LVLT

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• (LVLT)
• By Brendan Mathews

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The story begins in Dublin
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Walter Scott ? James Crowe

• Walter Scott Billionaire, Legendary CEO /
  Chairman of Peter Kiewet Sons, and a member of
  BRK.A board

James Crowe Mechanical Engineer and CEO of MFS
Communications
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The Plan...

• 6.5 million square feet of co-location space
• 77 upgradeable metronetworks
• 16,000 mile upgradeable North American network
• 4,750 mile upgradeable European network
• Underseas capacity

• Fund the entire project till cash-flow break-even
  with 14B in debt and equity offerings
• Began in 1997, the network is nearing completion.

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LEVEL 3 COMMUNICATIONS

• BUSINESS Bandwidth providers via a long-haul IP
  backbone network and co-location services.
• CUSTOMERS AOL Time Warner, Earthlink, Enron,
  Goldman Sachs, Yahoo!, Juno, Oracle, Verizon,
  Toys R Us, Sun Microsystems, NTT America, Sony
  Online
• SUPPLIERS JDSU, Cisco, Juniper, Nortel, Bay
  Networks, Corning, etc
• COMPETITORS Williams, 360Networks, Global
  Crossing, Qwest, Sprint, ATT, Cable Wireless

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The Numbers

• Communication revenue for Q4 2000 was 353 M, a
  292 increase over Q4 1999
• Earnings growth should average in the mid-60s
  for the next five years as revenue grows and
  margins extend

Market Cap 5-6B Pre-tax Earning Guidance 2001
600-700M 2002 750 850M
LVLT beat 2000 estimates and had backlogged 65
of 2001 revenue as of December last year.
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Competitive Advantages

• Lowest Cost Provider
• Silicon Economics
• Upgradeable network
• Capital Structure
• Fully-funded
• Management
• Proven Performers

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Silicon Economics (Moores Law)

• Assumption demand for bandwidth is price elastic
  and nearly infinite
• Meaning demand grows faster than prices fall
• Obvious example Personal Computers
• Applied to Telecom The industry leader will
  emerge by driving down its costs and profiting
  from the subsequent increase in demand.
• Result Increased market share and profits
• Conclusion technological improvements ?
  decreased costs ? decreased prices ? increased
  demand

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Taking Advantage of Silicon Economics in
Telecommunications
To do so, service providers must be able to
rapidly implement new technologies with minimal
capital expenditures LVLTs innovation is
the upgradeable network! Heres how it
works change fixed costs by laying additional
empty conduits. These empty conduits can be
filled with latest generation fiber quickly and
easily. So LVLT has the advantage of upgrading
fiber as well as upgrading network equipment to
decrease costs. LVLT has 80 of the worlds
empty conduits
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Empty conduits
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Capital Structure Fully Funded

• Phase 1
• 800 million initial cash contribution1.2
  billion proceeds from the sale of CalEnergy stock
  
• Phase 2
• 2 billion in 9.125 Senior Notes
• Phase 3
• 500 million in 10.5 Senior Discount Notes1.6
  billion in common equity issuance
• Phase 4
• 1.375 billion in Senior Securied Credit
  Facility823 million in 6 Convertible
  Subordinated Notes
• Phases 5 and 6
• 2.4 billion in common equity issuance867
  million 6 Convertible Subordinated Notes1.4
  billion U.S. High Yield, broken down as 800M
  in 11 Senior Notes250M in 11.25 Senior
  Notes359M in 12.875 Senior Discount Notes800
  million Euro High Yield
• Total Funding 14 billion

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Management

• Proven Success i.e. MFS Communications
• Value Creators i.e. fully expensed options and
  SP bench-marked options
• Integrity i.e. outline plans truthfully, very
  little corporate BS

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The Best CEO in America James Crowe

• Founded MFS Communication in 1988.
• Took MFS to IPO in 1993 for 1.4B
• Sold MFS to WorldCom in 1997 for 14B
• All-Star TeamWhen founding LVLT, Crowe re-united
  18 of the top 20 executives who helped to found
  MFS Communications

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NOT CONVINCED???

• You might be thinking
• There is a fiber glutno one will pay for more!
• Its a capital-intensive, commodity business
• LVLTs debt will cause bankruptcy in the current
  telecom credit crunch
• The NASDAQ, especially telecom isnt as trendy
  as it was a year ago

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The Fiber Glut Myth

• Prediction of a bandwidth services surplus do not
  consider capital to light planned fiber
  installation
• The current shortage of bandwidth services at the
  right price is likely to continue
• Much of existing and planned fiber will never be
  lit and newer generation of fiber will obsolete
  older technology
• The ability to adopt new fiber and equipment
  generation will be a key competitive advantage

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At current estimated levels of capex it will take
__ years to light all the the fiber planned or
constructed for the following companies

• Global Crossing over 20 years
• Qwest over 20 years
• 360 Networks over 30 years
• Genuity over 30 years
• Williams over 100 years
• Broadwing over 700 years
• Level 3 (internal) 2 years
• fiber is less than 5 of variable bandwidth
  costs

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Bandwidth Needs Will Grow

• De-regulation has set the stage for rapid
  innovation
• New technologies will spawn new needs for
  bandwidth
• The transfer of information will be an
  inevitable product as long as humans exist

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Predicting bandwidth
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Its a commodity business

• Yes bandwidth service is similar to a commodity
  business but consider that
• the primary driver for Level 3's business plan is
  that bandwidth is in fact a commodity. They
  believe that they have a large advantage because
  they will be able to be the lowest cost provider,
  and in commodity markets, that is usually who
  wins -- exactly as you expect...

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Capital intensive businesses are for losers

• Bandwidth services is very capital-intensive,
  and, yes capital intensive businesses are
  usually for losers. However, this might be a
  unique situation
• LVLT has sacrificed near-term results to save
  capex in the future margins will rapidly crank
  up after the network completes and free cash will
  abound
• LVLT will enjoy significant barriers to entry
  especially if todays credit markets persist
• LVLT has a better fixed cost structure than its
  competitors, which will lead to lower capex and
  more flexibility to optimize its production
  function
• Sometimes band industries forge great
  companiesfor example Intel, Nucor, Wal-Mart and
  Southwest Airlines

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Ravi Suria and the Credit Crunch

• LVLT is fully-funded to break-even

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And of course, the ultimate objectionIm going
to be an analyst when I graduate, and
lemming-like behavior is my specialty. I dont
think now is the time to buy telecom. My beloved
internet bubble has burst, and everyone else is
getting into defensive stocks and even bonds.
Id rather do that. I wont make any money, but
Ill still watch lots of CNBC!