By Mark Langner
Managing Director, Senior Analyst
Todd Fernandez, Bert Bangayan
Associate Analyst, Associate

	Key Points
		Level 3 Communications' plan to lay off 6 percent of its workforce raises concerns regarding the company's current financial standing. While we are not adjusting our revenue or EPS numbers at this time, we expect the company to revise forward guidance. Until the company's quarterly earnings announcement on April 18, shares of LVLT are likely to see continued selling pressure, as large holders pull out of established long positions.

Level 3's announcement about workforce layoffs exacerbated heavy selling of LVLT shares during Tuesday's trading session.

In our experience, layoffs are usually followed by either a corporate restructuring or revised earnings estimates. In talking with the company, we learned that the layoffs will affect under-performing sales people and that they result from a lack of natural attrition as the company completes the building of its infrastructure.

Although the action may make strategic sense, the timing is unfortunate, as it is likely to intensify investors' unsettled feelings about the "mixed signals" the company has been sending. Simply put, sending mixed messages to the Street only gives investors a reason to sell and no reason to buy.

Lately, the Street's confidence in Level 3's affirmation of its forward financial guidance has waned -- due partly to the fact that several competitors (360networks and Cable & Wireless, specifically) cut their earnings estimates. Also, even though the company reiterated its "fully funded" status, it recently secured new debt financing.

We remain cautious about the company's near-term financial stability as well as shares of LVLT. We are standing by our forward income statement estimates, while maintaining our discounted cash infrastructure sales forecast. (See our March 1, 2001 note.) We see no catalyst that can break LVLT shares out of their recent trading pattern. Pressures from institutional selling are likely to continue as these large holders move out of their long positions, likely placing a cap on any potential near-term rally.

We believe the company will meet expectations when it announces earnings April 18, but expect it to guide down cash sales for inter-city fiber infrastructure (we think metro fiber sales will outperform). We also expect capital expenditures for the year -- estimated to be approximately $3.4 billion -- to be cut in an effort to slow cash burn rates. Cost cutting efforts initiated Tuesday are not likely to affect the profit and loss line until later in the year, and we have therefore not included those numbers in our projections at this time.

We still see Level 3 as the best-positioned provider of long-haul data services in the marketplace, from both a financial and services standpoint. That said, the current market environment and trading patterns associated with these companies show no indication of a near-term floor for share prices. We therefore recommend investors avoid shares of LVLT for now.

Companies mentioned in this note: Level 3 (Nasdaq: LVLT, $12.06), 360networks (Nasdaq: TSIX, $3.52), Cable and Wireless (NYSE: CWP, $19.85)