Amid a telephone company market stung by financial failures, retrenchment and concern about ventures such as Crowe's latest, Level 3 Communications, the chief executive has attempted to allay the fears of investors on two fronts in recent weeks: by writing a letter to shareholders reconfirming the solid foundation Level 3 is built on and by duking it out with skeptics such as renowned futurist George Gilder.
Crowe knows as well as anyone that perception is everything on Wall Street, particularly in worrisome times such as these. He has passionately defended the fiber-optic carrier as being different from its struggling competitors, such as PSINet and ICG Communications, among others. What's so special about Level 3?
It has billions in cash in the bank.
"At this point, the capital markets have dried up," said Marc Liggio, vice president of broadband research at Allied Business Intelligence, a technology forecasting company. "What it comes down to is are you making money and do you have the money to fund your network?"
Level 3 has completely pre-funded its network construction and has about $5 billion on its books, with at least another $3.5 billion available via a combination of undrawn lines of credit, guaranteed bandwidth sales contracts, and equity investments the company could sell. That has at least quelled short-term questions about the company's future, and Crowe has been quick to remind the outside world of his company's position.
In a positive letter to shareholders earlier this month, the Level 3 chief assured investors that the company is strong and that revenue targets will be met, despite the ongoing stock market uncertainty and a communications industry fraught with financial woes and strategic shifts.
Separately, Gilder offered a critical assessment of Level 3 at a recent Internet financial conference in New York. Crowe later ripped Gilder in another open letter, describing his report as erroneous.
Level 3, which will soon complete construction of a 16,000-mile U.S. fiber-optic network as well as international networks, was upgraded to a "buy" rating from "accumulate" recently by Kaufman Bros., a communications investment bank--a stark validation of a start-up telecommunications company in a frothy industry.
Level 3's stock has recently been flirting with 52-week lows, trading Wednesday at $31.50 amid light trading, putting the company's market capitalization at just over $11.5 billion.
But that performance could be viewed as solid compared with other telecommunications concerns, such as PSINet, which had been reduced to a $1.22 stock, with a market cap of $240 million, in Wednesday trading. The company recently announced that it was exploring strategic options, including a possible sale.
Caught in market slide
Some analysts think Level 3 shares have been hurt by the broad communications sector slide and are now oversold. "We cut the stock at $85. Now it's down 50 points. It's time to buy," Kaufman analyst Vik Grover said.
Similarly, Banc of America Securities recently reiterated its "strong buy" rating on Level 3, citing the overall communications market downturn, rather than poor performance or a worrisome business, as the reason for the company's recent stock slide.
Level 3 executives recognize that the company has been caught up in the overall market downturn. But they believe the company's upgradeable network--Level 3 has 12 empty underground conduits it will fill in the future with fiber-optic cables and advanced technology--and sufficient cash stores puts it in an enviable position.
"But for the stock price, we're in a great position," said Ron Vidal, group vice president of new ventures at Level 3 and a company co-founder. "Everybody gets wet in a storm, and there's a storm out there right now."
Level 3's total financing is expected to take the company, which continues to spend more money than it generates, all the way through to cash flow break-even status in 2004 or 2005, according to the company.
"Having the money in the bank is great. It gives them a lot better chance of surviving because they don't have to go back to the capital markets," said Allied's Liggio. "But if a company isn't profitable yet there's only so much you can say about it, because it's a crap shoot as to whether the market will look the same in several years."
Analysts agree that the company's funding situation is what has really set Level 3 apart from many others, particularly several of the competitive local-phone companies, which have been hit hard lately. But company executives aren't worried.
"Some investors are saying, 'The sky is falling.' The big guys are struggling, the small guys are hurting, the dot-coms are failing, the IPO calendar is bare, and the capital markets have dried up," Level 3's Vidal said. "But we don't have to change a thing we're doing. We like the spot we're in today."
In his upbeat letter to shareholders, Crowe, who sold his previous network operator venture, MFS Communications, to WorldCom, announced the company is comfortable with fourth-quarter revenue projections and hinted that revised--potentially higher--2001 revenue projections could be forthcoming.
"We continue to believe that we have the right operation, financial and technical plans to capitalize on one of the great opportunities in business today," Crowe wrote. "We believe that we have built the most advanced communications network in the world and, more importantly, one that continues to advance as technology advances."
As a wholesale communications provider that generates roughly one-third of revenues by selling network capacity, or bandwidth, to other carriers, Level 3 is subject to the same quickly falling profits. Consumers have been demanding lower-priced services, which has also afflicted companies such as WorldCom and AT&T. But Level 3 has its advantages.
For one, the company is building its entire network to be based on Internet Protocol (IP ), which is expected to be more efficient, leading to lower costs.
Level 3, according to representatives, generates about a third of its revenue from co-location services, whereby customers rent space for their Internet equipment in the company's more than 50 worldwide secure data center facilities. Level 3 also generates about one-third of revenues from operating dial-up modem pools for major Internet service providers, such as America Online and EarthLink, as well as from other services, including voice-over-Internet technology.
Those assets leave some industry watchers wondering why Level 3 stock has been pounded just as heavily as some of the communications companies in more dire straits.
"We are of the view that this recent market action makes little common sense, given that the architecture alone should have tremendous value," Banc of America Securities analyst Andrew Hamerling said in a recent report.
Despite the hurdles and plummeting stock price, financial analysts point to Level 3's big-name customers--such as Yahoo, Akamai Technologies and France Telecom--as well as its ahead-of-schedule and pre-funded network construction, as huge positives.
Crowe hopes those kinds of customers on Level 3's resume will help him prove that the pen is indeed mightier than the cost-cutting telecommunications sword.