Level 3’s Storey: We work with our customers to understand what applications are appropriate for dark fiber

Level 3 Communications' campus in Broomfield, Colo.
Level 3 may be taking a right-sized approach in pursuing dark fiber deals, but the service provider still sees it as a healthy revenue generator.

Level 3 may be one of the largest dark fiber suppliers, but the service provider said dark fiber is not appropriate for every application. The company therefore focuses on matching the product with a customer’s particular needs.

Jeff Storey
Jeff Storey (Level 3)

Jeff Storey, CEO of Level 3, told investors during its first quarter 2017 earnings call that dark fiber is only one product in its broader toolkit of solutions.

“Dark fiber is a very competitive business out there and we win when we do a better job than our competitors,” Storey said during the earnings call, according to a Seeking Alpha earnings transcript. “That’s why we are focused on working with customers to make sure we understand what applications are appropriate for dark fiber and which ones aren't.”

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Storey added that while dark fiber may be a good fit to tying together data centers, a hybrid WAN solution may be the better solution to connect branch offices with a headquarters site.

“We work with them to understand their overall networking needs,” Storey said. “We don't want to just go in with every solution as dark fiber ... Sometimes that's the right solution, sometimes it’s a wave solution, sometimes it's IP VPN.”

Level 3 may be taking a right-sized approach in pursuing dark fiber deals, but the service provider sees it as a healthy revenue generator. Sunit Patel, CFO of Level 3, said that because dark fiber agreements are long term, the service provider gains ongoing revenue benefits.

“For dark fiber revenues, the gap benefit stretches out for 20 years,” Patel said. “We also get space and power revenues which are monthly recurring in nature, and annual maintenance fees which are recurring in nature. So I think that we will continue to see the benefit of that coming through over the next years, because demand has been very, very healthy.”

Patel said that besides North America, Level 3 is “seeing good demand for dark fiber in Latin America and Europe.”

5G wholesale opportunities

One potential growth segment Level 3 is anticipating for dark fiber and wholesale services is the oncoming 5G network build outs by the major wireless operators.

While Level 3 has not been a large vocal player in the recent wireless backhaul revolution its peers advocated in recent years, the service provider sees an opportunity to support wireless operators’ distributed network architectures.

“The need for 5G fiber infrastructure is a lot more distributed than just connecting to towers,” Patel said. “There are lot more places to connect to. It's clearly a bigger benefit for a local phone company or cable company, so I think CenturyLink would be a beneficiary.”

Storey agreed and added that becoming part of CenturyLink will create greater a larger network that will enable it to more effectively pursue new backhaul opportunities.  

“When you start combining with CenturyLink, and you have more local capillarity and more density of the network, then it probably makes more sense for the combined company than it might for Level 3 alone,” Storey said.

Enterprise gains, wholesale drops

Similar to earlier quarters, Level 3 reported that enterprise services now make up 75% of its revenues. The company continued to see downward revenue pressure in the wholesale segment, a segment that makes up only 25% of its revenues.

Here’s a breakdown of Level 3’s key metrics:

Core network services (CNS): Level 3’s total CNS revenues were $1.95 billion, down year-over-year from $1.6 billion in the same period a year ago.

IP/Data services were the dominant revenue source for CNS with $924 million. The service provider reported $581 million in Transport & Fiber and $295 million in Voice Services.

On a regional basis, North America continued to lead with $1.59 billion in total revenues due to strong Enterprise results of $1.19 billion. However, a decline in wholesale was clearly a drag on the region’s overall revenues. Wholesale revenues were $403 million, down from $434 million in the same period a year ago.

Wholesale: Wholesale revenues were $102 million, down from $105 million in the first quarter of 2016.

Financials: Total revenue was $2.05 billion for the first quarter 2017, compared to $2.05 billion for the first quarter 2016. In the first quarter 2017, the company generated net income of $95 million and basic earnings per share of 26 cents.