Level 3’s credit rating upgraded by Fitch, reflecting enterprise revenue growth

Fitch Ratings has upgraded the Issuer Default Rating (IDR) assigned to Level 3 Communications, citing ongoing revenue growth in the service provider’s enterprise unit.

While Level 3 saw a small hiccup in the second quarter in the lower end of the enterprise market, the service provider it has taken measures to mitigate future issues.

What bodes well for Level 3 are three main strategies being emphasized by the company: increasing enterprise customer sales, having a sizeable metro fiber network, and growing its set of IP-based products.

“LVLT's operating strategies are aimed at shifting its revenue and customer focus to becoming a predominantly enterprise-focused entity,” Fitch said in a research note. “The company's network capabilities -- in particular its strong metropolitan network, and broad product and service portfolio emphasizing IP-based infrastructure and managed services -- provide the company with a solid base to grow its enterprise segment revenue.”

Regardless of the near-term losses Level 3 faced in the second quarter, it’s clear that growth in enterprise service revenues is helping to boost the company’s core network services (CNS) revenue. In the second quarter, Level 3 reported $1.95 billion in CNS revenues, rising 0.7 percent year-over-year on a reported basis, and 2.8 percent year-over-year.

Within the CNS unit, IP & Data and Transport & Fiber were the dominant segments, generating $915 million and $575 million in revenues, respectively. These segments now make up 47 and 30 percent of Level 3's CNS revenue mix. Enterprise revenues made up about 73 percent of Level 3’s CNS second quarter revenues. From a regional perspective, North America CNS revenue made up 57 percent of total CNS revenue.

“LVLT's enterprise segment continues to drive overall revenue growth within CNS,” Fitch said. “The company is positioned to benefit from favorable secular demand trends including explosive bandwidth demand growth (video), the growth in number of devices connected to the Internet, and the increasing globalization of enterprises.”

As a result of the aggressive buildout of its fiber network in North America and its acquisition of tw telecom, Level 3 has also been able to maintain its lead over Verizon in the U.S. Ethernet race, taking the second place position under AT&T.

Additionally, mergers and acquisitions will be a factor for Level 3, particularly as it looks to scale its holdings in Latin America and Europe. The service provider has intimated during its earnings calls that it would consider deals in both of these regions to bolster its global reach.

Earlier this year, Level 3 announced it expanded its metro Ethernet 2.0 services into 27 new European markets. The business services-focused move is part of a broader expansion effort Level 3 has slated for the Europe, Middle East and Africa (EMEA) region in 2016. Level 3 plans to expand Ethernet into an additional 15 EMEA locations later this year, all of which are connected to their network.

“Fitch expects that M&A activity will remain a key component of LVLT's overall growth strategy,” Fitch said. “M&A is expected to focus on building incremental network and product capabilities and building scale in Europe and Latin America.”

Similar to its growth in the North American Ethernet market, Level 3’s aggressive buildouts in Europe and Latin America have helped the service provider advance its lead over Verizon again in the global Ethernet market, according to VSG. The service provider surpassed Verizon as the fifth largest service provider as it expands service availability in Europe and South America.

However, Level 3 still trails Orange Business, Colt and BT. These three service providers' aggressive network builds outside of their home countries have enabled them to stay on pace with the demands of their largest global enterprise customers.

Related articles:
Level 3 discontinues more TDM-based voice services in Idaho and Washington, but supports hybrid environments
Level 3 says Comcast, Charter, other cable operators can’t match its network scale, service breadth
Level 3’s Patel says 5G backhaul represents a good fit for our metro fiber network
Level 3 overtakes Verizon's global Ethernet lead, gains ground in Latin America, Europe
Level 3's Storey: We'll do more to make smaller customers more profitable