Level 3 maintains focus on smart growth, keeps M&A options open

Level 3 Communications (Nasdaq: LVLT) remains confident that ongoing growth in business services and a restart of wholesale network sales will help it meet its growth targets.

Jeff Storey, Level 3Speaking at this week's Credit Suisse Global Media and Communications Convergence Conference in Miami, Jeff Storey, president and chief operating officer for Level 3, said it is seeing some uptick in not only its Vyvx broadcast business but increasingly in its wholesale and enterprise segments.

"If you look at the wholesale side of our business, there was under spending and people cut back and rationalized after a series of acquisitions," Storey said. "There's not a catch up with wholesale, but there's a restart. Carriers utilized their capacity to a point they need to start adding to it."

In 2011, Level 3 will continue to invest new capital in areas such as colocation and metro area fiber-based networks to extend services to new and existing business customers.

Storey said that in the enterprise market it's "a bit about demand growth, but it's also more about taking share in the large enterprise and the federal markets, growing that business and executing well."

Focus on enterprise
One of Level 3's growth drivers since 2009 has been to focus more on enterprise services.

Taking more of a focus on the mid-market customer base, Level 3 is providing a mix of SIP-based VoIP, Ethernet, UC and increasingly data center and cloud services.

What's changed about Level 3's enterprise focus is its switch from being run as a centralized structure to a "going local" strategy in 2009, which included the installation of general managers into each individual markets and looking at the business from a market by market basis.

"We've had 3 percent growth in mid-markets during the last quarter and we're seeing those kinds of things pay off," he said. "It's just us executing in the footprint we have better than we were, and large enterprise and federal government is much the same story."

Of course, the past two years have been one of change in the business service space. In addition to seeing competitive carriers that were aggressive with pricing retracting during the recession, large RBOCs like Qwest (NYSE: Q) dialed down their efforts as they moved through the integration process with CenturyLink (NYSE: CTL).

However, Storey believes Level 3 is winning over new customers with services that they can't get from incumbent carriers.

"Price is not the primary driver for selecting Level 3 over others, but rather it's a transition going on in their business such as migrating from TDM to VoIP SIP trunking or they are looking at our Unified Communications products or our VPN products," he said. "As their businesses needs are changing, their telecommunications needs are changing there is a buying opportunity."

Some of the other growth opportunities for the enterprise service space are centered on data center and cloud services.

To date, Level 3 has between 6.5 million and 7 million feet of space with 2.5 million feet of space to sell to customers. With each of its collocation centers are designated in the major cities, Storey said that there "$100-$150 million of opportunities to expand and grow that business and it's all about increasing cooling and power."  

This data center expansion obviously will complement its ongoing movement into more managed services, including cloud services through a multi-pronged strategy that it will deliver itself or through partnerships in the cloud ecosystem.

"We believe we have great opportunity with cloud computing through transport services, through colocation services and partnering with other people to provide cloud services," Storey said. "We think those trends are very good for our business, whether it's selling  transport services or the VPN that helps the enterprise get to the cloud."  

Smart growth strategy
With over 100,000 opportunities within 500 feet of its fiber footprint, Level 3 is focused on a growth strategy that targets multiple opportunities.

"We typically won't build from our network to 500 feet within a building and stop, but rather we'll build it around through several other buildings to expand our network and increase our footprint so we're adding addressable buildings as our network expands," Storey said.

Throughout 2011 and 2012, Level 3 will continue to focus on extending fiber to more buildings that it does not have on net today.

Instead of the build and they will come mentality that was the fashion in the late 1990s, Level 3 will expand their fiber network to specific locations based on a couple of factors: a specific customer needs a lot of bandwidth, reducing off-net costs it is paying to a carrier partner, or there are multiple buildings and cell towers close by.

"When we look at adding a building, we don't go building by building, but rather how many buildings can we go past and how we can route our fiber so we can expand our network and not just building a bunch of laterals into an individual building," Storey said.

Of course, the wireless backhaul factor is always top of mind for Level 3's wholesale business during the recent quarters.

Similar to building fiber network to new buildings, they want to ensure they can get other opportunities to justify the network investment.

"Cell towers are great as long as they are sitting next to a building," Storey said. "We see great opportunities with cell towers, but you have to be careful with cell towers because you can build stuff that's not profitable. We make sure that the cell towers we go to we have existing customers and there's an overall network strategy that's included in that cell tower."

Consolidation is good
Having already bought out the former WilTel, Broadwing, Progress Telecom, and ICG, Level 3 has done its fair share of service provider consolidation over the years.

However, Level 3's rapid consolidation drive came with the price of integration, a process that it went through between the years 2007-2008. This prompted Level 3 to "pause" from doing any other deals.

With that integration behind them, Storey said that while it will look for potential future deals, but only if they make sense.

"About a year and a half or two years ago, we said that pause is off and our integration won't inhibit our ability to acquire companies, but since then you have to have a willing seller and a willing buyer," Storey said. "We actively look at a number of deals to figure out how to consolidate and build the business organically and inorganically."

The best kinds of opportunities will be those that come on three angles: backbone networks, expanding the fiber metro footprint, and technology (softswitch and CDN).

"We look at all of these categories, and each one appeals to us for a different reason," Storey said. "Backbone networks provide synergies, technology has product capabilities and metro is filling in what we already got."

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