Level 3's Storey: Lock-up agreements are stalling company's growth

The way incumbent providers structure their wholesale agreements is impeding future growth for Level 3 Communications, according to a top executive.

Speaking to investors during the third quarter earnings call, Jeff Storey, CEO of Level 3, said that if the FCC were to get rid of the so-called demand lock up agreements ILECs have for legacy TDM wholesale services it could open new opportunities for the company to serve other customers.

Under the current structure, a number of business customers lose their discounts even if they use Level 3 for a small amount of services.

"If we eliminate those demand lockup agreements -- and the FCC is investigating them and are asking the appropriate questions -- then there's a lot of opportunity for us that today is not fully addressable," Storey said. "Even though companies want to move services, even though we can provide a better solution to them, they don't have the ability to move to us because they lose their discounts on the embedded base of services if they do."

Storey also addressed the growing concern around Comcast Business (NASDAQ: CMCSA) launching its Fortune 1000 business division.

While Comcast has become a formidable competitor in the small and medium-sized business markets, Level 3 has been able to successfully compete against a host of large traditional U.S.-based ILECs such as AT&T (NYSE: T) and Verizon (NYSE: VZ) and global players like BT (NYSE: BT).

"Comcast is a very good company and they're an excellent customer of Level 3, vendor and partner to Level 3 that's done a good job at the small end of business customers so we don't take them lightly," Storey said. "However, Level 3 already operates in a very competitive environment and it's a competitive environment globally to deliver capabilities around the world, not just in North America."

Level 3 reported that CNS revenue was $1.95 billion in the third quarter of 2015, increasing 6 percent year-over-year on a pro forma and constant currency basis.

Within CNS, enterprise continued to be the star, rising 8 percent year-over-year to $1.42 billion.

Alternatively, total wholesale revenues were $529 million, down 1 percent from $540 in the same period a year ago.

From a regional perspective, North America is still the leader with $1.6 billion in total revenues, up from $1.5 billion in third-quarter 2014. North America enterprise revenues rose 8 percent to $1.13 billion from $1.04 billion, while wholesale revenues were $421 million, down from $428 million a year ago.

Meanwhile, in EMEA and Latin America, revenues declined 2 and 9 percent to $212 million and $183 million respectively, due to slower revenues in the wholesale and enterprise segments.

The service provider reported net income of $172 million and basic earnings per share of $0.48, which excludes a non-recurring charge related to the deconsolidation of the company's Venezuelan subsidiary's operations.

Total company revenue was $2.1 billion for the third quarter of 2015, up from $2.04 billion on a pro forma basis in the third quarter of 2014.

Shares of Level 3 were listed at $47.49 in Wednesday morning trading on the Nasdaq stock exchange.

For more:
- see the earnings release
- hear the earnings webcast (reg req.)
- WSJ has this article

Special report: Tracking wireline telecom earnings in Q3 2015

Related articles:
Level 3 says it has advantage over AT&T, Verizon in the enterprise market
Level 3 says Charter's settlement-free peering policy raises a number of concerns
Level 3 serves up wireless-based managed backup service, targets retail to start
CenturyLink asks FCC to reject Birch, BT, Level 3 special access reform proposal
Level 3: Freeing CLECs from ILEC lock-up plans for special access can spur $86M revenue boost

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