EarthLink Announces First Quarter
Results
Reports Record Net Income and Adjusted EBITDA
Raises Full Year Income from Continuing Operations, Free cash flow and
Adjusted EBITDA Guidance
ATLANTA, April 24 /PRNewswire-FirstCall/ -- EarthLink, Inc. (
NASDAQ:ELNK
) today announced financial results for its first quarter ended March 31,
2008. Highlights for the quarter include:
-- Income from continuing operations of $57.8 million, or $0.52 per share
-- Net income of $54.4 million, or $0.49 per share
-- Adjusted EBITDA (a non-GAAP measure) of $82.1 million
-- Free cash flow (a non-GAAP measure) of $81.7 million
-- Increased full year adjusted EBITDA (a non-GAAP measure) guidance to
$245 million - $260 million
"Clearly, we are very pleased with our first quarter
results. Our performance in the quarter is a testament to the hard work
and dedication of our employees who put our commitments to customers and
shareholders above everything else," said Rolla P. Huff, EarthLink's
chairman and chief executive officer. "As a result of the stability
we are seeing in the churn rates of our tenured customers, as well as our
better than expected expense optimization across every part of the
company, we are increasing our guidance for full year Adjusted EBITDA,
free cash flow and income from continuing operations," continued
Huff.
Financial and Operating Results
Revenue
As part of the restructuring analysis that was done during
the third quarter of 2007, EarthLink determined that the increase in early
life churn profiles of many newly acquired narrowband customers meant that
we were no longer generating a positive financial return on our sales and
marketing investments. EarthLink significantly reduced these activities,
which historically have been primarily to replace customer churn. This
change allows the narrowband subscriber base to decline to a more
sustainable customer level while generating significantly higher cash
returns. As a result of these expected subscriber declines, total company
revenues were $263.1 million, an 18.8 percent decrease compared to the
first quarter 2007.
Profitability and Other Financial Measures
EarthLink realized $57.8 million, or $0.52 per share, in
income from continuing operations in the first quarter of 2008, compared
to $(22.4) million, or $(0.18) per share, in the first quarter of 2007.
The significant improvement was primarily the result of a decrease in
expense related to acquiring and supporting new customers that, because of
early life churn, were no longer providing a positive shareholder return.
Additionally, EarthLink realized a reduction in equity method losses
compared to the first quarter of 2007, which were partially offset by an
increase in the company's income tax provision in the first quarter of
2008.
EarthLink generated Adjusted EBITDA (a non-GAAP measure,
see definition in "Non-GAAP Measures" below) of $82.1 million
for the first quarter of 2008, compared to $23.6 million in the first
quarter of 2007. This increase was the result of the significant
improvement in income from continuing operations noted above.
Net income was $54.4 million, or $0.49 per share, for the
first quarter of 2008, compared to a net loss of $(30.0) million, or
$(0.24) per share, for the first quarter of 2007. Our first quarter 2008
results include a loss of ($3.4) million from our discontinued operations
for the municipal Wi-Fi assets, compared to a loss of $(7.6) million
during the first quarter of 2007.
Subsequent to the end of the first quarter of 2008,
EarthLink reached agreements with the cities of Corpus Christi, TX and
Milpitas, CA to transfer ownership of our municipal Wi-Fi assets to those
respective cities. Additionally, EarthLink will terminate municipal Wi-Fi
service in New Orleans, LA and remove its network from the market.
Balance Sheet and Cash Flow
Free cash flow (a non-GAAP measure, see definition in
"Non-GAAP Measures" below) was $81.7 million during the first
quarter of 2008 compared to $8.0 million during the first quarter of 2007.
The improvement was the result of the significant increase in Adjusted
EBITDA in the first quarter 2008, coupled with a $15.2 million decrease in
capital expenditures and subscriber base acquisitions in the quarter
compared to the first quarter of 2007.
The company repurchased 1.3 million shares of its
outstanding common stock for $9.1 million in the first quarter of 2008 and
had $191.9 million remaining under its share repurchase program as of the
end of the quarter.
EarthLink ended the first quarter with $320.0 million in cash
and marketable securities, an increase of $31.4 million from December 31,
2007. Additionally, in April 2008, as a result of Platinum Equity's
acquisition of Covad, EarthLink received $50.8 million in complete
repayment of our debt investment in Covad. The Company will receive an
additional $6.3 million in May 2008 in payment of our equity investment in
Covad.
Non-GAAP Measures
Adjusted EBITDA is defined as income (loss) from
continuing operations before interest income and other, net, income taxes,
depreciation and amortization, stock-based compensation expense under SFAS
No. 123( R ), net losses of equity affiliate, gain (loss) on investments
in other companies, net, and facility exit, restructuring and other costs.
Free cash flow is defined as income from continuing
operations before interest income and other, net, income taxes, facility
exit, restructuring and other costs, stock-based compensation expense
under SFAS No. 123( R ), net losses of equity affiliate, gain (loss) on
investments in other companies, net, and depreciation and amortization,
less cash used for purchases of property and equipment and purchases of
subscriber bases.
Adjusted EBITDA and free cash flow are non-GAAP financial
performance measures. They should not be considered in isolation or as an
alternative to measures determined in accordance with U.S. generally
accepted accounting principles. Please refer to the Consolidated Financial
Highlights for a reconciliation of these non-GAAP financial performance
measures to the most comparable measures reported in accordance with U.S.
generally accepted accounting principles and Footnote 3 of the
Consolidated Financial Highlights for a discussion of the presentation,
comparability and use of such financial performance measures.
Business Outlook
These statements are forward-looking, and actual results
may differ materially. See comments under "Cautionary Information
Regarding Forward-Looking Statements" below. EarthLink undertakes no
obligation to update these statements.
For the full year 2008, management is increasing its
previously issued guidance. Management now expects to generate Adjusted
EBITDA of $245 million to $260 million, income from continuing operations
of $153 million to $163 million, and free cash flow of $215 million to
$235 million.
About EarthLink
"EarthLink. We revolve around you(TM)." As the
nation's next generation Internet service provider, Atlanta-based
EarthLink has earned an award-winning reputation for outstanding customer
service and its suite of online products and services. EarthLink offers
what every user should expect from their Internet experience: high-quality
connectivity, minimal online intrusions and customizable features. Whether
it's dial-up, high-speed, voice, web hosting, wireless or "EarthLink
Extras" like home networking or security, EarthLink connects people
to the power and possibilities of the Internet. Learn more about EarthLink
by calling (800) EARTHLINK or visiting EarthLink's Web site at
www.EarthLink.net
.
Cautionary Information Regarding Forward-Looking Statements
This press release includes "forward-looking"
statements (rather than historical facts) that are subject to risks and
uncertainties that could cause actual results to differ materially from
those described. Although we believe that the expectations expressed in
these forward-looking statements are reasonable, we cannot promise that
our expectations will turn out to be correct. Our actual results could be
materially different from and worse than our expectations. We disclaim any
obligation to update any forward-looking statements contained herein,
except as may be required pursuant to applicable law. With respect to
forward-looking statements in this press release, the company seeks the
protections afforded by the Private Securities Litigation Reform Act of
1995. These risks include, without limitation, (1) that changes to our
business strategy may reduce our revenues and profitability; (2) that the
continued decline of our consumer access services revenues could adversely
affect our profitability; (3) that prices for certain of our consumer
access services have been decreasing, which could adversely affect our
revenues and profitability; (4) that we might not realize the benefits we
are seeking from the corporate restructuring plan announced in August 2007
and our corporate restructuring plan might have a negative effect on our
efforts to maintain our subscribers and our relationships with our
business partners; (5) that as a result of our continuing review of our
business, we may have to undertake further restructuring plans that would
require additional charges including incurring facility exit and
restructuring charges; (6) that we face significant competition which
could reduce our market share and reduce our profitability; (7) that we
may be unsuccessful in making and integrating acquisitions and investments
into our business, which could result in operating difficulties, losses
and other adverse consequences; (8) that we may not be able to
successfully manage the costs associated with delivering our broadband
services, which could adversely affect our results of operations; (9) that
companies may not provide access to us on a wholesale basis or on
reasonable terms or prices, which could cause our operating results to
suffer; (10) that if we do not continue to innovate and provide products
and services that are useful to subscribers, we may not remain
competitive, and our revenues and operating results could suffer; (11)
that our commercial and alliance arrangements may be terminated or may not
be as beneficial as anticipated, which could adversely affect our ability
to retain or increase our subscriber base; (12) that our business may
suffer if third parties used for technical and customer support and
certain billing services are unable to provide these services, cannot
expand to meet our needs or terminate their relationships with us; (13)
that service interruptions or impediments could harm our business; (14)
that government regulations could adversely affect our business or force
us to change our business practices; (15) that we may not be able to
protect our proprietary technologies; (16) that we may be accused of
infringing upon the intellectual property rights of third parties, which
is costly to defend and could limit our ability to use certain
technologies in the future; (17) that we could face substantial
liabilities if we are unable to successfully defend against legal actions;
(18) that our business depends on the continued development of effective
business support systems, processes and personnel; (19) that we may be
unable to hire and retain sufficient qualified personnel, and the loss of
any of our key executive officers could adversely affect us; (20) that our
VoIP business exposes us to certain risks that could cause us to lose
customers, expose us to significant liability or otherwise harm our
business; (21) that we may not be able to sell our municipal Wi-Fi assets
and that we may incur additional losses related to these operations; (22)
that we may not realize the benefits we sought from our investments in the
HELIO joint venture; (23) that the use of our net operating losses and
certain other tax attributes could be limited in the future; (24) that our
stock price has been volatile historically and may continue to be
volatile; (25) that our indebtedness could adversely affect our financial
health and limit our ability to react to changes in our industry; (26)
that the convertible notes hedge and warrant transactions may affect the
value of our common stock; and (27) that provisions of our second restated
certificate of incorporation, amended and restated bylaws and other
elements of our capital structure could limit our share price and delay a
change of management. These risks and uncertainties, as well as other
risks and uncertainties that could cause our actual results to differ
significantly from management's expectations, are not intended to
represent a complete list of all risks and uncertainties inherent in our
business, and should be read in conjunction with the more detailed
cautionary statements and risk factors included in our Annual Report on
Form 10-K for the year ended December 31, 2007.
EARTHLINK, INC.
Unaudited Condensed Consolidated Statements Of Operations
(in thousands, except per share data)
Three Months Ended March 31,
2007 2008
Revenues:
Access and service $289,755 $234,849
Value-added services 34,392 28,225
Total revenues 324,147 263,074
Operating costs and expenses:
Service and equipment costs 109,791 96,792
Sales incentives 4,604 759
Total cost of revenues 114,395 97,551
Sales and marketing 99,269 30,916
Operations and customer support 60,072 39,224
General and administrative 43,261 24,926
Amortization of intangible assets 3,496 4,013
Facility exit, restructuring and
other costs (1) - 1,030
Total operating costs and expenses 320,493 197,660
Income from operations 3,654 65,414
Net losses of equity affiliate (29,346) -
Interest income and other, net 3,503 1,616
Income (loss) from continuing
operations before income taxes (22,189) 67,030
Income tax provision (169) (9,274)
Income (loss) from continuing
operations (22,358) 57,756
Loss from discontinued operations (2) (7,604) (3,392)
Net income (loss) $(29,962) $54,364
Basic net income (loss) per share
Continuing operations $(0.18) $0.53
Discontinued operations (0.06) (0.03)
Basic net income (loss) per share $(0.24) $0.50
Basic weighted average common
shares outstanding 123,058 109,493
Diluted net income (loss) per share
Continuing operations $(0.18) $0.52
Discontinued operations (0.06) (0.03)
Diluted net income (loss) per share $(0.24) $0.49
Diluted weighted average common
shares outstanding 123,058 110,300
EARTHLINK, INC.
Reconciliation of Income (Loss) from Continuing Operations to Adjusted
EBITDA (3)
(in thousands)
Three Months Ended March 31,
2007 2008
Income (loss) from continuing
operations $(22,358) $57,756
Provision for income taxes 169 9,274
Depreciation and amortization 12,089 10,482
Stock-based compensation expense 7,880 5,152
Net losses of equity affiliate 29,346 -
Interest income and other, net (3,503) (1,616)
Facility exit, restructuring and
other costs (1) - 1,030
Adjusted EBITDA (3) $23,623 $82,078
Depreciation - cost of revenues $4,860 $3,436
Depreciation - other 3,733 3,033
Amortization of intangible assets 3,496 4,013
Depreciation and amortization $12,089 $10,482
EARTHLINK, INC.
Reconciliation of Income (Loss) From Continuing Operations to Free
Cash Flow (3)
(in thousands)
Three Months Ended March 31,
2007 2008
Income (loss) from continuing
operations $(22,358) $57,756
Provision for income taxes 169 9,274
Depreciation and amortization 12,089 10,482
Stock-based compensation expense 7,880 5,152
Net losses of equity affiliate 29,346 -
Interest income and other, net (3,503) (1,616)
Facility exit, restructuring and
other costs (1) - 1,030
Purchases of property and equipment (13,724) (278)
Purchases of subscriber bases (1,865) (117)
Free cash flow (3) $8,034 $81,683
EARTHLINK, INC.
Reconciliation of Guidance Provided in Non-GAAP Measures (3)
(in millions)
Year
Ending
December 31,
2008
Income from continuing operations $153 - $163
Depreciation 27
Amortization of intangible assets 15
Stock-based compensation expense 20
Income tax provision 20 - 25
Facility exit, restructuring and
other costs (1) 12
Interest income and other, net (2)
Adjusted EBITDA (3) $245 - $260
Year
Ending
December 31,
2008
Income from continuing operations $153 - $163
Depreciation 27
Amortization of intangible assets 15
Stock-based compensation expense 20
Income tax provision 20 - 25
Facility exit, restructuring and
other costs (1) 12
Interest income and other, net (2)
Purchases of property and equipment (25) - (30)
Free cash flow (3) $215 - $235
EARTHLINK, INC.
Supplemental Financial Data and Key Operating Metrics
March 31, December 31, March 31,
2007 2007 2008
Balance Sheet Data (in thousands)
Cash and marketable securities $367,356 $288,595 $320,023
Long-term debt 258,750 258,750 258,750
Stockholders' equity 432,296 261,473 313,426
Employee Data
Number of employees at end of period (4) 2,108 983 922
March 31, December 31, March 31,
2007 2007 2008
Subscriber Data (5)
Consumer services
Narrowband access subscribers 3,208,000 2,624,000 2,368,000
Broadband access subscribers (6) 1,847,000 1,059,000 1,026,000
Total consumer subscribers 5,055,000 3,683,000 3,394,000
Business services
Narrowband access subscribers 36,000 27,000 25,000
Broadband access subscribers 69,000 66,000 65,000
Web hosting accounts 109,000 100,000 97,000
Total business subscribers 214,000 193,000 187,000
Total subscribers at end of period 5,269,000 3,876,000 3,581,000
Three Months Ended March 31,
2007 2008
Subscriber Activity
Subscribers at beginning of period 5,313,000 3,876,000
Gross organic subscriber additions 668,000 253,000
Churn (712,000) (548,000)
Subscribers at end of period 5,269,000 3,581,000
Churn Rate (7) 4.5% 4.9%
Consumer Data
Average subscribers (8) 5,085,000 3,538,000
ARPU (9) $18.13 $20.38
Churn rate (7) 4.6% 5.0%
Business Data
Average subscribers (8) 217,000 190,000
ARPU (9) $73.32 $81.88
Churn rate (7) 2.7% 2.7%
EARTHLINK, INC.
Supplemental Schedule of Segment Information (10)
(in thousands)
Three Months Ended March 31,
2007 2008
Consumer Services
Revenues
Access and service $242,800 $188,971
Value-added services 33,593 27,373
Total revenues 276,393 216,344
Cost of revenues 84,353 71,173
Gross margin 192,040 145,171
Segment operating expenses 159,333 61,001
Segment income from operations $32,707 $84,170
Business Services
Revenues
Access and service $46,955 $45,878
Value-added services 799 852
Total revenues 47,754 46,730
Cost of revenues 30,042 26,378
Gross margin 17,712 20,352
Segment operating expenses 16,668 14,871
Segment income from operations $1,044 $5,481
Consolidated
Revenues
Access and service $289,755 $234,849
Value-added services 34,392 28,225
Total revenues 324,147 263,074
Cost of revenues 114,395 97,551
Gross margin 209,752 165,523
Direct segment operating expenses 176,001 75,872
Segment income from operations 33,751 89,651
Stock-based compensation expense 7,880 5,152
Amortization of intangible assets 3,496 4,013
Facility exit, restructuring and
other costs (1) - 1,030
Other operating expenses 18,721 14,042
Income from operations $3,654 $65,414
EARTHLINK, INC.
Footnotes to Consolidated Financial Highlights
1. Facility exit, restructuring and other costs consisted of the
following for the periods presented:
Three Months Ended
March 31,
2007 2008
(in thousands)
Facility exit and restructuring
costs for the 2007 Plan $- $1,093
Facility exit and restructuring
costs for Legacy Plans - (63)
$- $1,030
In August 2007, EarthLink adopted a restructuring plan (the "2007
Plan") to reduce costs and improve the efficiency of the Company's
operations. The Plan was the result of a comprehensive review of
operations within and across the Company's functions and businesses.
Under the Plan, the Company reduced its workforce by approximately 900
employees, consolidated its office facilities in Atlanta, Georgia and
Pasadena, California and closed office facilities in Orlando, Florida;
Knoxville, Tennessee; Harrisburg, Pennsylvania and San Francisco,
California. The Plan was primarily implemented during the later half
of 2007 and is expected to be completed during the first half of 2008.
As a result of the 2007 Plan, EarthLink recorded $1.1 million of
facility exit and restructuring costs during the first quarter of
2008.
2. The Company has reflected its municipal wireless broadband results of
operations as discontinued operations for all periods presented. The
following is summarized results of operations related to the Company's
discontinued operations for the periods presented:
Three Months Ended
March 31,
2007 2008
(in thousands)
Revenues $259 $737
Operating costs and expenses (7,863) (2,180)
Impairment charges - (1,949)
Loss from discontinued operations $(7,604) $(3,392)
3. Adjusted EBITDA is defined as income (loss) from continuing operations
before interest income and other, net, income taxes, depreciation and
amortization, stock-based compensation under SFAS No. 123( R ), net
losses of equity affiliate, gain (loss) on investments in other
companies, net, and facility exit, restructuring and other costs.
Free cash flow is defined as income (loss) from continuing operations
before interest income and other, net, income taxes, depreciation and
amortization, stock-based compensation under SFAS No. 123( R ), net
losses of equity affiliate, gain (loss) on investments in other
companies, net, and facility exit, restructuring and other costs, less
cash used for purchases of property and equipment and purchases of
subscriber bases.
Adjusted EBITDA and free cash flow are non-GAAP measures and are not
determined in accordance with U.S. generally accepted accounting
principles. These financial performance measures are not indicative of
cash provided or used by operating activities and may differ from
comparable information provided by other companies, and they should
not be considered in isolation, as an alternative to, or more
meaningful than measures of financial performance determined in
accordance with U.S. generally accepted accounting principles. These
financial performance measures are commonly used in the industry and
are presented because EarthLink believes they provide relevant and
useful information to investors. EarthLink utilizes these financial
performance measures to assess its ability to meet future capital
expenditures and working capital requirements, to incur indebtedness
if necessary, and to fund continued growth. EarthLink also uses these
financial performance measures to evaluate the performance of its
business, for budget planning purposes and as factors in its employee
compensation programs. Since the elements of these financial
performance measures are determined using the accrual basis of
accounting and exclude the effects of certain capital, financing,
acquisition-related, and facility exit, restructuring and other costs,
investors should use them to analyze and compare companies on the
basis of current period operating performance.
4. Represents full-time equivalents.
5. Subscriber counts do not include nonpaying customers. Customers
receiving service under promotional programs that include periods of
free service at inception are not included in subscriber counts until
they become paying customers.
6. Paying customers who subscribe to EarthLink DSL and Home Phone service
are counted as both a broadband subscriber and a voice subscriber.
7. Churn rate is used to measure the rate at which subscribers
discontinue service on a voluntary or involuntary basis. Churn rate
is computed by dividing the average monthly number of subscribers that
discontinued service during the period by the average subscribers for
the period.
8. Average subscribers for the three month periods is calculated by
averaging the ending monthly subscribers or accounts for the four
months preceding and including the end of the quarterly period.
9. ARPU represents the average monthly revenue per user (subscriber).
ARPU is computed by dividing average monthly revenue for the period by
the average number of subscribers for the period. Average monthly
revenue used to calculate ARPU includes recurring service revenue as
well as nonrecurring revenues associated with equipment and other one-
time charges associated with initiating or discontinuing services.
10. EarthLink's business segments are strategic business units that are
managed based upon differences in customers, services and marketing
channels. EarthLink's Consumer Services segment is a provider of
integrated communications services and related value-added services to
individual customers. These services include dial-up Internet access,
high-speed Internet access and voice service, among others.
EarthLink's Business Services segment is a provider of integrated
communications services and related value-added services to businesses
and communications carriers. These services include managed data
networks, dedicated Internet access and web hosting, among others.
EarthLink evaluates performance of its operating segments based on
segment income from operations. Segment income from operations
includes revenues from external customers, related cost of revenues
and operating expenses directly attributable to the segment, which
include expenses over which segment managers have direct discretionary
control, such as advertising and marketing programs, customer support
expenses, site operations expenses, product development expenses,
certain technology and facilities expenses, billing operation and
provisions for doubtful accounts. Segment income from operations
excludes other income and expense items and certain expenses that
segment managers do not have discretionary control over. Costs
excluded from segment income from operations include various corporate
expenses (consisting of certain costs such as corporate management,
human resources, finance and legal), amortization of intangible
assets, stock-based compensation expense under SFAS No. 123( R ) and
facility exit and restructuring costs, as they are not evaluated in
the measurement of segment performance.
Source: EarthLink
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