Competitor Insight #43.2007: Level 3 Communications, Inc.: Despite debt load, recent acquisitions show promise

This market research report on Level 3 provides a comprehensive analysis and review of its 2Q07 strategies, operational and financial metrics. The report covers the key strategic issues facing the company and provides forecasts on its operations, notably we analyze in-depth recent acquisitions and how they combine with the firm’s existing debt load to influence its ability to sustain growth. We devote extensive coverage to Level 3’s financial performance and forecasts, highlighting expected 3Q07 results.

Strategic Outlook

Level 3 metro strategy enhances positioning

Industry consolidation positive, likely to continue

Common themes: volume growth, selective price stability

Volume growth should remain robust while prices stabilizes

Risks relating to supply & demand and revenue mix enough to dampen positive mood, however

Risks to our thesis are centered on Level 3’s revenue drivers, namely pricing for backbone capacity

Revenues from competitors may be “at risk”

Integration risk, potential for more deals

Operational Summary & Forecasts

Broadband additions slow in 2Q07

Strategically consistent with recent actions

AOL migration to broadband a slight negative

Sold software reseller business for $287 million cash

Acquisitions accretive, diversify revenues

The acquisitions have increased Level 3’s revenue stream on top of its highly fixed operating cost structure and its highly leveraged capital structure

Metro business has higher free cash flow margin

Revenue diversification and reducing existing costs

Potential upside on SG&A synergies

Financial Summary & Forecasts

Disappointing core results, integration slips

Lowering estimates

Estimates

Valuation

Level 3 rationalizing: telecom space, balance sheet

Transaction deleveraging, FCF accretive in 2008

Further deleveraging, accretive in 2008

Figures:

Table 1: Level 3 Communications segment and metro business margins

Table 2: 2007 estimates comparison

Table 3: Level 3 actual versus IEMR estimates

Table 4: Core communications actual versus IEMR estimates

Table 5: Level 3 balance sheet 2006 - 2009E

Table 6: Level statement cash flows 2006 - 2009E

Table A1: Key income statement data (Dec) 2005 - 2009E

Table A2: Key income statement data (Dec) 2005 - 2009E