Why Level 3 Communications Got Crushed

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Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of Level 3 Communications (Nasdaq: LVLT ) got crushed today by as much as 15% after the company reported earnings.

So what: Revenue in the second quarter added up to $1.6 billion, which resulted in a net loss of $62 million, or $0.29 per share, worse than expected. The shortfall was primarily attributed to weakness in Europe, where revenue from the U.K. government fell, although this was somewhat expected.

Now what: Sales to the U.K. government fell 13% sequentially to $42 million. Core network services, or CNS, sales in North America and Latin America grew by 1.1% and 2.3%, respectively. CNS revenue growth is expected to accelerate during the second half of the year. Level 3 reiterated its prior guidance, expecting adjusted EBITDA to increase by 20% to 25% for the full year.

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Fool contributor Evan Niu holds no position in any company mentioned. Click here to see his holdings and a short bio. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

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Report this Comment On July 25, 2012, at 4:06 PM, fundyinvestor wrote:

First, when it comes to LVLT we're always told to look ahead. But the rear view mirror is full wreckage of past misses. So why should investors trust what LVLT management says in front of the windshield?
Second, the EURO crisis has been with us for 3-4 years. LVLT purchased a company with large exposure there. Clearly, they overpaid for the European risk they purchased.
Third, the IMF, Brazilian officials and economic forecasters of all stripes have repeatedly adjusted Brazilian economic forecasts down throughout the year. Why should investors believe that LVLT's LatAm business will be unaffected by the lower forecasts?
Perhaps the current LVLT tea leaves don't warrant a guidance revision, but it's not hard to imagine looking through the rear view mirror in October when LVLT reports Q3 earnings and say there's another wreck behind us.