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Level 3 Communications (LVLT)
Q1 2013 Earnings Call
April 25, 2013 10:00 am ET
Jeffrey K. Storey - Chief Executive Officer and President
Sunit S. Patel - Chief Financial Officer and Executive Vice President
Scott Goldman - Goldman Sachs Group Inc., Research Division
Simon Flannery - Morgan Stanley, Research Division
Ana Goshko - BofA Merrill Lynch, Research Division
Colby Synesael - Cowen and Company, LLC, Research Division
Donna Jaegers - D.A. Davidson & Co., Research Division
Brett Feldman - Deutsche Bank AG, Research Division
Timothy K. Horan - Oppenheimer & Co. Inc., Research Division
Frank G. Louthan - Raymond James & Associates, Inc., Research Division
Arun Seshadri - Crédit Suisse AG, Research Division
Previous Statements by LVLT
» Level 3 Communications' CEO Presents at Morgan Stanley Technology, Media & Telecom Conference (Transcript)
» Level 3 Communications Management Discusses Q4 2012 Results - Earnings Call Transcript
» Level 3 Communications Management Discusses Q3 2012 Results - Earnings Call Transcript
Thank you, Kim. Good morning, everyone, and thank you for joining us for the Level 3 Communications First Quarter 2013 Earnings Call. With us on the call today are Jeff Storey, President and Chief Executive Officer; Sunit Patel, Executive Vice President and Chief Financial Officer; and Buddy Miller, Vice Chairman. To accompany today's call, you can find the presentation slides, press release and supplemental schedules in the Investor Relations section of the Level 3 website at www.level3.com.
During our discussions of revenue results today, we will be comparing this quarter's results to prior periods. Unless otherwise noted, all revenue comparisons to prior periods are provided on a constant currency basis. I also want to mention that on our fourth quarter 2012 earnings call, we noted that we were making some adjustments to our revenue reporting disclosure beginning with this quarter. The revenue results will be -- we'll discuss today are based of this new disclosure. For a prior period comparison, please see the supplemental schedules on our website.
I need to cover our Safe Harbor statement, which can be found on Page 2 of our 1Q '13 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 the presentation, which are posted on our website.
I will now turn the call over to Jeff.
Jeffrey K. Storey
Thank you, Valerie. Good morning, everyone, and thanks for joining us for the call. First of all, let me say how excited I am to be the CEO of Level 3. It is truly a great company, and I believe we have great opportunities in front of us. Before we get started, I'd like to take a moment to thank Jim Crowe for his leadership as the CEO for the last 15 years. On behalf of the entire company, we're grateful for his vision, his passion, his drive, not only for Level 3 but how his leadership helped shape the communications industry that we know today. On a personal note, I'd like to thank Jim, and I'm honored by the opportunity to build on his vision and to lead our company into our next phase of growth.
For the call today, we'll follow the usual process. Sunit will provide remarks on our financial results for the quarter, after which I'll provide commentary on our operations and talk a little bit about the CEO transition. Then we'll open it up to questions.
With that, I'll turn the call over to Sunit.
Sunit S. Patel
Thank you, Jeff, and good morning, everyone. I'd like to start with some of the highlights for the quarter, which can be found on Slide 3 of our presentation. Adjusted EBITDA grew 18% compared to the first quarter of 2012. Sequentially, excluding the $27 million net benefit we recognized in the fourth quarter, adjusted EBITDA grew about 2% and was $6 million better than the outlook we provided in the fourth quarter 2012. Our gross margin was back above 60% this quarter for the first time since the Global Crossing acquisition closed.
CNS revenue grew year-over-year and declined sequentially as expected. We expect to see good sequential CNS revenue growth beginning in the second quarter and expect that growth to continue for the rest of the year. Free cash flow was negative as expected but improved $51 million compared to the year ago quarter.
Turning to revenue on Slide 4. Core Network Services revenue grew to $1.372 billion or 2% year-over-year in the first quarter of 2013. Sequentially, CNS revenue declined 1.3%, primarily as a result of the reversal in strong fourth quarter seasonal revenue, the decline in U.K. government revenue during the quarter and a disconnect in North America that I'll cover in a moment.
Enterprise CNS revenue grew 5.1% year-over-year and was flat sequentially. Excluding U.K. government revenue, enterprise CNS revenues grew 6.8% year-over-year and grew 0.7% sequentially. We saw year-over-year growth in enterprise revenue in all 3 regions. We continue to expect enterprise CNS revenue to be the key growth driver for the rest of the year. Also, CNS revenues declined 2.5% year-over-year and 3.8% sequentially. The decline was primarily the result of an anticipated disconnect from a large carrier customer in North America. When we signed this contract a couple of years ago, we expected it to terminate in the first quarter of this year.