2 q14 external earnings presentation_final
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Issued on July 29, 2014 © 2014 Level 3 Communications, LLC. All Rights Reserved
July 29, 2014
Second Quarter 2014 Results
Issued on July 29, 2014
Cautionary Statement & Pro Forma Adjustment
2
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.
In 2013, the company accrued 60 percent of its annual employee bonus compensation expense in the form of
equity and 40 percent in cash, compared to 100 percent cash in 2014. The amount of the bonus accrued as
equity based compensation in the second quarter of 2013 was $15 million. SG&A, Adjusted EBITDA and
Adjusted EBITDA margin for the second quarter of 2013 have been adjusted on a pro forma basis to include
the $15 million to present the results on a consistent basis with the accrual of bonus compensation expense in
2014 as 100 percent cash.
Issued on July 29, 2014
Second Quarter 2014 Highlights
3
CNS revenue grew 6.9% YoY
Enterprise CNS revenue grew 11% YoY
Gross margin increased to 62.3% in 2Q14
Adjusted EBITDA of $459 million or $463 million,
excluding $4 million of tw telecom transaction-related
fees
Generated Free Cash Flow of $62 million
Issued on July 29, 2014
$884 $905
$939 $962
$984
2Q13 3Q13 4Q13 1Q14 2Q144
CNS By Region CNS By Customer Type
CNS revenue grew to $1.479
billion or 6.9% YoY on a constant
currency basis
Enterprise CNS grew 11% YoY on
a constant currency basis:
13% YoY from North America
10% YoY from Latin America
8.1% YoY from EMEA(1)
CNS revenue churn(2) was 1.4%
compared to 1.5% in the second
quarter 2013
Core Network Services
Revenue
(1) Excludes EMEA UK Government CNS revenue
(2) Level 3 measures revenue churn as disconnects of Core Network Services
monthly recurring revenue as a percent of Core Network Services revenue. This
calculation excludes usage. Also included in the churn calculations are customers
who are disconnecting existing service, but are replacing their old service with
new, generally higher speed services
Total Enterprise CNS Revenue ($ in millions)
71%
16%
13%
North America EMEA Latin America
34%
66%
Wholesale Enterprise
Issued on July 29, 2014
Level 3 Gross Margin and SG&A
5
Gross Margin improvement driven
by high margin CNS revenue growth and optimization initiatives
SG&A benefitted from 3Q13
headcount reductions, offset by
merit increases in the quarter
Gross Margin($ in millions)
SG&A(1)(2)(3)
($ in millions)
(1) SG&A excludes non-cash compensation expense
(2) Second quarter 2014 SG&A expense includes $4 million of tw telecom transaction related fees
(3) Second quarter 2013 SG&A expense is adjusted to include the $15 million in bonus-related non-cash compensation and to exclude $13 million of severance charges
$949
$1,012
60.6%62.3%
2Q13 2Q14
GM $ GM %
$564 $553
36.0%
34.0%
2Q13 2Q14
SG&A SG&A % total revenue
Issued on July 29, 2014
Level 3 Adjusted EBITDA and Capital Expenditures
6
Year to date, Adjusted EBITDA
growth of 21% compared to the
year ago period
Year to date, capital expenditures as
a percent of total revenue were 12%
Continue to target 12-13% for the
full year 2014
Adjusted EBITDA(1)(2)
($ in millions)
Capital Expenditures($ in millions)
(1) Second quarter 2013 Adjusted EBITDA and resulting Adjusted EBITDA margin are adjusted to include the $15 million in bonus-related non-cash compensation
and to exclude $13 million of severance charges
(2) Second quarter 2014 Adjusted EBITDA excludes $4 million of tw telecom transaction related fees
$385
$463
24.6%
28.5%
2Q13 2Q14
Adj EBITDA Adj EBITDA % of Total Revenue
$208
$241
2Q13 2Q14
Issued on July 29, 2014
Level 3 Free Cash Flow
7
Free Cash Flow improved by $54
million YoY, driven by high
margin CNS revenue growth and
disciplined cost management
Free Cash Flow – Year over Year($ in millions)
Free Cash Flow – Rolling Four Quarters ($ in millions)
Strong improvement of $256
million in Free Cash Flow on a
rolling four quarter basis
$8
$62
2Q13 2Q14
($109)
$147
2Q13 2Q14
Issued on July 29, 2014
$475 $300
$3,420 $3,471
$640
2014 2015 2016 2017 2018 2019 2020 2021
Debt Maturity Profile
8
Net Debt to Adjusted EBITDA ratio was 4.4x, compared to 5.1x in the second
quarter 2013
Focused on the lower end of target leverage range of 3 to 5 times
Average interest rate was 6.8%, compared to 7.4% in the second quarter 2013
2015 maturity is 7% Convertible Senior Notes that convert at $27 per share
Cash on hand as of June 30, 2014 of $637 million
Note: Maturity chart excludes capital leases and other debt of approximately $80 million
June 30, 2014($ in Millions)
Issued on July 29, 2014
Full Year 2014 Standalone Business Outlook
9
Reiterating the outlook for the full year 2014, excluding the effects from the
tw telecom acquisition:
For the full year 2014, expect CNS revenue growth to be higher than the 2.9%
growth we saw for the full year 2013
Expect Adjusted EBITDA growth of 14-18% for the full year 2014 compared to the
full year 2013 (from a starting point of $1.565 billion)
Expect Free Cash Flow of $250 to $300 million for the full year 2014
Expect GAAP interest expense of approximately $600 million
Expect net cash interest expense of approximately $560 million
Expect capital expenditures of approximately 12-13% of total revenue
Expect depreciation and amortization of approximately $750 million for the full year
2014
Expect GAAP income tax expense of approximately $70 million
Issued on July 29, 201410
Appendix
Issued on July 29, 2014
Revenue by Region
11
($ in millions)
2Q13 1Q14 2Q14
2Q14/
2Q13
%Change
Constant
Currency
2Q14/
1Q14
%Change
Constant
Currency
2Q14
% CNS
CNS Revenue ($ in millions)
North America 970$ 1,043$ 1,051$ 8.3 % 0.7 % 71 %
Wholesale 367$ 368$ 367$ (0.2)% (0.4)% 25 %
Enterprise 603$ 675$ 684$ 13.4 % 1.3 % 46 %
EMEA 220$ 225$ 229$ (1.8)% 0.8 % 16 %
Wholesale 88$ 87$ 86$ (7.7)% (1.9)% 6 %
Enterprise 132$ 138$ 143$ 2.2 % 2.5 % 10 %
Latin America 189$ 189$ 199$ 9.7 % 3.4 % 13 %
Wholesale 40$ 40$ 42$ 7.2 % 2.5 % 3 %
Enterprise 149$ 149$ 157$ 10.4 % 3.6 % 10 %
Total 1,379$ 1,457$ 1,479$ 6.9 % 1.1 % 100 %
Wholesale 495$ 495$ 495$ (0.9)% (0.5)% 34 %
Enterprise 884$ 962$ 984$ 11.2 % 1.8 % 66 %
Total CNS 1,379$ 1,457$ 1,479$ 6.9 % 1.1 %
Wholesale Voice Services
and Other Revenue 186$ 152$ 146$ (21.2)% (3.7)%
Total Revenue 1,565$ 1,609$ 1,625$ 3.5 % 0.6 %
Level 3 Communications
Issued on July 29, 2014
Level 3 Communications($ in millions)
Core Network Services Revenue 2Q13 1Q14 2Q14
2Q14/
2Q13
%Change
2Q14/
1Q14
%Change
2Q14
% CNS
Colocation and Datacenter Services 145$ 145$ 146$ 0.7 % 0.7 % 10 %
Transport and Fiber 480$ 502$ 508$ 5.8 % 1.2 % 34 %
IP and Data Services 522$ 573$ 588$ 12.6 % 2.6 % 40 %
Voice Services (Local and
Enterprise) 232$ 237$ 237$ 2.2 % —% 16 %
Total Core Network Services 1,379$ 1,457$ 1,479$ 7.3 % 1.5 % 100 %
Wholesale Voice Services and
Other 186$ 152$ 146$ (21.5)% (3.9)%
Total Revenue 1,565$ 1,609$ 1,625$ 3.8 % 1.0 %
Services Revenue
12
2Q14 Percent of CNS
Revenue by Service
Type
10%
16%
34%
40%
Colocation and DataCenter Services
Voice Services(Local and Enterprise)
Transport & Fiber
IP and Data Services
Issued on July 29, 201413
Non-GAAP Reconciliation
Issued on July 29, 201414
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 and presented in the accompanying news release. 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 in the accompanying news release 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 July 29, 201415
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 July 29, 201416
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 and modification 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 and modification 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 July 29, 201417
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.
Schedule To Reconcile To Non-GAAP Financial Metrics
Issued on July 29, 201418
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 long-term 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 July 29, 201419
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 July 29, 201420
Schedule To Reconcile To Non-GAAP Financial Metrics
2013
($ in millions) Q2(2) Q1 Q2(1) YTD 2014 YTD 2013(1)
Consolidated Net Income (Loss) 55$ 112$ (11)$ 167$ (86)$
Income Tax Expense (Benefit) 12 7 11 19 25
Total Other Expense 193 145 153 338 372
Depreciation and Amortization
Expense 187 184 199 371 393
Non-cash Compensation Expense 16 10 33 26 55
Consolidated Adjusted EBITDA 463$ 458$ 385$ 921$ 759$
Consolidated Revenue 1,625$ 1,609$ 1,565$ 3,234$ 3,142$
Adjusted EBITDA Margin 28.5 % 28.5 % 24.6 % 28.5 % 24.2 %
Level 3 Communications, Inc. and Consolidated SubsidiariesAdjusted EBITDA
2014
(1) Adjusted EBITDA and the resulting Adjusted EBITDA Margin includes $15 million in non-cash
bonus related compensation in the f irst and second quarters of 2013 and excludes $13 million and
$3 million of severance charges in the f irst and second quarter of 2013, respectively.
(2)Consolidated Net Income, Adjusted EBITDA and the resulting Adjusted EBITDA Margin in the
second quarter of 2014 excludes $4 million of tw telecom transaction-related fees.
Issued on July 29, 201421
Schedule To Reconcile To Non-GAAP Financial Metrics
($ in millions) Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q2 2013 Q2 2014
Net Cash Provided by Operating
Activities 70$ 400$ 7$ 216$ 104$ 386$ 141$ 303$ 693$ 934$
Capital Expenditures (227) (198) (169) (208) (194) (189) (163) (241) (802) (787)
Free Cash Flow (157) 202 (162) 8 (90) 197$ (22)$ 62$ (109)$ 147$
Cash Interest Paid 234 123 190 145 178 161 128 149 692 616
Interest Income — — — — — — — — — —
Unlevered Cash Flow 77$ 325$ 28$ 153$ 88$ 358$ 106$ 211$ 583$ 763$
Rolling Four
Quarter Basis
Level 3 Communications, Inc. and Consolidated SubsidiariesCash Flows
2012 2013 2014
Issued on July 29, 201422
($ in millions)
Debt 8,386$
Cash and Cash Equivalents (637)
Net Debt 7,749$
LTM Adjusted EBITDA 1,768$
Net Debt to LTM Adjusted EBITDA Ratio 4.4
Level 3 Communications, Inc. and Consolidated Net Debt to LTM Adjusted EBITDA ratio as of June 30, 2014
Schedule To Reconcile To Non-GAAP Financial Metrics
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