Level 3’s Storey: Wedge segment rose 6% in Q4, but smaller customer churn remains a challenge

A Level 3 Communications network monitoring center (Image: Level 3)
In order to mitigate churn with the lower end of its customer base, Level 3 plans to improve the customer experience, a process that CEO Jeff Storey said improved during the fourth quarter.

Level 3 is finding success with its “wedge” customer strategy that allows new customers to initially purchase a small amount of services with the aim of adding more over time, but the company said it has plenty of work ahead of it to improve the customer experience and reduce churn.

Jeff Storey, CEO of Level 3, told investors during its fourth quarter earnings call that once the service provider wins a customer that purchases less than $2,000 a month in services, it is having success in driving them into higher spending categories.

“It's also our strategy to move them out of that category and into higher spend categories with us, and as a result, revenue may swing more than you would expect,” Storey said during the earnings call. “This quarter revenue from this customer group grew 6% compared to the 18% decline last quarter, which is a fairly big swing.”

Storey said that while its wedge strategy is paying off—in that customers start small and grow over time—it still sees churn with its smaller customer base.

“We do have churn at the low end and it's a real issue for us to focus on,” Storey said. “We are very focused on it, and we're making progress and we're improving, but we're not done yet.”

In order to mitigate churn with the lower end of its customer base, Level 3 plans to improve the customer experience, a process that Storey said improved during the fourth quarter.

"We are highly focused on continuing to provide a better experience for all of our customers and this remains the top initiative in 2017,” Storey said. “We'll continue to focus on looking at things like how do we renew better, when do we go and talk to customers about renewals, and how do we do a better job of satisfying an existing customer's needs for extended services.”

While Storey would not disclose how much of an improvement it saw with smaller customers, he said he thinks “we can do better across those customers and across all of our enterprise customers, so we'll continue to focus on that.”

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

Core network services (CNS):

CNS revenue was $1.93 billion in the fourth quarter 2016, down 0.5% year-over-year on a reported basis, and increasing 0.2% year-over-year on a constant currency basis.

For the full year 2016, CNS Revenue was $7.7 billion, which increased 0.1% on a reported basis and 1.9% year-over-year on a constant currency and modified basis.

Enterprise CNS revenue, excluding U.K. government, grew 3.4%. Within CNS, revenue from large, multinational enterprise customers increased 11.6%.

On a regional basis, North America CNS revenue grew 0.8% for the fourth quarter, and from an enterprise perspective, CNS revenue grew 3.2%. On a sequential basis, North America enterprise CNS grew 1.6% compared to the sequential decline of 0.2% it saw last quarter.

“The improvement this quarter was due in part to changes we implemented in the second half of last year aimed at improving the overall experience for our smaller customers, along with strength from our government business,” said Sunit Patel, CFO of Level 3.

Total EMEA CNS revenue declined 6.1% and enterprise CNS revenue, excluding U.K. government, declined 1.1%. Finally, in Latin America, Level 3 saw strong enterprise performance with revenue growing 10% year-over-year.

Wholesale services:

Fourth quarter wholesale revenues were $98 million, down year-over-year from $110 million in the same period a year ago.

Total wholesale CNS revenue declined 6.9% primarily due to continued consolidation driven disconnects. 

Financials:

Net income was $677 million compared to net income of $3.4 billion for 2015, which included a non-cash benefit to the fourth quarter 2015 income tax.

In 2017, Level 3 said it expects for the full year 2017, excluding CenturyLink acquisition-related expenses, adjusted EBITDA to reach $2.94 to $3.00 billion and Free Cash Flow to reach $1.10 to $1.16 billion.