Soros Fund Management ups stake in Level 3 Communications



Increased stake in Level 3 Communications

Soros Fund Management increased its position in Level 3 Communications, Inc. (LVLT) in the quarter ended on September 30, 2014. The position accounts for 1.89% of the fund’s 3Q14 portfolio. The fund currently owns 5,426,582 shares, up from 1,987,306 shares in 2Q14. The position was added in the second quarter ending in June 2014.


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Overview of Level 3 Communications

Level 3 Communications is a facilities-based provider of a broad range of integrated communications services. A facilities-based provider owns or leases a substantial portion of the plant, property, and equipment necessary to provide its services.

Headquartered in Broomfield, Colorado, Level 3 Communications 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 businesses.

Two types of total revenue

Level 3 Communications’ total revenue consists of:

  • Core network services (or CNS) revenue
  • Wholesale voice services and other revenue
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CNS revenue

The company’s 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. Level 3 believes 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, as well as 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 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 reported that the revenue potential for wholesale voice services is huge. However, 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.

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Completes acquisition of TW Telecom

In October, Level 3 completed its acquisition of TW Telecom, headquartered in Littleton, Colorado. Level 3 reported that the “transaction further positions the company as a global leader in the rapidly evolving business communications market.” The acquisition was announced in June, and the deal was valued at $5.7 billion in cash and stocks.

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 US and globally. To facilitate the closing of the TW Telecom transaction, Level 3’s wholly owned subsidiary, Level 3 Financing, Inc., raised an aggregate of $3 billion through two capital market transactions.

Revenue growth driven by CNS

Revenue increased 4% to $1.629 billion in 3Q14 driven by growth in Core Network Services revenue from enterprise customers. This was partially offset by declines in Wholesale Voice Services and Other Revenue. The company’s 10Q noted that it saw continued growth in its IP and data services, as well as transport and fiber services, “driven primarily by end user customer demand for content delivery over the Internet, VPN, and bandwidth in the enterprise channel as well as increases in professional services fees. It also saw modest growth in co-location and data center services, as well as voice services.”

Level 3 generated net income of $85 million and $0.36 basic and $0.35 diluted net income per share, which included expenses of $7 million associated with the TW Telecom transaction.

Soros positions traded in 3Q14

During 3Q14, Soros Fund Management added positions in Yahoo! (YHOO), Travelport Worldwide (TVPT), Alibaba Group Holding (BABA), and Netflix Inc. (NFLX). Top positions that saw an increase were Level 3 Communications, Inc. (LVLT), Dow Chemical Company (DOW), and Phillips 66 (PSX). Soros sold its stakes in Halliburton (HAL) and CONSOL Energy Inc. (CNX), and it significantly reduced its position in Herbalife (HLF).

The next part of this series will highlight the fund’s position change in Dow Chemical.


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