Level 3's Storey: We'll do more to make smaller customers more profitable

Jeff Storey(Level 3)

Level 3 Communications saw lower end churn among its smaller enterprise customer base and wholesale customers take a toll on second quarter revenues, as these segments transitioned to other technologies and the industry consolidated.

Jeff Storey, CEO of Level 3, told investors that despite the near-term impact of the service disconnections that took place in the lower end of the enterprise market, it has taken measures to mitigate future issues.

"There are a variety of different reasons why customers disconnect," Storey said. "What we saw in the second quarter was the low end of our customer base so we want to look at them from a full customer lifecycle perspective: make sure we're talking to them, make sure we have account reps assigned to them and those are marginally profitable we'll try to make them more profitable."  

Level 3 attributed the decline to what it said was "higher disconnects at the lower end of our enterprise customer base."

Part of this included a $5 million credit Level 3 issued during the quarter related to a two-year contract extension, which it said put pressure on revenue in the short term. However, this move will provide Level 3 with $100 million of additional revenue during the extension period.

In addition to enterprise customers disconnecting service, a number of wholesale customers disconnected as some service providers were acquired.

Storey said that some of the wholesale service disconnects were due to some carriers that did wireless combinations.

"We knew those disconnects were coming, but we did not expect them to come at the pace they did so we don't really know the timing," Storey said. "Some of them we thought we'd get last year so we really don't know the timing, but we knew the magnitude of them."

Core network service revenue was $1.95 billion in the second quarter 2016, rising 0.7 percent year-over-year on a reported basis, and 2.8 percent year-over-year.

Within the CNS segment, IP & Data and Transport & Fiber segments were the dominant units, generating $915 and $575 million in revenues, respectively. These segments now make up 47 and 30 percent of Level 3's CNS revenue mix.

Meanwhile, Level 3 reported Voice Services and Colocation & Data Center generated $302 and $164 million during the quarter.

Typical of the trend the service provider has seen in earlier quarters, Level 3 reported that Wholesale Voice revenue declined to $100 million, down year-over-year from $119 million in the same period a year ago.

From an overall financial perspective, Level 3 reported total revenue of $2.05 billion, down slightly year-over-year from the second quarter.

On a regional basis, North America was the strongest region with a total of $1.6 billion in revenue.

The company's second quarter total revenues missed financial analyst expectations of $2.08 billion.

Level 3 noted that the second quarter 2015 modified results exclude the results from the company's Venezuelan subsidiary's operations that was deconsolidated as of Sept. 30, 2015.

Investors did not take kindly to Level 3's revenue decline as shares of Level 3 were trading at $52.83, down $3.16, or 5.63 percent in Wednesday morning trading on the New York Stock Exchange.

For more:
- listen to the earnings webcast (reg. req.)

Special report: Tracking wireline telecom earnings in Q2 2016

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