Telecosm - Ike Elliott

Blogging Hiatus

Well, I've been back at Level 3 for two weeks, and I have to say I am really enjoying working with the great people at the company, many of whom I had the pleasure to work with before.  In my last blog post, I promised that I would keep you posted on whether I could continue blogging about telecom, and that I'd have to see how the new job went first.

Unfortunately, given my role in corporate strategy, it has become clear to me that not only would it not be appropriate for me to blog about Level 3, but it really wouldn't be appropriate for me to blog about telecom in general.  If I were to blog about telecom, then some of my readers would undoubtedly be wondering if my blog posts were somehow influenced by what I am working on at Level 3, and would be trying to read between the lines to see what they could glean about what is going on inside of Level 3.  And of course, even if I thought I could segregate my thinking and only blog about stuff that I'm not working on at Level 3, I couldn't be sure if I could really pull that trick off.  Sadly, that means I am going to have to put this blog on a telecom hiatus...so no telecom posting from here on out, unless and until something materially changes in my employment situation. 

I want to thank all of my readers...the give and take was really fun and I learned a lot from you.  I still hope to meet many of you face to face at some point. 

I'll leave the blog archives up at least until my TypePad subscription runs out in a couple of months...I can't promise it will continue after that. 

All the best,

Ike 

Level 3 Takes The Lead In Revenue Per Employee Race

Of the nine companies I track in the "revenue per employee" metric I started a few weeks ago, it looked like Equinix was the leader at nearly $189,000 per employee.  However, in a comment on this blog, Paolo Gorgo points out that with Equinix's latest quarterly financial report has trimmed the company's revenue per employee to about $169,000 per employee per quarter, propelling Level 3 Communications into the lead with its $179,715 per employee per quarter.  Thanks, Paolo, for the alert!

Level 3's Business Markets Group

Following up on Dutch's Friday comment about Level 3's Opex Margins and Revenue per Employee:

"A much more useful discussion would be: given Level 3's current revenues come from business units that are almost exclusively wholesale in nature and given the Company's need to grow revenues in the corporate / enterprise segment, what happens to Level 3's cost structure & OpEx margin (and yes, Revenue per Employee) if it's to be successful in growing it's presence in the Corporate/Enterprise segment?"

Good question.  I think you have to start with looking at how much of Level 3's revenue comes from the business markets group, as of the 2nd quarter:

BMG is about 25% of Level 3's revenues right now.  Last quarter it was 26% of revenues.  So, the current trend is not toward BMG becoming a much bigger slice of the pie, but let's suspend disbelief for a few minutes and assume that Level 3 is successful in achieving significant growth in the BMG in the future.  What might that mean to Level 3's Revenue per Employee?

I don't think it will make much of a difference, to be honest.  Even if you assume BMG revenue doubles over the next two years, to $482M per quarter, and even if you assume the BMG is only as efficient as Time Warner Telecom's $111K quarterly revenue per employee, and even if you assume that Level 3 achieves no additional efficiencies in revenue per employee in any of the other three market groups, I think you still get something like only an $8K drop in Level 3's overall quarterly revenue per employee.  I think this scenario is also wildly unrealistic.

A more realistic scenario would assume that Level 3 makes gradual gains in efficiency in all four of its market groups, and that each market group contributes annual revenue growth of 11% plus or minus 4%.  In that kind of future, Level 3's revenue per employee can be expected to continue to grow, even if BMG becomes a bigger slice of the pie.

Digging Deeper on Level 3's Revenue Per Employee

Last week we saw that Level 3 Communications' revenue per employee is approaching $200K for the first time in the company's history, and we saw that this is a whole lot higher than Verizon and AT&T, both of whom have about $100k in revenue per employee.  However, comparing Level 3 to AT&T and Verizon on this metric isn't really all that useful, as Dutch Brinkert pointed out in a comment on Friday's post.  As Dutch put it:

"Interesting analysis although I'm not sure these numbers (revenue per employeee) really surprise nor are meaningful when you take into account the differences in the business models between LVLT which has a relatively small number of customers who each generate relatively large amounts of traffic/revenue compared to T and VZ who both derive signifcant revenue streams from many, many customers who individually generate comparatively little traffic/revenues and require lots of hand-holding (think of all the folks working down at your local Verizon Wireless or AT&T store working to support your $100 a month wireless bill and your kids $5.99 a month unlimited text package).

Because LVLT has the vast majority of it's business in wholesale markets (Voice, transport, CDN, IP) one would expect their revenue per employee to be higher than T and VZ and suggesting that a measure like this represents a valid measure of managerial effectiveness is superficial."

Dutch makes a great point: it's hard to compare revenue per employee across wholesale and retail business models in any meaningful way, and that the metric is maybe not such a great measure of managerial effectiveness.  And I don't suggest that is is a good measure of managerial effectiveness.  However, revenue per employee does give us a peek into the employee productivity that should be expected from different telecom strategies. 

Level 3 took a largely wholesale approach early in its history, selling bandwidth, internet, colocation, and voice services to large carriers, service providers, and media/content companies.  The company only added a business markets group to their portfolio when they saw that Verizon and AT&T were consolidating many of their would-be customers, and that T and VZ planned to continue their vertical integration strategy, making it highly unlikely that they would outsource much of their network business to Level 3.  So, Level 3 pragmatically decided to buy more metro assets and business customers and created their own business markets focus.

Over time, if Level 3 is successful in growing their Business Markets Group, it might serve to dilute the apparent efficiencies Level 3 is enjoying in the form of low SG&A costs as a percentage of revenue, as compared to some of their peers.   However, I am guessing that even if Level 3 is successful in business markets, the dilution in revenue per employee will not be so severe that SG&A efficiency ceases to be an advantage for Level 3.

SG&A efficiencies, as measured by metrics like revenue per employee, derive from several sources.  Yes, wholesale strategies, in scale, should be more efficient than retail strategies, but more broadly, the source of SG&A efficiency is focus.  A focused strategy, in which the product suite is carefully guarded against bloat, and in which the sales force carefully targets their customers, can really help to contain expenses.   

To illustrate, let's look at how a few other Level 3 competitors stack up on the revenue per employee metric:

	Employees	Quarterly Communications Revenue (millions)	Quarterly Revenue Per Employee
Equinix	911	$      172	$188,804
Level 3	5,965	$   1,072	$179,715
Global Crossing, Limited	4,936	$      630	$127,634
Cogent	431	$        52	$120,650
Time Warner Telecom	2,859	$      318	$111,228
Paetec	3,900	$      404	$103,590
Verizon	235,000	$ 24,124	$102,655
ATT	310,000	$ 30,866	$ 99,568
XO	4,416	$      361	$ 81,748

Note: For companies on this list other than Level 3, AT&T, Verizon, Paetec and Equinix, revenue is from the first quarter because the companies had not yet announced actual second quarter earnings yet.  I did use Paetec's estimated 2nd quarter revenue range from their announcement last week to estimate revenue per employee for Paetec. 

Equinix tops the list with $189K in revenue per employee.  The company bill itself as "the leading global provider of network-neutral data centers and Internet exchange services for enterprise, content companies, and network service providers."  So, like Level 3, they are not entirely wholesale, but largely so, and they are certainly focused in their strategy.

Level 3 does well, though, in the revenue per employee metric, when compared against a broader group of companies.  I think this due to their largely wholesale focus and their tighter product and sales focus.   

The further down the list you go, the lower the revenue per employee.  Also, as Dutch pointed out, you get more retail focus lower on the list.  I'd also point out that as you go further down the list, you generally get a broader product portfolio and/or sales focus.   

I believe Dutch correctly diagnosed the primary cause of the disparity between Level 3 and AT&T in revenue per employee: wholesale versus retail strategy.  I think that you can generalize that even further, though, and say that companies with a tighter focus should rise in the revenue per employee rankings.

Dutch asked a number of other excellent questions in his comment on Friday's post, so I encourage you to check it out.  I'll try to offer some opinions on them later this week.   

Level 3's Revenue per Employee Beats AT&T, Verizon

Yesterday, we saw how Level 3's communications revenue per employee is approaching $200K for this first time in the company's history.  That's good news, but how does it stack up against Level 3's competitors?

Level 3 often compares itself to AT&T and Verizon as national telecommunications companies, though when you really look under the hood there are vast differences between Level 3 and the big telcos.  For one thing, Level 3 doesn't have any consumer businesses, plus Level 3 doesn't sell any wireless phone service.  Where the companies do compete head to head is mostly in business telecom services and in wholesale.  Plus, when you compare revenues, Level 3 looks tiny in comparison to AT&T and Verizon. 

However, when you look at revenue per employee, Level 3 looks pretty good:

	Employees	2Q08 Communications Revenue (millions)	Quarterly Revenue Per Employee
ATT	310,000	$           30,866	$        99,568
Verizon	235,000	$           24,124	$      102,655
Level 3	5,965	$             1,072	$      179,715

Why should it be that Level 3 is generating close to twice as much revenue per employee as the biggest carriers?  Shouldn't the greater scale of AT&T and Verizion create more efficiency, and better revenue per employee that Level 3? 

More to come next week...

Level 3 Showing Improvement In Revenue Per Employee

One of the struggles at Level 3 Communications over the years has been that the revenue generated from communications services has never really been sufficient to cover both network costs and the cost of the company's employees.  Until now, that is.  Finally, the company is showing progress in generating a reasonable amount of revenue per employee, and it's no coincidence that the company just generated positive cash flow for the first time in years in the second quarter of 2008.

Yesterday, I charted the number of employees at Level 3 over the years, and today I have combined that data with the company's reported quarterly communications revenue to get a trend of quarterly revenue per employee:

The last two quarters on this chart are an estimate of 3rd quarter and 4th quarter headcount levels (5,665 and 5,565, respectively), combined with an estimate of communications revenue levels($1.067B and $1082B, respectively).  As you can see, the quarterly communications revenue per employee is approaching $200K for the first time in the company's history. 

This ratio jumps around a bit, at least in part due to the effect of acquisitions.  Each time Level 3 acquired a big chunk of revenue, they subsequently began to either reduce headcount or sell off the parts of the acquired businesses that they didn't want to keep, or both.  The timing differences between revenue additions, cost cuts, and asset sales cause the "quarterly communications revenue per employee" metric to see-saw. 

Tomorrow, we'll look at how Level 3's revenue per employee compares to some of its competitors. 

Level 3 Headcount Trends

In the wake of a massive string of acquisitions, along with the massive migraine that Level 3 caused with integration challenges, Level 3 is finally making some headway on reducing SG&A expenses.  On the earnings conference call last week, Sunit Patel, the company's CFO said:

"On the headcount reductions, they have been coming down a few hundreds every quarter and similarly we saw a decrease again that much of a decrease by a few hundred, it's averaged anywhere from 3 to 415 in that range over the last couple of quarters."

When asked about the third quarter, Patel said:

"Well, as I said in my remarks that the Q3 reductions will be a little less, because while the headcount reductions and operating expense reductions will continue at the same pace, we will see a seasonal pickup in utility bills as because of the summer temperatures, the air-conditioning loads in our data centers or co-locations sites go up."

Naturally, investors are wondering what he meant by these comments.  Did he mean that the company has already let about 715 people go this year (415 in 1Q and 300 in 2Q), and expects to let another 300-600 go by the end of the year?  Or, did he mean that the company let go somewhere between 300 and 415 people this year, and expects to let go a similar number by the end of the year?  I'm not really sure, but given the $22M in sequential SG&A savings in the company's 2nd quarter earnings report, it's looking like Sunit meant the larger numbers of 715 in 1H08, with another 300-600 or so in 2H08, placing the end of year total communications-related headcount at about 5,500.  If so, this will create a strong tailwind for profit growth in the second half, assuming that cuts this deep do not impair the company's ability to operate.

The chart below shows my estimates of Level 3's communications-related headcount levels since their public listing, based on SEC filings and some guesswork on my part:

 

Level 3's Prospects

Level 3 Communications posted solid earnings yesterday, beating most analyst estimates, but many analysts were quick to point out that the headline numbers painted a prettier picture than reality.  Morgan Stanley and Citigroup are still decidedly pessimistic about Level 3's prospects.  I, on the other hand, own the stock and was pleased with yesterday's report, and I remain optimistic about the company's prospects.  In fact, I'm more bullish now than I was before yesterday's report.

The chief complaints among the naysayers:

• One-time events skewed the numbers, including the sale of the Vyvx advertising unit and a one-time $12M recognition of past deferred revenue. 
• Yes, the company achieved positive cash flow, but it was primarily through cost-cutting rather than through revenue growth. 
• Revenue growth in key market segments was disappointingly low, especially in the Business Markets Group.
• Gross margins are not improving, so the company is not realizing the promised synergies from the big six acquisitions of the past several years.  More of the acquired traffic needs to be migrated on-net in order to realize the synergies, and the company is not doing it.
• The company enjoys a higher valuation than its peers by most measures, and has not demonstrated a greater growth rate to justify that valuation.

I admit this laundry list is enough to give one pause about Level 3, so let's pick apart the complaints to see which ones are the bigger concerns.

• Yes, one-time events skewed the number upward.  The complaint about the Vyvx sale is particularly annoying, though...the company had a non-strategic asset and managed to sell it for a fair price.  That's a good thing.  If the company didn't have the asset in the first place then they couldn't have sold it to realize the gain.  Level 3 deserves credit for monetizing that asset.
  
  Also, while they company did have a one-time $12M recognition of past revenue, the forecast for the remainder of the year and beyond was actually revised upward (the company is now saying they will be cash flow positive for the year, rather than cash flow breakeven for the year).  So without the benefit of one-time events the company expects to at least make the prior projections, and probably will do better.  So quit your griping about one-time events.  The company is doing well even without those one-time events.
• The company successfully cut $22M from SG&A, a key factor in achieving positive cash flow.  Yes, investors in a growth company would rather see the company achieve positive cash flow through revenue growth, rather than through cost-cutting.  However, these SG&A cuts are the first step of a two-step process of realizing synergies from the acquisitions (the second step being optimizing the network to reduce cost of goods sold).  It's interesting to me, as an investor, that the company is reducing SG&A costs while simultaneously adding new payroll costs with new sales hiring.  In other words, the percentage of payroll that is spent on revenue-growing activities is increasing, relative to the percentage of payroll spent on operations and overhead.  True, the company isn't growing some key business units at a speed that satisfies the street, but the company is investing the cashflow of the business into juicing sales.  Revenue growth should follow, but given the history of this company, Wall Street wants to see the results before they give the company credit. That's understandable...hiring salespeople doesn't always create additional sales.  However, the company should be congratulated for having the discipline to cut SG&A spending as much as they have.  We should expect a continued and gradual improvement in SG&A for the remainder of the year, resulting in further improvements in cash flow.
• Business Markets Group isn't growing at the expected rate.  When questioned about this on the conference call, Neil Hobbs pointed to the fact that they have had quite a bit of turnover among Business Markets salespeople, and as a result many new salespeople are ramping toward productivity now.  That's great if the salespeople ramping toward productivity don't also churn themselves out.  Growing a productive salesforce is one of the more difficult tricks to pull off in telecom, requiring selectivity in hiring, diligence in monitoring sales performance, discipline in enforcing standards, and iteration when salespeople don't make the grade.  It's apparent that Level 3 is in the middle of that process right now in the Business Markets Group and the jury is still out on whether they will be successful.  This one certainly bears watching over the next two quarters.
• The street is looking for more improvement in communications gross margins, which remain stuck at 58.8%, only one percentage point better than a year ago.  I'd certainly like to see this number improve, too, but I think I understand part of why the number isn't improving quickly.  I think the company made some hard decisions about three quarters ago to focus first on SG&A cost reductions instead of the more capital-intensive work of moving traffic to the lowest-cost network.  I think this is a shrewd move aimed at generating positive cash flow sooner rather than later.  Generating sustainable cash flow has several near-term benefits:  it creates certainty about the company's ability to refinance maturing debt traunches, and it generates the money to invest in sales growth.  Later, as the growth in the sales force bears fruit, cash flow can be invested in growing the network to handle the new sales, and also in optimizing the network by migrating traffic to the lowest-cost platform. 
• Yes, the company enjoys a higher multiple than many so-called peers.  However, I have always had a hard time comparing Level 3 to any other company.  The company's network and focus are different from the large incumbents like AT&T and Verizon.  Many CLECs like Time Warner Telecom do not own Tier 1 Internet backbones.  No, Level 3 is a different animal, more of a pure-play on Internet growth than the others.  Does that justify a higher multiple, though?  No, not unless the company can demonstrate higher growth rates or sustainably better margins than their so-called peers.  The street is rightly saying "show me first, then I'll believe." 

So, the big question in my mind is this:  can Level 3's growth accelerate from here?  Time will tell.  Meanwhile, it's good to be past the old big question, which was: can Level 3 refinance their debt and avoid bankruptcy?  I think it is clear now that Level 3 has crossed this hurdle.   

US Telecom Recession? Not!

Level 3 Communications reported solid 2nd quarter earnings this morning, generally beating most of the predictions I've seen floating around the blogosphere, and achieving positive cash flow.  The company expects to be cash flow positive for the remainder of the year.  This report from Level 3, combined with yesterday's strong report from AT&T, shows that there is no US recession in the telecom sector as yet.

In the Q&A section of the Level 3 conference call, an analyst noted that Business Market Group growth is slow, and that Wholesale Voice Services growth showed the highest percentage growth of all sales segments, implying that maybe Internet traffic on the network is slowing down, as Cogent had reported recently.  CEO James Crowe answered by saying that Level 3 is seeing "no slowdown in aggregate demand," and suggested that competitors that are reporting a slowdown have product portfolios that are too narrow.  Level 3, with a broader product portfolio, is seeing cross-product substitution, such as content delivery networks substituting for dedicated Internet access, or private line services substituting for VPNs, etc.  Crowe was suggesting that companies that don't offer a complete product portfolio stand to lose market share when customers substitute one product for another.  He was also suggesting that companies that don't offer a complete product portfolio are unreliable measures of aggregate network services demand, because these narrow product portfolios don't capture this substitution effect. 

Sunit Patel added that Level 3 sees Core Network Services growth picking up for the remainder of the year. 

More analysis of the Level 3 report coming later today. 

Dial-up Refuses to Die

The new Pew Internet report paints a not-so-rosy picture of broadband adoption in the U.S., including a stubborn dial-up Internet access market that just refuses to die, and contrary to what you might think, that's good news for broadband leader Level 3 Communications. 

According to the Pew survey,

"62% of dial-up users say they are not interested in giving up their current connection for broadband."

When asked what it would take for them to switch, here's what the reluctant dial-up users said:

Criteria for Switching to Broadband	% responding
Price of broadband needs to fall	35%
Nothing can convince me to move	19%
Broadband needs to become available	14%

19% refuse to move, for any reason!  So, like the plague victim in Monty Python's Holy Grail, dial-up is "not dead yet."  However, dial-up internet access is certainly ill:

Dial-up is down to about 10% of the population, but the curve is flattening out somewhat.  One thing you have to watch out for in this chart, which is directly from the Pew report, is that the time scale on the X-axis is not constant, with the last three data points separated by 5 months and 9 months, and the prior data points separated by about 12 months each on average.  That means that the curve is not actually flattening as much as the chart seems to imply. But, the curve IS flattening.   

Why is this good to Level 3 Communications?  Because Level 3 owns most of the wholesale dial-up Internet access market, and it is a high-margin product for them.  In the company's first quarter earnings report, they reported $51M in "Other Communications Revenue", which is mostly from their managed modem wholesale dial-up Internet access product.  This $51M was a 39% decline from 1st quarter 2007.  The flattening dial-up defection curve as shown in the Pew report would indicate a smaller decline in the coming year than what was seen in 2007.

If Level 3 were to see a 39% decline in "Other Communications Revenue" in 2008, then the $51M per quarter would drop to about $35M in 1st quarter of 2009.  I think the Pew report is showing that Level 3 will lose less than 39% in the coming year in "Other Communications Revenue."  This might turn into a small up-side surprise for Level 3 over the next few quarters.

"Level 3 is Back"

The world is starting to wake up to Level 3 again. In an article from Telephony Online, Janco Partners analyst Donna Jaegers says "Level 3 is back," referring to reports that Cogent is feeling pricing pressure for wholesale Internet access, and noting that the pressure is coming directly from Level 3. 

This is great news for Level 3, and the first market evidence I have seen reported in the press that Level 3 is once again aggressively ramping its sales efforts.  Go get 'em!

Level 3 on the Hunt Again?

Rob Powell has a couple of interesting posts over on the Telecom Ramblings blog about Global Crossing's UK unit being up for sale.  Rob speculated about potential buyers in a post the next day, including the possibility that Level 3 Communications might buy the unit, or the whole company, but worried that LVLT isn't operationally or financially ready to make that purchase yet.

Then came yesterday's Level 3 Annual Stockholders Meeting, in which CEO James Crowe said that Level 3 is open to doing the right acquisitions in Europe or in content delivery networks.  Could it be the Level 3 is on the hunt again, and this time the prey is Global Crossing UK?  Or is Limelight in the crosshairs?

Level 3 Annual Meeting Report

I have just returned from the Level 3 Communications Annual Meeting, held here in Broomfield, Colorado.  CEO James Crowe and CFO Sunit Patel hosted a meeting that was in some ways surprisingly tame, given the company's most recent twelve month history, including the announcement of the Big Miss in October and the resignation of the President and COO in March.  We seem to be far enough removed from these events that the shareholders are optimistic, once again.

I'll skip all the formalities in this report...yes, they re-elected the board and approved a motion to maybe do a reverse stock split, and a few other odds and ends.  Not a lot of suspense there.

Instead, I'll skip right to the fun part: the presentation by Jim and Sunit on the company's results and prospects, and then the Q&A.  Jim was his usual eloquent self, reminding me once again of why he inspires such loyalty.  His presentation was full of worthy Crowe-isms, including these:

"Make no mistake about it, at the end of the day the problem is management, meaning myself and the other top managers of the company." (referring to the company's widely-reported provisioning issues announced in the 2nd half of 2008).

"We screwed up, and I assure you it won't be the last time.' (in the apology to shareholders that Jim issued at the end of the meeting)

"Only two?" (answering a question about two complaints from former employees about "fear management": a lack of management by walking around and a perception of an old boys network more interested in self-preservation than the best interests of the company.  Of course, Jim went on to say that the company is now focused on reaching out to all employees).

Jim has an honesty, humility, and buck-stops-here mentality that is all too rare among chief executives and is refreshing to see.

Jim and Sunit gave the standard Level 3 pitch (here), and then took questions.  Here are some paraphrased highlights from the Q&A:

Q: Are WiFi networks and mobile phone networks a threat to Level 3?

A: A good part of our business is connecting anntenas together.  Today, most antenna towers don't drive enough traffic to justify fiber connectivity, but over time, that is changing.  It's a future opportunity for us.

Q: When will Level 3 be operationally ready to do more acquisitions?

A: "If business plagiarism were a crime, we'd have to go to jail, because we want to be the UPS or FedEx of our industry."  Project Unity (the project to integrate and automate the operational systems of the most recent six acquisitions) should be 2/3rds complete by the end of the year, meaning 2/3rds of orders should flow through Unity by then.  Our operational problem, though, wasn't in Content Distribution or in Europe.  If we had an opportunity in Content or in Europe, we might do it.

Q: (Ike made a thinly-veiled attempt to settle his bet with Dan Caruso by asking) Is Level 3's 75-80% growth in IP traffic representative of the industry or is the industry growing more slowly, meaning Level 3 is taking market share by growing more quickly?

A: (Jim refused to take the bait, and confessed he reads this blog by way of saying he had to be careful with his answer) Level 3 can only speak for traffic on our own backbone.  We grew, what, 90% last year, is that right, Jack? (CTO Jack Waters confirmed from the audience) We're projecting 75%-80% this year.  The industry lacks good third-party measurements of Internet growth.  We believe that 70% of demand comes from individuals, now, people with broadband in the home.  We expect more video traffic to continue to move to the Internet, because it is cheaper.  Standard-definition TV became cheaper to distribute on the Internet back in 2003, and HDTV became cheaper in 2006.  We think the Internet will grow in the range of 60%-110%, and we see no end to that.  And whether it is 60% or 110%, it is extraordinary unit growth.

Ah well...I was hoping Jim could get me off the hook from buying Caruso dinner, along with some outrageously overpriced wine.  No such luck, yet.

If you are not familiar with my bet with Dan, click the continuation link below to learn more.

"Toes" Starts a Blog!

I have just discovered that Rob Powell started a blog last week, and for those that track Level 3 Communications, this is big news.  That's because Rob Powell is one of the best of the "anonymous analysts" that haunt the Level 3 Investor Village message board, where he goes by the alias "toes_that_twinkle." 

In my occasional trips to the Level 3 Investor Village message board, I have learned to scan for posts from "toes," because they are almost always thoughtful, never ranting, and most importantly, on the mark.  He really digs through the SEC reports, and as a result has very deep and informed perspective on Level 3.  If you track Level 3, you are going to want to add Rob's new blog to your RSS reader. 

To start, I highly recommend Rob's post on the "Virtuous Circle" that awaits Level 3 if the stock rises enough to start calling their convertible debt. 

Rob, welcome to my blogroll!  I will be an avid reader of your posts.

How Level 3 Gets to Positive Cash Flow

Yesterday I posted about how Level 3's positive earnings report, and their forecast of positive cash flow before the end of the year, could be due to couple of things:

• Cost reductions in both capital expenditures and SG&A
• More rapid growth in wholesale Internet access utilization and revenue

Meanwhile, I've been picking through the posts from the "anonymous analysts" over on the Investor Village Level 3 message board, and have discovered some additional factors that should figure in to an outstanding year for Level 3.  You've got to hand it to this particular message board: it has a number of very talented and thoughtful posters, and they turn over a lot of rocks, and they share their findings.  I often learn from them.

• Gross margin improvement: The company forecast a slight improvement in gross margins this year, but since gross margins came down a little bit in the first quarter, the company must be counting on improving gross margins more in the remaining three quarters.  This margin improvement should come from additional transitioning of services to on-net fiber, and from slight increases in wholesale voice pricing.  This could add on the order of $20M or so per quarter in additional free cash flow.
• Lower interest expense:  Level 3's bond interest expenses are seasonally concentrated in the 1st, 2nd, and 3rd quarters.  Less interest expense in the 4th quarter equals more free cash flow at that time.

Add these factors to continued improvements in SG&A forecast by the company, and you could get enough cash flow improvement to meet or beat guidance even without increasing sales much at all.  Meanwhile, the company is adding 100 salespeople in the first half of this year, so we should see some of those new hires begin to hit their stride in the 4th quarter.

Many thanks to a certain members of the Investor Village gang for this info!

Level 3's Wholesale Internet Business Turning the Corner

Listening to the Level 3 Communications quarterly earnings conference call this morning, CEO Jim Crowe offered the following forecast for the company's IP business for 2008:

Bandwidth Growth: 75-80%
Pricing Decline: 25-30%

Taking these two data points and plotting them on the table I published last week in my post on "Is An Internet Industry Resurgence Coming?", we can now plot a range for Level 3's IP and Data Services revenue growth for 2008:

Industry Internet Year over Year Revenue Growth
	Rate of Price decline in price per Mbps
Rate of Bandwidth Growth	20%	22%	24%	26%	28%	30%	32%	34%	36%	38%	40%	42%	44%
50%	20%	17%	14%	11%	8%	5%	2%	-1%	-4%	-7%	-10%	-13%	-16%
55%	24%	21%	18%	15%	12%	9%	5%	2%	-1%	-4%	-7%	-10%	-13%
60%	28%	25%	22%	18%	15%	12%	9%	6%	2%	-1%	-4%	-7%	-10%
65%	32%	29%	25%	22%	19%	16%	12%	9%	6%	2%	-1%	-4%	-8%
70%	36%	33%	29%	26%	22%	19%	16%	12%	9%	5%	2%	-1%	-5%
75%	40%	37%	33%	30%	26%	23%	19%	16%	12%	9%	5%	1%	-2%
80%	44%	40%	37%	33%	30%	26%	22%	19%	15%	12%	8%	4%	1%
85%	48%	44%	41%	37%	33%	30%	26%	22%	18%	15%	11%	7%	4%
90%	52%	48%	44%	41%	37%	33%	29%	25%	22%	18%	14%	10%	6%
95%	56%	52%	48%	44%	40%	37%	33%	29%	25%	21%	17%	13%	9%
100%	60%	56%	52%	48%	44%	40%	36%	32%	28%	24%	20%	16%	12%
105%	64%	60%	56%	52%	48%	44%	39%	35%	31%	27%	23%	19%	15%
110%	68%	64%	60%	55%	51%	47%	43%	39%	34%	30%	26%	22%	18%
115%	72%	68%	63%	59%	55%	51%	46%	42%	38%	33%	29%	25%	20%

It looks like 23-33% revenue growth for Level 3's IP and Data Services Business this year, thanks to a small reduction in the rate of price compression, and an uptick in traffic growth at Level 3. This is much better than 2007, when the company's IP and Data Services revenue grew at about 8 or 9%.  A higher IP and Data Services growth rate could be a big part of why Level 3 is comfortable reiterating its forecast of 8-13% growth in Core Communications Services revenue for 2008. 

If Level 3 is representative of the Internet industry as a whole, then maybe we are seeing the beginning of a "resurgence," as Dan Caruso calls it, in the wholesale Internet industry, here in 2008, in revenue terms.  Does Level 3's traffic growth of 75-80% match the industry, or is Level 3 expecting to take market share and grow faster than the industry?  I suspect that Level 3 is growing faster than the industry, but that we may actually be seeing an uptick on overall industry growth rates from the 50-60% we saw last year.

Jim Crowe pointed to video delivery over the Internet as the big driver, citing a stat from Comscore that 10 billion videos were viewed over the Internet in February, a 65% year-over-year increase.  A continuation or acceleration of that growth rate in 2008 could nudge the overall Internet's traffic growth above 60%, since video files are so large.

It's going to use data from Level 3 to track this in the future, though, because Level 3 has stopped reporting revenue by product group and is now reporting revenue by customer segment instead. 

LVLT: Crowe Predicts CFBE For Remaining Three Quarters of 2008

Level 3 Communications released a promising earnings report this morning, with the highlight being this statement from CEO James Crowe:

"...we expect to be free cash flow breakeven for the remaining three quarters of this year."

That's big news, even though Crowe only meant that the next three quarters would cash flow breakeven on a cumulative basis.  Prior to today, the company had only predicted positive cash flow, on a run rate basis, by the end of 2008.   Today's statement accelerates the march to positive cash flow by at least one quarter, and maybe by two quarters three quarters.

It appears that the company is achieving this milestone by managing its SG&A and capital expenditures downward.  SG&A for 1Q08 was $418M, a cut of $21M from the $439M in 4Q07.  Capital expenditures were down to $113M in 1Q08, compared with $153M in 4Q07, a drop of $40M. 

Cost-cutting your way to profitability by itself would not inspire celebration, but there was other good news in the report:

• CFO Sunit Patel reaffirmed EBITDA guidance of $950M - $1.1B for 2008
• Patel also reaffirmed the company's projection "that Core Communications Services revenue will grow 8 to 13 percent for the full year 2008."

There had been speculation that the company would need to cut its sales forecast for 2008, due to a worsening economy and lack of demonstrated sales momentum, so a reaffirmation of revenue guidance is a very good sign.  Growing sales for the remainder of the year is key for Level 3.

The only dark lining on this silver cloud was that 1st quarter results in core network services revenue were sequentially lower than 4th quarter 2007.  This high-margin segment declined to $774M in 1Q08 from $783M in 4Q07.  The company telegraphed that revenue would be down a bit in the 1st quarter on their last quarterly earnings call.

Overall, though, things seem to be heading in the right direction, and the market likes the news, too.  The stock is trading at $2.69, up 13.5% on the day, so far.

I may post more after the conference call.

Full disclosure: I own Level 3 Communications stock.

The Bear Strikes Back

Interesting post today from Dan Caruso over on the Bear on Business blog, regarding my contention that the wholesale Internet access business isn't growing quickly, at least in revenue terms, due to price compression.  I used data from Level 3's quarterly reports, and from Qwest's quarterly reports to support the hypothesis, showing that neither company's revenue line for the business grew much in 2007. 

Now Dan raises the possibility that Level 3's Internet and Data Services revenue line is sufficiently corrupted by other revenue items that it isn't a reliable indicator of the growth of the wholesale Internet access business.  Dan's hypothesis is that revenue from discontinued or de-emphasized businesses is included in the Internet and Data Services revenue line item...revenue from things like IP-VPN services.  He even speculates there might be some retail VoIP revenue in there.  Dan's hope is that these businesses are shrinking at a rate that offsets and masks the true growth rate of Level 3's wholesale Internet acccess business.

Dan might be right on this point (gasp!), Level 3 might have a bunch of other businesses cluttering up their IP and Data services revenue line item.  Even so, the burden of proof is still on Dan to show how much of that revenue isn't related to Level 3's wholesale Internet access business.  And, keep in mind, that it is not only Level 3 who is showing slow growth in wholesale Internet access.

I told Dan I'd buy him dinner if he can prove that the wholesale Internet access business grew quickly, in revenue terms, in 2007, and that is no small bet, given Dan's expensive taste in wine!  I'm ready to pay up, though, if I must, just for the joy of getting to tell Dan to go find a rock, for once in my life!

Triangulating Internet Growth

In yesterday's post, we saw that the big Internet backbone providers like Level 3 Communications really want to see a boom in the rate of Internet bandwidth consumption, and would be thrilled if that boom was accompanied by a sudden reduction in the rate of bandwidth price declines.  More units sold for more money per unit equals bigger profits.

So, are we heading for a boom?  To get a read on that, I looked at Level 3's "IP and Data Services" revenue for 2007 to see if I could spot a trend.   Now, looking at a single company, like Level 3, is kind of dangerous when trying to extrapolate a trend for an entire industry, so take this analysis along with a disclaimer that, well, it could be wee bit speculative!

Here was Level 3's IP and Data Services revenue:

	1Q07	2Q07	3Q07	4Q07
Level 3 IP and Data Services Revenue ($millions)	$     144	$     143	$     144	$     153

You can see that revenue was really very flat until the fourth quarter, when it saw a 6% quarter-over-quarter jump.  You can interpret this data in one of two ways:

• Look at the entire year, which gives you an 8% annual revenue growth rate, supporting the hypothesis that price compression is eating most of the revenue you would otherwise achieve from bandwidth growth, or
• Look at just at the fourth quarter, and assume every quarter thereafter will grow just as much, and you get a much prettier 25% annual revenue growth rate.

Okay, assuming 2007 is a good guide for 2008, that gives us a range of 8-25% revenue growth in 2008.  So, how much bandwidth growth does that imply?  To find that, we need an assumption on how much prices will decline in 2008. 

Again, looking at 2007 as a guide, if you assume that Level 3's 2007 bandwidth growth matched the overall Internet's bandwidth growth, then you would have to assume that Level 3 grew 50-60% in bandwidth in 2007.  Some sources think that Level 3 officials have dropped hints that the actual bandwidth growth at Level 3 was more like 90% in 2007.  So, we have a range of 50% to 90% bandwidth growth in 2007.  This much bandwidth growth, combined with what we know about Level 3's Internet revenenue, results in a range of price compression between 28% (if bandwidth grew 50%) and 40% (if bandwidth grew 90%), year over year, for 2007.

What does all this mean for bandwidth growth in 2008?  Well, if 2008 is similar to 2007 in terms of revenue growth (8 to 25%) and price compression (28 to 40%), then you get a range of potential Level 3 bandwidth growth as follows:

Likely Level 3 2008 Internet Bandwidth Growth Range
	Price Compression
Revenue Growth	28%	40%
8%	50%	80%
25%	74%	108%

So, you're probably thinking "Thanks a lot, Ike.  So we know it should be somewhere between 50% and 108% bandwidth growth in 2008.  Thanks for narrowing it down!" 

I know this isn't much of a prediction, but I wanted to take you through the calculation of how you end up with this range of performance, because the analysis might indicate that an acceleration in Internet bandwidth growth is already underway, at least at Level 3, and it may have started in the 4th quarter of 2007, as shown by Level 3's revenue data.  In just one example, if you pick the midpoint of the 50% to 108% range, you get a 79% year-over-year bandwidth increase in 2008, which is certainly a better number than the standard 50-60% we have seen for a few years.  If that accelerated growth rate of roughly 79% sustains for a few years, I would certainly call that a resurgence!

Of course, to use this as a prediction for the whole industry, it helps to believe at least six things:

• That Level 3's revenue growth rate is a good proxy for the whole Internet bandwidth industry,
• That Level 3's price compression rate is a good proxy for the whole Internet bandwidth industry, and
• That Level 3's bandwidth growth rate is a good proxy for the whole Internet bandwidth industry.
• That Level 3's 4th quarter jump in Internet revenue was not just a one-time seasonal blip, and that some of that jump was an accelerated growth rate that the whole industry is experiencing, and that will extend into 2008 and beyond.
• That Level 3's 8% growth rate in Internet revenue in 2007 represents a floor for 2008 Internet revenue growth (after all, it could be lower, couldn't it?).
• That a slowdown in the US economy won't create too much of a drag on growth.

Any of these might be an erroneous assumption, so as always, use this little exercise at your own risk!

PS - click the continuation link to see the math that relates revenue growth to bandwidth growth and price compression.

Level 3: Is Brady Rafuse Out?

Big news:  The Level 3 web site now lists Grant Van Rooyen as President, Content Markets, in place of Brady Rafuse.  Rumors are flying that Rafuse has left the company.  I don't know if that's true, and hope it's not...stay tuned.

UPDATE: A reader comment confirms that there was an announcement last week to all employees that Brady Rafuse had left the company. 

Level 3 Amassing CDN Patents

Dan Rayburn, who writes the Business of Online Video blog, has done some masterful sleuthing in a guest post on GigaOm about Level 3 acquiring 20 IBM Content Delivery Network patents.  We knew that Level 3 had done a cross-licensing deal with IBM last month, but the company did not announce that they were also acquiring these 20 CDN patents. 

Now we know why Grant Van Rooyen, Group Vice President of Content Markets for Level 3, said what he said in a recent Contentinople article:

"First and foremost, we feel we have all the intellectual property rights and protections we need to conduct our business," van Rooyen says. With regards to Akamai's intellectual property portfolio: "For a range of reasons, [we] believe we have no exposure to the 703 patent."

Grant was holding his cards close to his vest.  Thanks to Dan Rayburn, we got to sneak a peek.

Rayburn says he's doing an analysis of Level 3's CDN patent portfolio versus Akamai's.  It should be interesting reading!

Level 3: Why the Big Change?

These things do happen.  In some ways, it is remarkable that Kevin O'Hara survived for over ten years as the number two exec at Level 3, before stepping down on Monday.   The industry environment has been pretty treacherous during his tenure, especially for the last seven of these years.  I had already had enough by 2003 and elected to leave, but Mr. O'Hara stubbornly stuck with it 'til 2008.  It's a tribute to his perseverance, and to his political skills, that he continued for so long.

Level 3 didn't give us much information about why Mr. O'Hara stepped down, so we are left to speculate.  I've heard some theories that don't sound right to me, such as "O'Hara was fired because the provisioning fix is way behind schedule."  I posted earlier this week as to why I don't think that is the case, yet there has to be a reason why Mr. O'Hara stepped down.  So, in today's post I offer an example scenario to point out that there are other plausible explanations.

First some background:

Back when the provisioning miss was announced in October, an analyst asked CEO Jim Crowe why nobody had been fired.  I wrote a post praising Mr. Crowe for his response to that question, and if you are interested, you can check it out here, but here is what Mr. Crowe said:

"I'll say again, the responsibility for the provisioning issues, which I've tried to be clear about, and the consequences, which I've tried to be clear about, flows up through the operating organization to Kevin and I.  If I thought there was a lack of recognition of the problem, if I thought there was a lack of appreciation of the causes or the seriousness of the problem, I think it would be completely appropriate to have answers to your questions.  I see none of those, and I can assure you, by the way, if I didn't feel that way, our board would. I'm not of the school that says a mistake, in and of itself, is cause to start terminating people.  We're moving quickly, we're an organization that has covered a lot of ground in a short period of time.  We've made mistakes in the past.  We'll make mistakes in the future.  Analyzing those mistakes, understanding them, and correcting them quickly is what I believe is important, and if I see any evidence that that is not occurring, then I do think it is appropriate to look for other individuals that will fix those problems.  But I don't see any evidence of that.  Next question."

It was an interesting statement, in that Crowe backed up his team but basically left the door open to making changes after looking into it further.  Crowe resisted the knee-jerk impulse to find a scapegoat based on the inadequate information he had at the time, choosing instead to wait until he knew more.

Given the way events have unfolded, with O'Hara's departure four months later, here's one potential explanation.  Please note that this is a tale of my own making, and is meant to be an example of how things could have happened.  Certainly things could have happened differently, but the following version sounds credible enough to me.

Heading into the third-quarter conference call when the bad news was about to be announced,  Mr. Crowe started to roll up his sleeves and dig into the business, turning over rocks to see what was really going on.  He assigned key execs to make sure the provisioning fix was progressing.  He attended weekly meetings with those execs and with O'Hara.  In effect, he was looking over Mr. O'Hara's shoulder a lot.

I'm guessing that Mr. Crowe didn't find a single smoking gun that pinned the blame for the provisioning problems on Mr. O'Hara, but instead found more subtle issues that gave him concern and encouraged him to keep turning over rocks.  I'm guessing this detective work wasn't aimed only at the question of "Where are the provisioning problems and are we doing the right things to fix them?", but also focused on "How could we have missed this provisioning issue, and why was it such a surprise?"  The results in this latter area, while less black and white, were probably more worrisome to Mr. Crowe.

Meanwhile, Mr. O'Hara was getting signals that he may have lost the trust of his boss, and naturally wondered if he was still a shoo-in to replace Mr. Crowe as CEO when Mr. Crowe retired.  He probably had an honest conversation with Mr. Crowe about it, and I'm guessing Mr. Crowe probably gave an answer that was less than what Mr. O'Hara was seeking.  No longer assured that he would become CEO, Mr. O'Hara elected to step down rather than continue with that uncertainty, in effect accelerating what may have been the inevitable. 

The problem with the this tale is that it is only speculation.  It is not even based on rumors I have heard coming from current or former employees...it is based solely on my familiarity with the company, the individuals involved, and my own imagination.  There are countless other plausible versions of this tale, where it is not Mr. Crowe who loses confidence in Mr. O'Hara, but it is the board, or the large institutional investors.  The point is not whether this particular version is right.  Take this version with a grain of salt...I offer this tale only in an effort to show that there can be rational explanations to the executive change that do not indicate that the company's condition has worsened, as some seem to wish to believe.   

So, I'll go out on a limb and say that even with the exeuctive change, I believe the condition of the company is still consistent with the report from the February conference call, and that the company is steadily improving its operations.  Looking forward, the only negative I see from the executive change is that the company no longer has a clear succession plan.   Time will tell if I am right.

Level 3: Does Exec Shakeup Mean More Layoffs Ahead?

Since Monday's big announcement of leadership changes at Level 3, I've been looking into what the announcement does and does not mean.  So far, I've posted that

• The announcement doesn't mean that provisioning is still broken, and
• The announcement doesn't mean that the company is about to do more acquisitions.

Today, we'll look at the speculation on GigaOm earlier this week that the announcement means more layoffs are ahead for the company.  The specific quote from GigaOm:

"The disagreement might have been over possibility of layoffs. I have heard for quite some time that Level 3 is contemplating a big reduction in its head count. These have been postponed for a while now."

This question of layoffs at Level 3 is something of a mystery, especially since TheStreet.com published a report early last month that up to 1,100 would be laid off. The company gave no details of layoffs in their quarterly earnings report, so we are left to speculate at what happened and what will happen. 

In terms of how many were laid off already, I've heard reports from ex-Level 3-ers ranging from up to 200 in Broomfield, to up to 675 company-wide, have already been laid off in December and January.  It's hard to pin the number down because I've heard a lot of different data points, but I tend to believe the 675 number is in the right range. 

The company has said all along that as they realized operating efficiencies from acquisition integration work, they would gradually reduce headcount throughout the year.  By the end of the year, they may well reach the 1,100 total that TheStreet.com reported. 

As for GigaOm's speculation that the ongoing layoffs may have been a source of disagreement, and that the changing of the guard may portend higher layoffs, I have my doubts.  Jim Crowe, Kevin O'Hara, and Sunit Patel are industry veterans and would not be squeamish about a layoff plan, and my guess is they would be united in the view that some additional layoffs would be needed as the integration work proceeds.  Also, I doubt that O'Hara's departure has changed the planned course of layoffs for this year.

Bottom line: Level 3 has to manage SG&A downward this year, and some layoffs have been a part of that plan all along.  The executive shakeup hasn't changed the layoff plan, nor did the layoff plan motivate the executive shakeup.

Level 3: Do the Exec Changes Foreshadow More Acquisitions?

In the continuing series of posts analyzing the executive shake-up at Level 3 Communications, it's time to take on another theory, this one from Andy Abramson, who speculated that the shake-up is somehow connected with a forthcoming acquisition of XO Communications or Global Crossing, to be followed by a Sprint acquisition.  Andy is usually good for this kind of thought-provoking insight, and I do enjoy having my thoughts provoked, but after thinking those thoughts, I think Andy is stretching a bit too far on this one.

In order to buy a company, Level 3 would need three things:

1. The currency to make the purchase.
2. The operating capacity to do the integration of the acquired company.
3. The desire to own the purchased assets and/or customers.

You could argue the point on number 3, that Level 3 may or may not want to buy XO or Global Crossing or Sprint.  That might be a topic for another post someday.  For now, let's just simplify the analysis and assume that Level 3 does want to buy one or more of these companies. 

The problem for Level 3 right now is in categories 1 and 2.  Starting with number 1, which is a great place to start, I don't think Level 3 has the gumption to buy anything but a small company right now.  The company's stock is at $1.95, near an all-time low, so the company would be reluctant to do an all-stock acquisition, because they would have to dilute themselves an awful lot to do it, and I really don't think they want any of the three companies mentioned badly enough to do that kind of dilution. 

In terms of using cash on an acquisition, the company had about $714M cash at the end of the year.  With the company forecasting negative cash flow for 2008, and with $25M in debt maturing this year and another $362M in debt maturing next year, I think the company wants to conserve most of that cash to fund operations and/or debt retirement, rather than spending cash on an acquisition.  Selling more equity to raise cash at current stock prices would be ugly, so that's out.  Raising more cash through a debt offering in today's debt market is not attractive, either.

On number 2, the company is still playing catch-up on the string of acquisitions it made for the past several years.  Like a contestant at a speed-eating contest, they were plowing through hot dogs until they got to the one labeled Broadwing, and they choked.  The Heimlich maneuver has included re-assigning leading executives to focus on the problem, and re-forecasting 2008 revenues, and now the departure of the President and COO.  That's a lot of indigestion, so I don't think the company is ready to start shoveling in more hot dogs right now. 

I could be wrong, and Jim Crowe could be out there actively shopping for more companies to buy, but I doubt it.  If he is trying to shop with investors' money, he is likely to hear the investors tell him to take his prior purchases out of the box and enjoy them for a while, first. 

So, from where I sit, it looks like Level 3 will be on an acquisition diet until the company does some more digestion of the prior acquisitions.  That diet will include steadily managing SG&A downward for this year, which is hard to do when you are adding to the acquisition integration workload.

Level 3: Does O'Hara's Departure Mean Provisioning is Still Broken?

On Monday, Level 3 announced the departure of their long-time President and COO, Kevin O'Hara, without really explaining why, other than a statement from CEO Jim Crowe that "Kevin and I have agreed that a different perspective will be of benefit to our company."  Predictably, there has been wild speculation around the 'Net as people try to fill in the blanks, with much of the speculation being flawed, in my view.  Chief among these theories is that O'Hara's departure indicates that the provisioning problems announced in the 3rd quarter are still rampant, and Kevin took the fall because of lack of current progress there.

Contrary to popular belief, all indications are that progress on the provisioning issues has been slow but steady, and that the company has now created enough provisioning capacity to meet existing demand, and then some.  That's what the company said on their first quarter conference call last month, and opinions on the Broomfield grapevine seem to confirm it.  Some would say that the company has demonstrated that you can't trust what they say, as evidenced by optimistic presentations made in late September, 2007, that were then contradicted only weeks later on the company's bad news at their 3rd quarter 2007 earnings call, when the provisioning problems were announced. 

If anything, that third-quarter experience would make the company more careful about what they tell the public.   Couple that with the fact that Neil Hobbs was tasked with overseeing the fix, and that Hobbs was elevated to executive vice president of operations in this latest announcement, and it seems that the company is satisfied with the job that Hobbs is doing.  Matching all of this with other murmurings tells me that the provisioning problem is not worse now, and is in fact it is better and improving steadily. 

Please note: I'll be writing a series of posts this week about what the Level 3 executive shakeup does not mean and what it does mean.  Meanwhile, I am delaying the announcement of the next BUNGL award winner to next week so that I can provider more thorough coverage of the events at Level 3. 

Thank You, Mr. O'Hara

Everyone must carry two pieces of paper with him and look at them every day.  On one it is written: "You are as dust and ashes."  And on the other: "For you the universe was created." - Rabbinic saying

"I'm just a soul whose intentions are good. Oh Lord, please don't let me be misunderstood." - The Animals

My reactions to yesterday's executive changes at Level 3 are on so many different levels that I think it is going to take several blog posts to work my way through this one.  For today, I just want to focus on the departure of Kevin O'Hara, who was a founding executive of the company and served as one of its most senior executives for 10 and 1/2 years. 

This is written from the perspective of a former employee and a current shareholder of Level 3, and to be honest, from the perspective of somebody who did not see eye to eye with Kevin O'Hara on some issues.  Despite our differences over the years, I would like to personally thank Mr. O'Hara for pouring his life into this company for over ten years.  It's not an easy job, and I wouldn't have wanted to walk a mile in his shoes.

There is a little workout room in the basement at Level 3's headquarters, and I used to be a frequent early-morning visitor there.  Now and then, O'Hara would be there too, and one time, shortly after I had been promoted to a senior executive role, I went over and thanked him.  He smiled and said something about making the big leagues, and said something else about remembering that it might not last.   It wasn't a threat or anything...he just knew that ball players live a pretty precarious existence. 

Whenever I see a leader with O'Hara's stature and tenure step down, I think the baseball player analogy fits, because it's a lot like watching a player getting cut from a team.  It took a ton of work to make the team in the first place, it took even more work to stay there, and sometimes, in spite of the work, the team says thanks, but we won't be needing your services any more.

Like a player who has played his whole career with one team, O'Hara has Level 3 in his blood.  When you are leading a company of that size, it occupies your thoughts for almost every waking moment, and invades your dreams.  So, when I heard that the company was making a change, my first thoughts were of how badly he must have wanted to finish the job, and how he must have felt when he was taken out of the lineup.

I've heard that another former Level 3 exec once said (as they were leaving the company) that people at Level 3 are like cartons of milk...we all have an expiration date.  Now, I don't know if that is universally true, but it was certainly true for me, and now, for Mr. O'Hara.

Kevin O'Hara led the company during the most exciting and the most challenging period in the history of the telecommunications industry.  Over the last decade, there has been more bad news than good news for shareholders, and the company has struggled to stay afloat at times (though I don't think that now is one of the times that the company is struggling to stay afloat, despite its low market cap).  O'Hara oversaw round after round of layoffs, acquisitions, and consolidations.  Not a very popular role to play, to say the least.  Shareholders and ex-employees had good reason to be upset with the company, and by extension, were often upset with him, but from where I sat it looked like he was playing the hand he was dealt the best way he knew how.  In that kind of environment, it is impossible to please everybody all of the time.

Some would say that an executive departing amid corporate difficulties does not deserve thanks, and that the money is all the reward they need.  For my part, I couldn't disagree more.  By itself, money is never an adequate answer for anything in this life.

So, as a shareholder and a former employee, thank you, Kevin O'Hara, for over ten years of devoted service to Level 3 Communications, through thick and thin.  I wish you every success in your next endeavor!

Big Changes at Level 3

Level 3 Communications announced that Kevin O'Hara is stepping down as president and COO, and that Jim Crowe is assuming the title of president, along with his current title of CEO.  Neil Hobbs has been appointed as executive vice president, operations.  CFO Sunit Patel is staying with the company in that role, even though the company publicly announced in October that they were going to replace him. 

Wow.  I had heard this was coming but didn't blog about it because I don't want this blog to be a gossip column.  Big news, though. 

It will be interesting to see how the stock reacts today.  I'll weigh in later this week with some thoughts on the changes.