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Level 3 revamps for tough times

The fiber-optic operator announces layoffs and a massive overhaul to its financial projections as it struggles to survive the economic downturn.

Level 3 Communications announced layoffs and a massive overhaul to its financial projections Monday, as it struggles to survive the economic downturn. Its management has also agreed to halt selling of company shares.

The troubled operator of fiber-optic networks shed $1.65, or almost 22 percent, to $5.97 by market close.

Level 3 plans to cut 1,400 employees from its payroll, or about 25 percent of its 5,900 employees. The majority of reductions will be from its communications business and will include about 820 jobs in North America, 550 in Europe and 30 in Asia. Level 3 will also cut back spending and refocus its sales efforts on more established customers.

The revisions will reduce expenses by about $2.3 billion until the company reaches breakeven on an operating basis. With its Monday moves, the company should have enough cash to break even "with an appropriate cushion."

The moves are designed to keep Level 3 afloat during tough times, which already earned it a downgrade last month from Robertson Stephens analyst Jim Friedland. In his research note, Friedland said he thought the company's previous long-term estimates were too aggressive.

On Monday, Merrill Lynch analyst Adam Quinton doled out another downgrade of the stock, lowering his near-term and long-term ratings on the stock to "neutral," from a near-term "accumulate" and long-term "buy."

"The revenue outlook remains challenging," Quinton wrote. "While we applaud management's prudent actions here, they will in our view provide cash-flow benefit at the expense of revenue growth."

Level 3 Communications
Stock price from June 2000 to present.  
Source: Prophet Finance
This is the second time in two months the company has cut revenue estimates. Though CEO James Q. Crowe said Monday it expects to be "substantially in line with" its previous second-quarter projections--a loss of $1.83 a share according to First Call--results after that aren't going to meet forecasts, he stated.

"Over the past two months, we have experienced a reduction in the growth of recurring revenue," Crowe said. Level 3 estimates that it could lose about 20 percent of its current recurring revenue base over the rest of the year.

New projections include: 2001 revenue of $1.53 billion, compared to its previous estimate of $1.62 billion to $1.72 billion; and 2002 revenue of $1.92 billion to $2.02 billion, down from a previous projection of $2.52 billion to $2.72 billion. Capital expenditures are estimated to be $3 billion, down from $3.3 billion to $3.4 billion, for 2001; and $1.5 billion, from $2 billion to $2.4 billion, for 2002. The company also set a 2003 estimate of $1.3 billion.

The company now expects earnings before interest, tax, depreciation and amortization (EBITDA) to be about $600 million for 2001, $1 billion to $1.1 billion for 2002 and $1.6 billion to $1.7 billion for 2003. The company expects to turn consolidated EBITDA positive during the first quarter of 2002.

Net loss in 2001 is expected to be about $7.50 per share. Excluding one-time noncash charges of about 25 cents a share, the company expects a loss of $7.25 per share, unchanged from previous projections. First Call's consensus estimate predicts the company will lose $7.27 per share for the fiscal year.

A one-time charge of about $100 million is also expected in the second quarter, $40 million of which comes from staff-reduction costs and $60 million of which comes from charges resulting from project deferrals.

The company also issued an open letter to shareholders Monday stating that its top executives won't sell any shares of the company's stock until further notice, in order to quell accusations that they have been selling on inside information. Effective with the close of trading on June 22, President and COO Kevin O'Hara, CFO Sureel Choksi, Chairman of the Board of Directors Walter Scott, Jr. and CEO James Q. Crowe have agreed not to sell shares of common stock of the company until further notice.

However, Crowe will unload 2.95 million shares of common stock to Scott, who has agreed to purchase them. Crowe said the money from the transaction will allow him to pay off debt accumulated from past losses on Level 3 stock. The deal will also be subject to Scott's agreement not to sell.

Analysts and investors will be awaiting more news from the company's conference call at 1:30 p.m. PDT.