Job cuts are not new in the communications market, which has seen layoffs from hardware makers such as Nortel Networks, Alcatel and Lucent Technologies, which have been affected by reduced spending from the carriers they supply.
However, the layoffs at the Broomfield, Colo.-based data communications service provider seem to depart from the trend.
In a statement, Chief Executive James Crowe said the reduction is part of a shift in focus toward the higher growth segments of the company's business. He added that Level 3's total employment will grow during the year through hires in sales, provisioning and network operations.
Josh Howell, senior vice president of corporate marketing at Level 3, said the cuts are just a part of the transition the company is making from building a network to running one, and said the company aims to hire in areas that will push services towards the customer.
"What we've done over the last three years is build the factory; now we're ready to ramp up and sell the cars," he said.
Howell added that current market conditions played a part in the move and compelled the company to clean house faster instead of making the cuts over a period of time.
He also acknowledged that Level 3 wanted to do some "belt tightening where appropriate and prudent," but did stress that the company is in a strong position. Level 3 had $4.2 billion in cash on its balance sheet as of December, $5.3 billion including existing lines of credit.
But layoffs are generally not a sign of great times, as one analyst pointed out. "You generally don't announce layoffs if business is percolating along," said Mark Langer, an equity analyst at Epoch Partners. The reduction "portends to a softening situation at Level 3."
Langer has faith in the company and the industry over the long term because demand for Internet access and bandwidth will only increase. However, he does wonder what kind of message the cuts send to the financial community when taken with the company's March 2 reaffirmation of its guidance for the first quarter and full-year 2001.
"This sends a mixed signal to the market, and in today's market, mixed signals mean sell," he said.
Investors are withholding judgment for now. In after-hours trading, the stock remained unchanged at $12.06 according to Island ECN, an electronic trading network.
During the day, the stock fell $3, or almost 20 percent, to $12.06 on a volume of about 22.6 million shares, nearly four times the stock's average daily volume. Deutsche Banc analyst Rohit Chopra reiterated his "buy" rating on the stock, but cut his price target to $50 from $137 a share.