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Level 3 Communications (LVLT)
Q3 2012 Earnings Call
October 24, 2012 10:30 am ET
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
Previous Statements by LVLT
» Level 3 Communications Management Discusses Q2 2012 Results - Earnings Call Transcript
» Level 3 Communications' CEO Discusses Q1 2012 Results - Earnings Call Transcript
» Level 3 Communications' CEO Discusses Q4 2011 Results - Earnings Call Transcript
Colby Synesael - Cowen and Company, LLC, Research Division
Ana Goshko - BofA Merrill Lynch, Research Division
Scott Goldman - Goldman Sachs Group Inc., Research Division
Donna Jaegers - D.A. Davidson & Co., Research Division
Timothy K. Horan - Oppenheimer & Co. Inc., Research Division
Simon Flannery - Morgan Stanley, Research Division
Ladies and gentlemen, thank you for standing by, and welcome to the Level 3 Third Quarter 2012 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded, Wednesday, October 24, 2012. I would now like to turn the conference over to Ms. Valerie Finberg, Vice President of Investor Relations. Please go ahead.
Thank you, Frank. Good morning, everyone, and thank you for joining us for the Level 3 Communications Third Quarter 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 3Q '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 is posted on our website at www.level3.com.
I will now turn the call over to Jim. Jim?
James Q. Crowe
Thanks, Valerie. Following our normal format, Sunit Patel will lead off with a discussion of the financial results for the quarter and an outlook for the balance of the year. Jeff Storey will discuss operational matters, including segment results and provide an update on the status of integration planning and implementation. I'll provide a brief summary, and then we'll open it up for questions. Sunit?
Sunit S. 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. Overall, Core Network Services revenue grew 1.1% sequentially on a constant currency basis, with strong growth from our Latin America business, as well as continued growth in enterprise. Adjusted EBITDA increased to $372 million this quarter. We remain on track to achieve our adjusted EBITDA guidance for 2012, and we continue to make progress in achieving EBITDA synergies.
In addition, we completed approximately $3.7 billion of financings after the end of the second quarter, reducing interest expense and improving our maturity and liquidity profile.
Turning to the detailed results for the third quarter 2012 on Slide 4, keep in mind, my comments regarding overall EMEA and LatAm revenue growth are on a constant currency basis. Core Network Services revenue grew 1.1% in the third quarter compared to 0.7% growth in the second quarter. Enterprise CNS revenue grew 1.5% sequentially. On a regional basis, North American CNS revenues grew 0.5% sequentially, as a result of 1% growth from our enterprise customers. Revenue from our wholesale customers was relatively flat compared to the second quarter.
In EMEA, sequential revenue declined 0.8%, an improvement compared to a decline of 2.3% in the second quarter. Enterprise CNS revenue grew 1.3% sequentially. U.K. government revenue is slowly stabilizing, declining 2% sequentially, a significant improvement compared to the 13% decline in the second quarter. Wholesale revenues declined approximately 2.1% sequentially.
Latin America CNS revenues grew stronger this quarter, increasing 6% sequentially. Enterprise revenues grew 4.8% sequentially as a result of broad-based demand, while wholesale also had strong performance, increasing 10.8% sequentially.
Wholesale voice services and other revenues was $195 million this quarter compared to $200 million in the second quarter. As a reminder, we managed our combined wholesale voice platform for margin growth, and we continue to expect volatility in wholesale voice services revenue going forward.
At the bottom of Slide 4, before third quarter 2012, CNS revenue churn improved across the business to approximately 1.2%, which is back to rates typical for our business. This compared to 1.6% in the second quarter of 2012.
Turning to Slide 5. We continue to improve our gross margin to 59.6% compared to 59.1% in the second quarter of 2012. It's primarily as a result of an increase in our higher-margin CNS services revenue, a decrease in our lower-margin wholesale voice services revenue and network expense synergies.
SG&A. Excluding noncash compensation, SG&A expense was $576 million in the third quarter 2012 compared to $585 million in the second quarter. Utility costs were higher by about high-single-digit millions of dollars in the quarter, due to seasonal increases for cooling requirements in our network and data centers in the summer months. We expect those costs to decrease by about that amount in the fourth quarter.