Level 3’s softer enterprise results affected by customers' hesitance over CenturyLink merger

A Level 3 Communications network monitoring center (Image: Level 3)
Image: Level 3

Level 3 Communications, which is in the process of being purchased by CenturyLink, says some of its enterprise customers are taking a cautious approach to signing new deals with the service provider as the two companies come together.

Jeff Storey, CEO of Level 3, told investors that while customers are holding back on large purchases, he remains confident that the CEO succession plan at the new company is allaying customer concerns.

Jeff Storey (Level 3)
Jeff Storey

“With the longer close time for the CenturyLink transaction compared to previous Level 3 acquisitions, we have seen some customers taking a wait-and-see approach to making decisions,” Storey said during the earnings call, according to a Seeking Alpha transcript. “However, a few recent announcements that helped with some of this distraction. One is the succession planning announcement of my role as COO at close and moving to CEO.”

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As part of the transition, CenturyLink laid out its CEO transition for the new company in June. Upon completing the acquisition of Level 3, Storey will become CenturyLink’s president and COO after the telco completes its acquisition of Level 3 Communications later this year and will then succeed Glen Post as CEO of CenturyLink on Jan. 1, 2019. Post will then become executive chairman of the company's board of directors.

The COO organizational structure will include five business units and several functional support groups, each of which will have their own leaders that will directly report to Storey.

“Another factor is the announcement of my direct report team, the customer-facing units, and the commitment to the Level 3 General Manager model, which focuses on the unique needs of each market and covers the majority of the enterprise sales force in North America,” Storey said. “I believe our customers appreciate this approach to the market and have been pleased to learn that we will continue to support them in the same way.”

While CNS sales grew slightly at 1%, Level 3 reported that light sales in the fourth quarter of 2016 and the early part of the first quarter of 2017 had an effect on the second quarter results. Although the wait-and-see factor was an issue that impacted second quarter results, Storey said he’s confident that its current customers will see value in the breadth of solutions the new combined company will bring to bear.

“We think that our customers are responding to not only our products and services, not only our capabilities to deliver those products and services, but also to the combined company and the belief that the combined company can serve them well,” Storey said. “I can't attribute how much of the fourth quarter had to do with this or that. But I do think that we're seeing continued improvement in the sales and think that that's getting behind us.”

Minimizing customer disruption

One of the key issues that Storey wants to ensure is that the integration planning with CenturyLink won’t affect the service levels that its customers get.

To achieve the balance of integration and minimal customer disruption, Storey said that the company is focused on a number of areas, including developing clear processes, while making it easy for its sales support team to easily introduce new standardized products.

“As we think about integration planning, our customer experience is the most important and differentiating aspect of the services we provide,” Storey said. “Providing a great customer experience drives every decision we make, including our organizational structure.”

While Level 3 is confident it can reach the $975 million in synergies it set upon announcing its merger with CenturyLink, the initial focus is to continue to serve the customers well.

“We'll get the synergies as well and we'll focus initially on them, but the main focus needs to be how we do this in a way that does not disrupt the customer experience,” Storey said.

Enhancing the SMB market

Level 3 may be increasing its wallet share with large enterprises, but the service is also making progress with gaining profitability in its small- to medium-sized business (SMB) customer base.

Concerns about Level 3’s SMB segment emerged during the third quarter of 2016 when the provider saw revenue softness as smaller customer churn continued to offset gains made by its larger enterprise base. At that time, the service provider implemented changes that challenged revenues on the lower end of its customer base. By moving 8,000 of its customers to inside sales, Storey said Level 3 said did not engage as well as it should with its lower-end customer base.

“If you look at the second quarter, we think that we're doing a good job with those customers now,” Storey said. “But we're going to heavily lean on expertise that exist in both companies. This is not just one company has all the answers.”

When Storey takes over as COO of CenturyLink, one of his direct reports will be Vernon Irvin, who will become president of the company’s SMB, local government and education division. Irvin will oversee CenturyLink’s sales to small and midsize business (customers with 1-500 employees) as well as the local education and government teams. This structure will ensure this segment gets the attention it deserves.

We're going to continue to build on the expertise that Level 3 has, but we're going to also make sure that we continue to evolve the products and services, our go-to-market strategy, our execution around that specific customer base for Vernon and his executionand his customer-facing unit,” Storey said. “We'll do the same thing with each of our business units, but in particular on the small and medium business side.”

Here’s a breakdown of Level 3’s key metrics:

Core Network Services: Total CNS revenue was $1.96 billion, up 1% year-over-year. Within CNS, results were mixed as wholesale revenues declined 6% to $506 million, while Enterprise rose 3% to $1.5 billion.

For the second quarter, total revenue grew 0.6%, CNS revenue grew 0.8% and enterprise CNS revenue, excluding UK Government, grew 3.6%.

Wholesale Services: Total wholesale CNS revenue declined 6% to $506 million, compared to a 7.4% decline last quarter. Performance continues to be driven by the effects of industry consolidation from wireless and cable customers.

Specifically, Wholesale Voice Services (WVS) revenue was $96 million in the second quarter 2017 compared to $100 million from the year-ago quarter, representing 5% of total revenue.

Financials: Level 3 reported total revenue of $2.06 billion for the second quarter 2017, compared to $2.05 billion for the second quarter 2016. In the second quarter 2017, the company generated net income of $154 million and basic earnings per share of $0.42.

For remainder of 2017, Level 3 said it is maintaining its forecast of adjusted EBITDA of $2.94 billion to $3 billion and free cash flow of $1.10 billion to $1.16 billion, excluding CenturyLink acquisition-related expenses.