Rodent Regatta

Someone suggested that Level 3 Communications has been denying this fact: ”despite being a broadband company, a bulk of its revenues came from potatoes and meat business of selling dial-up access for wholesale.”

Let’s consider that statement for a moment. What have they denied? Clearly, they have been listing their ”managed modem service” as a primary service for the past five years. It has always been prominent on their home page.

Each quarter they have reported their ten largest customers and the list of services that each of those ten customers purchased. Earthlink, NetZero (United Online) and AOL have been clearly established for at least three years as major customers.

As for ”a bulk of its revenues,” there has been no question about the demand for the service and the company’s pursuit of that business. I’m not sure what ”a bulk of its revenues” means, but the implication is that some very large percentage of the company’s annual revenue comes from the managed modem business. AOL’s announced reduction in that service – at the highest end of the estimate – is expected to amount to $150 million a year. That represents less than four percent (3.7%) of the company’s annual sales!

There shouldn’t be an implication that Level 3 has somehow been secretive or misleading. No matter how tough the communications business has been the past five years, Level 3’s executives have been completely forthcoming and truthful about the conditions in the market, the services they sell and the prospects for the company.

Losses to stockholders in all communications companies have been well-documented the past five years. Level 3’s stock price fell as the bubble deflated just like a lot of the other telecommunications companies. This does not alter the fact that many people have used and continue to use modems as they travel to access the Internet. Level 3’s end-to-end, IP network terminates those modem calls at Level 3 aggregation points and carries the traffic over their fiber.

An announcement that AOL’s reducing its use of the managed modem service with a possible impact on annual revenue of $100-$150 million per year is not something that completely undermines the company’s stated strategy. Remember, this is a company that did $988 million in consolidated sales for the fourth quarter of 2003.

For any serious investor or prospective investor, a careful study of this company’s information is easy to conduct because everything they’ve been saying is archived at their web site.