Level 3 says small cell backhaul has potential, must align with other on-net business service opportunities

Level 3 Communications may have not have pursued the tower backhaul opportunity as aggressively as its other fiber-based counterparts, but the service provider continues to see potential in extending its fiber to small cell deployments.

Speaking to investors during the first quarter earnings call, Sunit Patel, CFO of Level 3 said that small cells in dense markets like New York City might be one to pursue only if it the opportunities line up with business service opportunities.

"Compared to the tower opportunity, which started out as really low bandwidth and took a while before the average demand for a tower went up, small cell opportunities in highly urban areas I think could create opportunities for us to take advantage of that and expand our network," Patel said. "I think we're still in the early stages and in our situation we'd have to look at the return opportunities to light buildings on net, but we do think it's an opportunity."

Patel added that what makes the small cell backhaul market more compelling is that these sites will require higher bandwidth solutions including a mix of Ethernet and dark fiber.

"With small cells the average demand that wireless companies will look for will be high right out of the gate compared to what happened in the tower situation," Patel said.

Fiber-based wholesale, a segment that includes dark and lit fiber-based wavelength services and IP and data services, was one of two key product revenue sources within Level 3's Core Network Services (CNS) portfolio first quarter revenues.

Transport & Fiber revenues were $579 million, up 1.2 percent year-over-year, while IP & Data Services and Transport & Fiber were the fastest growing segments. IP & Data Services were $918 million, up 7.2 percent.

Finally, voice service revenue was $303 million and Colocation & Datacenter was $147 million.

Level 3 reported that CNS revenue grew 3.6 percent year-over-year to $1.95 billion, while wholesale voice revenues declined to $104 million, which has been an ongoing trend for the company.

Within the CNS segment, enterprise service revenues were once again a key contributor, growing 5.7 percent year-over-year, or 6.2 percent year-over-year, excluding UK Government revenue, both on a pro forma and constant currency basis.

On a regional basis, North America remained the largest market. North America Enterprise CNS revenue grew by about two percent sequentially.

North America CNS Enterprise revenue rose 6 percent year-over-year to $1.2 billion, while wholesale revenue declined 1 percent to $434 million.

However, the service provider saw weaker revenues in EMEA and Latin America.

Level 3 reported EMEA revenues were $191 million, down 5 percent year-over-year, while Latin America declined 8 percent to $155 million.

In EMEA, the service provider expanded its metro Ethernet service into 27 new European markets, illustrating its ongoing efforts to extend its EMEA business service penetration. The service provider said that it plans to expand Ethernet into an additional 15 EMEA locations later this year, but did not provide a specific timeline. These actions should enable Level 3 to grow revenues in market share in EMEA.

From an overall financial perspective, Level 3 reported total revenues of $2.1 billion, up year-over-year from $2.03 billion in the same period a year ago.

"While revenues were slightly light due to weaker EMEA and LatAm revenues, EBITDA and FCF were both stronger than expected," said Jennifer Fritzsche, senior analyst at Wells Fargo, in a research note. "We believe the FCF growth is a crucial component to this story and this significant beat should be viewed quite positively. EBITDA margins expanded 410 bps yr/yr and 140 bps sequentially, offering further evidence of cost containment following the TWTC integration is tracking very well."

Shares of Level 3 were listed at $55.39, up $1.30, or 2.40 percent in Thursday morning trading on the Nasdaq stock exchange.  

For more:
- see the earnings release
- hear the webcast (reg req.)

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