What: Shares of Level 3 Communications (NYSE:LVLT) slumped on Wednesday after the company reported its second-quarter results, beating analyst estimates for earnings while falling short on revenue. After being down as much as 10% earlier in the day, by 3 p.m. the stock was down about 7.5%.
So what: Level 3 reported quarterly revenue of $2.06 billion, barely shy of the average analyst estimate, and up 1.5% year-over-year adjusting for the effect of the acquisition of TW Telecom. Core Network Services revenue grew by 5% year-over-year, on a constant-currency basis, accounting for the vast majority of the company's revenue.
Non-GAAP EPS came in at $0.42, two cents better than analysts were expecting. This result excludes a $163 million charge related to refinancing, pushing GAAP EPS down to a loss of $0.04. This compares to a GAAP EPS of $0.13 during the second quarter of 2014, adjusting for the acquisition.
Level 3 expects full-year Adjusted EBITDA to grow by 14%-17%, and for free cash flow to be between $600 million and $650 million. As a result of its refinancing, the company expects its annual interest expense to fall to $650 million, down from a previous outlook of $660 million.
Now what: CEO Jeff Storey had this to say about Level 3's quarter: "Level 3 continued to drive profitable growth, as evidenced by our expanding margins. We executed on our integration plans, while maintaining our focus on the customer experience. Beyond integration, we are also making investments to position the company for long-term growth by advancing our product offerings, expanding our network footprint and simplifying our operating environment."
Level 3's quarter was solid, with the big refinancing charge depressing GAAP earnings significantly. Ultimately, this refinancing allows the company to reduce its sizable interest expense, and excluding this charge, earnings looked fine. The market may be overreacting a bit to Level 3's results.