't ramp as quickly as salespeople, we are beginning to see productivity from our new sales reps. With respect to the launch of our local initiatives I’ve discussed over the past several calls, we are essentially complete. We'll continue holding customer launch events and adding new resources to specific markets, but the broad scale program we've discussed is now behind us and we are focused on ongoing operation. These efforts, along with the improvements we’ve made in the customer service excellence, continue resulting in improved sales and reduced churn.

During the first quarter, we put initiatives in place to drive sales and challenged our sales teams to get off to a fast start for the year. Many of those initiatives are producing results and we saw the fast start in sales from our Wholesale, Large Enterprise, Federal and Mid-Market Groups. For the Wholesale Group, although revenue declined during the quarter, primarily driven by seasonality and broadcast revenues and a decline in local Voice-related inter-carrier compensation, we saw increased sales and had the strongest sales quarter since the second quarter of

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2008. March CNS sales were the largest single month since we began tracking that metric. In the first quarter, we saw sequential CNS revenue growth in the Wireless and Cable customer groups and overall, as Sunit mentioned, our revenue outlook continues to improve, in part driven by the sales momentum we're seeing. We had another great quarter in the Large Enterprise and Federal customer groups as well. Among these customers, our ability to provide scalable on-net solutions continues to resonate and we expect further opportunities to provide superior solutions to meet their bandwidth and networking needs.

For example, our Special Networking customers continue to be active in expanding or building out data centers, often in rural locations with access to low cost power. In the first quarter, we continued to expand our relationships with these customers, winning incremental business to support their initiatives and are currently building significant bandwidth capabilities to connect these data centers to our network. Our reputation for delivering large-scale construction projects against aggressive timelines, the redundancy and diversity of our overall solution, and our ability to scale with our customers’ growth expectations have been critical factors in their selection of Level 3. We continue to see opportunities to provide this type of support across our entire Large Enterprise customer base. This is but one area of our success with large enterprise customers and we are excited about the opportunity to continue to grow this area of the business.

In the Federal space, we continue to make progress and had another great sales quarter from this group. We've been very successful supporting the established systems integrators to serve the Federal government and are positioning the company for additional direct opportunities in 2010.

I'm also pleased to report that we had a very good quarter in our Mid-Markets Group. Sales were up more than 10% sequentially. Disconnects were down 20% sequentially. And for the first time since we formed the Business Markets Group, which is focused on the Mid-Market segment, Core Network Services revenue was stable. As I mentioned, we are substantially complete with the transformation of our local business model and we'll continue our efforts to operate in a more local manner for these customers. Over the course of the past year, we have converted to a local operating model, including the hiring of general manager, the alignment of critical customer facing functions along with geographic access including customer care, sales engineering, network planning and field operation. While we may still see a quarter or two of revenue declines this year, due to continued account cleanup, we believe we have largely turned the corner on revenues for this group.

Our European business continues to face pricing pressure and currency headwinds. As Sunit mentioned, adjusted for foreign currency, we saw sequential Core Network Services revenue growth, but this year we don't anticipate seeing the historical growth we've come to expect in Europe. Despite the pricing pressures in IT and CDN Services, we do see opportunities to grow the business with content and financial service customers in Europe by expanding our Vyvx capabilities and expanding the network to new locations within the continent.

As I touched on earlier, our customer experience has dramatically improved. We've seen this in our internal metrics and heard directly from our customers that we continue to improve from service delivery, pre-service management and ability. Across the board, we are seeing the positive impacts of the efforts we've been making.

With regard to pricing and demand, we've seen very little change since the fourth quarter. As we've noticed previously, pricing for Transport and Infrastructure Services, particularly for Metro Services, remains healthy and is relatively stable. Pricing pressure continues for IP and CDN Services though somewhat more moderate in the U.S. compared to 2009 but a continuing issue in Europe. Bandwidth demand continues to be strong.

In summary, we are encouraged by the trends we've been seeing. Sales are up and we have a strong pipeline from new opportunities. We're still cautious about the economy and we'll continue to monitor the effects of economic changes with our largest customers and for our European business. With that, I'll turn the call over to Jim.

James Crowe

Thanks, Jeff. I'd summarize by echoing the theme that I think you heard from both Sunit and Jeff. While we remain cautious like everyone and while progress rarely follows a straight line, we do see some very encouraging signs with respect to churn, erosion, sales, and customer satisfaction. They bode well for returning to our historical levels of revenue growth.

Before we open it up to broad questions, I'm going to ask a couple of questions which we think have topical interest and are relevant. We've heard these questions from quite a number of parties. So I'm going to ask Buddy Miller, our Vice Chairman of Strategy and Corporate Development, to answer them. The first is: What are your thoughts about the general environment for telecommunications M&A activity? And the second is: What do you think will be the effect of the pending CenturyLink/Qwest deal on Level 3?

Jeffrey Storey

As we've said many times, we believe the logic for consolidation in our industry is strong. Telecommunications tends to reward scale and utilization. All of our customer segments, wholesale, enterprise, content, government, are increasingly looking for alternative end-to-end solutions linking their networks. By end-to-end, we mean a single network that combines long-haul and metro fiber assets. The acquisitions we completed in 2006 and early 2007 were designed to make Level 3 an alternative nationwide end-to-end optical IP competitor. The need for scale and scope to compete is apparent. We believe that further consolidation is probable and we plan to be an active participant. To put it simply, we believe that $1 of revenue added to our network from a merger is worth more than on the other company's standalone network, and that $1 of investment to extend our network will produce more revenue and cash flow than the same investment in other networks. With that said, I would add that we do not comment on and will not speculate about any particular target or the timing of consolidation in general.

The second question deals with the pending merger of CenturyLink and Qwest. I should note that we are still studying the transaction and so my remarks should be regarded as preliminary. Most big mergers, including this one, tend to have pluses and minuses with respect to our business, generally, creating incremental opportunity out of region offset by some contraction in region. We expect the same in this case. We have managed through years of consolidation in the past, and we expect no material effect on our business.

James Crowe

Okay, thank you, Buddy. Operator, would you explain the question-and-answer procedure?

Question-and-Answer Session

Operator

[Operator Instructions] And our first question comes from Frank Louthan with Raymond James.

Mike Ciaccia

This is Mike for Frank. The first one was on the wholesale pricing trends. Maybe you can give a little color about what you're seeing there. And then on the SME space, maybe talk about the trends that you're seeing there and a little more color around that.

James Crowe

Could you repeat that second question? You said trends around the?

Mike Ciaccia

SME space, small business?

James Crowe

Oh, small, yes. Jeff, do you want to talk about pricing?

Jeffrey Storey

Sure. On the wholesale pricing, as we said, the transport and infrastructure pricing is fairly stable and has been for a while. We see IP pricing pressure, both domestically in the U.S. and in Europe. It's moderating a little bit in the U.S., but it's still pretty significant in Europe. So we're monitoring that pretty carefully. In general, pricing is somewhat stable.

James Crowe

And with regard to SME.

Jeffrey Storey

The…

Jeffrey Storey

Let me -- I’ll take that one, once it’s -- rather than repeating the question. The question is pricing with respect to SME. I think for us, the question would be mid-market. We don't go down below -- it depends on the type of business. With financial services for instance, generating more revenue per head, and therefore we have smaller -- particularly serve smaller enterprises. But in general, we don't go below 50 seats, something like that. Again, heavily dependent on the type of business and whether it's on-net or off-net. Pricing there really is not an issue. As you would expect, we compete with the local exchange company, the former monopoly. When we -- we’re a facility space carrier, so our goal is to build in to buildings. We may open up a building using leased facilities, but our goal is to bring buildings on-net. We pick buildings where typically there's one, maybe two competitors, but generally one. And the former monopoly are good folks to compete with. So pricing isn't an issue there. It's more a matter of properly identifying the targets and making sure we can bring them on-net with acceptable margins. Next question?

Operator

We'll move on to Donna Jaegers with D.A. Davidson.

Donna Jaegers - D.A. Davidson & Co.

On the $7 million asset sale. Sunit, what line item was that in? And can you talk a little about the margins on that? And then a little more on the Century and Qwest merger. Can you talk a little about exposure that you have that either or both of these customers, as far as them being a customer for you?

Sunit Patel

Okay. The $7 million asset sale was in the wholesale business within CNS. The margins for that are comparable to our -- generally our CNS revenues, as we've said in the past, incremental margins with CNS revenues are roughly in the 80% range. The second question with CenturyLink/Qwest, they are both good customers of Level 3, consistent with previous consolidations like this we've seen in the past. Net-Net, haven't had much of an impact on us, as Buddy pointed out earlier. You have outer region -- they have outer region needs that continue to grow, and then you have in region needs where we might see reductions. And obviously, we’ve managed through all of this with much bigger consolidations in the past, like BellSouth, SBC and others.

James Crowe

And I'd emphasize, Donna, that as Buddy said, Buddy Miller, we're still studying this transaction. I don't know what the expected closing period is, but given the number of state PECs, I assume it will be fairly long, measured in several quarters. So a lot will depend on Qwest and CenturyLink's strategic plans, what are going to be their targets. And I would expect that there may be all sorts of opportunities to work with them, particularly if they have an emphasis on business, given our extensive local metro footprint. We're the logical alternative to AT&T and Verizon. And that could be quite a large opportunity for us. But it's just too early to be making declarations other than we don't expect anything material certainly out of cost-cutting.

Donna Jaegers - D.A. Davidson & Co.

Are either Qwest or Century in your top 10 customer list?

James Crowe

No.

Operator

And we'll move now to JPMorgan and Mike McCormack.

James Crowe

Excuse me. Let me correct myself, my statement. Qwest is in the top 10 list by virtue I believe of a fair amount of voice termination, which we would expect wouldn’t -- particularly international I think, and I don't think we expect to see that affected. But I’d underline, that's not CNS, that's not high margin revenue, and, in any event, isn't that material. I’m sorry, next question?

Operator

Mr. McCormack, your line is open.

Michael McCormack - JP Morgan Chase & Co

First on the wholesale enterprise trends. It certainly seems like things are getting better there. We've heard pretty good things and good trends at AT&T, Verizon and Qwest. Maine indicated some qualitative comments about at least seeing the beginnings of some demand pickup. Can you just sort of talk a little bit about what you're seeing at the ground level as far as demand goes, and whether it's really true new demand or whether it's just pipeline loosening up. And then secondly on the higher CapEx for the year, can you just sort of identify which areas you’re really putting the capital of use?

James Crowe

Yes, with respect to your first question, we've been I believe fairly consistent starting at the beginning of last year, that we thought the wholesale customers would delay purchases as they tried to accommodate the severe issues in the credit markets that wholesale customers can defer purchases for a fair amount of time since they are estimating demand three, four quarters out. That's the type of period you need to solicit, choose someone, have that person provision and then you to -- the wholesale customer has to provision test and turnout. And when you're dealing with unit growth, take your number, 40%, 50%, 60%, you’re looking out quite a ways in order to accommodate that growth. We said we expected that freezing in customer demand to perhaps last four quarters, three quarters, five quarters. And I think that estimate, which Jeff Storey made a year ago, is fairly accurate. We think we're seeing all sorts of demand. It's very difficult to say how much that it is from deferred purchases that should've been made or could have been made earlier and how much is new demand. When you're compounding unit growth at 40%, 50%, 60%, that’s a very difficult question to answer. But over any length of time, obviously, it's new demand that drives the wholesale customer. And I might add, a lot of large enterprise data center, the social networking sites or social networking industry that Jeff mentioned is a good example of folks who have almost the same dynamics. So we would say that we are seeing what we expected and I'd repeat what Sunit said, sales, these are signed orders, are up 15% quarter-over-quarter. And we -- obviously what Jeff said, we had our best Core Network Services sales month ever since we've begun measuring that metric, since we defined it and measured it, in March. So those are all positives. Life doesn't proceed in a straight line. It'll have some ups and downs, but we're feeling much better than we have in quite a while.

Michael McCormack - JP Morgan Chase & Co

Jim, do you or Jeff have any update on provisioning intervals?

Charles Miller

Provisioning intervals, we continue to reduce our provisioning intervals. It's going to be – it’s hard for me to give you a number because each type of order, each type of circuit has a different interval associated with it. But we’ve made substantial improvements. We think we're one of the industry leaders in our provisioning times now. And we continue to set our targets for standard intervals, and then meeting customer requested due dates regardless of the interval.

James Crowe

And this is anecdotal, but Jeff and I were reviewing high-speed waves -- all waves are high-speed, let's call them optical waves. And our intervals are now in the 20s, 20 days, between 20 and 30, which we think puts us in the top tier and becomes a sales benefit, a sales tool. That those kind of intervals, which we think we can improve though, are obviously useful to someone who's trying to guess how much demand they’ve got to meet some number of months ahead.

Sunit Patel

And then on your question on capital. I think we’ve just seen a pretty large increase in the number of opportunities from customers that we can invest capital at pretty short paybacks and I think it's across the board. It's through large enterprise and Federal, it is for our content customers, it is for our wholesale customers. It’s in Europe, both for customer and just general geographic expansion type opportunities. So seeing those go up a fair bit in the last quarter, and we are excited about it because it means more revenue opportunity for us over the next year.

James Crowe

To put that in some context, I think Sunit and I both emphasize that we continue to focus on improving our balance sheet to ensure that our balance sheet becomes a competitive advantage. We've made enormous progress over the last two to three years. And I think it was last quarter or the quarter before, we said we saw all sorts of opportunities to extend our network since it's so large. Just a single tail off on our network gets us to an awful lot of potential buildings with high returns. And we expected we'd begin doing some of that to make sure we have the institutional capability. And I think that's what Sunit's referring to, is just a large number of high return targets that are very close to our network, and we think can be accessed with high returns.

Operator

We'll take our next question from Ana Goshko with Bank of America.

Ana Goshko - Banc of America

I have two, if I may. The first one’s on network grooming by other carriers. The second one’s going to be a question on the cash outlook. But on the first question, last year in the first part of the year, you had a really severe negative impact from grooming by other carriers. And you’ve said in the past that it usually happens in the first quarter on a seasonal basis as other carriers plan for the year. So I wondered to what extent you've been impacted by that this quarter? And to what extent you look forward to potential negative impacts this year, particularly from cable carriers that may be bringing VoIP in-house?

James Crowe

So I'm going to provide some context to that question, and ask Jeff to provide some specifics from his perspective since he tracks this pretty closely. I think last year at this time, we said we didn't have a lot of grooming disconnects that were unexpected. We did think that they were telescoped into the first quarter as carriers moved ahead cost-cutting plans in response to the credit crisis. So the reaction over the year wasn't different than what we expected. The real severe impact was our customers stopped buying. So with that context, Jeff?

Jeffrey Storey

I think that's exactly right. Network grooming in the first quarter of 2009 was much more severe than it was in the first quarter of 2010. So we see a dramatic improvement in that. We have network grooming as part of our business. Carriers are constantly monitoring and managing their network. So it's a reality for us. But we are more focused on growing our business with those customers and looking at places where we can serve their needs and continue to add capabilities to them. So it’s an ongoing issue. It's far improved versus 2009, but it's part of our ongoing business.

James Crowe

And maybe to flesh that out just a bit, take any particular carrier. Jeff mentioned that wireless had been a particularly strong sector for us this quarter. Many of the grooming activities that you were referring to, Ana, came in the wireless sector. Consolidation led to moving, trunking and inner-machine capacity to in-house. That was expected. What didn't happen though is purchases to accommodate demand. And obviously, that's caused some carriers some difficulties, wireless carriers, and now they're back to buying at levels that support the underlying growth. So I would say, yes, grooming was the issue, but -- the proximate cause, but the real underlying issue last year was cessation of purchases by customers.

Ana Goshko - Banc of America

Okay, and my second question is for Sunit. Sunit, you recently announced that you're going to call some of your maturities, $172 million, that are due in 2011. And I'm a little surprised by that because I had expected you to either try to refinance those or exchange them into new convertibles, which you've done quite a bit of in the past. So with the pro forma cash balance below $500 million, I just wanted to get an update on what your comfort level is with a minimum cash balance, and kind of what drove you to take those bonds out at the current time?

Sunit Patel

Well, I think taking the bonds out was pretty easy. It was costing us less than two months -- I mean the payback was less than two months. That's a very high rate of return not to have taken them out for maturities that were coming due in over the next year. With respect to our cash position, we feel pretty comfortable. As I mentioned in our remarks, the amount of maturities, we only have $38 million due this year. The next maturity's not until December of next year. And as always, we tend to be early in terms of maintaining liquidity and/or taking care of that maturity. So given the amount of debt maturities we have remaining this year and next year, we feel comfortable. And as always, we'll continue to be active to look at ways to keep liquidity levels high. And as you know, historically, we always maintain good levels of liquidity.

James Crowe

And the bonds we called were due when?

Sunit Patel

They were due next May, so...

James Crowe

Next May. So they're current.

Sunit Patel

Yes. They're current. Due over the next year. Payback was very good. That compete -- that was a higher return than a lot of the -- even the investment opportunities we look at. Two months payback – two-month paybacks are very good.

Ana Goshko - Banc of America

Given that you don't have a revolver, is there a minimum cash balance that’s your comfort level?

Sunit Patel

Well, I think as we've, again, said in the past, our cash -- we like to maintain good levels of liquidity, it's in the several-hundred-million-dollar range and up, but I’ll just go by high average quarterly cash balance over the last 12 years has always been good.

Operator

We'll move now to Simon Flannery and Morgan Stanley.

Simon Flannery - Morgan Stanley

Sunit, on capital intensity, you have about 5% year-over-year, still in high single digits as a percent of revenue. I think in the past, you sort of said that run rate CapEx normal set of circumstances would be a little bit more of a low double-digit number. Perhaps you could reflect on that, you can help us think about sort of timing of CapEx through the year? And then question for Jeff. Sounds like good momentum in the Large Enterprise and Federal segment. Can you help us understand, is this your install base starting to spend again? Or is the mix more new logos, new wins coming in? Any color around that would be great.

James Crowe

Just in context on Sunit's answer before he picks it up. As you know, Simon, at least I believe we've said repeatedly, the percentage capital intensity is for maintenance capital and success-based capital. The project capital that Sunit referred to earlier where we add to our network, is different from what we're discussing. So go ahead.

Sunit Patel

Yes, I mean Simon, as we've said in the past, the capital intensity is driven by revenue growth. So back when we were growing at 2% a quarter, that sort of range, the capital expenditure was -- and that's 2% sequential, the capital expenditures are about -- running about 12% of revenue. When we weren't growing at all last year, capital expenditures were running at about 8% of revenues, which speaks to the maintenance portion that Jim talked about. So I think as we’ve said, the capital, we believe will increase some more over the course of the year, which obviously means we expect revenue momentum to pick up over the course of the year. So it'll very much dependent on the revenue momentum and the pace of pickup on the revenue side.

Jeffrey Storey

With respect to the Large Enterprise and Federal, it's a mix of our existing customers and new customers, probably a little more heavily weighted to existing customers spending more with us. But we may have one or two circuits with the customer, and now they’re rolling more and more of their traffic to us. It's a good healthy mix of both growing our embedded base, which is a return of confidence in those customers, in our ability -- and our ability to grow and attract new customers. That said, we continue to work very hard with the systems integrators and on new projects within the Federal government, but we're also positioning ourselves with our Networks Contract and our WITS Contract, the Washington area contract that the Federal government buys services on. We're working to get those direct opportunities and expanding the direct business with the government.

James Crowe

Operator, any other questions?

Operator

We have no further questions.

James Crowe

Okay. Thank you, everyone, for listening, and we’ll look forward to reporting next quarter at the appropriate time. Thank you.

Operator

This concludes today's Level 3 Communications, Inc. First Quarter 2010 Earnings Conference Call. Thank you for attending, and have a good day.

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Source: Level 3 Communications Q1 2010 Earnings Call Transcript
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