Level 3 Reduces 2007 and 2008 Earnings Projections
Level 3 reduced expectations for 2007 and 2008 after struggling to integrate delivery processes among recent network acquisitions in the third quarter, it said Tuesday. The backhaul company saw high sales orders, but had operational problems moving efficiently along the provisioning process to the final installation, testing and activation, it said. Level 3 met Q3 predictions, but didn’t see the provisioning capacity increase it needed “to meet the revenue increases we had previously projected” for 2007 and 2008, said CEO James Crowe. Level 3’s problems are not caused by demand, pricing or marketing ability, he said. “The breadth of the [provisioning] problem was greater than we had earlier diagnosed.”
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Level 3 had trouble integrating provisioning processes among the six network companies it acquired in the past two years, Crowe said. A decision to split previously centralized processes among its business divisions made identifying problems more difficult and particularly sabotaged Level 3’s integration process, he said. Level 3 executives also focused too much on high- level financial integration and synergies, failing to “monitor detailed operations metrics as closely as we should have,” the CEO said. Officials were “overly comforted” by high sales through July, he said. “We took our eye off provisioning.”
Due mainly to the inefficient delivery process, Level 3 reduced expected 2007 earnings to a range of $813 million to $833 million, from $860 million to $920 million. 2008 earnings projections dropped to a range of $950 million to $1.1 billion, from $1.15 billion to $1.3 billion. “The most frustrating part is we continue to see high demand from the marketplace,” said Chief Operating Officer Kevin O'Hara in the company’s Q3 analyst call. Level 3’s total third quarter revenue was $1.06 billion, up from $875 million in 2006 and $1.05 billion in the second quarter. Net loss was $174 million, vs. $138 million last year, but down from $193 million in the previous quarter.
The provisioning issue hasn’t yet affected churn or sales, but a pick up in cancellations is possible going forward, O'Hara said. Level 3 is “spending lots of time” explaining the problem to existing customers and establishing “revised [timeframe] expectations” for new ones, he said.
To fix the delivery problem, Level 3 has shuffled management responsibilities. Level 3 reorganized all end- to-end provisioning authority under Neil Hobbs, Global Network Services president. Business Markets Group President Raouf Abdel will work with Hobbs to “more tightly align” and streamline provisioning processes until new integrated ones are deployed, it said. Metro Network Services President Lynn Refer will manage the Business Markets Group in Abdel’s absence. Level 3 also called in an outside consulting group to offer advice, Crowe said.
Development of Level 3’s final integrated provisioning process “Unity” is “largely on track,” O'Hara said. Level 3 has started user training and begun initial deployment, he said. The company expects Unity development and deployment to continue through 2007 and 2008, he said.
Level 3’s search for a new chief financial officer had nothing to do with 2007 and 2008 guidance reductions, Crowe said. The move reflects changes in the company and its needs, “not any mistake” by exiting CFO Sunit Patel, he said. Level 3 is talking to candidates outside the company, he said. Patel will remain CFO until the search completes, and Crowe plans to convince the officer to take a new position, he said.
The reduced projections don’t bode well for Level 3, but the company should be able to turn itself around, GimmeCredit analyst Kim Noland said in a note. “While third quarter results met expectations, the magnitude of the guidance cuts combined with a recently announced search for a new CFO with more of an operating background suggests that there could be more downside into 2008,” she said. Long term, Level 3 “should get control of its provisioning systems… aided by still relatively healthy industry conditions.”
Crowe also updated investors on his health Tuesday. Stanford Hospital and Clinics physicians examined Crowe Monday and determined there was “no indication” that the benign pituitary tumor removed Aug. 27 had recurred, he said. “I will now continue to schedule periodic examinations to confirm that this remains the case.”