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Level 3 Communications (NYSE:LVLT)

Q1 2007 Earnings Call

April 26, 2007 10:00 am ET

Executives

Valerie Finberg - VP, IR

Jim Crowe - CEO

Sunit Patel - CFO

Kevin O'Hara - President, COO

Analysts

Tim Horan - CIBC World Markets

Tom Watts - Cowen and Co.

Mike McCormack - Bear Stearns & Co.

John Hodulik - UBS

Chris Larsen - Credit Suisse

Jonathan Chaplin - J.P. Morgan

Qaisar Hasan - Buckingham Research Group

Ana Goshko - Banc of America Securities

Jonathan Schildkraut - Jefferies & Co.

Donna Jaegers - Janco Partners Inc.

Presentation

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the First Quarter Earnings Release Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session. The instructions will be given at that time (Operator Instructions).

As a reminder, today's call is being recorded. I would now like to turn the call over to Vice President, Investor Relations, Valerie Finberg. Please go ahead.

Valerie Finberg

Thank you, Operator. Good morning, and thank you for joining us on our first quarter 2007 earnings call. With us on the call today are Jim Crowe, Chief Executive Officer, Kevin O'Hara, President and Chief Operating Officer, and Sunit Patel, our Chief Financial Officer.

Before we get started, I would like to remind everyone that some of the statements we will be making today are forward-looking in nature, and involve risks and uncertainties. Actual results may vary significantly from those statements.

Please note that on today's call, we will be referring to certain non-GAAP financial metrics. Those metrics are reconciled to the most comparable GAAP measurement in our press release. The press release, including the non-GAAP reconciliation is posted on our website.

With that, I will turn the call over to Jim.

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Jim Crowe

Thanks, Valerie. Our prepared remarks today will include financial analysis of the quarter and some comments about the balance of the year by our CFO, Sunit Patel, remarks about sales and pricing trends, operational highlights, and a rather detailed discussion of the integration of the acquisitions we have made by our President and Chief Operating Officer, Kevin O'Hara.

Then I will have a few summary comments to make, then we will open it up for questions and answers. Sunit?

Sunit Patel

Thank you, Jim, and good morning, everyone. We are pleased to report a good quarter. We have made substantial integration progress, and benefited from continued favorable industry conditions, in terms of demand growth and pricing stability.

During the quarter we also realized solid revenue growth, and met or exceeded all guidance measures. We completed some significant capital markets activities that reduced our leverage and interest expense. We are also reiterating our guidance for the full year 2007 and 2008.

I will start first with the Core Communications growth. Core Communications Services revenue grew as expected, with strong demand coming from the cable, content, international carrier and financial services segments. Core Communication Services revenue was $870 million, compared to projections of $860 million to $880 million.

Of this $870 million Broadwing and the acquired CDN business contributed $239 million. Excluding the acquisition revenue, quarter-over-quarter revenue growth was over 3%. The growth rate in Core Services revenue should improve over the remainder of 2007.

The pricing environment remains stable, with no discernible change in any of our major service groupings. Our overall pricing trends are largely unchanged from last quarter and remain attractive. More than 90% of our revenue continues to experience annual unit price changes, in the plus or minus 10% range.

High speed IP pricing is declining at a rate of mid-20% per year, but represents about 8% of our total revenues, and is growing nicely, given the strong unit demand growth. We believe our results in revenue growth, indicate that the balance between pricing and demand remains favorable, and should support continued profitable growth.

Customer concentration also improved during the quarter, as we diversified our revenue base. Our top 10 customers represented only 35% of total revenues, including SBC contracts in the first quarter, compared to 45% in the fourth quarter. Beyond our top three customers, AT&T, Time Warner, and Verizon, no single customer represents more than 2% of total Communications revenue.

Other Communications revenues. Other Communications Services revenue were $84 million this quarter, at the high end of our projected range of $80 million to $85 million. Revenue from SBC Contract Services was $83 million in the first quarter, above our projected guidance of $60 million to $80 million.

Cost of revenues, communications cost of revenue increased to $450 million in the quarter, primarily due to nearly a full quarter of Broadwing network expenses. As expected, gross margin decreased to 57% in the first quarter, from 63% in the fourth quarter, primarily as a result of the lower margin Broadwing business, the absence of the 100% margin $12.5 million SBC contract year-end performance bonus, and $8 million in termination revenue in the fourth quarter.

Communication gross margin in dollar terms increased from $519 million in the fourth quarter, to $587 million this quarter. Our Communications SG&A expense excluding non-cash compensation was $415 million in the first quarter, compared to $333 million in the fourth quarter.

The increase in SG&A was primarily due to the additional Broadwing and the acquired CDN business headcount and expenses associated with integration. Non-cash compensation expense was $24 million in the first quarter, compared to $32 million in the fourth quarter.

Turning to our integration efforts, during the quarter our integration expenses related to network expenses and operating expenses were less than the $35 million we expected. We still expect to spend more than half of total network and operating expenses, integration expenses of $100 million in the first half of 2007. Additionally during the quarter, we spent about $16 million in capital expenditures related to integration.

In terms of synergies, at the end of the first quarter, we have reduced our annualized operating expenses by $55 million, and our annualized cost of revenue or network expenses by about $15 million, for a total annualized expense reduction of $70 million. We remain on-track to reach the annualized run rate reduction of $200 million we discussed on the fourth quarter call.

Consolidated adjusted EBITDA was $170 million in the first quarter, compared to $189 million in the fourth quarter, and was at the high end of our projections of $150 million to $170 million. In the quarter, adjusted EBITDA benefited from growth in Core Services, acquisitions, and higher than expected Other Communications and SBC contract revenues. Communications adjusted EBITDA margins was 16% in the first quarter, versus 22% in the fourth quarter.

Capital expenditures. Capital expenditures in the first quarter were $155 million, versus $141 million in the fourth quarter. This increase was due to the addition of Broadwing, integration capital, the buyout of a lease, and support of existing Level 3 customer contracts.

Cash flow. Consolidated free cash flow was negative $248 million during the quarter, versus negative $29 million in the fourth quarter of 2006. While the free cash flow loss was high in the first quarter, it was expected and is mostly related to timing of interest expense payments and normal working capital swings, relating to timing of annual bonus payments, and prepayments to suppliers. In addition, we had acquisition related payments for severance and advisory fees of about $30 million.

Cash interest expense in the quarter was $179 million, compared to our guidance for the full year of $500 million. This implies on average $107 million a quarter of interest expense payments for the balance of the year, which is an improvement of $72 million a quarter from the first quarter, on this one item alone. The balance of the year should generally show working capital to be a source of cash.

Capital Markets transactions, the first quarter was productive in terms of liability management activities. We converted $605 million of in the money convertible notes, raised a total of $2.4 billion in the high yield and senior secured markets, and completed redemptions and tender offers to retire higher coupon debt, with a total principle amount of approximately $1.7 million.

Through these transactions we were able to reduce outstanding debt by $500 million, and reduced interest expense on an annualized basis by over $110 million. As of the end of the quarter, we had long-term debt of approximately $6.8 billion.

GAAP interest expense exclusive of interest income for the first quarter was $165 million, and we expect that to decrease to approximately $138 million a quarter for the balance of the year. We had $892 million in cash and marketable securities at the end of the first quarter.

Projections. For the second quarter, Core Communications services revenue is expected to be approximately $890 to $910 million. Other Communications revenues are expected to be $65 to $70 million, and SBC contract revenues are expected to be about $45 to $65 million. We estimate total communication services revenue of $1 to $1.045 billion for the quarter.

Consolidated adjusted EBITDA is expected to be in the range of $180 to $200 million in the second quarter. At the midpoint, this implies an improvement of $20 million from the first quarter, and we expect that that quarterly improvement will substantially increase over the balance of the year, as integration expenses come down, and synergies from cost reductions in network expenses and operating expenses ramp up.

Our organic growth in the first quarter was over 3%, excluding the benefit of acquisitions in the first quarter. First quarter sales growth was very strong, and gives us confidence that this sequential core revenue growth in percentage terms will improve in the second quarter, and subsequent quarters on a larger revenue base, given the added revenue from the Broadwing and CDN business acquisitions. Also compared to the last two years, we are seeing this revenue growth coming in earlier in the year.

As we indicated in the fourth quarter call, we project $100 million in integrated related expenses for 2007. As we look at our expenses in the first quarter, we were a little lower than that, but we continue to expect to be on-track to the $100 million a month for the full year. In the second quarter, we expect to see the integration expenses ramp up a little higher than the first quarter.

We are ahead of plan in head count reductions, and are tracking to operating expense and network expense synergies of $200 million in annualized savings by the end of the year. The network expense savings that we have talked about will accelerate over the course of the year, as we shift off net traffic to the Level 3 network. We continue to feel confident about our projected 17% annualized growth in core revenues, from the first quarter to the fourth quarter of 2007. Also we remain comfortable with our previous guidance for 2007 and 2008.

In summary, we had a good quarter. Industry conditions for both demand growth and pricing continue to be attractive. Revenues and sales showed strong growth in the quarter. We made material improvements to the balance sheet. Integration is progressing nicely. We still have a lot to execute on the for the remainder of the year, and our liquidity position continues to be healthy.

With that, I will turn the call over to Kevin.

Kevin O'Hara

Thanks, Sunit. Overall the first quarter was a very strong quarter for Level 3. We made significant progress on the integration of all acquisitions, core services revenue grew in-line with expectations. The pricing and demand environment remain favorable, and new sales grew nicely. The effect of all of these factors enabled us to meet or exceed all guidance metrics, and make us comfortable with our outlook for the balance of the year.

Our growth in core services revenue excluding revenue attributable to Broadwing and the CDN acquisition, and excluding termination revenue was approximately 3% quarter-over-quarter. We previously guided to an annual organic growth rate in core service of 17%, and we remain comfortable with that for a number of reasons. The VYVX business is traditionally slower in the first quarter, and this quarter's results reflect that expected seasonality.

We enjoyed a very strong sales quarter and as a result, expect our core revenue growth to accelerate as we go through the 2007. These trends are similar to 2006, where the quarter-over-quarter growth rate started slower, but accelerated as we moved through the year, as the sales from earlier periods were converted into revenue.

In the quarter we finished the realignment of our sales force. We integrated the Broadwing sales people, and spent a tremendous amount of time launching our product set to the combined sales force, and training them on everything from products to Level 3 processes.

We also completed all anticipated risks in the sales organization. Our focus was to ensure that these actions did not come at the expense of the positive sales results we had been expecting. In fact, we enjoyed a very strong sales quarter.

Our consolidated sales were quite a bit higher than to some of the historical sales rates for Level 3 and all acquired companies would have implied. It is difficult to determine with certainty the reasons for this strong sales performance, but it is clear that the industry consolidation has improved the market dynamics from a service provider perspective, and it is also clear that demand remains robust, and the relationship between price and demand is attractive.

We also believe that the breadth of the service portfolio enabled by the combination of our local and long distance networks, is particularly attractive to our target customers. I will take a minute now to walk through the trends and opportunities that we are seeing in each of our market groups.

Our wholesale market group enjoyed a very strong sales quarter, and their funnel of customer opportunities is very healthy. We continue to strengthen our relationships with the cable, wireless, and carrier segments, and our traction with voice service providers continues to increase. Transport IP and VOIP services are driving most of the revenue growth in new sales.

As in previous quarters, we are seeing greater pricing pressure in the transactional business of in solution sales, but we have been able to maintain our pricing discipline and still close a very large amount of new business. Overall, the pricing environment and rates of compression were consistent with the levels experienced throughout 2006.

Of our four market groups, business markets had the most organizational change this quarter, as we combined the Broadwing enterprise activities, and began repositioning our product set and sales force. The business market sales force is largely made up of people from either TelCove or Broadwing.

The Broadwing sales force was characterized as having relatively high sales productivity, but low gross margin and higher churn. TelCove on the other hand, had relatively low productivity, but very high gross margin and very low churn.

As Level 3 goes forward, we are targeting a combination of customers, locations, and products that allow us to leverage our extensive assets, and drive an aggregate result that is higher in both sales productivity and gross margin.

We are confident that this is achievable, as we sell the targeted services to on net customers. As a result of the very different market dynamics in the enterprise sector for facility-based service providers, we are not seeing the type of pricing pressure here that characterized the wholesale business previously.

Our Content Markets group continued to see very strong demand in growth from both our existing customers, as well as new customers. The integration the CDN acquisition is a key part of the content market group's challenge and opportunity this year, but this integration is much simpler than that required for the physical network-base companies.

We have been working on refining the initial product set, and preparing the systems and servers for product launch. We intend to launch the service in the second quarter, but do not expect the CDN business to contribute in a meaningful way in 2007. Our European market group saw significant growth particularly for IP and colocation services. The largest sources of demand were the content, carrier, and cable customers.

Our Top 10 customers for the quarter in alphabetical order were AT&T, Alltel, Comcast, Commonwealth of Pennsylvania, EarthLink, Qwest, Sprint, Time Warner, Verizon, and Vonage. The Top 10 customers represent 35% of total communications revenue, and without the SBC contract revenue, 29% of communications revenue.

In the fourth quarter, the Top 10 customers represented 35% of Total Communications revenue with SBC, and 36% without. The diversification of our customer base continued to improve this quarter, and we expect this trend to continue over the course of the year.

Moving to integration. This quarter we also made good progress in the overall integration front. We have now had approximately one quarter to add Broadwing and the CDN business, to the already complex integration challenge that ran through most of 2006. Importantly, we have not had any unpleasant surprises from the new acquisitions, and we are pleased with the progress to date.

The total head count for the business went down faster than anticipated during the quarter, and we are on-track to complete the great majority of all reductions by the end of the third quarter. As I mentioned earlier, a key objective during the integration process, is to make sure that we do not compromise our sales momentum.

We are equally focused on insuring that the excellent reputation that Level 3 has earned over the years for customer service does not get degraded. It is inevitable that as employees from seven companies learn new business processes and systems, that some inefficiency will be incurred during the transition.

The overall integration effort is tracking within expectations in this regard, and the overall customer experience is still positive. But this is an area that we are monitoring closely. The sales and product integration efforts are progressing well, and all changes should be completed by the end of the second quarter. We currently have between 450 and 500 quota-bearing sales people, and we expect that number to rise as we continue through the year.

From a network perspective, the majority of interconnects for the transport and IP networks have been completed, and we expect to be substantially complete with the physical interconnects in the third quarter. Most of the network operations control centers have been consolidated into Denver and Atlanta, and we expect to be complete with all NOC integrations by the end of the second quarter.

The CDN business required minimal physical integration. We have been focused on training the sales force, augmenting capacity in key locations, and establishing or growing the relationships with the existing CDN customers.

As a result of the addition of the lower gross margin Broadwing business to our results, our reported gross margin in the first quarter was 57%. The gross margin contraction from the fourth quarter of 2006 was expected, but we also expect now to see margin expansion throughout 2007, as we migrate off net services from all of the acquired companies to Level 3 metro facilities. We also expect gross margin improvements as we focus the new sales efforts towards higher margin on net opportunities.

Over the course of 2007, we expect gross margin to increase in to the low 60s in percentage terms, as we progress in each area. The results to-date are encouraging. From the outset, we believe that consolidating the processes and systems that support the entire Level 3 business, was both a key to successful integration, as well as to driving our SG&A costs down over time.

As I have mentioned in past quarters, Level 3 was committed to redesigning our operating support systems independent of any acquisition. As we develop these new processes and systems, we are often working in a hybrid systems environment that has elements of both the legacy Level 3 systems, and various systems of the seven acquisitions. This hybrid environment will continue in varying degrees until the development of the end state systems are completed.

We are getting new systems releases each month during 2007, but this work will continue through 2008. While this is the most complex part of the integration, we remain confident in our end state architecture, and the progress we are making on the execution.

While we are pleased with the integration so far and remain confident in the plan that we are executing against, combining the operations of seven facility-based businesses simultaneously, is complicated and requires a lot of heavy lifting.

All of the planning and much of that heavy lifting is behind us, but much remains to be done. In the IT area in particular, much of that lifting is still ahead of us. I am confident in our plan and in our people, and will be monitoring our performance in this area closely.

One final, but important point on integration, the cost of the integration effort is weighted towards the first half of the year, but since the benefits are cumulative, the savings are heavily weighted towards the second half of the year. The expected improvements in both network expense and SG&A in the third and fourth quarters, contribute significantly to the expected increase in EBITDA in those quarters.

In summary, we are pleased with the results this quarter. Our financial and operational results were strong. New sales closed during the quarter, and the funnel of opportunities are both very encouraging. The integrations are progressing well, and customer demand and the pricing environment remain favorable.

With that, I will turn the call back over to Jim.

Jim Crowe

Thank you, Kevin. At the beginning of this year, we set as our goals two key matters. First, we wanted to substantially complete the work of ensuring our financial strength and viability were unquestioned, and we wanted to ensure we properly integrated the acquisitions we have made.

I am pleased to say that the first goal is largely accomplished. We have reduced net cash interest expense over $110 million on an annualized basis, and we have rescheduled debt maturities in a way that we believe matches our long-term ability to generate cash to service that debt.

Today, I believe our long-term financial viability is clear. A quick look at our debt trading levels versus those of a couple years ago, will confirm the market agrees with that statement. While we see opportunities to improve our balance sheet, we think those are generally at the margin, and we think the heavy lifting is behind us.

Operationally, it is important to note that we expect that the kind of revenue growth and incremental margins we enjoy, will continue to improve our credit quality and financial strength. As Sunit and I have both said, and I want to reiterate, we expect to achieve our leverage ratio goal of total debt to EBITDA in the three to five times range sometime next year.

With respect to our progress in integrating the acquisition we have made, Kevin did a good job of explaining our current status in some detail. I would like to emphasize three points. We understand that this job is our operational challenge and our opportunity and it is job number 1, and we are determined to ensure that Level 3 ends 2007 with one network platform, one set of business processes, and most importantly, with an organization with one set of common values. While we have hard work to do, we are on-track to accomplish that goal.

Before I close, I want to touch on one additional issue that a number of our investors have inquired about. As many of you may know, two of our top 10 customers, Verizon and Vonage are locked in a legal dispute over intellectual property.

We understand that Verizon contends that Vonage infringed on certain of its patents, a contention which Vonage denies. We have been asked, assuming that Verizon might prevail, and Vonage's business is therefore harmed, what effects such an outcome might have on Level 3.

As I said at our Analyst and Investor Conference earlier this year, and Sunit just reiterated, with the exceptions he noted, no customer accounts for more than 2% of our revenue. So while we value every one of our customers, no one customer is in a position to have a material effect on our results.

We have also been asked if we infringe on any of the VoIP, that is Voice-over-IP patents held by Verizon. We operate our network and offer our services in such a way, that we are confident we do not infringe on the subject patents. On a more strategic note we have been saying for quite a while, that protection of our intellectual property is a key matter for our business.

We acquired the CDN assets of Savvis specifically in recognition in this fact. We have a substantial portfolio of patents, covering many areas of our business. We have excellent internal and outside intellectual property council, and they participate directly in our technology and service development. And we believe we are well equipped to both offensively and defensively deal with intellectual property issues.

Thanks for listening, and we will now open the call to questions. Operator, would you please explain the Q&A procedures.

Questions-And-Answers Session

Operator

(Operator Instructions) Our first question comes from the line of Tim Horan with CIBC World Markets. Please go ahead.

Tim Horan - CIBC World Markets

Thanks, good morning. I am always kind of struggling to get some proxy on volume growth and I think data centers might be kind of one way to help us understand what growth was maybe a year ago, and kind of where we are at now.

And maybe if you could talk about that and maybe while we're on the data center business, could you maybe size that for us, in terms of square footage or revenue, and what your utilization is there, because it seems to be pretty strong business these days.

And Jim, do you think in that business you might be better suited operating that more as a neutral provider, like Equinix is doing, and does that limit you a little bit? Thank you.

Jim Crowe

With respect to your third question, we do operate as a neutral provider, in the sense that we certainly don't require anyone to use Level 3's bandwidth, in order to rent racks or cages or space from us, although we also believe that locating our data centers directly on top of our optical IP network, presents a substantial opportunity for our customers.

Those that have bandwidth as a large portion of their costs can enjoy real benefits by locating on our networks and eliminating the expense of the local access expense of getting to a backbone. But we do operate as a neutral provider.

With respect to your question about volume growth, I spent a fair amount of time talking about that at our Analyst and Investor Conference, and I said at that time that volume growth is accelerating, and it continues to be, if by the way, you are talking about IP volume growth, and I assume you are, Tim --

Tim Horan - CIBC World Markets

Yes.

Jim Crowe

Yes, it is accelerating, and it is well over 100% at this point. I also, and I would refer you to my comments, cautioned in many ways that those kind of metrics have to be carefully scrutinized, and have to be part of an overall context.

The business is changing. The mix of edge versus backbone is changing, and we are seeing real substitutability with Ethernet based products, private line, waves, and IP. So comparability is really tough, but IP growth on our backbone is accelerating, and is well over 100%.

Kevin, do you have any comment on the data center business, and growth in that business?

Kevin O'Hara

I guess from our perspective, the number one point, Jack Waters at the Investor Conference went through some of the physical metrics, the physical metrics of our colocation business.

We continue to opportunistically augment some of those facilities, to support the ongoing sales. We are not actively looking at building new data centers. Our utilization rate varies by market.

It's very, very high in the Tier 1 markets. It's a bit lower in the Tier 2, Tier 3 markets, but that industry in terms of the raw data center, is tracking towards more real estate rates of return, and requiring tremendous amounts of capital, to add the power and cooling required, to support needs of internet-based companies and data center applications.

We think we can get better return by focusing on our network assets, and augmenting as I said, on an opportunistic basis our data centers. And working, more importantly, or as importantly, with other independent data center operators and data center owners that need connectivity to make their data centers valuable.

So we are kind of coming at it from a multi-pronged approach, not looking at this time to put significant new capital in new data centers.

Jim Crowe

I want to emphasize Kevin's last point. Data center business, the colocation business is a good business. Volumes are growing. Prices are going up, not down.

However, we believe that our capital is better allocated to expanding our network in the metro, given changes over the last three or four, five years in the industry than any other place.

We see almost limitless opportunities to expand our network in the metro. Certainly, for quite a long time, given the moves, or the increases in the wireless business and in broadband to residences. And that is where you should expect us to allocate our capital.

Tim Horan

Thank you.

Jim Crowe

Next question?

Operator

Our next question is from the time of Tom Watts with Cowen and Company. Please go ahead.

Tom Watts - Cowen and Co.

Good morning, everyone. Couple of quick questions. One, what was the purchase price for the AT&T assets, and could you comment on how those will be integrated and help in your drive to on net traffic?

And then second, as you are focusing more on solution selling and particularly in the business and media sectors, could you comment on any additional product capabilities you would like to see, and could we see acquisitions focused on the product side, or technology side?

Then finally could you comment on customer receptively so far onto offering the CDN services with the SAVVIS assets, and do you see adding more other types of CDN products, other than what the SAVVIS assets are best suited for?

Jim Crowe

Yes. I am going to ask Kevin to answer the first question. Your questions two and three are actually related. That is, would we consider acquisitions of product or technology or both?

We have done a number of such acquisitions over the years. Most recent is the CDN assets, where we were focused on acquiring the intellectual property, the enabling intellectual property from SAVVIS to allow us to offer CDN products.

And with respect to your second question, we have our product rollout, as Kevin explained, coming up here in the next month or two, and I think we are better, we wouldn't be rolling it out if we didn't already have solid indications of interest from a broad range of customers.

Remembering that we serve today, that is Level 3, today serves both emerging media companies, a broad range of so-called new media companies, and traditional media companies.

All the networks, all the sports leagues, many of the news organizations, all are current customers, as well as those newer media companies, the mega-portal companies, the video companies, those that are offering video online, etcetera. So we have contacts, and we believe that we have receptively.

With respect to additional product offerings, yes, you should expect those. We spent quite a bit of time at the Analyst and Investor Conference talking about how early we are in the development of mega file, mega content offerings over the Internet.

How today it is largely short form video. It is largely low quality, with respect to what consumers are traditionally used to having, and depending on what part of the video market you are talking about, there is a different answer technically, in terms of the product that best suits today's mix, and that mix is changing. So you should expect to see us offer additional services, additional technical developments over the coming quarters. Kevin?

Kevin O'Hara

Yes, on your question on AT&T, that acquisition total consideration was under $5 million. There were roughly 200 buildings that we acquired from AT&T as part of their required divestiture, as well as the fiber to connect those buildings back to a Level 3 facility in each of those markets where the buildings were.

We said earlier in the year that our goal this year was to grow on that building by 750 to 1000. Along the way we assumed we would be constructing many of those.

This is effectively a buy versus build analysis, where it was favorable for Level 3 to acquire both the rights and the fiber to those locations from AT&T, rather than constructing them all ourselves.

Jim Crowe

Next question?

Operator

Our next question is from the line of Mike McCormack with Bear Stearns. Please go ahead.

Mike McCormack - Bear Stearns & Co.

Thanks, guys. Can you just give us a sense on the EBITDA for second quarter? You have got the run rate of synergies that I think you said $70 million, which I assume has been ramping and got to that level towards the end of the quarter.

So there must be, you have got integration potentially a little bit higher, but maybe the puts and takes on how we got the guidance for next quarter? Then secondly on the Top 10 customer base, can you give us a sense for maybe how that revenue is tracking as a percentage of revenue excluding the M&A transactions, so sort of an organic run rate of the Top 10? Thanks.

Sunit Patel

Let me, I will take the question on the EBITDA for the second quarter. A couple of things. I think, one, we had said at the beginning of the year that first quarter, the midpoint of guidance was 160, and we improve on average, on average about $40 million a quarter.

So if you look at that from that perspective, 160 plus 40, you would be at 200. That would be 360 for the first half of the year. What we are reporting is 170 for the first quarter, the second quarter is 190, the midpoint, so we are still at 360. So the first half outlook really hasn't changed from what we said previously,

There is a timing shift, and as I indicated in my comments, some of that timing shift is related, relates to the timing of integration expenses, a little lighter than we thought in the first quarter, a little more than we think in the second quarter.

I think probably the most important thing is that we are managing, if you look over the course of the year, we are managing three different curves. We have got integration costs. We have the synergies from operating expenses, and synergies from network expenses.

So if I go through each one of those with respect to integration expenses, we expect them to be much heavier first half of the year, and then ramp down second half of the year.

The operating expense savings, we will see those coming in first half of the year, some in the third quarter, and then that will slow down. The network expenses start slower at the beginning, they accelerate over the course of the year.

So when you add all those curves together, that adds to the point that Kevin was making, is that we will see, while we have saved $40 million on average every quarter, you will certainly see that weighted more heavily towards the second half of the year compared to the first half of the year, as Kevin was explaining.

Mike McCormack - Bear Stearns & Co.

Sunit, can you sort of break apart…

Jim Crowe

When you said network expense, network expense savings will accelerate throughout portion of the year.

Sunit Patel

Yes, network expense synergies or savings, yes.

Mike McCormack - Bear Stearns & Co.

Can you sort of break apart those two, are the networks coming in later in the year, what percentage or dollar amount of synergies are you expecting from each?

Sunit Patel

Well, yes, we said of the $200 million in savings, we said about $120 million would come from the operating expense side, and $80 million will come from the network expense side.

And as I mentioned today, of those numbers, you know, of the 120 in operating expense savings, by the end of the first quarter we achieved $55 million, and of the $80 million in network expense savings, we achieved about $15 million.

And looking at it today, I would say on the margin, we probably expect the network expense savings to be a little better than that, as we go through the year.

Mike McCormack - Bear Stearns & Co.

I am assuming those run rates were more achieved towards the end of the quarter as the process went on.

Kevin O'Hara

That's right, that's right. Okay. And Mike, could you quantify if she is not quantify, but clarify your second question please about…?

Mike McCormack - Bear Stearns & Co.

Just trying to get a sense on the Top 10 customer base, and what they represent as a percentage of revenue. Obviously your M&A transactions have reduced their overall percentage, but the base itself, you know, how stable is the environment?

I guess AT&T was making comments about, you know, it is maybe a little more sticky to bring the revenue that you guys have from them back on net, outside of the SBC contract from WilTel, but legacy AT&T stuff, maybe a little more sticky, maybe takes a year or two, but there is still in their opinion, an opportunity move some of that IP traffic back on net, so just trying to get a sense for how stable that Top 10 customer base looks?

Kevin O'Hara

Yes, I would, we are pretty comfortable with the revenue in dollar terms the revenue has been growing. The types of business that we have with all of those customers we think is pretty important. Some of the business that we have with those customers we think is pretty important. Some of the business that we have with those customers moves around on a month-over-month basis, and changes within each acquisition.

For instance, Commonwealth of Pennsylvania wasn't even a customer of ours until the TelCove acquisition. And as we have seen industry consolidation, we have seen the mix of revenue from some of those Top 10 customers move around. Voice, for instance, moves off fairly quickly.

IP has moved off pretty quickly in the past, and we pointed that out in 2006, for instance. But overall we are pretty happy with both the mix of business that we have, the stability of that business, and that base on our Top 10 tends to be growing in absolute terms, despite all of the moving parts.

We are pretty pleased with the trends, in terms of percentage of our overall business, which is decreasing, but in absolute dollar terms, actually increasing.

Jim Crowe

Yes, I think it would be important to note that each of the companies in our Top 10 list, particularly carriers, are going do their best to manage their network expenses, just as we do. And there will be continuing opportunities, I am sure, for the larger integrated organizations to manage those expenses, particularly in service territory.

Our goal is to be their out of service territory partner of choice, particularly in those areas where we have invested substantial amounts of money in metropolitan facilities and acquired companies that have invested many billions in facilities.

So we believe there is a very large opportunity to serve their out of service territory needs, and that that opportunity is not in conflict with their desire to manage their network expense, and in fact is generated in no small part by their desire to manage their network expense.

Mike McCormack - Bear Stearns & Co.

I guess we heard the buy versus build decision on some of these, as you are pointing out, out of reach circuits tends to favor continuing on with third-party providers…?

Jim Crowe

It is pretty tough, particularly in those areas where somebody has density and existing network to justify a Greenfield build. I don't have the number handy, but if you look at the investments made by all of the companies we have acquired, it is a very large number measured in the tens of billions.

Mike McCormack - Bear Stearns & Co.

All right. Thanks a lot, guys, for the color.

Jim Crowe

You bet.

Operator

Our next question is from the line of John Hodulik with UBS. Please go ahead.

John Hodulik - UBS

Okay, good morning. First question is for Kevin. If you could provide a little more detail about the strong pipeline you talked about in the first quarter. You know, it is especially impressive given the consolidation of the sales force, but can you talk about whether or not it is due to just a stronger industry environment and because of pricing, or do you guys think you are taking market share in those wholesale segments?

Second, question for Jim, what are you seeing in terms of the M&A environment? Any change since we last talked at your conference, anything out there look particularly interesting, or any holes that you guys are looking to fill at this point? Thanks.

Kevin O'Hara

I will take the first question, John. It is hard to pinpoint the exact source of the increased sales, but the sales in absolute terms did increase from some of the parts. We believe that the industry consolidation, both that that we led and that we were the direct beneficiary of, or direct beneficiary of someone else's actions is a probably a more accurate way to put it, is a big part of that.

Importantly, though, we are seeing demand accelerate. We are seeing customer requests increasing for services that we previously sold. Transport services and IP services are the poster children for that, as Jim mentioned earlier. IP, we have been seeing increasing demand, not a leveling off of demand.

We have also seen, when we have brought sales folks in from various companies, that the portfolio of products and geographies that are available through the Level 3 network, are greater than what any of those companies previously had, and with each successive acquisition, the portfolio of products and geography available to the legacy Level 3 sales force is also greater than what we had before, and our ability to go back and upsell to existing customers, is probably outpacing what we had anticipated. In fact, it is not probably. It is outpacing what we had anticipated.

The power of having metro facilities in 120 markets, plus a very large transport backbone, plus one of if not the largest IP backbone, is presenting a compelling proposition to many of our customers, and we think that we're seeing the benefits of that, and the pricing environment, while I said that, you know, there clearly is pricing pressure in some of the transactional markets, our closing prices for our solution sales do not appear to be getting effected by that, and in some cases, we continue to see pricing increases despite some of that transactional pricing pressure.

You put all those things together, and it falls into the category of we want to know why, but right now we are pretty happy with the results, both what we have closed, as well as the funnel that we continue to track. The funnel does not look like it's decreasing. The funnel looks like it is holding steady, perhaps potentially increasing a bit.

Jim Crowe

I would also comment on something that Kevin said a number of times previously. That is our wholesale group is a larger user of our metropolitan facilities than our business markets group. That is simply another way of saying what Kevin said. When you can offer an end-to-end service, including the metropolitan facilities that we now have in 120 cities, it is a very compelling proposition, when combined with the kind of advanced services that Level 3 traditionally had.

With respect to your question about M&A, I will start with the qualifier we always start with. Until we are comfortable that we have one platform, one set of business processes and one organization, we are not going to take on, the hurdle for any acquisition is going to be, that might affect that outcome and goal is going to be quite high.

The M&A environment we think continues to be robust. We still think that consolidation is sensible. At the end of the day, this is a scale business. We have made no secret of what we think is desirable. They come in three categories. We repeated it in our Annual Report.

We have backbone acquisitions where we can combine customer bases, and reduce facility and operating expense. We have the really important acquisitions that expand our metro footprint. There it is a build versus buy. We have no doubt that we would be building, but where we think the buy improves present value of our efforts, we will do it.

And then finally, it is back to a question asked earlier, where we think we can add a capability, an important piece of intellectual property, a technology, we will certainly do it. That is a capability. But until we are comfortable that we have our arms clearly around the integration effort, the hurdle is going to be very high.

John Hodulik - UBS

Great, thank you.

Operator

Our next question is from the line of Chris Larsen with Credit Suisse. Please go ahead.

Chris Larsen - Credit Suisse

Hi, thanks. Jim, you mentioned in your comments that you are seeing IP growth in excess of 100%, and I wonder if you can give us an idea of where you see that coming from? Is that the shift from TDM over to VoIP? Is it IP video? Is it just Internet traffic in general?

And maybe there is a way you could also classify perhaps by type of creator of that, whether it be a net, internet content company versus an enterprise company, or a TelCove, another TelCove who is handing you that much more traffic? Where are you seeing the pockets? What is sort of the leader of that incremental demand?

Jim Crowe

It is not often we get asked a question that we can give a really, really clear black and white answer for. It is not Voice-over-IP. That is certainly a rapidly growing part of our business, but Voice is not a large consumer of bandwidth in relative terms. It is not enterprise.

In fact, in the future, I think enterprise adoption of video for various reasons, of moving images, as opposed to static is going to be another accelerator of traffic.

Today, traffic is being generated by video to consumers, by content, mega-content files to consumers. We see it. We measure it, and the sources to your question are the usual suspects you read about. The new generators of video content that people are excited about, video distributors on the Internet; social networking sites are increasingly becoming exchangers of video and photos, which are very large.

You see quite a number of pay sites now that offer rather short form video, some larger form, larger file content, and traditional media companies. I mean you, I am sure you read the same things and see the same things we do. We don't know of a traditional media owner, sports leagues, those that own big libraries of desirable entertainment content, who aren't actively exploring monetizing that content over the Internet.

And I would repeat, we are at the very early stages of the impact of mega-content on the Internet. In fact, take a look at our Annual Report, this is a subject explored in a great deal of detail in the report we just mailed. There is a special insert that talks specifically about the effective content on our network, and on the Internet broadly.

Chris Larsen - Credit Suisse

Jim, is there any differentiation in the profitability of an IP traffic, if it's VoIP versus video versus a normal web page, or an e-mail?

Jim Crowe

Yes, even today, a VoIP, or a voice bit that either originates or terminates on the public switch telephone network, is priced 2 or 3 orders of magnitude higher than a VoIP bit that originates and terminates on a broadband connection.

Let me say that again. If it costs you $0.02 a minute at either end to originate or terminate on a cellular call or a land line call, you are paying roughly 1500 times per bit, what you would pay if it both originates and terminates on a VoIP, a broadband connection.

So obviously there is a big arbitrage of opportunity, and there are lots and lots of folks who are moving to take advantage of that. We have said for quite a while that over time, and it's going to be a long time, it's not going to be a few quarters, we don't see any reason to think that voice is going to be distinguished from other forms of bits on broadband connections.

That is like e-mail, it isn't free, but you don't pay any incremental costs for it. It is part of your broadband connection.

So VoIP, Voice-over-IP is going to have a product cycle like every technology business. Today it is exciting. It has a lot of margin in it, but it is going to over time be squeezed down. That's why we are focused on content so heavily, because that is the exciting opportunity for the future.

Chris Larsen - Credit Suisse

Thanks.

Operator

Our next question is from the line of Jonathan Chaplin with J.P. Morgan. Please go ahead.

Jonathan Chaplin - J.P. Morgan

Good morning, thank you. So two quick questions, if I may. Firstly, I am wondering if you can give us what the sequential growth in organic revenue was, in the fourth quarter a year ago, compared to the 3% that you reported this quarter.

And then as I look out to guidance for next quarter, it looks like you are looking for sequential organic growth of about 3.5%. I think the number a year ago was 2.5%, so looks like you are seeing a steeper acceleration sequentially this year than last year? I just wanted to make sure that was correct.

And then finally, the EBITDA number this quarter was definitely very impressive relative to what people were expecting. I am wondering if you can give us a breakdown of how much of the upside came from the higher SBC contract revenues versus, you know, potentially higher EBITDA than you expected from just the underlying Broadwing revenues versus synergies, and then what the integration cost component was?

It seems like integration costs are probably higher than expected, so given that you weren't laying off people faster than expected, seems like it's particularly impressive in the context of that. Thank you.

Kevin O'Hara

Jonathan, this is Kevin. I will take the first one. Last year, if my memory serves me, Q4, to Q1 '05 to Q1 '06, core organic growth was about 2%, and we said at that time that we were anticipating 20% annualized growth organically over the course of the year. We started at 2, we ramped up a little bit in the second quarter, but we came in, in excess of 20%. I want to say it was 23 or 24%.

Sunit Patel

23.

Kevin O'Hara

On a fully annualized basis, but it was in excess of 20% for the year starting with 2%. This year we have got a much bigger base, so we are guiding to 17%, and we are off to a better start. So the ramp is actually less steep than last year, not more steep. So that is why we are feeling quite good about it.

Jim Crowe

Well, I know

Jonathan Chaplin - J.P. Morgan

Stronger earlier in the year.

Jim Crowe

I know everybody on the call understands compounding even better than I do, but just for reference, a 4% quarterly growth is 17% annualized, so, and we said this quarter we were a bit over 3. So we feel pretty good about, and for the reason that we have expressed our confidence in our full year guidance. Sunit.

Sunit Patel

On the EBITDA question, some of you are right. Some of the out performance was due to the SBC contract, SBC contract. As we said before, that is pretty low margin, on the margin that is 20% incremental margin. So compared to the midpoint of our guidance, you can see that was only a small part of the contribution of our performance. I think some of it, as you pointed out, was just better performance in the overall business.

On the integration costs, it is a little different than what you indicated, because you are right, we had quite a bit of reduction in head count, but some of that was voluntary, so that we didn't incur as much in integration expenses, and then we had some timing-related efforts on integration expenses, which is why I say that the integration expenses were a little lower in the first quarter, and some of that is timing related and will increase in the second quarter, but overall, you are right. That is why we said we think that the first quarter was a pretty good quarter in terms of profitability.

Jonathan Chaplin - J.P. Morgan

Great. Thank you very much.

Jim Crowe

I had a comment that for two years now we have seen a ramp in '05 and '06 both in core revenue. We have seen a ramp from first quarter to fourth quarter. That is for variety of reasons. I think Kevin talked about them in his remarks, but that has been typical at least for the last couple of years, where we start the year in the 2, 3%, and ramp up to the 6 to 8 quarterly sequential growth, and we are not, certainly not guiding for that kind of a ramp. It does underlie our confidence in 17% growth for our core revenues for the year.

Next question?

Operator

Our next question is from the line of Qaisar Hasan with Buckingham Research. Please go ahead.

Qaisar Hasan - Buckingham Research Group

Yes, hi, good morning. I had a couple questions more on future growth in revenue. The first one was on your data centers. Now you mentioned that especially in some of your Tier 1 markets you have got fairly high utilization rates, and since you're not willing to invest in adding new capacity with them, I am just wondering if you face somewhat limited growth prospects over there, at least in terms of square footage growth, and whether or not that could be a drag on your drawn supported infrastructure category revenue growth metrics in the last few quarters, and also going forward?

And related to that, to the extent that you feel like you are better off investing money in other areas where the returns are higher, would you ever actually consider selling this business off to someone who could perhaps do a better job with it, and then reinvest those proceeds in to some of your higher margin, higher return businesses?

Jim Crowe

I think with respect to your first point about whether our investing, or our indication that we wouldn't be looking to invest substantial funds in growing our data center, will cause a drag on transport. I think what we would say is we are not investing in our data centers, because we see enormous opportunities to invest at much higher returns in metropolitan facilities, and we believe that the result of those investments will be a much, much bigger contributor to transport growth, than anything we would see out of data center.

With respect to selling our data center assets, we don't see that as in the cards at this time. That is a strategic matter for certain of our customers. Certainly there are those who are colocation customers of ours, and we should make a point here.

When we talk about our customers in our facilities, that is not comparable to the kind of data center services that maybe some other companies offer, which is a rich set of server maintenance, perhaps even application hosting, a broad range of services.

What we offer is colocations. Space that has at its core, core value proposition, access to a very robust set of optical and IP assets, that go very deep and very broad across the country. And for a number of our customers, that is a strategic matter.

That is a real benefit. They don't come to us because they are looking to outsource management of operating of server operating systems, or share environments, or looking to reduce server expense. That is the business of other people. They come to us because they are trying to manage the bandwidth costs, and locating on top of our network provides just such an opportunity.

Qaisar Hasan - Buckingham Research Group

Okay. The other question I had was on government revenues. Obviously you were part of one of three short listed, for the network university contract, I understand you guys are actually bidding on your own for the smaller portion that comes up for a final decision I guess in a couple of months.

Can you give us a sense of how accretive some of these contracts would be for you, whether you think that you would generally expect to kind of maintain the market share that you have in the government side right now.

Kevin O’Hara

Yes, today while we are pleased with the government business in terms of market share of the overall government spend, it is extremely modest, and our expectations in the future is that it remains modest. There is no expectation that we grow materially as part of any of our thinking of the future.

That being said, that doesn't mean that we are not attempting to. We are, we are a party to one of the success, not short listed, but successful bidders, but just for a very select set of services, something that is going to be a nice contributor, but not material in the overall scheme of things.

And we are, and have for two or three years now been participating directly, pursuing the enterprise portion of the government contract, even if we were to get an award there, we wouldn't see any contribution in '07, and it is doubtful that even any contribution in '08 would be meaningful.

So we are still active in the government market. It is a nice incremental market for us. We are not expecting at this time that government does anything that moves a needle for us, at least in the short-term.

Jim Crowe

And I would comment further that I think both Kevin and I have said at the heart of our business strategy is selling the right services, to the right customers, in the right locations. That is what we believe results in superior gross margins, particularly incremental gross margins, and superior EBITDA margins, particularly incremental.

And that means selling on net services that scale rapidly. We generally don't see ourselves as purveyors of managed services, complicated customized services, in much of government contracting, that is precisely what the government's looking for.

We much prefer to say here is the set of services we have on net, very high speed, very scalable services, and ask where can we sell those services, either as a subcontractor to others, where we can add some value, or in a limited set of places where the government may wish to buy those services. Now, there is always exceptions. There is always opportunities at the margin.

But in general, that is what drives our strategy. So on net services that scale rapidly that result in kind of margin performance that we are seeking.

Qaisar Hasan - Buckingham Research Group

Thank you. That is very helpful.

Operator

Our next question comes from the line of Ana Goshko with Banc of America. Please go ahead.

Ana Goshko - Banc of America Securities

Hi, thank you. On your leverage profile goals, if I take the high end of your 2008 EBITDA guidance, which is 1.3 billion and then your debt balance, which there aren't really any material maturities coming up, I get to about 5.3 times at the end of '08, and your intentions are more aggressive than that.

You said that you would be able to achieve somewhere between 3 times and 5 times sometime within '08. So wondering what your intentions are to really meet those more aggressive leverage reduction goals?

Sunit Patel

Ana, you know, just as this year's indicative of last year, next year less so, but if you look at the annualized EBITDA, even over the course of next year, and maybe 1300 is a good way to look at it, I think we approach the 5 times just from an operational perspective.

At the same time, keep in mind we have always been active in terms of liability management, so depending on this year and next year, we will continue to have the opportunity to look at various liability management activities, either in terms of outright reduction, or paydown of debt, or equity type of opportunities that are accretive to our shareholders.

So I think when you put all of that together, we continue to be pretty comfortable that we should be, you know, within that range or approaching, you know, or going through the top end of that range over the course of next year.

Jim Crowe

Yes, if you just take the average EBITDA, and assume that there is a slope, that is that the first quarter is less than the fourth quarter, you can see that why we have confidence, at 1.3, that is 5 times, it would be $6.5 billion in debt and we are at 6.8. So if you simply assume there is a slope to the quarterly EBITDA performance, I think you can see why we would say what we have said.

Sunit Patel

Keep in mind our cash position is pretty healthy now, we don't have much in the way of cash flow losses. Actually as I say, we could pay down a few hundred million dollars of debt gets us there, so again, we remain very comfortable with that.

Jim Crowe

Okay.

Ana Goshko - Banc of America Securities

Okay. Great. Thank you.

Jim Crowe

Next question?

Operator

Our next question…

Jim Crowe

Excuse me, operator, I think we have time for two more questions. We’ve actually gone a bit over here today.

Operator

Okay. Certainly. Our next question then is from Jonathan Schildkraut with Jefferies. Please go ahead.

Jonathan Schildkraut - Jefferies & Co.

Thank you very much. Most of my questions have been asked and answered. But if you could spend a little bit of time on the transition of the CDN assets from Savvis to your sales, I would appreciate it, on Savvis' call last night they pointed to about $4 million from the CDN business.

I think that you said that you got about $3 million of revenue from that business during the quarter. That seems to be a run rate that is higher than actually I would have expected, based on where that business was a year ago? I am wondering if already that business isn't just seeing some organic growth, just based on the overall demand for that type of service?

Jim Crowe

Let me make a couple points. The whole CDN business today is between $500 million and $1 billion. If we expect that that is what the business would be, we wouldn't be taking the actions we are taking. I think we would have lots of company when we say we expect explosive growth in the CDN business. That is point one.

Point two, we already have both new media and traditional media customers. We spend a lot of time with them, and in no small part our actions come from talking to them, and hearing what they believe are the services they want, and we think want from us.

Third point, when we acquired the Savvis assets, we said that the important matter was acquiring the intellectual property associated with those assets. Let me be very clear here. Savvis and the successor companies to the Savvis CDN, hold and now we hold foundational patents. Fundamental patents in Content Distribution.

As we all know, and as I have repeated in this call, Intellectual Property is a battlefield, and we expect that that battlefield will widen, it is a key matter for any business that has intellectual property, they either want to defend, or be more offensive about, and we expect to be participating in both activities.

Savvis, the acquisition of Savvis was primarily aimed at insuring we had the intellectual property to allow us to offer a set of services, not just this year, but in the coming years. Kevin said today we don't expect CDN to be a material contributor to revenue this year.

But we expect it to be a very large contributor over the next few years. The amount we get currently from CDN, we view as immaterial, and you should expect that we want a much, much larger piece of the overall CDN market, which we expect to grow explosively.

Jonathan Schildkraut - Jefferies & Co.

Okay, thanks. Can I ask one more question about this? At the time that you looked at the CDN business, did you consider buying all of Savvis, considering their fiber backbone is two strands of Level 3 fiber?

Jim Crowe

I think we will dodge that question for what I hope are obvious reasons. I think we have time for one last question. Operator?

Operator

Thank you. The final question today will be from the line of Donna Yeagers with Janco Partners. Please go ahead.

Donna Jaegers - Janco Partners Inc.

Just under the wire. Thanks. One quick question, you guys reported about $31.8 million in IRU sales. Can you clarify, are you selling dark fiber again, is this wavelengths, what sort of customer base are you selling it into?

Sunit Patel

Yes, I think we had a very strong quarter with respect to IRU sales, which is why the deferred revenue balance went up, and as we indicated in the press release, you know the government channels was one of them, the wireless channel was another. But I think in general, we are starting off the year pretty strong with fiber sales. Kevin anything you need to add to that?

Kevin O'Hara

It is both fiber and transport services, both metro and little bits of inner city, but we are not, we are not big in pushing inner city dark fiber sales.

They tend to be very, very opportunistic and very selective, but we are seeing pretty strong demand in the metro markets and inner city markets for transport services, so it wasn't one trend that dominated that 31. It was pretty robust demand across geographies and services.

Jim Crowe

All right, Operator. That's the end of the call. And thank all of you for listening.

Operator

Thank you ladies and gentlemen. Today's call will be available for replay beginning at 5:00 p.m. Eastern Time today, and running through May 3rd at midnight. You may access the playback by dialing 320-365-3844, and entering the access code 869890. That number again is 320-365-3844 with the access code 869890.

That does conclude our conference for today. Thank you for your participation. You may now disconnect.

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Source: Level 3 Communications Q1 2007 Earnings Call Transcript
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