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Level 3 Communications (NYSE: LVLT) operates communications and Internet backbones that connect customers with heavy bandwidth requirements, including nearly every telecom, cable, and wireless company and internet service provider in the US.[1] Level 3 Communications provides content delivery networks (CDNs), which speeds up network access by copying client's websites onto servers around the world. This service is important for bandwidth-intensive content providers such as online video sites.[2]
The increased need for broadband access from wireless providers, content providers, and end users has driven growing demand for LVLT's services. However, bandwidth costs have also decreased, offsetting some of the growth from increased demand.[3] Margins from LVLT's telephone line and dial-up modem services are declining due to the shift to voice over ip and broadband.
Increased integration costs from eight acquisitions have led to a persistent operating loss over the past five years.[4][5] Furthermore, with AT&T (and its subsidiaries) accounting for 15% of its revenue, LVLT is sensitive to changes in AT&T.[1]
LVLT competes with Verizon Communications (VZ), AT&T (T), Qwest Communications International (Q), Global Switch, and Limelight Networks (LLNW).
[edit] Company Overview
[edit] Business & Financial Metrics
In 2005, LVLT acquired Witel, a telecommunications company specializing in long-distance voice and data. Level 3 expected WilTel to contribute $1 billion to its revenue but has since lowered its estimates to $600 million.[8] Despite the increase in revenue from acquisitions, Level 3 Communications has posted annual losses over the past five years. Additionally, interest payments on the heavy debt LVLT collected during the dot com bubble amount to over $100 million each year.[8][9][10] Because of investor's fears that Level 3 would not be able to achieve cost savings it had expected from its acquisitions, the stock plunged from $6.5 to below $2 from February 2007 to May 2008.[11]
LVLT sold its advertising distribution business, Vyvx LLC, for $129 million in cash to DG FastChannel (DGIT) in May 2008.[12]
[edit] Business Segments
- Core Communications Services
- Transport and Infrastructure (40% of revenue): Level 3 sells unused long-distance bandwidth and leases telecommunications equipment. Revenue growth in this area depends on the demand for bandwidth. Currently, bandwidth prices are declining which is offsetting some of the increasing demand.[3]
- Voice (28% of revenue): Level 3 owns and operates traditional telephone lines, but margins and revenue in this area are declining due to the shift to wireless service and low-cost voice over IP technologies.[3]
- IP and Data (14% of revenue): These services include high-speed Internet access, virtual private network (VPN), and content delivery network services (including video streaming). Level 3's VPN services let large companies to replace traditional networks with a more cost effective virtual network. Prices dropped 30% in 2007 and the company expects them to decline further at similar rates in 2008. [3]
- SBC Contract Services (7% of revenue): The merger of SBC and AT&T created a contract for WilTel to provide long-distance voice and data services to SBC's consumers through 2009.[14] These services were originally an asset of WilTel and was transferred to LVLT after the acquisition.
- Other Communication Services (6% of revenue) includes dialup-modem services and are the most mature services offered by Level 3, but the demand for these services are declining with the shift to broadband technologies.
- Level 3 Vyvx (3%): Vyvx carries limited audio and video programming and was sold in June 2008 for $129 million to DG FastChannel (DGIT).[12][3]
[edit] Trends & Forces
[edit] Declining revenue from largest customer
Over 15% of LVLT's revenue comes from its largest client, AT&T.[1] In the five days after AT&T was downgraded,[15] LVLT stock dropped 15%.[11]
WilTel had a large contract with SBC Communications which was later merged with AT&T.[16] As SBC Communications moves is communications from WilTel's networks to AT&T's, LVLT expects to see a decline in this revenue stream.[17] LVLT expects what was a $1 billion revenue source to drop 40% to $600 million.[8]
[edit] Company benefits from growing internet traffic, particularly bandwidth intensive video
Cisco expects Internet traffic to grow sixfold in the next five years, especially in bandwidth-intensive areas such as video hosting. This makes LVLT's fiber optics prime real estate as it will be needed to satisfy the growing demand for bandwidth.[18][7]
[edit] Commodization leads to declining prices
With firms throughout the content deliver business buying smaller firms and building their own facilities, sending information is becoming commoditized.[19] As prices decline, Level 3 Communication's is feeling the pressure to decrease costs, especially after their recent acquisitions.
[edit] Difficulty integrating acquisitions
Level 3 Communications has acquired eight business since 2005, but has been operating at a loss during this time.
In 2006, LVLT acquired Looking Glass and Telcove, which own optic fiber networks. However, the mergers created inefficient network overlaps and cost savings from the merger have not been realized.[20][21] For example, in 2007 Level 3 CEO stated that the company has not been able to eliminate the redundant applications and Level 3 employees are forced to invest time to learn complex systems which will soon be eliminated.[22]
[edit] Competitors
As the demand for bandwidth increases, LVLT's growth is most dependent on its ability to compete against other content delivery providers such as Limelight Networks (LLNW) and Akamai Technologies (AKAM). Its largest competitors remain those who serve end users, such as AT&T. LVLT is currently not the number one company in the content delivery market, but it is the leader in terms of CDN related patents. It recently purchased 20 patents from IBM, directly relating to CDN, which do not infringe on any of Akamai's (the largest content delivery provider) patents. In the first quarter of 2008, it filed suit against Limelight, the number two company in content delivery, on the grounds of patent infringement.[23]
[edit] Content Delivery
- Akamai Technologies (AKAM) competes with LVLT in content delivery.[24] As Akamai expands its networks and moves into more complex technologies such as VoIP and video, it will compete with Level 3 Communications for clients in these areas.
- Internap Network Services (INAP) is both a customer and competitor of LVLT. It purchases excess bandwidth from LVLT and competes with LVLT in content delivery.[9]
- Limelight Networks (LLNW) is a content delivery company that has provided bandwidth to YouTube[25] and Facebook.[26] The markets for online video and social networking are growing, putting Limelight is in a favorable position with its previous experience.
| Company | Revenue (in millions) | Operating Loss | Operating Margin |
| Level 3 Communications[27] | 4,269 | (241,000,000.00) | (6%) |
| LimeLight Networks[13] | 103 | (74,210.00) | (72%) |
| Akamai[28] | 636 | 100,967.00 | 16% |
| Internap[29] | 234 | (9,711.00) | (4%) |
[edit] Telecommunications Companies
Telecommunications competitors are the largest in terms of sales, financial power, and control over local networks. These companies always pose a threat to Level 3 Communications as they have the money and industry knowledge to enter as a player in the content delivery business at nearly any time.
LVLT's top three competitors in telecommunications are:[30]
- AT&T (T) is one of the largest telecommunications companies in the US. AT&T is a competitor, supplier, and customer of Level 3 Communications. It competes with LVLT in many of the fixed-line based services. AT&T owns one of the largest networks of telecommunications cables across America. As a supplier, it provides LVLT local connections.[31] As a customer, AT&T Wireless purchases advanced network features from Level 3 Communications. For example, Level 3 provided a network for AT&T Wireless which let cellphone users to bypass public switching towers to connect their calls faster. [32] AT&T has made a pitch to media companies to expand its content delivery business.[33]
- Sprint Nextel (S) is the third-largest wireless carrier in the US and competes with Level 3 Communications in the fixed-line services. Fixed-line services are a minor component of Sprint's business, accounting for only 18% of its revenue.[34] Sprint competes with Level 3 Communications in supplying excess bandwidth to data centers such as Internap.[35]
- Verizon Communications (VZ) provides services ranging from fixed-line services to wireless services to fiber-optics based cable television. Like AT&T and Sprint, it competes with LVLT in the fixed-line businesses.
[edit] Summary of Telecommunications Companies
| Key Numbers | Level 3 Communications | AT&T | Sprint Nextel | Verizon |
| Annual Sales ($ mil.) | 4,269.00 | 118,928.00 | 40,146.00 | 93,469.00 |
| Employees | 6,680 | 310,000 | 60,000 | 235,000 |
| Market Cap ($ mil.) | 5,898.10 | 217,915.90 | 23,333.30 | 106,413.90 |
[edit] References
- ↑ 1.0 1.1 1.2 Wachovia Analyst Report: LVLT, March 3, 2008
- ↑ Wikipedia:Content delivery network. Retrieved on June 29,2008.
- ↑ 3.0 3.1 3.2 3.3 3.4 LVLT 2007 10-K pg. 62
- ↑ Level 3 First Quarter 2008 Results (April 23, 2008). Retrieved on June 25, 2008.
- ↑ LVLT 2007 10-K pg. 7
- ↑ 6.0 6.1 LVLT 2005, 2006, 2007 10-K pg. F92
- ↑ 7.0 7.1 DataMonitor. Retrieved on June 26, 2008.
- ↑ 8.0 8.1 8.2 Level 3 Takes out WilTel (October 31, 2005). Retrieved on June 26, 2008.
- ↑ 9.0 9.1 LVLT 2007 10-K pg. 4
- ↑ LVLT 2007 10-K pg. 40
- ↑ 11.0 11.1 Google Finance:LVLT. Retrieved on June 26, 2008.
- ↑ 12.0 12.1 12.2 Knight Ridder (June 6, 2008). Business Week: Level 3 Communications Inc.. Retrieved on June 26, 2008.
- ↑ 13.0 13.1 LVLT 2007 10-K pg. 53
- ↑ WilTel, SBC Communications Inc. Announce New Master Services Agreement; Agreement Designed to Ensure Consistent, High-Quality Services for SBC Customers Throughout AT&T Acquisition and Integration Process (June 16, 2005). Retrieved on July 3, 2008.
- ↑ Yahoo Finance: Verizon, AT&T slip after UBS downgrades on economy (June 16,2008). Retrieved on June 26, 2008.
- ↑ Marguerite Reardon (November 18, 2005). Cnet.com: SBC & AT&T. Retrieved on June 26, 2008.
- ↑ LVLT 2007 10-K pg. 42
- ↑ Jim Cramer (June 16, 2008). The Street: LVLT Will Benefit from Video Growth. Retrieved on June 26, 2008.
- ↑ Nifty Investment: Limelight Networks, Inc.. Retrieved on June 25, 2008.
- ↑ LVLT to Acquire Looking Glass Networks (June 5, 2006). Retrieved on June 26, 2008.
- ↑ Level 3 Communications: What the Deal Means. Retrieved on June 26, 2008.
- ↑ Light Reading: Level 3 Feels Integration Irritation (July 26, 2007). Retrieved on June 26, 2008.
- ↑ Dan Rayburn (April 13, 2008). When it Comes to CDN Patents, Level 3 Is the One to Watch. Retrieved on July 3, 2008.
- ↑ WikInvest: AKAM. Retrieved on June 26, 2008.
- ↑ Dan Frommer (April 28, 2006). Your Tube, Whose Dime?. Retrieved on June 27, 2008.
- ↑ Goliath: Limelight Networks Announces Extended Relationship With Facebook (January 31, 2006). Retrieved on June 25, 2008.
- ↑ LVLT 2007 10-K pg. F91
- ↑ AKAM 2007 10-K pg. 22
- ↑ INAP 2007 10-K pg. F3
- ↑ 30.0 30.1 Hoovers: LVLT Competitor Fact Sheet. Retrieved on June 20, 2008.
- ↑ LVLT 2007 10-K pg. 46
- ↑ LVLT Press Release (2001). Retrieved on June 26, 2006.
- ↑ Dan Frommer. Silicon Alley Insider: AT&T Takes On Akamai, Limelight; Makes Its Pitch To Big Media. Retrieved on June 26, 2008.
- ↑ WikInvest: Sprint Nextel. Retrieved on June 26, 2008.
- ↑ WikInvest: Internap. Retrieved on June 26, 2008.
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