Level 3's Patel: Dark fiber opportunities are on the rise

Level 3's overall wholesale business revenues may be gradually declining every quarter, but it sees a bright spot in the dark fiber business, a company executive told investors.

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Speaking during the Citi 2015 Global Internet, Media & Telecommunications Conference, Sunit Patel, CFO for Level 3, said that although the company continues to see declines in the broader wholesale business, there's continual demand for dark fiber and network infrastructure from a host of carrier and content companies.

"Within that story it's a mixed bag: There is the underlying theme of bandwidth demand growth that everyone has to deal with--even if it's a deflationary revenue stream, they still have to deal with bandwidth demand," Patel said. "Some of that does manifest itself in the need for more metro infrastructure that companies like us and Zayo are a beneficiary of, whether it's connecting to cell towers or going from mobile switching centers, or long haul networks."

While Level 3 won't release its fourth-quarter 2014 earnings until Feb. 4, the service provider reported in the third quarter of 2014 that transport and fiber revenues rose 5.8 percent to $511 million.

"One of the things that we took pains to point out in our last quarter's earnings release is that we are also in the dark fiber business, which is six percent of our revenue base," Patel said. "There's plenty of business to be had for us in that segment and we think that will continue as demand sets for bandwidth get larger for many companies that have much larger scale in terms of their requirements."

Besides selling dark fiber wholesale services, Level 3 sees new fiber and overall enterprise service opportunities through its acquisition of tw telecom.

By acquiring tw telecom, Level 3 immediately bolstered the amount of buildings, which includes a mix of content providers, government and other enterprises, connected to its fiber network.

"When I look at what tw telecom does for us, we in the U.S. have about 10,000 buildings on-net and tw telecom triples our network footprint in the U.S.," Patel. "From a velocity or vectored perspective, we were adding about 500 buildings a year in North America while tw telecom was adding 2,000 so it quadruples our rates of building additions, which is very powerful."

Patel said he expects that the combination of the two companies will also enable them to improve the overall operating leverage to get to an 8 percent growth rate for the enterprise business. Today, the enterprise business makes up 70 percent of its revenue mix, while wholesale makes up 30 percent.

"Combining these two companies together further improves our operating leverage both from an incremental EBITDA margin perspective and from a capital intensity perspective," Patel said. "The average distance to a building in any metro area becomes shorter for two companies' networks in a city than either one company's network."

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