So Level 3 Communications (Nasdaq: LVLT) took a break from its hot pursuit of future mate Global Crossing (Nasdaq: GLBC) in order to report first-quarter results. Here's the tale of the tape:


Q1 2011

Q1 2010

Change (Year-Over-Year)


$929 million

$910 million


Earnings per share




Free Cash Flow

($115 million)

($90 million)


Cash Equivalents

$1.1 billion

$0.6 billion


Long-term Debt (including current portion)

$7.1 billion

$6.4 billion


Source: Company quarterly report.

This is what Level 3 CEO Jim Crowe calls "a solid quarter, giving us a strong start to 2011." I shudder to think what a bad start would have looked like, because I see a ton of red flags here.

Sales are growing at inflation-like rates, also known as "cold molasses." The higher cash balance is more than erased by more debt. Worst of all, Level 3 is burning cash at an accelerated rate. The one truly bright spot is a significantly smaller net loss -- but losses are rarely celebrated anyhow, right?

Management pins its hopes and dreams on rising demand for data bandwidth, which makes plenty of sense. Mobile computing is still in its infancy and will require a much sturdier backbone in coming years. Cloud computing dovetails with the mobile trend, but also with enterprises and consumer-facing operations wanting to do business in a new, more efficient way. And high-definition digital video is already a big deal, but still has orders of magnitude of growth ahead. Cisco Systems (Nasdaq: CSCO) will tell you the same thing, as would any observer of data traffic trends with half a brain.

Somebody has to connect the pipes behind the scenes, and why wouldn't Level 3 play a large part in that?

It will, but the milk and honey will only flow if Level 3 can figure out how to turn a darn profit from all this traffic. Customers keep expecting lower and lower prices per gigabyte handled, and that won't stop anytime soon. For a sense of the scale involved, noted industry analyst Dan Rayburn saw the cost of streaming a full-length Netflix (Nasdaq: NFLX) movie has fallen from $270 in 1998 (assuming that Netflix could have streamed movies over broadband-class pipes back then, which it couldn't) to $0.05 in 2010.

The data demand will come, but revenue won't necessarily follow suit.

This company needs to become much more efficient and cost-conscious than it is today in order to turn the red ink black. Buying Global Crossing won't change any of that. Buying Akamai Technologies (Nasdaq: AKAM) or Limelight Networks (Nasdaq: LLNW) for their value-added content delivery services would have been a smarter long-term move, though the sticker shock would be severe.

Will Level 3 surprise me by turning Global Crossing into a game-changing asset, or will network-agnostic equipment vendor Arris Group (Nasdaq: ARRS) prove a better buy for years to come, as explained in this free report? Add Level 3 to your Foolish watchlist, and you'll be the first to know.