Bear Sterns on Level 3 and Comcast

Bear Sterns, one of the more liberal investment banks took a contrarian like view on the Level3 Landing Comcast story that appeared in today’s Wall Street Journal.

The WSJ reported today that Comcast is close to announcing a VoIP
wholesale deal with Level 3 and Sprint to offer VoIP services in 2006. For
Level 3, we believe the wholesale deal will consist of IP transport and/or
call termination, which we believe are on the lower end of Level 3’s
previously discussed VoIP revenue estimates of $5-$20 per subscriber per
month. In addition, we note that an IP transport contract may be structured
as leased network capacity only, and not metered on a per customer basis.
We expect to hear more information on Level 3’s earnings conference call
scheduled for tomorrow, October 27 (details below).

Although increased business with Comcast is an incremental
positive for Level 3, we caution investors not to expect material revenue
and EBITDA gains in the near term from a VoIP contract with Comcast.
Assuming Comcast gains 7% penetration in its customer base of 21M by
year-end 2006, and Level 3 provides services to one-third of those customers
(or ~500K average subscribers for Level 3) at $5 per subscriber per month,
we estimate Level 3 would gain ~$30M in annual revenue and ~$7M in annual
EBITDA in 2007.

From an industry perspective, we note that transport of VoIP
minutes largely represents a shift from circuit switched voice capacity to
IP network capacity. As VoIP transport is not bandwidth intensive, we do
not expect increased VoIP traffic over the next few years to materially
reduce available IP and transport network capacity from the wholesale
industry.

Level 3 is scheduled to report its 3Q04 results tomorrow;
conferences call at 10AM, dial-in 612-326-1003. We anticipate total revenue
and EBITDA of $873M and $123M (14.1% margin), respec­tively. Our EPS
es­timate is $(0.26), com­pared with the consensus estimate of $(0.28).

I’m sure this will spur comments…the key here is that Level3 has landed at least two cable companies and many of the resellers and MLMs. They are selling capacity and access. The question becomes can their customers sell VoIP?