Is XO Communications Taking Level 3’s Market Share?

 |  Includes: LVLT, XOHO
by: Tech101

Level 3 (Nasdaq: LVLT) pushed out its CFO more than two weeks ago, which was followed by a weaker Q3 earning report and lowered guidance for the full year (see conference call transcript). As business is not ramping up as previously predicted and a quick turnaround remains out of reach, the stock tanked.

What’s wrong with the once hyped competitive telecommunication service provider that is suffering from growing pains?

After a string of acquisitions, including Progress Telecom, SAVVIS, Broadwing, and Telcove, Level 3 has been trying hard to integrate all the pieces into an end-to-end seamless network. However, Level 3 "continues to experience provisioning issues," – meaning they could not complete the network installation and start the services timely.

“The breadth of the problem was greater than we had earlier diagnosed, and we did not increase provisioning capacity as we had expected. This increase in provisioning capacity was necessary to meet the revenue increases we had previously projected,” Chief Executive Officer James Crowe said.

Is XO Communications (OTC:XOHO) taking Level 3’s market share?

As Level 3 Communications Inc. continues to struggle with provisioning issues, XO Communications has increased its network capacity. The just completed 800 Gigabit Core Network capacity upgrade presents another challenge to Level 3’s woes with its newly announcedXO 10 Gigs in 10 Days” Installation Guarantee for High Capacity Network Transport Services.

Starting from November 1 through Dec. 31, 2007, XO promises to provision 2.5gbps or 10gbps transport services within 10 business days or XO will provide a one-month service credit for each year of the customer’s contract to wholesale customers that sign two- to three-year contract terms.

Based on information from the article by Paula Bernier, xchange, Cindy Whelan of Current Analysis notes that the network upgrade and new wholesale offer from XO builds on what the company has been doing over the past year. Last year XO deployed Infinera gear to upgrade its network, she said, and since then the carrier has continually upgraded capacity while also instituting guarantees for provisioning times, service levels and pricing.

In February, XO announced the 3 Guarantee Program, which included a 90-day trial period for new IP transit services, a promise XO would beat any price for 2.5 and 10GB wavelength services, and installation guarantees, said Whelan.

Then, in July, XO came back and offered a best price promise on 1gbps and 10gbps Ethernet services along with 2.5GB and 10GB wavelengths; expanded its installation guarantee to apply to Ethernet services; and continued its risk-free trial offer, she said.

“They’re just continuing to strengthen not only the network capabilities, but on the customer service side, their ability to support and service their customers,” said Whelan. That may enable XO to wrestle some customers away from Level 3. The XO nationwide network connects 75 major metropolitan markets across the United States. In addition to its nationwide network, XO has approximately 1 million fiber miles of metro fiber networks in major markets across the country.

Level 3 was not specific on the provisioning problems, but David Hold, senior analyst for network services at Current Analysis, told xchange on Monday that in the process of integrating its acquisitions, Level 3 made some headcount reductions in the area of provisioning that led to problems in getting services “turned up in a reasonable amount of time.

“We are disappointed by our performance, particularly given the strength of the current market,” Level 3 CEO Crowe said. With bandwidth demand doubling every two years and IPTV gaining momentum, there, indeed, is money to be made as Crowe remains optimistic it will recover. We believe we have identified the underlying causes of our provisioning constraints, and we have begun to implement additional changes. We are focused on correcting this issue as quickly as possible."

Disclosure: Author has a long position in XOHO.OB