SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Date of Report(Date of earliest event reported): February 2, 1999
Level 3 Communications, Inc.
(Exact name of Registrant as specified in its charter)
Delaware 47-0210602
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3555 Farnam Street, Omaha, Nebraska 68131 (Address of principal executive
offices) (Zip code)
402-536-3677
(Registrant's telephone number including area code)
Not applicable
(Former name and former address, if changed since last report)
<PAGE>
Item 5. Other Events.
On February 2, 1999, the registrant held a conference entitled "Silicon
Economics: The New Math of Communications." Attached to this filing as Exhibit
99.1 are excerpts adapted from the slides presented at that conference. Exhibit
99.1 is hereby incorporated herein by reference as if set forth in full herein.
Item 7. Financial Statements and Exhibits.
(a) Financial statements of businesses acquired
None
(b) Pro forma financial information
None
(c) Exhibits
99.1 Excerpts adapted from the slides presented at the registrant's
February 2, 1999 conference entitled "Silicon Economics: The New Math of
Communications."
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Level 3 Communications, Inc.
February 23, 1999 By: /s/ Neil J. Eckstein
Date Neil J. Eckstein, Vice President
Exhibit 99.1
The presentations made at the Level 3 Communications First Annual Investor
and Analyst Conference - Silicon Economics: The New Math of Communications, both
oral and written, contain forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. These forward-looking
statements include, among others, statements concerning: anticipated trends in
the market for communications services; the elasticity of demand for
communications services; the anticipated reduction in the cost to provide
communications over an IP technology based network; the anticipated
price-performance of IP technology based products and services; the sources of
demand for communications services; estimates of completion dates, future
revenues, gross margin percentages, expenses, capital requirements and levels of
capital expenditures, expectations as to funding the company's capital
requirements; and other statements of expectations, beliefs, future plans and
strategies, anticipated developments and other matters that are not historical
facts.
The forward-looking statements are based on management's beliefs as well as
on a number of assumptions concerning future events. Participants at the
conference and readers of these materials are cautioned not to put undue
reliance on these forward looking statements, which are not a guarantee of
performance and are subject to a number of uncertainties and other factors, many
of which are outside the company's control, that could cause actual events or
results to differ materially from those expressed or implied by the statements.
The most important factors that could prevent the company from achieving its
stated goals include, but are not limited to, failure by the company to: achieve
and sustain profitability based on the creation and implementation of the Level
3 Network; overcome significant early operating losses; produce sufficient
capital to fund the company's business plan; develop financial and management
controls, as well as additional controls of operating expenses as well as other
costs; attract and retain qualified management and other personnel; install on a
timely basis the switches/routers, fiber optic cable and associated electronics
required for successful implementation of the company's business plan; and
develop and implement effective internal processes and systems for processing
customer orders and provisioning. For a discussion of certain of these factors,
please see the Company's Current Report on Form 8-K/A filed with the Securities
and Exchange Commission on February 17, 1999.
* * *
The materials presented at the Level 3 Communications First Annual Investor
and Analyst Conference - Silicon Economics: The New Math of Communications,
including materials contained in the fofllowing presentation, are copyrighted by
Level 3 Communications, Inc.
Copyright (C) Level 3 Communications, Inc. 1999 - All Rights Reserved
<PAGE>
Agenda
Introduction Crowe
The Communications Marketplace
- - Market Trends Crowe
- - Technical Trends Vidal
- - Regulatory Analysis Gips
- - The NextGen Service Provider Crowe
Internet Protocol Voice Crowe/Elliott
The Level 3 Approach
- - Services and Sales Channels O'Hara
- - The Level 3 Network Caruso
- - International Strategy Williams
- - Business Support Systems Jones
- - Our People O'Hara
- - Financial Analysis Bradbury
Summary Crowe
<PAGE>
Market Trends
Jim Crowe
President
and
Chief Executive Officer
<PAGE>
After Decades of Regulated
Pricing, Silicon Economics is
Coming to Communications
<PAGE>
Silicon Economics
[Graphic: Intersecting supply and demand curve].
Rapid Decrease in Price and Increase in Demand For Price Elastic Products and
Services
<PAGE>
Price Elasticity of Demand
If price drops 1%, what happens to demand?
Demand Increase . . . . . . . . . Price Elasticity
Less than 1% . . . . . . . . . . . Inelastic
1% . . . . . . . . . . . . . . . . Unitary
More than 1% . . . . . . . . . . . Elastic
<PAGE>
The Virtuous Cycle of
Silicon Economics
[Graphic: circle graphic showing decreasing unit price on left and increasing
unit demand on right].
* Unit costs and prices drop
* Unit demand increases more rapidly than unit price
<PAGE>
IP Technology Enables
Rapid Cost and Price Reductions
* Traditional telephone technology is centrally planned and improves slowly
* IP technology is market based and improves rapidly
<PAGE>
IP Standards Development is Market Based and Rapid
Market Based
IP Technology
Led by hardware, software and service providers
Product success determines standards
Unpredictable and rapid
Centrally Planned
Telephone Technology
Led by national and international standards bodies
Standards determine product development
Predictable and slow
<PAGE>
Today, IP Technology is More Cost Effective
Than Traditional Telephone Technology
[Graphic: bar graph showing that Cost per CD Rom of information from New York to
Los Angeles, based upon assumptions stated below, is $1.98 for ISP and $27.08
for PSTN. Graph also shows that transmission costs are constant between
examples].
Assumptions
Switched access $.005/min
Long distance $.01/min
45Mb Internet port $19,000/mo
DS-3 dedicated line $1,000/mo
Packet overhead 10%
<PAGE>
Over Time, IP Price-Performance Will Improve Rapidly
* IP is now a worldwide set of standards supported by hardware, software and
service providers
* Because they are market based, thousands of entrepreneurs are working to
improve IP standards
- Security
- Quality of Service
- Latency (delay through network)
* Because it is market based, IP technology is improving much faster than
closed, proprietary telephone technology
<PAGE>
IP Technology Costs And Prices Are Based On Silicon Economics
[Graphic showing slopes of price performance of Frame relay, ATM switching,
Routers and Circuit switching (Performance/cost (bps per $)) over time. Source
is "Why Circuit Switching is Doomed" by Peter J. Sevcik, Business Communications
Review, Sept. 1997.]
Platform Time to Double Performance/Cost
Frame 10
Router 20
ATM 40
Circuit 80
Transmission 10
<PAGE>
Future Sources of Communication Service Demand
[Graphic illustrating increased demand over time]
* Electronic commerce
* Software distribution
* Music distribution
* Video on demand
* Video conferencing
* Telepresence
<PAGE>
Communications Approaching The Quality Of Physical Presence (Telepresence) Is
Illustrative of Future Bandwidth Demand
[Graphic: Human head with semi-circle shown 1 foot away from face].
Assumptions
1 half sphere/ per eye
24 bit color
30 frames per sec.
2400 dots per inch
10.4 billion pixels
One telepresence session requires 15 terabits/second (uncompressed)
<PAGE>
Market Based Standards And Rapid Price-Performance Improvement Will Disrupt The
Communications Industry
* Similar to mainframe replacement by client server computing
* Centralized circuit switched networks replaced by distributed softswitched
networks
* Vertical integration replaced by horizontal integration
<PAGE>
Silicon Economics Disrupted The Communications Industry
Mainframe Market
(Vertical Integration)
- ----------------------
Applications
Operating Systems
Memory Processor Storage
Physical Hardware
Microprocessor Market
(Horizontal Integration)
- ------------------------
Applications Applications Applications
Operating System(s)
Memory Microprocessor Storage
Physical Hardware Physical Hardware Physical Hardware
<PAGE>
Silicon Economics Will Disrupt
The Computer Industry
Traditional Communications
(Vertical Integration)
- --------------------------
Applications
Switching/Routing
Transmission
Marketing & Sales [covering all three of the above]
NextGen Communications
(Horizontal Integration)
- ------------------------
Applications Applications Marketing & Sales
Switching/Routing Marketing & Sales
Transmission Marketing and Sales
<PAGE>
The Voice/Multimedia Revenue Gap
($ millions)
Today's IP Market
Data Services 37,092
Internet Access 15,471
IP Telephony 1,890
IP VPN 419
Total 54,872
Today's Voice Market
Switched Telephony 462,763
Fax 64,775
Total 527,538
Today's IP Market / Today's Voice Market = 9.4%
Source: International Data Corp. 1998
<PAGE>
Summary
* IP technology is based on market based standards
* Market based standards and industry disruption mean rapidly dropped unit
cost and pricing
* Communications demand is price elastic
* Voice will dominate revenues in the near term
* IP based multimedia will dominate longer term
<PAGE>
Technical Trends
Ron Vidal
Senior Vice President
New Ventures
<PAGE>
Some Key Attributes of Carrier Class Networks
[Graphic: Globe showing a telecommunications network]
* Information routing and addressing
* Quality of service capability
* Information aggregation (Multiplexing)
* Low transport error rate
* Fault tolerance
* High capacity
<PAGE>
Level 3's Network Uses 4 Layers
Network Layer Primary Attribute
- ------------- -----------------
IP Addressing
ATM QOS
SONET Multiplexing
Low Error Rate
Fault Tolerance
WDM High Capacity
Fiber Physical Medium
<PAGE>
4 Layer Networks Have Overlapping Functionality
[Graphic: showing that Addressing is present in IP and ATM; QOS is present in
ATM; Multiplexing is present in IP, ATM, SONET and WDM; Low Error Rate is
present in IP, ATM, SONET; Fault Toleranceis present in SONET; High Capacity is
present in SONET and WDM].
<PAGE>
Network Layers Have Different Price-Performance Characteristics
[Graphic: Showing Improvement Rate per Year % and Time to Double Performance per
Dollar (mo), respectively, for the following: IP at 52 and 20; ATM at 23 and 40;
WDM at 32 and 30 and SONET at 130 and 10].
Source: Level 3 Estimates
"Why Circuit Switching is Doomed" Peter J. Sevcik, Business Communications
Review, Sept. 1997
<PAGE>
Over Time, Functionality Will Migrate
To Elements With More Rapid Price-Performance Improvement
[Graphic: Picture at left showing from top to bottom IP, ATM, SONET, WDM and
Fiber with arrow to picture at right showing from top to bottom IP, Thin Sonet,
WDM and Fiber].
<PAGE>
Optical Fiber Is Now A Rapidly Changing Capital Cost Element
[Graphic: Showing IP, ATM, SONET and WDM as variable and Fiber and Conduit as
fixed for a Legacy Network and IP, ATM, SONET, WDM and Fiber as variable and
Conduit as fixed for a NextGen Network].
<PAGE>
Historically, Transport Costs Have Rapidly Decreased
[Graphic: Showing Cost per Gb-mi per sec in dollars decreasing from 1990 to 2000
as SMF, NZDSF and LEAF were introduced].
Source: Level 3 Engineering
<PAGE>
Multiple Conduits Are Required To Leverage Technical Improvements
[Graphic: Showing 10 conduits with optical fiber in only one conduit]
* Pull new fiber when unit cost is lower
* Move traffic when O&M cost in oldest fiber exceeds Capex + O&M in newest
fiber
* Current estimates require 4 to 5 conduits
<PAGE>
Flexible Amplifier/Regenerator Spacings
Are Required to Leverage Technical Improvements
[Graphic: Showing amplifier/regenerator spacings along network connecting
Austin, Dallas and Houston].
* Optical signals require periodic amplification and regeneration
* Initial amplifier and regenerator costs for a 16,000 mile network are
approximately $200 million and will be recurring
* New fiber generations substantially increase amplifier and regenerator
spacing
<PAGE>
In Addition, Other Operational Elements
Must Be Upgradeable To Leverage Technical Improvements
* Right of way acquisition plans
* Real estate acquisition plans
* Business support systems
* Equipment purchasing and logistics
<PAGE>
Summary
* Rates of technical improvement are rapid and accelerating
* Market based standards mean improvements may be unpredictable
* In NextGen networks, all variable cost elements including fiber must be
rapidly upgradeable
* Level 3's network is designed to accommodate these principles
<PAGE>
Regulatory Analysis
Don Gips
Senior Vice President
Corporate Development
<PAGE>
Key Issues For A NextGen Service Provider
[Graphic: Artist's rendition of government building].
* Regulatory treatment of converged industry
* The local loop bottleneck
* The universal service dilemma
<PAGE>
Convergence Requires A New Regulatory Approach
[Graphic: Artist's depiction of Video, Telephony and Internet converging in
NextGen Networks].
* Digital technology has eliminated differences between telephone and
enhanced (computer based) service
- DSL and telephone services sharing local loop
* Regulation based on geography is failing
* The Internet is speeding convergence
* Today's regulatory regime does not work for converged industry
<PAGE>
The Local Loop Bottleneck
[Graphic: Three columns - first showing Long Distance Switching & Trunking, with
the attributes of Equal Access, which was competitive in 1980's; the second
showing Local Switching & Trunking, with the attributes of Interconnection,
Colocation, Local Number Portability, which is competitive in 1990's and the
third showing Local Loop, with the attributes of Separate from ILEC networks,
Non discriminatory access for all competitions, Widely available alternatives
and a question as to its competitiveness].
<PAGE>
The Local Loop Bottleneck
Implications
[Graphics: Artist's rendition of Level 3 connection to customer location and
Artist's rendition of Level 3 connection to a Central Office with access to
customer through Central Office].
* LEC incentives to unbundle will be further reduced after LD entry
* Combination of technical innovation and political pressure for residential
broadband access will force reform over time
* Level 3 approach is to leverage efforts of others -- Sell directly to large
customers over broadband facilities -- Wholesale services to others to
address medium/small businesses and residential customers -- When scalable
solution emerges, move quickly to implement
<PAGE>
The Universal Service Dilemma
Subsidy Flow
[Graphic: Showing four quadrants labeled Long Distance and Local on left and
Suburban Rural and Inner City on top with three arrows pointing to Local,
Suburban Rural quadrant].
* Developed in early 1900's to subsidize universal service
* U.S. social and economic patterns have reversed
<PAGE>
The Access Charge Dilemma
[Graphic: Artist's rendition of government building crumbling]
* Access charges arbitrage is collapsing the old framework n IP technology
will accelerate trend
* Actual ratio of universal service subsidy versus LEC handout is unknown --
* Estimates range from 20% to 70%
<PAGE>
Universal Service Subsidies
Key Principles
* Must be technology and revenue unit neutral (i.e., no per minute charge)
* Must be competitively neutral
* Must be targeted at universal service as defined by policy makers
* Must be visible subsidy for targeted users
* Where practical, universal service provider should be competitively
determined
<PAGE>
Our Vision for Regulatory Treatment Of A Converged Industry
Key Principles
* Eliminate distinctions between services
* Key distinction is service provider versus customer - Service provider has
access to network control systems and databases
* Service providers contribute to reformed universal service fund - On
competitively neutral basis - Used for subsidies to targeted customers
<PAGE>
Our Vision for Regulatory Treatment Of A Converged Industry
Key Principles
(cont.)
* Service providers subject to mandated interconnection - With technical
quality equal to their own internal network - If service is competitive,
rates are market based - If services are monopoly, rates are cost based
* Self-regulating entities need to be developed similar to NASD or FASB
<PAGE>
The NextGen Service Provider
Jim Crowe
President
and
Chief Executive Officer
<PAGE>
The NextGen Service Provider Must Leverage
[Graphic: Showing intersection of price and demand curves]
* Shortened useful lives of assets
* Higher absolute capital requirements
* Rapidly decreasing unit costs and prices
* Rapidly increasing unit demand
* Higher cash flows and profits
<PAGE>
NextGen Service Providers Must
Develop New Tools To Manage The
New Financial Model
[Graphic: Bar graph showing Capacity Utilization percentage of a Telephone
Network as less than 20%. Source North River Ventures].
* High capacity utilization at low cost is key
* Requires development of new financial models
<PAGE>
Using Historical Data to Predict Demand
Underestimates Demand Created by
New Applications
[Graphic: Showing Gb/s over time increasing, with actual demand greater than
annual projection].
Source: Industry Data
<PAGE>
Microprocessors Illustrate Demand
Driven By Technology and New
Applications
[Graphic: Graph showing cost and price per MIPS decreasing over time and a
corresponding increase in the demand for MIPS over the period].
* Technology and manufacturing scale is rapidly lowering unit cost and price
* New applications are rapidly increasing demand
<PAGE>
Selected Price Elasticities
[Graphic: Showing that Arc Elasticity of Demand is greatest for Backbone
routers, followed by microprocessors, electricity, computer hard drives and US
Long Distance].
Source: Steve Lanning, Bell Laboratories, Lucent Technologies
<PAGE>
Silicon Economics Model
[Graphic: Showing price elasticity on vertical axis, and price-performance
improvement on horizontal axis with bandwidth in the upper right quadrant of
highest price elasticity and price performance improvement].
<PAGE>
NextGen Service Provider
Financial Model
* Rapidly rising revenue
- Price elasticity
- New applications
* Lower operating expenses
- Scalable systems
- Web enabled sales
* Capital expenditures
- Higher absolute CapEx
- Lower per unit CapEx
* Higher cashflows and profits
<PAGE>
The NextGen Service Provider
Simplified DCF Model
Input Assumptions
- ----- -----------
Initial Operating Expense as % of Revenue 70%
Annual OE Productivity Improvement 10%
Initial Capital Expense per $1 of Revenue $1.50
Annual CapEx Price-Performance Improvement 60%
Price Elasticity 2.0
Discount Rate 14%
Note: Price reduction per year set to optimize NPV
<PAGE>
Simplified DCF Model
Selected Annual Performance Metrics
[Graphic: charting revenue, cash flow, operating expense and capital expense.]
<PAGE>
Summary
* To benefit from silicon economics, a service provider must rapidly decrease
unit cost and unit price and increase unit demand
* Financial implications include shortened asset lives and higher capital
requirements
* Benefits include rapid market share increase and higher cashflow and profit
<PAGE>
Internet Protocol Voice
Jim Crowe
President
and
Chief Executive Officer
<PAGE>
Internet Protocol Voice
[Graphic: Artist's rendition of telephone]
* Voice quality indistinguishable from the telephone network
* Call setup times indistinguishable from the telephone network
* No additional customer equipment required
* No change in user behavior patterns required
* Leverages silicon economics
<PAGE>
Key Concepts
Major Communication Networks
[Graphic: Artist's rendition of telephone network]
<PAGE>
Key Concepts
Digital Circuit Switch
[Graphic: Artist's rendition of digital circuit switch]
* Integrated functionality
* Proprietary code
* Proprietary service development
<PAGE>
Key Concepts
SS7 Enabled Softswitch
[Graphic: Artist's rendition of SS7 Enabled Softswitch]
* Distributed functionality
* Open platforms
* Open interfaces enable new services
* Overflow to PSTN when quality is unacceptable
<PAGE>
Capital Cost Comparison
Cost Per Ports For 32,256 Ports
(U.S. Dollars)
Softswitch
- ----------
Call Control Server 27.72
Route Server 2.78
SS-7 Gateway .10
DSO Cross Connect 23.25
Total 53.91
Circuit Switch
- --------------
Single Integrated Purchase
Total 95.00
Source: Level 3 Estimates
<PAGE>
Capital Cost Comparison
Time to Double
Performance Per Dollar (mo)
- ---------------------------
Circuit Switch 80
Softswitch 20
* Currently a distributed softswitch costs 40% to 45% less than an equivalent
circuit switch
* Given relative price-performance improvement rates, softswitches will be
much less expensive over time
* Distributed components with open interfaces will spur development of new
applications
<PAGE>
Internet Protocol Voice
Demonstration
Ike Elliott
Senior Director, Voice and Access
Network Engineering
<PAGE>
Voice Quality Factors
Public Telephone Quality
Latency (delay two-way). . . . . Less than 250 msec
Call setup delay . . . . . . . . 1 to 3 seconds
Signal loss. . . . . . . . . . . . Less than 0.5 dB
Packet loss. . . . . . . . . . . . 1 in 10,000
Speech Quality . . . . . . . . . . Less than 2.0 ITU PSQM Score
<PAGE>
Actual Quality Measurements
Softswitch(1) Circuit Switched
------------- ----------------
Latency (delay two-way) 200 ms 120 ms
Call setup delay 3 seconds 2 seconds
Signal loss ~ 0 dB ~ 0 dB
Packet loss 1 in 1,000,000 N/A
Speech Quality 1.1 PSQM 1.1 PSQM
(1) Based on Level 3 internal tests
<PAGE>
Demonstration Diagram
[Graphic: Artist's rendition of IP Voice demonstration conducted. The rendition
compares the path of a call between Denver, CO and New York, NY over the circuit
switched network with the path of a call between Denver, CO and New York, NY
over a softswitched network].
<PAGE>
Services & Sales Channels
Kevin O'Hara
Executive Vice President
and
Chief Operating Officer
<PAGE>
Level 3 Provides A
Comprehensive Range of Services
* Private Line
* Colocation Services
* Internet Access
* Managed Modem
* Voice Service Commercial Testing 1Q1999
* Special Services
<PAGE>
To All Customer Segments
[Graphic: Artist's illustration of Level 3's sales channels]
* Direct sales to larger businesses
* Indirect sales to general businesses and residential customers
<PAGE>
Private Line
[Graphic: Bar graph showing CAGR of 6.4% for Global Market Size for the years
1998 through 2001. Source: International Data Corp. 1998].
* Dedicated, non switched circuit
* Carries voice, data or video
* U.S. CAGR 13.6%
<PAGE>
Private Line
[Graphic: Artist's rendition of Level 3 local network]
Target Customers
* Carriers
* Resellers
* Internet Service Providers
* Large Businesses
<PAGE>
Private Line
Level 3 Competitive Advantages
[Graphic: Artist's rendition of Level 3 local network]
* Managed local, national and international service over Level 3's network
* Upgradeable network assures long term price superiority
* State of the art reliability and quality
* Web enabled support
<PAGE>
Colocation Services
[Graphic: Bar graph showing CAGR of 100% for Global Market Size for the years
1998 through 2001. Source: International Data Corp. 1999]
* Secure, monitored technical space with broadband connectivity to Level 3
network
* Today's market is supply limited
* Strategic fit with network services
<PAGE>
Colocation Services
[Graphic: Photograph of Level 3 colocation equipment]
Target Customers
* Portals
* Content Providers
* Web Hosting Services
* Internet Service Providers
* Carriers
* Resellers
<PAGE>
Colocation Services
Competitive Advantages
[Graphic: Photograph of Level 3 colocation equipment]
* Over 1.25 million square feet of gateway space
* Current presence in 15 U.S. cities and London
* High quality, secure space monitored 24 X 7
* Broadband connectivity
<PAGE>
Internet Access
[Graphic: Bar graph showing CAGR of 20% for Global Market Size for the years
1998 through 2001. Source: International Data Corp. 1998]
* Dedicated and dialup access to Internet
* Dialup access from 2000+ POPs worldwide
<PAGE>
Internet Access
[Graphic: Artist's rendition of computer workstation]
Target Customers
* Large businesses
* Resellers of Level 3 services
* Content providers
<PAGE>
Internet Access
Level 3 Competitive Advantages
[Graphic: Artist's rendition of computer workstation]
* Provided over Level 3 facilities
* High capacity, dual OC-3 network
* Multiple, high speed interconnections with major ISPs
* Guaranteed service availability
* 40msec average one way delay between U.S. nodes
<PAGE>
Managed Modem Service
[Graphic: Bar graph showing CAGR of 23.7% for Global Market Size for the years
1998 through 2001. Source: International Data Corp. 1998].
* Allows ISPs to outsource capital intensive modem infrastructure
* Unique Level 3 service based on softswitch technology
<PAGE>
Managed Modem
[Graphic: Photograph of Level 3 managed modem equipment]
Target Customers
* Internet Service Providers
<PAGE>
Managed Modem
Level 3 Competitive Advantages
[Graphic: Photograph of Level 3 managed modem equipment]
* Unique Level 3 softswitch based service
* High quality and availability services
* Substantial savings versus alternatives
* Softswitch architecture means rapid, long term price reductions
<PAGE>
Voice And Fax Services
[Graphic: Bar graph showing CAGR of 6% for Global Market Size for the years 1998
through 2001. Source: International Data Corp. 1998].
* Local, long distance and international voice services
* PSTN quality service
* Unique Level 3 service based on softswitch technology
<PAGE>
Voice And Fax Services
[Graphic: Artist's rendition of telephone]
Target Customers
* Large Businesses
* Agents
* Resellers
* ISPs
<PAGE>
Voice And Fax Services
Level 3 Competitive Advantages
[Graphic: Artist's rendition of telephone]
* Unique Level 3 service based on softswitch technology
* PSTN quality service
* Substantial initial cost savings
* Softswitch technology means rapid, long term price reduction
<PAGE>
Special Services
Services
- --------
Empty Conduits
Dark Fiber
Wavelengths
Very High Speed SONET
Target Customers
- ----------------
Carriers
ISPs
Web Hosting Services
Very Large Businesses
<PAGE>
Special Services
Level 3 Competitive Advantages
* Low cost provider of conduit
* Level 3's strategy ensures continued low cost over time
- Continuously upgradeable network
- Leverages rapid technology price-performance improvements
- Success based capital expenditures keep financial costs low
<PAGE>
Service Availability
Service Availability
- ------- ------------
Private Line. . . . . . . . . . . . . . . . Available
Colocation Services . . . . . . . . . . . . Available
Internet Access . . . . . . . . . . . . . . Available
Managed Modem . . . . . . . . . . . . . . . Available
LD Voice Services . . . . . . . . . . . . . Commercial Testing 1Q1999
Local Voice Services. . . . . . . . . . . . Commercial Testing 1Q2000
Special Services. . . . . . . . . . . . . . Available
<PAGE>
Level 3 Products and Services
Summary
* Comprehensive service offerings
- International scope
* Unique services target large markets
- Softswitch based technology
- Leverages silicon economics
* Sales channels address full range of customers
- Direct sales to larger businesses
- Indirect sales to medium/small businesses and residential users
<PAGE>
The Level 3 Network
Dan Caruso
Senior Vice President
Operations
<PAGE>
The Level 3 U.S. Network
[Graphic: Artist's map showing Level 3 intercity network when fully
constructed].
* Gateway sites
* Local fiber networks
* Intercity network
* IP backbone
<PAGE>
The Level 3 U.S. Network
Typical Gateway
[Graphic: Artist's rendition of layout of typical Level 3 Gateway facility].
* 20,000 sq. ft. to 80,000 sq. ft.
* Dual, fault tolerant Level 3 network connections
* Interconnected with minimum 2 other local networks
* Minimum 8 hours backup power
* Uninterruptable power supply
<PAGE>
Representative Gateway Sites
[Graphic: Four photographs showing equipment in Level 3 Gateways facilities in
Los Angeles, Washington, D.C., Chicago and New York]
* 825,000 sq. ft. completed
* Approximately 1,250,000 sq. ft. under lease
<PAGE>
Planned Gateways
[Graphic: Artist's map of United States with locations of cities where Level 3
has installed or plans to install networks through the fourth quarter of 2001].
<PAGE>
Typical City Network
[Graphic: Artist's rendition of typical, simple Level 3 local network]
* Upgradeable multiple conduit system
* Fault tolerant SONET rings
* IP optimized
* Leased facilities enable sales upon gateway completion
<PAGE>
Planned City Networks
[Graphic: Artist's map of United States with locations of cities where Level 3
plans to install local city networks through the fourth quarter of 2001].
<PAGE>
U.S. Intercity Network
[Graphic: Artist's rendition of cross-section showing installation of 10
conduits, one of which contains fiber optic cable].
* 16,000 route miles
* Upgradeable 10 to 12 conduit system
* Connects more than 150 cities
* Leased facilities enable sales upon gateway completion
<PAGE>
U.S. Intercity Network
93% ROW Acquired
[Graphic: Artist's map of United States with Level 3 intercity network. Several
portions show sections where Right of Way negotiations are pending].
<PAGE>
U.S. Intercity Network
Construction Status
[Graphic: Artist's map of United States with anticipated completion dates for
Level 3 intercity network through the first quarter of 2001].
<PAGE>
Level 3 IP Backbone
[Graphic: Artist's map of United States with logical depiction of Level 3 IP
Backbone]
* In service IP backbone connects 15 cities on leased network
* Additional cities added as Level 3 network is completed
<PAGE>
Summary
* Substantial implementation progress made
* On track to achieve major milestones
* Continued focus on execution
<PAGE>
International Strategy
Colin Williams
Chief Executive Officer
Level 3 International
<PAGE>
International Strategy
[Graphic: Artist's rendition of flags of United Kingdom, Germany, Italy, France,
Japan and Austraila]
* Leverage silicon economics
* Avoid alliances which negatively affect speed to market
* Build upgradeable network
* Provide advanced end to end service between global financial centers
* Address needs of communications intensive multinational corporation
<PAGE>
Western Europe
(U.S. $ billions)
[Graphic: Artist's map of Europe]
Market Size
- -----------
Germany 49.8
United Kingdom 28.6
France 27.3
Italy 23.0
Other Europe 63.5
Total 192.2
Source: ITU, 1997 Yearbook of Statistics; Telecommunications Services, Total
Telecom Services Revenues
<PAGE>
Western Europe
Market Status
[Graphic: Artist's rendition of flags of United Kingdom, Germany, France and
Italy]
* National carriers provide local, long distance and international
* Response to competition is predatory pricing of local monopoly services
* European Union / euro expanding cross border opportunities
* Regulatory barriers disappearing
* Broadband transport pricing very high
<PAGE>
EU Private Line Pricing
[Graphic: Artist's rendition of flag of each nation next to information below
for that country].
Price ratio per Kbps
--------------------
U.S. 1.0
Netherlands 11.5
Belgium 13.5
United Kingdom 14.7
France 16.0
Germany 18.0
Italy 36.0
Source: Tariffica " Leased Line Market in Europe" 1998 (Incumbent Pricing)
<PAGE>
Asia
($ billions)
[Graphic: Artist's map of the Pacific Rim]
Market Size
-----------
Japan 93.6
China 16.9
Korea 14.9
Australia 13.4
Hong Kong 6.4
Taiwan 5.9
Singapore 2.8
Other 12.9
Total 166.8
Source: ITU, Asia Pacific Telecommunications Indicators, 1997
<PAGE>
Asia
Market Status
[Graphic: Artist's rendition of flags of Japan, Austraila and Singapore].
* Reform occurring more quickly than anticipated
- Inter-region competition
- Impact of Internet
* Reform still lags U.S. and EU
* Market success may require partnerships or JV's
* Current economic weakness represents historic opportunity
<PAGE>
The Level 3 International Approach
[Graphic: Artist's world globe showing a telecommunications network]
* Initiate private line, IP and voice services over submarine and leased
facilities
* Build IP and telephony colocation facilities in major cities
* Build metro and Pan European fiber networks
* Develop common EU/U.S./Asia product set, processes and business support
systems
<PAGE>
International Network Development
* Trans-oceanic capacity agreements
* National and international infrastructure licenses and public voice
telephony licenses - Granted in UK, Netherlands, Sweden, France, Germany,
Switzerland and Belgium
* City Gateways ready for service - London 75,000 square feet gateway
facilities - Mid year for Frankfurt, Amsterdam and Paris
* Deployment underway on Pan European network
<PAGE>
1999 European Networks In Service
[Graphic: Artist's map of northern Europe highlighting location of London,
Amsterdam, Brussels, Frankfurt and Paris].
<PAGE>
London Gateway Facility
[Graphic: Photograph of London Gateway technical space]
* London gateway facility in service
* Private line, Internet access and colocation services now offered
<PAGE>
Pan European Network
[Graphic: Artist's rendition of proposed Level 3 Pan European network, noting
that the projected completion date for one ring is the third quarter of 2000 and
that the other two rings are in the planning stages].
<PAGE>
Summary
* Regulatory reform and technical innovation have created an historical
opportunity
* Level 3 business plan - Leverages silicon economics - Emphasizes cross
border, advanced applications - Builds common EU/U.S./Asia business
platform
* Level 3 is rapidly implementing this plan
<PAGE>
Business Support Systems
Mike Jones
Senior Vice President
and
Chief Information Officer
<PAGE>
Business Support Systems
Our Objectives
* Maximize Level 3 value by applying information technology
* Build a continuously upgradeable IT infrastructure
* Enable superior Level 3 services
* Maximize customer self service using web enabled processes
<PAGE>
Key Concepts
* Use web browser to perform business transactions, access decision support
information and knowledge assets
* Maximize use of commercial off the shelf (COTS) software
* Leverage enterprise resource planning (ERP) suites
* Leverage advances in enterprise application integration (EAI) software
* Emphasize data warehousing with high scalability and integrity
<PAGE>
Simplified Architecture
[Graphic: Showing architecture of Level 3 business support systems]
<PAGE>
Enterprise Application Integration Software
[Graphic: Showing architecture of enterprise applications]
* Vendor provides connectors for COTS applications
* Integration layer communicates with applications and databases
* Applications share common databases
* Enables cost effective application upgrades and substitutions
<PAGE>
Current Vendors/Applications
Browers
- -------
Microsoft Internet Explorer
Netscape Navigator
Online and Warehouse Data
- -------------------------
Erwin
Brio
Ab Initio
Oracle
ERP
- ---
Oracle
Clarify
EAI
- ---
Vitria
Active
COTS
- ----
Kenan
Hewlett Packard
Small World
ACE*COMM
Bellcore
<PAGE>
Current Status
Corporate Systems
[Graphic: Artist's renditions of calculator and computer workstation]
* ERP systems operational
- Finance and accounting
- Asset management
- Human resources
- Payroll
* Common Communications System operational
- Microsoft Office
- Intranet
- Web based internal applications
<PAGE>
Current Status
Customer Facing Applications
[Graphic: Artist's rendition of computer workstation]
* Customer care to support current services
* Billing to support current services
* Network monitoring by customers (beta testing)
* Web enhanced purchasing by customers
<PAGE>
Current Status
Network Facing Applications
[Graphic: Artist's rendition of world globe and communications network]
* Network provisioning
* Network inventory
* Network monitoring
* IP backbone services
- RADIUS server
- DNS server
- Routing registry
* Integration of operations applications
<PAGE>
Status Summary
[Graphic: Artist's rendition of release list showing checkmarks]
* Management and production team in place
* 170 Level 3 and 400 contract personnel in place
* Production platform in place
- Data center
- 2000 user network
* Predictable, reliable development processes in place
- Release schedule supports Level 3 plan
- First 3 releases delivered
- 4th release on schedule
<PAGE>
Future Plans
[Graphic: Artist's rendition of Gnatt chart for the years 1998 through 2000].
* Improve "hands free" workflow process
* Expand web enabled commerce platforms to voice services 2Q 1999
* Web based access to business support systems by agents, resellers and
wholesale customers
* Improve data warehousing process
* Enhance knowledge management architecture
<PAGE>
Our People
Kevin O'Hara
Executive Vice President
and
Chief Operating Officer
<PAGE>
Level 3's first priority is to attract and keep the best people in the
communications industry
<PAGE>
The NextGen Service Provider Versus The Traditional Carrier
NextGen Service Providers
-------------------------
Entrepreneurial
Flexible, team oriented
Very rapid business cycle
Scalable thru information technology
Emphasizes use of partners and market based solutions
Traditional Carriers
--------------------
Utility mentality
Highly structured workplace
Slow business cycle
Scalable thru rigid processes
Centrally planned, with custom systems
<PAGE>
Level 3's People
[Graphic: Photograph of three person work group]
* Entrepreneurial
* Results oriented
* Prefer success based compensation to entitlements
* High degree of technical expertise
* Take responsibility for continuous learning
Think Like Owners
<PAGE>
Level 3's Approach
[Graphic: Map of Denver metropolitan area]
* Locate in the right place
* Provide the right work environment
* Compensate in the right way
<PAGE>
Compensation Plan
Salary: 90% - 95% of competition
Bonus: Up to 110% of competition for targeted performance
Benefits: Competitive and "market smart"
Long Term: Ownership oriented
- Shareworks
- Outperform Stock Options
<PAGE>
Long Term Incentives
Shareworks Stock Grant All employees
Up to 3% annual compensation
Shareworks Match All employees
Up to 7% annual compensation
Outperform Stock Options Granted to upper 60% of team Innovative value formula
<PAGE>
Outperform Stock Option
[Graphic: Chart showing maximum multiplier of 8 times at 11% outperformance]
* Grants equal in initial value to competitors' grants of standard options
* Four year life
* Granted on rolling quarterly basis
* Value at exercise equal to market price minus strike price, times
multiplier
<PAGE>
Few Companies Consistently Outperform The S&P 500
[Graphic: Bell curve showing percentage of number of companies that outperform
the S&P 500]
<PAGE>
Outperform Stock Options
[Graphic: Artist's rendition of stock certificate]
* Aligns management team and stockholder interest
* Properly balances management team and stockholder rewards - Stockholders
receive S&P 500 return before management participates - At maximum
outperformance, stockholders receive 75% of extra value creation
* Attracts and retains success oriented entrepreneurs
<PAGE>
The Level 3 Plan Is Working
* Hired executive team with proven record
* Hired 1,350 experienced people
* Receiving average of 500 resumes per week
* Current data base of 14,000 applicants
<PAGE>
Financial Analysis
Doug Bradbury
Executive Vice President
and
Chief Financial Officer
<PAGE>
Overview
* Strategic financial approach
* Business plan implementation
* Financial drivers
* Summary
<PAGE>
Strategic Financial Approach
* Level 3's strategy is to minimize financial risk
- Conservative use of debt
- Prefunding of business plan
* Preserving access to capital is key goal
<PAGE>
Capital Acquisition Plan Guidelines
* Diversify funding sources
* Maintain timing flexibility
* Equity is appropriate for up front expenditures
* Debt is appropriate for success based spending
* Substantially prefund logical business phases
* Continue to improve credit quality
<PAGE>
Business Plan Is Logically Phased
* Business Plan requires $8 to $10 billion
* Plan divided into 5 phases
* Phases designed to service debt without additional capital
<PAGE>
Prefunding Each Phase Minimizes Risk
[Graphic: Artist's rendition of intercity networks in United States and Europe
joined by trans-oceanic links]
* Prefunding minimizes both financial and operating risk
* Available liquidity substantially prefunds Phase 1 and 2
* Phase 1 and 2 result in substantial U.S. and European presence
<PAGE>
Success Based Capital Spending Enhances Value
* Capital spending directly associated with incremental cash flow
* Electronics installed after customer order
* Success in executing strategy
- Increases ROI
- Decreases risk
* Efficient network utilization
* Benefit from silicon economics
<PAGE>
Phases 1 and 2 Substantially Prefunded
in Accordance with Capital Acquisition plan
[Graphic: Two pie charts - one for capital expenditures showing that 54% are Up
Front and 46% are Success Based, and one for capital structure showing Equity at
55% and Debt at 45% (a note indicates that pro forma equity incorporates sale of
Cable Michigan and market value of RCN and Commonwealth Telephone)].
<PAGE>
Key Financial Drivers
Revenue
Key Drivers
* Number of markets
* Array of products
* Number of sales reps per market
* Indirect sales expected to be 70% of revenue
* Capacity and dark fiber sales
<PAGE>
Key Financial Drivers
Network Expense
Key Drivers
* Startup expenses
* Migration of traffic from leased to owned facilities
* Direct vs. indirect sales ratio
<PAGE>
Key Financial Drivers
Operating Expense
Key Drivers
* Startup and growth related expenses
* Variable expenses dominate over time
* Operating expense efficiency
- Web enabled customer service and provisioning
- Indirect sales channels
<PAGE>
Key Financial Drivers
CapEx
Key Drivers
* Scope and pace of network construction
* Up front to success based capital ratio
* Average depreciable life of approximately 5 to 7yrs
<PAGE>
CapEx Becomes More Variable Over Time
[Graphic: Graph of $ incremental revenue per $ of Capital Expenditures over
time]
<PAGE>
Financial Summary
(figures as of Sept. 30, 1998)
* Financial strength to execute plan
- $4.2 billion in available liquidity
- Debt / book capitalization of 55%
- Debt / market capitalization of 17%
- $1.1 billion of equity holdings in RCN and Commonwealth Telephone
<PAGE>
Summary and Conclusions
* A fundamental shift in technology has created a unique opportunity
* New companies with technical, financial and management strength can create
substantial value
* Level 3 is well positioned to capitalize on this opportunity
