Overview: Soros Fund’s new position in Level 3 Communications

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Must-know: Changes to Soros Fund Management’s 2Q14 positions (Part 3 of 7)

(Continued from Part 2)

Soros Fund Management and Level 3 Communications

Soros Fund Management initiated new positions in CONSOL Energy (CNX), Level 3 Communications (LVLT), Time Warner Cable (TWC), and New Oriental Education & Technology Group (EDU). It sold positions in FedEx (FDX) and Monster Beverage (MNST).

Soros Fund Management’s position in Level 3 Communications 

Soros Fund Management’s new position in Level 3 Communications accounts for 0.66% of the fund’s second quarter of 2014 (or 2Q14) portfolio.

Level 3 Communications is a facilities-based provider of a broad range of integrated communications services. A facilities-based provider is a provider that owns or leases a substantial portion of the plant, property, and equipment necessary to provide its services. Headquartered in Broomfield, Colorado, the company provides communications services to enterprise, government, and carrier customers in more than 60 countries around the world. Its comprehensive portfolio of voice, data, video, and security services provides solutions to help companies grow and protect their business.

Two types of total revenue

Level 3 Communications’ total revenue consists of

  • core network services (or CNS) revenue
  • wholesale voice services and other revenue

CNS revenue

The CNS revenue comes from

  • co-location and data center services
  • transport and fiber services
  • Internet protocol (or IP) and data services
  • local and enterprise voice services

CNS revenue represents higher margin services, and its growth is critical to the long-term success of Level 3′s business. The company believes a source of future incremental demand for CNS will be from customers who want to distribute their feature-rich content or videos over the Internet. The company saw revenue growth in its co-location and data center services and IP and data services in 2013. The growth was mainly due to end-user customer demand for content delivery over the Internet and enterprise bandwidth.

Wholesale voice services and other revenue

The wholesale voice services and other revenue comes from

  • sales of long-distance voice services
  • revenue from managed modem and its related intercarrier compensation services
  • revenue from the SBC Master Services Agreement

Level 3 Communications obtained the SBC Master Services Agreement by acquiring WilTel Communications Group in 2005. The company said the revenue potential for wholesale voice services is huge. But pricing is expected to continue declining over time because of the new low-cost IP and optical-based technologies. Also, many competitors are targeting the market for wholesale voice services. Several of these competitors are larger and have more financial resources than Level 3 Communications.

Level 3 acquires TW Telecom, expecting $240 million in annualized synergies

In June, Level 3 announced that it acquired TW Telecom for about $5.7 billion in cash and stocks. Headquartered in Littleton, Colorado, TW Telecom is a national provider of managed services, including business ethernet and converged and IP virtual private network (or VPN) solutions for enterprises throughout the U.S. and globally.

The release noted that “TW Telecom’s business model is directly aligned with Level 3′s initiatives for growth, which include building managed solutions to meet customer needs through an advanced IP/optical network.” Plus, Level 3 expects the combination to provide $240 million in annualized synergies, with $200 million from adjusted earnings before interest, tax, depreciation, and amortization (or EBITDA) savings and $40 million from capital expense savings.

Level 3 swings to profit in 2Q14

Level 3 reported total revenue of $1.625 billion for 2Q14, up from $1.565 billion for 2Q13. It reported a profit of $51 million, or $0.21 a share, compared with a loss of $24 million, or $0.11 a share, a year earlier. The current results included a $0.14 loss for the devaluation of the Venezuelan bolivar and a $0.02 transaction-related fee regarding TW Telecom.

Under the segments, CNS revenue was $1.479 billion in 2Q14, increasing 6.9% year-over-year due to continued growth in its IP and data services and transport and fiber services. Wholesale voice services and other revenue decreased 22% because of usage declines as customers transition to IP voice services. The company said it continues to manage its combined wholesale voice services platform for margin contribution.

In terms of outlook, Level 3 said it expects CNS revenue growth for the full year of 2014 to be higher than the full year of 2013. The company expects the adjusted EBITDA to grow 14% to 18% for the full year of 2014.

Continue to Part 4

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