Level 3 Communications, Inc. (LVLT)

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Level 3 Communications (LVLT)

Q4 2012 Earnings Call

February 12, 2013 9:00 am ET

Executives

Valerie Finberg

James Q. Crowe - Chief Executive Officer, Director and Member of Classified Business & Security Committee

Sunit S. Patel - Chief Financial Officer and Executive Vice President

Jeffrey K. Storey - President and Chief Operating Officer

Charles C. Miller - Vice Chairman, Executive Vice President, Director, Member of Classified Business & Security Committee and Member of Strategic Planning Committee

Analysts

Simon Flannery - Morgan Stanley, Research Division

Ana Goshko - BofA Merrill Lynch, Research Division

Christopher M. Larsen - Piper Jaffray Companies, Research Division

Michael Rollins - Citigroup Inc, Research Division

Colby Synesael - Cowen and Company, LLC, Research Division

Donna Jaegers - D.A. Davidson & Co., Research Division

Scott Goldman - Goldman Sachs Group Inc., Research Division

Frank G. Louthan - Raymond James & Associates, Inc., Research Division

Michael J. Funk - BofA Merrill Lynch, Research Division

Presentation

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Fourth Quarter 2012 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded Tuesday, February 12, 2013.

I would now like to turn the conference over to Ms. Valerie Finberg, Vice President, Investor Relations. Please go ahead.

Valerie Finberg

Thank you, Kim. Good morning, everyone, and thank you for joining us for the Level 3 Communications Fourth Quarter and Full Year 2012 Earnings Call. With us on the call today are Jim Crowe, Chief Executive Officer; Jeff Storey, President and Chief Operating Officer; Sunit Patel, Executive Vice President and Chief Financial Officer; and Buddy Miller, Vice Chairman.

Before we get started, as a reminder, our press release and the presentation slides that accompany this call, as well as our detailed supplemental schedules, are all available in the Investor Relations section of the Level 3 website.

I need to cover our Safe Harbor Statement, which can be found on Page 2 of our 4Q '12 earnings presentation, which says that information on 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 and in the earnings presentation, 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 and presentation which are posted on our website at www.level3.com.

I will now turn the call over to Jim.

James Q. Crowe

Thanks, Valerie. In our prepared remarks today, as is our norm, Sunit Patel, our CFO, will discuss financial results for the quarter and the outlook for 2012. Jeff Storey will then discuss operational matters, including segment results, provide an update on the status of integration planning and implementation, some general comments about customer service, pricing and other operational matters. I'll then provide a summary, and we'll take questions. Sunit?

Sunit S. Patel

Thank you, Jim, and good morning, everyone. Before we discuss the highlights for the quarter, which can be found on Slide 3 of our presentation, I'd like to review our outlook metrics for 2012.

We expected and delivered sequential CNS revenue growth each quarter in 2012, and our performance strengthened in the fourth quarter as we said they would. We projected capital expenditures to be about 12% of total revenues for the year, and we ended up at 11.7%. Also, free cash flow for the second through fourth quarters in the aggregate was positive $48 million, in line with our outlook.

However, we fell short of our adjusted EBITDA outlook. As noted in our press release, adjusted EBITDA was $1.459 billion for the full year, but included $27 million of onetime net benefit. Excluding that benefit, we grew 18% for the full year 2012, compared to our targeted 20% to 25% growth.

In the press release, we also noted other smaller items that negatively impacted adjusted EBITDA in the quarter by $15 million.

While we did a good job achieving run rate EBITDA synergies, those savings were offset by additional expenses in other areas of the business, such as network expenses for expansions, additions to our sales force and investments in new products and services.

Additionally, and specific to the fourth quarter, we realized higher-than-expected health care costs, entered into a settlement to resolve a long-standing dispute with a large carrier and were affected by Superstorm Sandy, all of which amounted to about a $15 million hit to adjusted EBITDA.

Shifting to revenue on Slide 4. Core Network Services revenue grew to $1.424 billion, primarily as a result of a strong enterprise growth of 2.2% sequentially and 7.8% year-over-year, both on a constant currency basis. Excluding U.K. government revenue, enterprise CNS revenues grew 9.4% from 1 year ago on a constant currency basis.

On a regional basis, North America CNS revenue grew 1.4% sequentially and 4.9% on a year-over-year constant currency basis.

In EMEA, CNS revenue increased sequentially, growing 0.9%, primarily due to a sequential growth of 5.2% in Enterprise. This quarter, U.K. government revenue grew slightly. However, we do expect this revenue to decline over the first half of 2013. Year-over-year, on a constant currency basis, EMEA CNS revenue declined 2.9%, which was an improvement compared to the 8.5% year-over-year decline in the third quarter.

Latin America had another strong quarter, with CNS revenues growing 4.5% on a constant currency basis compared to the third quarter and 14.1% compared to the fourth quarter of 2011. Quarter-over-quarter, enterprise revenue in the region grew 4.2% and wholesale grew 5.6% on a constant currency basis.

Our CDN services revenue grew 18% sequentially. Compared to the fourth quarter in 2011, CDN revenues grew 34%. At the end of the quarter, CDN continued to represent about 2% of our CNS revenue.

Also, voice services and other revenue was $190 million this quarter compared to $195 million in the third quarter of 2012 and $211 million in the fourth quarter of last year. For the full year, also, voice and other was $789 million, a decline of 12% compared to the full year 2011 pro forma.

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