RealTime IT News

Level 3 Diet Continues

Hoping to stem the growing tide of operational and legal setbacks, fiber giant Level 3 Communications Monday announced a 25 percent workforce cut and $2.3 billion cost reduction plan.

Officials at the beleaguered company hope its forced diet, the result of lowered projections and lost revenues, will keep the company alive in the months to come before the market rebounds.

For James Crowe, Level 3 chief executive officer, it's all about keeping his company afloat until the expected upswing in the economy rights his ship. To make it that long, the belt-tightening measures were considered essential.

"Over the past two months, we have experienced a reduction in the growth of recurring revenue," Crowe said. "As a result, we have updated our business outlook consistent with our views regarding the severity and duration of the economic slowdown. While it is difficult to predict with any certainty, we, like many industry observers, anticipate a recovery in late 2001."

Level 3 officials expect to take a cash loss of $100 million, charged to the second quarter's financial sheets, to pay for the 1,400 employees laid off Monday. Of its worldwide operations, 820 U.S. employees in its communications division have been cut from the payroll.

That, coupled with a belt-tightening designed to reduce travel and contractor costs, is one of the methods Level 3 officials expect will keep them afloat into next year. The other is continued targeting of top global bandwidth customers with substantial bandwidth needs. More importantly, bandwidth companies with substantial bandwidth needs that can pay their bills on time.

According to its figures, approximately 20 percent of Level 3's customer base is at risk of defaulting on revenue commitments. That's roughly $710 million of its reported $5.3 billion in customer backlog, or revenues expected in the future for signed contracts.

Financial experts at the company hope to reduce that 20 percent by five to 10 percent before the end of 2001, with the addition of companies with higher credit ratings and the disconnection of at-risk companies.

Sureel Choksi, Level 3 chief financial officer, said the combination of reducing costs and adding legitimate customers to its base will provide a solid foundation for the company to continue.

"We are taking these actions today in an effort to maintain our financial strength, provide a clear, disciplined focus on controlling costs, and ensure we are well-positioned to benefit when the economy recovers," Choksi said. "Based on our updated business outlook, we remain fully funded to free cash flow breakeven, with an appropriate cushion."

Its number-crunching estimates place a Level 3 breakeven date sometime in 2004, a year later than its previously announced 2003, but with enough funds to keep running comfortably.

But a lot depends on the company's ability to remain in business until 2004. Recent events have conspired to deep-six shareholder confidence in the fiber company, reinforced by its share price drop after Monday's announcement.

Last week, officials released two open letters to shareholders designed to instill hope in the company's current business model.

The first letter was released Thursday, with the announcement it intended to "vigorously appeal" a $900,000 age discrimination lawsuit it lost in a Denver federal jury trial that day. The second letter, released Friday, refuted reported claims it was about to pull out of Europe and sell its assets to Cable & Wireless, a competitor.

Crowe said the company has several contingency plans in the works for future opportunities.

"Our overriding goal is to be well-positioned to prosper when the industry recovers," he said.

The Level 3 CEO has made a reputation for himself displaying a level of honesty and forthrightness that may be his eventual undoing. In April, he released a letter designed to placate shareholders worried about rumors that Level 3 was going to miss a payment on its $1.7 billion credit facility.

Since then, it's been an uphill battle to reassure investors. While investor confidence was high beginning in May, stock values have plummeted from nearly $20 per share to its current $6 per share price.