Is Level 3 Communications Ready to Move to the Next Level?

After a terrific quarterly report, better times lie ahead for Level 3 Communications.

May 19, 2014 at 10:45AM

The threat of Apple and Netflix (NASDAQ:NFLX) moving to their own content delivery networks, or CDNs, has not dampened the performance of network services company Level 3 Communications (NYSE:LVLT). Level 3 shares are up 32% this year, driven by two terrific quarterly reports. Back in February, Level 3 posted an unexpected profit, and shares shot up. When the company reported its first-quarter results last month, investors found yet another reason to cheer.

Let's take a closer look at the company's recent results and see if it is still a buy after its strong performance in 2014.

A handsome performance
Level 3 reported total revenue of $1.6 billion, up 2% year over year, a shade ahead of the $1.59 billion consensus estimate. The company generated earnings per share of $0.47, way better than the $0.28 per share expected by analysts. Level 3 has focused on capturing more market share by helping enterprises optimize their cost structure. Also, the company is moving to newer, more scalable technologies that are more efficient and are helping it to lower costs. Moreover, the company raised its forecast for 2014's adjusted EBITDA growth and free cash flow

The company's results illustrate its execution and emphasis on profitable growth. Level 3 was able to offset the seasonal decline in its business due to continued growth from its enterprise customers, particularly in North America. 

Targeting more market share
Level 3 is looking to win over more enterprise customers from rivals. It is providing an easy migration path for enterprises to achieve the savings of technology transitions, such as cloud and voice over IP. In addition, Level 3 is enabling the businesses to improve their capabilities, reduce their costs, and migrate to more scalable technologies in a reliable, secure, and efficient way. Driven by such moves, Level 3 was able to capture market share last quarter in the enterprise channel.

Level 3 still has a lot of room to run. According to management, it only has a low-single-digit share of the addressable market for its products and services. Since businesses need to invest to move to more efficient technologies with greater capabilities and lower overall cost structures, Level 3 is seeing an opportunity to expand its business.

Key customers and solutions
Level 3 has entered into a strategic partnership with Microsoft to deliver private, direct connections to Microsoft Windows Azure. This partnership could be a key driver of Level 3's growth, as Microsoft Windows Azure is growing at a fast pace. In the recently reported third quarter, Microsoft's revenue from the Azure platform grew 150%. Looking ahead, Microsoft will be going all out to tap the cloud market; sales of Azure can be expected to improve. Accordingly, Level 3 could make the most of Microsoft's cloud focus with this partnership.

Level 3 will also be connecting Digital Realty Trust's customers in 14 major markets in the U.S. and Europe. Digital Realty, which is involved in data-center acquisition, ownership, development and operation, will leverage Level 3's virtual private network services and enable its customers to scale their bandwidth and only pay for what they consume.

During the quarter, Level 3 also announced the introduction of its Video Cloud offer. This targets content companies and broadcasters, combining its content delivery, video broadcasting, and cloud storage capabilities to create a more scalable, secure, and streamlined approach to global content distribution. 

Level 3 is also expanding its network footprint with the construction of a new subsea cable landing in Colombia to enhance capacity. Also, adding customers' locations directly to its network remains a key part of Level 3's strategy as directly connecting customers to the network allows it to deliver a better experience, drive profitability, and easily add new solutions to their existing services.

A minor concern
Netflix could spoil Level 3's party, at least to some extent. Its move to its own content delivery system could hurt Level 3. Netflix's Open Connect CDN has already started delivering content since last year.

Netflix was reported to deliver 5% of its content from its own CDN last year, and it has recently entered into a partnership with Comcast for paid peering. This would eliminate suppliers like Level 3 from the middle and might hurt revenue growth.

Bottom line
Overall, Level 3's diverse client base and rapid growth in enterprise should help it sustain its momentum going forward. The company's recent partnership with Microsoft and its focus on enhancing its offerings should help it report year-over-year revenue growth going forward. At just 23 times forward earnings, Level 3 could turn out to be a good investment, since it is rapidly growing its earnings.

The biggest thing to come out of Silicon Valley in years
If you thought the iPod, the iPhone, and the iPad were amazing, just wait until you see this. One hundred of Apple's top engineers are busy building one in a secret lab. And an ABI Research report predicts 485 million of them could be sold over the next decade. But you can invest in it right now... for just a fraction of the price of AAPL stock. Click here to get the full story in this eye-opening new report.

Mukesh Baghel has no position in any stocks mentioned. The Motley Fool recommends Netflix. The Motley Fool owns shares of Netflix. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.

Compare Brokers