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Initiation of Research Coverage for Two Fiber Network Operators

Tuesday, April 19, 2016

William Blair & Company initiated research coverage of Level 3 Communications, Inc. (LVLT $53.76) and Lumos Networks Corp. (LMOS $12.86). Level 3 owns and operates one of the largest intercity and metro fiber networks in the industry, and Lumos is a fiber-based service provider that provides data, broadband, and IP services over its fiber optic network in the Mid-Atlantic region.

Analyst Jim Breen estimated that Level 3 would generate revenue of $8.5 billion and EPS of $1.76 in 2016, followed by revenue of $8.7 billion and EPS of $2.04 in 2017. For Lumos, Breen expects revenue of $208.1 million in 2016 and revenue of $215.1 million in 2017.

“Since the dot-com bubble, there has been a wave of fiber industry consolidation that has taken some excess capacity out of the market,” Breen said. “Large deals, such as Level 3’s takeover of tw telecom, have removed formidable competitors from the market and have resulted in fiber suppliers gaining some leverage in negotiations. We expect that Level 3’s acquisition strategy will continue once the tw telecom integration is complete, which will allow the provider to continue to add scale to its network while removing competitors. Level 3 management expects to achieve additional synergies from tw telecom through the first half of 2016 that should result in margin expansion of another 150 basis points this year. Over the long term, we believe that Level 3’s margin can attain 40%-plus as growth segments of the business outweigh legacy services.”

Breen continued, “Lumos’s strategy is to transition to a pure-play fiber infrastructure company through organic and inorganic means. It is harnessing cash in its legacy businesses to invest in growth of its data business, which includes enterprise, transport, and fiber-to-the-cell services. Lumos’s expansion in the Richmond and Norfolk, Virginia, areas is slated for completion in the first quarter of 2016, which will increase the company’s total enterprise addressable market and bolster its tower opportunity. Although total company top-line growth is somewhat muted for 2015, data revenue expanded 7% annually, and we expect that these investments will accelerate growth slightly in 2016. The company’s fiber assets are valuable to enterprises in the Mid-Atlantic region and to carriers seeking to bolster their LTE networks in the region.”

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