- Level 3 reported financial results for the third quarter of 2013, with revenue growing 2.9% year-over-year on a constant currency basis driven by 7.4% growth in enterprise core network services revenue.
- Adjusted EBITDA, which excludes severance charges, grew 13% year-to-date compared to the first three quarters of 2012, with margins expanding.
- The company refinanced $2.6 billion in debt, resulting in $23.5 million in annual net cash interest savings.
2. Cautionary Statement
Some statements made in this presentation are forward-looking in nature and are based on management's
current expectations or beliefs. These forward-looking statements are not a guarantee of performance and
are subject to a number of uncertainties and other factors, many of which are outside Level 3's control,
which could cause actual events to differ materially from those expressed or implied by the statements.
Important factors that could prevent Level 3 from achieving its stated goals include, but are not limited to,
the company's ability to: successfully integrate the Global Crossing acquisition or otherwise realize the
anticipated benefits thereof; manage risks associated with continued uncertainty in the global economy;
maintain and increase traffic on its network; develop and maintain effective business support systems;
manage system and network failures or disruptions; avert the breach of its network and computer system
security measures; develop new services that meet customer demands and generate acceptable margins;
defend intellectual property and proprietary rights; manage the future expansion or adaptation of its
network to remain competitive; manage continued or accelerated decreases in market pricing for
communications services; obtain capacity for its network from other providers and interconnect its network
with other networks on favorable terms; attract and retain qualified management and other personnel;
successfully integrate future acquisitions; effectively manage political, legal, regulatory, foreign currency
and other risks it is exposed to due to its substantial international operations; mitigate its exposure to
contingent liabilities; and meet all of the terms and conditions of its debt obligations. Additional information
concerning these and other important factors can be found within Level 3's filings with the Securities and
Exchange Commission. Statements in this presentation should be evaluated in light of these important
factors. Level 3 is under no obligation to, and expressly disclaims any such obligation to, update or alter its
forward-looking statements, whether as a result of new information, future events, or otherwise.
Issued on October 30, 2013
2
3. Third Quarter Financial Summary
CNS revenue grew 2.9% YoY on a constant currency basis
Enterprise CNS revenue grew 7.4% YoY on a constant
currency basis
CNS sales orders continued to grow on a YoY basis
Year to date, excluding severance charges, Adjusted EBITDA
grew 13% compared to the first three quarters in 2012
The company refinanced approximately $2.6 billion of debt
resulting in $23.5 million in annualized net cash interest
savings(1)
(1) Includes both $1.4 billion in the third quarter 2013 and $1.2 billion in the fourth quarter 2013
Issued on October 30, 2013
3
4. Core Network Services
Revenue
CNS revenue grew to $1.397
billion or 2.9% YoY on a constant
currency basis
CNS By Region
CNS By Customer Type
13%
35%
16%
65%
71%
Enterprise CNS grew 7.4% YoY on
a constant currency basis:
7.8% YoY from North America
8.7% YoY from EMEA(1)
North America
EMEA
Latin America
Enterprise
Total Enterprise CNS Revenue
Wholesale
($ in Millions)
13.1% YoY from Latin America
CNS revenue churn(2) decreased to
1.4% from 1.5% in 2Q13
(1) Excludes EMEA UK Government
(2) Level 3 measures revenue churn as disconnects of Core Network Services
monthly recurring revenue as a percent of Core Network Services
revenue. This calculation excludes usage. Also included in the churn
calculations are customers who are disconnecting existing service, but are
replacing their old service with new, generally higher speed services
Issued on October 30, 2013
4
5. Level 3 Gross Margin / SG&A
Gross Margin
($ in millions)
Gross Margin percentage improved YoY
$949
$961
60.6%
61.2%
2Q13
$948
3Q13
in 3Q13. Expansion was driven by:
Higher margin CNS revenue growth
Optimization initiatives
59.6%
3Q12
GM $
GM %
SG&A expenses(1) declined by 4.2%
YoY, excluding severance charges in
3Q13 and 3Q12
SG&A(1)(2)
($ in millions)
$570
$549
35.1%
(1) SG&A excludes non-cash compensation
(2) SG&A excludes $30 million, $13 million and $6 million of severance charges in 3Q13, 2Q13,
and 3Q12, respectively
Issued on October 30, 2013
3Q12
SG&A
34.8%
2Q13
35.8%
$546
3Q13
SG&A % revenue
5
6. Level 3 Adjusted EBITDA and Capital Expenditures
Adjusted EBITDA
Adjusted EBITDA(1) was $415 million for
3Q13
Year to date, excluding severance charges,
Adjusted EBITDA grew 13% to $1.204
billion compared to $1.066 billion for the
first three quarters in 2012
($ in millions)
$400
$378
25.6%
23.8%
3Q12
Excluding severance charges, Adjusted
EBITDA margin expanded to 26.4% from
23.8% in 3Q12
(1)
2Q13
Adj EBITDA
$415
26.4%
3Q13
Adj EBITDA % of Revenue
Capital Expenditures
$227
($ in millions)
$208
$194
Year to date, capital expenditures
represent approximately 12% of total
revenue
(1) Adjusted EBITDA excludes $30 million, $13 million, and $6 million of severance charges in
3Q13, 2Q13, and 3Q12, respectively
Issued on October 30, 2013
3Q12
2Q13
3Q13
6
7. Level 3 Cash Flow
Unlevered Cash Flow – Rolling 4 Quarters
($ in millions)
On a rolling four quarter basis,
Unlevered Cash Flow improved by
$11 million from 2Q13 to 3Q13
Free Cash Flow was negative $90
million, compared to negative $157
million in 3Q12
$594
$583
$542
1Q13
Expect net cash interest expense to
decrease by $46 million in 4Q13 to
$132 million
2Q13
3Q13
Free Cash Flow – Rolling 4 Quarters
($ in millions)
($42)
On a rolling four quarter basis, Free
Cash Flow improved by $67 million
from 2Q13 to 3Q13
Issued on October 30, 2013
($114)
1Q13
($109)
2Q13
3Q13
7
8. Debt Maturity Profile
The company completed the refinancing of approximately $2.6 billion in capital market
transactions during and after the close of the quarter(1)
Expect a loss on the $1.2 billion term-loan refinancing of $10 million or $0.04 per share in 4Q13
Expect $23.5 million in annualized net cash interest expense savings from all three refinancing
transactions
Total debt as of September 30, 2013 of $8.6 billion
Cash on hand as of September 30, 2013 of $507 million
Net Debt to Adjusted EBITDA ratio was 5.2x
Target leverage ratio of 3x-5x
Average interest rate improved to 7.1% from 7.4% in 2Q13
$3,420
$3,471
2019
2020
Pro forma
Sept 30, 2013
($ in Millions)
$775
$640
$201
2013
2014
Issued on October 30, 2013
2015
2016
2017
2018
Note: Maturity chart excludes capital leases and other debt of approximately $91 million
(1) Includes both $1.4 billion in the third quarter 2013 and $1.2 billion in the fourth quarter 2013
8
9. Business Outlook
Generally expect sequential CNS revenue growth to be stronger compared to
2012
Expect low double-digit EBITDA growth for the full year 2013 compared to the
full year 2012, excluding the total of $40 million of severance charges incurred
in 2Q13 and 3Q13
Expect stronger sequential growth in Adjusted EBITDA, compared to $415 million in the
third quarter, excluding severance charges
Capital expenditures expected to be approximately 12% of total revenue
Expect Free Cash Flow to be positive for the full year 2013, excluding 2013
interest rate swap payments of $45 million
Expect GAAP interest expense to be approximately $665 million and net cash
interest to be approximately $645 million for the full year 2013
Depreciation and Amortization expected to be approximately $800 million for
the full year 2013
Issued on October 30, 2013
9
14. Schedule To Reconcile To Non-GAAP Financial Metrics
Pursuant to Regulation G, the company is hereby providing definitions of non-GAAP financial
metrics and reconciliations to the most directly comparable GAAP measures.
The following describes and reconciles those financial measures as reported under accounting
principles generally accepted in the United States (GAAP) with those financial measures as adjusted
by the items detailed below. These calculations are not prepared in accordance with GAAP and
should not be viewed as alternatives to GAAP. In keeping with its historical financial reporting
practices, the company believes that the supplemental presentation of these calculations provides
meaningful non-GAAP financial measures to help investors understand and compare business
trends among different reporting periods on a consistent basis.
In addition, measures referred to as being calculated “on a constant currency basis” or "in constant
currency terms" are non-GAAP metrics intended to present the relevant information assuming a
constant exchange rate between the two periods being compared. Such metrics are calculated by
applying the currency exchange rates used in the preparation of the prior period financial results to
the subsequent period results.
Issued on October 30, 2013
14
15. Schedule To Reconcile To Non-GAAP Financial Metrics
Consolidated Revenue is defined as total revenue from the Consolidated Statements of
Operations.
Core Network Services Revenue includes revenue from colocation and datacenter services,
transport and fiber, IP and data services, and voice services (local and enterprise).
Gross Margin ($) is defined as total revenue less cost of revenue from the Consolidated
Statements of Operations.
Gross Margin (%) is defined as gross margin ($) divided by total revenue. Management
believes that gross margin is a relevant metric to provide to investors, as it is a metric that
management uses to measure the margin available to the company after it pays third party
network services costs; in essence, a measure of the efficiency of the company’s network.
Adjusted EBITDA is defined as net income (loss) from the Consolidated Statements of
Operations before income taxes, total other income (expense), non-cash impairment charges,
depreciation and amortization and non-cash stock compensation expense.
Adjusted EBITDA Margin is defined as Adjusted EBITDA divided by total revenue.
Issued on October 30, 2013
15
16. Schedule To Reconcile To Non-GAAP Financial Metrics
Management believes that Adjusted EBITDA and Adjusted EBITDA Margin are relevant and useful metrics
to provide to investors, as they are an important part of the company’s internal reporting and are key
measures used by Management to evaluate profitability and operating performance of the company and to
make resource allocation decisions. Management believes such measures are especially important in a
capital-intensive industry such as telecommunications. Management also uses Adjusted EBITDA and
Adjusted EBITDA Margin to compare the company’s performance to that of its competitors and to eliminate
certain non-cash and non-operating items in order to consistently measure from period to period its ability to
fund capital expenditures, fund growth, service debt and determine bonuses. Adjusted EBITDA excludes
non-cash impairment charges and non-cash stock compensation expense because of the non-cash nature
of these items. Adjusted EBITDA also excludes interest income, interest expense and income taxes
because these items are associated with the company’s capitalization and tax structures. Adjusted EBITDA
also excludes depreciation and amortization expense because these non-cash expenses primarily reflect
the impact of historical capital investments, as opposed to the cash impacts of capital expenditures made in
recent periods, which may be evaluated through cash flow measures. Adjusted EBITDA excludes the gain
(or loss) on extinguishment of debt and other, net because these items are not related to the primary
operations of the company.
There are limitations to using Adjusted EBITDA as a financial measure, including the difficulty associated
with comparing companies that use similar performance measures whose calculations may differ from the
company’s calculations. Additionally, this financial measure does not include certain significant items such
as interest income, interest expense, income taxes, depreciation and amortization, non-cash impairment
charges, non-cash stock compensation expense, the gain (or loss) on extinguishment of debt and net other
income (expense). Adjusted EBITDA and Adjusted EBITDA Margin should not be considered a substitute for
other measures of financial performance reported in accordance with GAAP.
Issued on October 30, 2013
16
17. Schedule To Reconcile To Non-GAAP Financial Metrics
Debt is defined as total gross debt, including capital leases from the Consolidated
Balance Sheet.
Net Debt to Last Twelve Months (LTM) Adjusted EBITDA Ratio is defined as debt,
reduced by cash and cash equivalents and divided by LTM Adjusted EBITDA.
Issued on October 30, 2013
17
18. Schedule To Reconcile To Non-GAAP Financial Metrics
Unlevered Cash Flow is defined as net cash provided by (used in) operating activities less capital
expenditures, plus cash interest paid and less interest income all as disclosed in the Consolidated
Statements of Cash Flows or the Consolidated Statements of Operations. Management believes
that Unlevered Cash Flow is a relevant metric to provide to investors, as it is an indicator of the
operational strength and performance of the company and, measured over time, provides
management and investors with a sense of the underlying business’ growth pattern and ability to
generate cash. Unlevered Cash Flow excludes cash used for acquisitions and debt service and the
impact of exchange rate changes on cash and cash equivalents balances.
There are material limitations to using Unlevered Cash Flow to measure the company’s cash
performance as it excludes certain material items such as payments on and repurchases of longterm debt, interest income, cash interest expense and cash used to fund acquisitions. Comparisons
of Level 3’s Unlevered Cash Flow to that of some of its competitors may be of limited usefulness
since Level 3 does not currently pay a significant amount of income taxes due to net operating
losses, and therefore, generates higher cash flow than a comparable business that does pay
income taxes. Additionally, this financial measure is subject to variability quarter over quarter as a
result of the timing of payments related to accounts receivable and accounts payable and capital
expenditures. Unlevered Cash Flow should not be used as a substitute for net change in cash and
cash equivalents in the Consolidated Statements of Cash Flows.
Issued on October 30, 2013
18
19. Schedule To Reconcile To Non-GAAP Financial Metrics
Free Cash Flow is defined as net cash provided by (used in) operating activities less capital
expenditures as disclosed in the Consolidated Statements of Cash Flows. Management
believes that Free Cash Flow is a relevant metric to provide to investors, as it is an indicator
of the company’s ability to generate cash to service its debt. Free Cash Flow excludes cash
used for acquisitions, principal repayments and the impact of exchange rate changes on
cash and cash equivalents balances.
There are material limitations to using Free Cash Flow to measure the company’s
performance as it excludes certain material items such as principal payments on and
repurchases of long-term debt and cash used to fund acquisitions. Comparisons of Level 3’s
Free Cash Flow to that of some of its competitors may be of limited usefulness since Level 3
does not currently pay a significant amount of income taxes due to net operating losses, and
therefore, generates higher cash flow than a comparable business that does pay income
taxes. Additionally, this financial measure is subject to variability quarter over quarter as a
result of the timing of payments related to interest expense, accounts receivable and
accounts payable and capital expenditures. Free Cash Flow should not be used as a
substitute for net change in cash and cash equivalents on the Consolidated Statements of
Cash Flows.
Issued on October 30, 2013
19
20. Schedule To Reconcile To Non-GAAP Financial Metrics
LEVEL 3 COMMUNICATIONS SUMMARY FINANCIAL RESULTS
$ in Millions
(unaudited)
3Q12
2Q13
3Q13
Core Network Services
Wholesale Voice Services and Other
Total Revenue
$ 1,365
$
225
$ 1,590
$ 1,379
$
186
$ 1,565
$ 1,397
$
172
$ 1,569
Adjusted EBITDA (1)
Capital Expenditures
Unlevered Cash Flow (1)
Free Cash Flow (1)
$
$
$
$
$
$
$
$
$
$
$
$
Gross Margin
Adjusted EBITDA Margin (1)
372
227
77
(157)
59.6 %
23.4 %
387
208
153
8
60.6 %
24.7 %
385
194
88
(90)
61.2 %
24.5 %
(1) See schedule of non-GAAP metrics for definition and reconciliation to GAAP measures.
Issued on October 30, 2013
20
21. Schedule To Reconcile To Non-GAAP Financial Metrics
Level 3 Communications, Inc and Consolidated Subsidiaries
Adjusted EBITDA
2012
Q3
($ in millions)
Consolidated Net Loss
Income Tax Expense
Total Other Expense
Depreciation and Amortization
Expense
Non-cash Compensation
Expense
Consolidated Adjusted
EBITDA
Severance charges
Adjusted EBITDA excluding
severance charges
YTD Adjusted EBITDA excluding
severance charges
Consolidated Revenue
Adjusted EBITDA Margin
Issued on October 30, 2013
$
2013
Q2
(166)
13
291
$
Q3
(24)
11
153
$
(21)
14
159
185
199
203
49
48
30
$
372
6
$
387
13
$
385
30
$
378
$
400
$
415
$
1,066
$
789
$
1,204
$
1,590
$
1,565
$
1,569
23.4 %
24.7 %
24.5 %
21
23. Schedule To Reconcile To Non-GAAP Financial Metrics
Level 3 Communications, Inc and Consolidated Subsidiaries
Net Debt to LTM Adjusted EBITDA ratio as of September 30, 2013
($ in millions)
Debt
$
Cash and Cash Equivalents
8,598
(507)
Net Debt
$
8,091
LTM Adjusted EBITDA
$
1,565
Net Debt to LTM Adjusted EBITDA Ratio
Issued on October 30, 2013
5.2
23