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Level 3's Crowe: "Moving to Offense"

Level 3 is a telecom company that Wall Street loves to hate these days. It's one of the 10 most shorted stocks. Although analysts generally remain bearish, CEO Jim Crowe believes he can turn his money-losing telecom giant in a profitable wholesale voice-and-data behemoth.

He intends to do this through a combination of emphasizing higher-end services, making smart acquisitions, and winning new customers in the zero-sum telecom game right now. With some of the highest gross margins in the telecom sector, Level 3 (LVLT) stands to benefit enormously should the business improve (see BW Online, 9/5/03, "A Fine Line for Level 3").

Level 3 also has a growing business in software distribution, which Crowe believes will one day work in tandem with the telecom side to deliver software as an à la carte service over the wire rather than in the shrink-wrapped box or via a hefty download of an entire program.

To get to where he wants to go, though, Level 3 will need to pay off a heavy debt load of nearly $7 billion. BusinessWeek Online Technology editor Alex Salkever spoke with Crowe on Sept. 4. Here are edited excerpts of their conversation:

Q: Where is Level 3 right now?

A: We're more than holding our own in a difficult market. We have accomplished a lot in the last two years. We have restructured our balance sheet. We have restructured our business plan. We've cut costs by a great deal. We've raised capital. Our bond prices have tripled over the last year.

We announced earlier that we have largely completed our defensive moves. Now we're moving to offense, trying to add revenue to what we think is the industry's most efficient network. We have the best gross margins in the industry. For every dollar of revenue we had, we have margins we think are double those of other companies. So the challenge is to add revenues in a difficult market.

Q: How will you do that?

A: Two ways. One is selective mergers and acquisitions. That's difficult to schedule. And we've announced a pretty vigorous new-product initiative focusing on products that utilize our Internet protocol (IP) platform and voice products that utilize our soft-switch platform.

Q: How can you build the company in a market this bad?

A: The key is to offer services that address large existing markets where we can help customers save money. There are many products that hold promise - Wi-Fi, new advanced data services -- but those are not services that people are buying in the billions of dollars.

The kinds of services we think sell are things like voice services using soft-switch and IP, which are much less expensive than traditional public telephone products. They help companies save money, and companies already buy those services in the tens of billions. If we can deliver, we can take market share even in this difficult market.

Q: How else would you differentiate Level 3 from other players?

A: We are one of the few, if not the only one, left standing. Our customers see us as a reliable business partner that's going to be there for the long term. We have $1.7 billion in cash as of the last quarter, which is part of the reason we're here. And we have a network that's clearly the most efficient.

Q: You have your finger on the pulse of the telecom market as much as anyone. What do you see out there in the next six months?

A: It's a microcosm of the economy as a whole. Consumers are buying, but businesses aren't. The economy is largely still being supported by consumer spending. It's harder to tell if that's a trend that will be there for the longer term. I certainly think we will see business investment in communications technology in the long run. Now, [businesses are] still using inventories built up during the bubble.

Q: Telecom analysis firm Telegeography told me last week it's seeing price declines in some key long-haul telecom routes, some of which Level 3 sells in, that had previously appeared to stabilize. Are you seeing a second wave of price wars?

A: Those kinds of statistics are like polling in California right now. They don't mean much. There isn't enough transaction volume to draw any conclusions. And the parts of our business that are growing are not the transport business. Although, for the first time in two years, we did see some growth in transport, it was still very small. It's pretty obvious on the macro basis that the number of competitors and the supply is shrinking. That bodes well for pricing and demand.

Q: In the latest earning call, you reduced revenue estimates slightly for the coming year.

A: We only narrowed the range. We lowered the top and upped the bottom. And we upped our EBITDA [earnings before interest, taxes, depreciation, and amortization] projections, so I think it was more good news than bad news. It wasn't a reduction.

Q: WorldCom (WCOEQ), the biggest company in telecom, continues to struggle. What opportunities do its problems present to other players in the field?

A: First, I was chairman of that company for a short period before the problems. That being said, I think they're looking for ways to improve their operating efficiency. Right now, it's miserable. Their EBIDTA margins are in the zip code of 10%. That's not a sustainable model.

This might mean there are parts and pieces of their operations that might be worth more to us than to them. There also may be places where we can sell services to them. Certainly the days when companies such as WorldCom build everything and provide every service to everyone at every level are long behind us. Right now, they're a customer of ours, and we hope to meet their needs more broadly.

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