Level 3 Communications, Inc. (LVLT)

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Level 3 Communications (LVLT)

Q2 2011 Earnings Call

July 27, 2011 10:00 am ET

Executives

James Crowe - Chief Executive Officer and Director

Jeffrey Storey - President and Chief Operating Officer

Sunit Patel - Chief Financial Officer and Executive Vice President

Valerie Finberg - VP of IR

Analysts

David Sharret - Barclays Capital

Christopher Larsen - Piper Jaffray Companies

Colby Synesael - Cowen and Company, LLC

Donna Jaegers - D.A. Davidson & Co.

Michael Funk - BofA Merrill Lynch

Ana Goshko - BofA Merrill Lynch

David Dixon - FBR Capital Markets & Co.

Simon Flannery - Morgan Stanley

Frank Louthan - Raymond James & Associates, Inc.

Presentation

Operator

Good day, and welcome to the Level 3 Communications Inc. Second Quarter 2011 Earnings Conference Call. Today's call is being recorded. At this time, I'd like to turn the conference over to Valerie Finberg, Vice President of Investor Relations. Please go ahead.

Valerie Finberg

Thank you, Jessica. Good morning, everyone, and thank you for joining us for the Level 3 Communications Second Quarter 2011 Earnings Call. With us on the call today are Jim Crowe, Chief Executive Officer; Jeff Storey, President and Chief Operating Officer; and Sunit Patel, Executive Vice President and Chief Financial Officer. Before we get started, as a reminder, our press release, supplementary information and the presentation slides that accompany this call are all available on the Level 3 website at www.level3.com in the Investor Relations section on the Quarterly Financials page.

I need to cover our Safe Harbor statement, which can be found on Page 2 of our 2Q '11 earnings presentation and that says that information on this call and in the presentation contains 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. As today's presentation will discuss the business combination transaction, the following information is required by the SEC's rules and regulations in the context of the business combination transaction. This presentation shall not constitute an offer to sell or the solicitation of an offer to buy any security or solicitation of any vote or approval. In connection with seeking approval for the transaction from their respective stockholders, Level 3 and Global Crossing filed registration statements on Form S-4, a joint proxy statement prospectus and other relevant documents concerning the proposed transaction with the SEC. Investors and security holders are urged to read the registration statement and the final joint proxy statement prospectus and any other relevant documents filed with the SEC. Investors and security holders will be able to obtain a copy of the registration statement and joint proxy statement prospectus, as well as other filings containing information about Level 3 and Global Crossing free of charge at the SEC's website at www.sec.gov or from Level 3 or Global Crossing's corporate website. Level 3, Global Crossing and their respective directors, executive officers and certain other members of management and employees may be deemed to be participants in the solicitation of proxies in favor of the proposed transaction. Information about Level 3's directors and executive officers is contained in the proxy statement for its 2011 annual meeting, and information about Global Crossing's directors and executive officers is contained in the proxy statement for its annual meeting.

Additional information regarding participants in the proxy solicitation may be obtained by reading the joint proxy statement prospectus. Finally, please note that on today's call, 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, which is posted on our website. I will now turn the call over to Jim. Jim?

James Crowe

Thanks, Valerie. As is our normal practice, we'll start with the financial summary from our Chief Financial Officer, Sunit Patel. He'll also provide some thoughts about the balance of the year. Jeff Storey will then pick up the conversation. He'll discuss operational matters including segment results and provide an update on Global Crossing integration planning and status. I'll provide some contextual remarks, and we'll open it up for questions. Sunit?

Sunit Patel

Thank you, Jim, and good morning, everyone. I'd like to begin with some of the highlights for the quarter, which can be found on Slide 3 of our presentation. We saw a further improvement this quarter in Core Network Services revenue growth with 2% sequential revenue growth. Communications adjusted EBITDA increased to $234 million, excluding $8 million in costs associated with the Global Crossing transaction, up from $225 million last quarter. Additionally, we generated positive free cash flow during the quarter. Finally, we raised $1.2 billion in unsecured notes for the Global Crossing acquisition and this morning, we launched a $650 million senior secured term loan transaction to complete the financing necessary for the Global Crossing transaction.

Revenue. Turning to the detailed results for the second quarter on Slide 4, CNS revenues grew 2% sequentially as reported and 1.7% on a constant currency basis. Notably, our sales and installs were also up sequentially from the prior quarter. Moving to our customer channels, Core Network Services revenue from wholesale was up 2% sequentially. We saw particularly strong revenue performance from our wireless and content customers during the quarter. Large Enterprise and Federal reported 3% sequential growth, Mid-Market Core Network Services revenue increased by 2% sequentially. European Core Network Services revenue declined by 1% sequentially on a constant currency basis and increased 1% as reported. Year-over-year Core Network Services revenue growth for Europe was 6% on a constant currency basis and 16% on an as reported basis.

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