Current Report


 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D. C. 20549

 


 

FORM 8-K

 

CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

Date of report (Date of earliest event reported): October 27, 2009

 

EARTHLINK, INC.

(Exact Name of Registrant as Specified in Its Charter)

 

Delaware

 

001-15605

 

58-2511877

(State of Incorporation)

 

(Commission File Number)

 

(I.R.S. Employer Identification No.)

 

1375 Peachtree St., Atlanta, Georgia      30309

(Address of principal executive offices)     (Zip Code)

 

(404) 815-0770

(Registrant’s telephone number, including area code)

 


 

(Former name, former address and former fiscal year, if changed since last report date)

 


 

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:

 

o    Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

 

o    Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

 

o    Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

 

o    Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

 

 

 



 

Item 2.02  Results of Operations and Financial Condition

 

On October 27, 2009, EarthLink, Inc. issued a press release announcing its financial results for the three and nine months ended September 30, 2009 and providing guidance for the year ending December 31, 2009.  A copy of the press release is being furnished as Exhibit 99.1 to this Current Report on Form 8-K.

 

                In accordance with General Instruction B.2 of Form 8-K, the information in this Current Report on Form 8-K, including Exhibit 99.1, shall not be deemed “filed” for the purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liability of that section, nor shall it be deemed incorporated by reference in any filing under the Securities Act of 1933, as amended, except as shall be expressly set forth by specific reference in such a filing.

 

Item 9.01 Financial Statements and Exhibits

 

(d)            Exhibits

 

Exhibit
No.

 

Description

99.1

 

Press release dated October 27, 2009

 

2



 

SIGNATURE

 

        Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

 

 

EARTHLINK, INC.
(Registrant)

 

 

 

 

By:

/s/ BRADLEY A. FERGUSON

 

 

 

 

 

Name: Bradley A. Ferguson

 

 

Title: Chief Financial Officer

 

Date: October 27, 2009

 

3



 

Exhibit Index

 

Exhibit
No.

 

Description

99.1

 

Press release dated October 27, 2009

 

4


Exhibit 99.1

 

Investors

Louis Alterman

404-748-7650

678-472-3252

altermanlo@corp.earthlink.net

 

Media

Michele Sadwick

404-748-7255

404-769-8421

sadwick@corp.earthlink.net

 

EARTHLINK ANNOUNCES THIRD QUARTER 2009 RESULTS

 

ATLANTA – October 27, 2009 – EarthLink, Inc. (NASDAQ: ELNK) today announced financial results for its third quarter ended September 30, 2009.  Highlights for the third quarter include:

 

·                   Net income of $29.9 million or $0.28 per share

 

·                   Adjusted EBITDA (a non-GAAP measure) of $60.9 million

 

·                   Free cash flow (a non-GAAP measure) of $55.3 million

 

·                   Ending cash and marketable securities balance of $654.9 million

 

·                   Increased and narrowed full year 2009 Adjusted EBITDA (a non-GAAP measure) guidance to $243 million - $248 million

 

“We are pleased with our third quarter operating performance,” stated EarthLink Chairman and Chief Executive Officer Rolla P. Huff. “Adjusted EBITDA, free cash flow and net income all came in at the high end of our estimates and as a result, we are slightly raising our full year 2009 guidance. This increased guidance includes the cost of fourth quarter productivity enhancements and the resulting cost rightsizing that continues to occur in our business. These fourth quarter initiatives are part of our ongoing and proactive efforts to reduce our cost structure.”

 

“Last week, we announced the approval of our second consecutive quarterly dividend payment,” added Huff. “We believe our financial strength and future cash flow continue to provide our company meaningful flexibility in considering value creating options for our shareholders.”

 



 

Financial and Operating Results

 

Revenue for the third quarter of 2009 was $174.5 million, a decline of 6 percent from the second quarter of 2009 and 24 percent from the year-ago quarter. The pace of revenue declines in EarthLink’s consumer business continues to decelerate as this quarter the company reported single digit million dollar sequential revenue declines in its consumer segment.

 

EarthLink reported net subscriber losses of 146,000 for the quarter, a decrease from 149,000 in the second quarter of 2009 and 275,000 in the year-ago quarter.   Subscriber churn was flat with the second quarter of 2009 at 3.6%, and an improvement from 4.2% in the third quarter of 2008.

 

These trends represent the increasing tenure of EarthLink’s customer base and ongoing shift to broadband products offsetting seasonally lower churn in the second quarter. In the third quarter of 2009, 80% of EarthLink’s consumer customers had two or more years of tenure with the company, nearly 40% had five or more years of tenure, and broadband products comprised 57% of EarthLink’s revenue.

 

Total sales and marketing, operations, customer support, and general and administrative expenses for the third quarter were $53.9 million, down 2 percent versus the prior quarter and 32 percent from the year-ago quarter. EarthLink continues to invest opportunistically in select marketing channels which are generating positive lifetime value customers and to implement cost reduction initiatives to align costs with the revenue trends.

 

Profitability and Other Financial Measures

 

EarthLink realized $29.9 million, or $0.28 per share, of income from continuing operations in the third quarter of 2009, down from $31.5 million, or $0.29 per share, in the second quarter of 2009, and from $52.6 million, or $0.47 per share, in the third quarter of 2008.

 

Net income was $29.9 million, or $0.28 per share, for the third quarter of 2009 as compared to $31.5 million, or $0.29 per share, in the prior quarter, and $51.9 million, or $0.46 per share, in the year-ago quarter. Included in the change from the year-ago quarter was a $9.0 million increase in the company’s income tax provision, primarily due to an increase in non-cash deferred taxes resulting from the use of the company’s net operating loss carryforwards (NOLs) and a $4.3 million decrease in gain on investments, net.

 



 

The decelerating revenue declines, combined with continued reductions in cost of revenues, sales and marketing and back office support expenses resulted in EarthLink generating Adjusted EBITDA (a non-GAAP measure, see definition in “Non-GAAP Measures” below) of $60.9 million for the third quarter of 2009, as compared to $68.5 million in the second quarter of 2009 and $74.0 million in the third quarter of 2008.

 

Balance Sheet and Cash Flow

 

Free cash flow (a non-GAAP measure, see definition in “Non-GAAP Measures” below) was $55.3 million during the third quarter of 2009, compared to $66.6 million during the second quarter of 2009 and $71.6 million in the third quarter of 2008. During the quarter, EarthLink made $15.0 million of dividend payments and had capital expenditures of $5.6 million. EarthLink ended the third quarter with $654.9 million in cash and marketable securities, an increase of $44.5 million from June 30, 2009.

 

Business Outlook

 

The following 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.

 

Today Earthlink is raising and narrowing the ranges on its previously announced guidance for the full year 2009.  Management now expects 2009 Adjusted EBITDA of $243 million to $248 million and 2009 free cash flow of $225 million to $235 million, based upon the aforementioned Adjusted EBITDA guidance combined with $13 million to $18 million in estimated capital expenditures. Additionally, EarthLink now expects to generate income from continuing operations of $110 million to $115 million for full year 2009.

 

Payment of Quarterly Dividend

 

On October 21, 2009, EarthLink announced that its Board of Directors had approved payment of its quarterly cash dividend on its common stock in the amount of $0.14 per share to be paid on December 23, 2009 to shareholders of record on December 9, 2009.

 



 

Non-GAAP Measures

 

Adjusted EBITDA is defined as income from continuing operations before interest expense and other, net, income taxes, depreciation and amortization, stock-based compensation expense, gain (loss) on investments, net, impairment of goodwill and intangible assets, and facility exit and restructuring costs.

 

Free cash flow is defined as income from continuing operations before interest expense and other, net, income taxes, depreciation and amortization, stock-based compensation expense,  gain (loss) on investments, net, impairment of goodwill and intangible assets, and facility exit and restructuring costs, 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 4 of the Consolidated Financial Highlights for a discussion of the presentation, comparability and use of such financial performance measures.

 

Conference Call for Analysts and Investors

 

Conference Call Details

Tuesday, October 27, 2009, at 8:30 a.m. EDT hosted by EarthLink’s Chairman and Chief Executive Officer, Rolla P. Huff and Chief Financial Officer, Bradley A. Ferguson.

U.S. and Canada Dial-in Number

800-706-0730

International Dial-in Number

706-634-5173

Participants reference the EarthLink call and dial in 10 minutes prior to scheduled start time.

 

Webcast

A live Webcast of the conference call will be available at:  http://ir.earthlink.net/index.cfm

 

Replay

Replay available from at 9:30 a.m. EDT on October 27 through midnight on November 3.

Dial 800-642-1687 from US and Canada, International callers dial 706-645-9291.

The replay confirmation code is 33409322 .

The Webcast will be archived on the company’s website at: http://ir.earthlink.net/events.cfm

 



 

2010 Annual Meeting of Stockholders

 

EarthLink’s 2010 Annual Meeting of Stockholders is scheduled for May 4, 2010.

 

About EarthLink

 

“EarthLink. We revolve around you™.” A leading 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 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 website 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 the continued decline of our consumer access subscribers, combined with the change in mix of our consumer access subscriber base from narrowband to broadband, will adversely affect our results of operations and we will have less ability in the future to implement offsetting cost reductions; (2) that we face significant competition which could reduce our profitability; (3) that adverse economic conditions may harm our business; (4) 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; (5) 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; (6) 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; (7) that our business is dependent on the availability of third-party telecommunications service providers; (8) that our commercial and alliance arrangements may not be renewed, which could adversely affect our results of operations; (9) that our business may suffer if third parties used for technical and customer service and technical support and certain billing services are unable to provide these services, cannot expand to meet our needs or terminate their relationships with us; (10) that service interruptions or impediments could harm our business; (11) that government regulations could adversely affect our business or force us to change our business practices; (12) that privacy concerns relating to our business could damage our reputation and deter current and potential users from using our services;  (13) that we may not be able to protect our intellectual property; (14) 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; (15) that we could face substantial liabilities if we are unable to successfully defend against legal actions; (16) that our business depends on effective business support systems, processes and personnel; (17) 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; (18) 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; (19) that we may be required to recognize additional impairment charges on our goodwill and intangible assets, which would adversely affect our results of operations and financial position; (20) that the use of our net operating losses and certain other tax attributes could be limited in the future; (21) that our stock price has been volatile historically and may continue to be volatile; (22) that we may reduce, or cease payment of, quarterly cash dividends; (23) that our

 



 

indebtedness could adversely affect our financial health and limit our ability to react to changes in our industry; and (24) 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, 2008.

 

#              #              #

 



 

EARTHLINK, INC.

Unaudited Condensed Consolidated Statements Of Operations

(in thousands, except per share data)

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

 

2008

 

2009

 

2008

 

2009

 

Revenues:

 

 

 

 

 

 

 

 

 

Access and service

 

$

206,693

 

$

156,731

 

$

661,583

 

$

502,347

 

Value-added services

 

24,138

 

17,790

 

77,925

 

56,834

 

Total revenues

 

230,831

 

174,521

 

739,508

 

559,181

 

 

 

 

 

 

 

 

 

 

 

Operating costs and expenses:

 

 

 

 

 

 

 

 

 

Cost of revenues

 

87,616

 

66,885

 

277,655

 

211,720

 

Sales and marketing

 

22,191

 

13,840

 

78,913

 

45,405

 

Operations and customer support

 

34,048

 

23,569

 

106,914

 

75,255

 

General and administrative

 

23,316

 

16,472

 

72,010

 

51,503

 

Amortization of intangible assets

 

3,153

 

2,039

 

11,153

 

6,224

 

Facility exit and restructuring costs (1)

 

1,078

 

(97

)

4,169

 

5,318

 

Total operating costs and expenses

 

171,402

 

122,708

 

550,814

 

395,425

 

 

 

 

 

 

 

 

 

 

 

Income from operations

 

59,429

 

51,813

 

188,694

 

163,756

 

Gain on investments, net

 

4,352

 

35

 

5,677

 

305

 

Interest expense and other, net (2)

 

(3,281

)

(5,067

)

(7,804

)

(14,458

)

Income from continuing operations before income taxes

 

60,500

 

46,781

 

186,567

 

149,603

 

Income tax provision

 

(7,924

)

(16,914

)

(23,923

)

(55,754

)

Income from continuing operations

 

52,576

 

29,867

 

162,644

 

93,849

 

Loss from discontinued operations, net of tax (3)

 

(681

)

 

(8,438

)

 

Net income

 

$

51,895

 

$

29,867

 

$

154,206

 

$

93,849

 

 

 

 

 

 

 

 

 

 

 

Basic net income per share

 

 

 

 

 

 

 

 

 

Continuing operations

 

$

0.48

 

$

0.28

 

$

1.48

 

$

0.88

 

Discontinued operations

 

(0.01

)

 

(0.08

)

 

Basic net income per share

 

$

0.47

 

$

0.28

 

$

1.40

 

$

0.88

 

Basic weighted average common shares outstanding

 

110,153

 

106,615

 

109,895

 

106,853

 

 

 

 

 

 

 

 

 

 

 

Diluted net income per share

 

 

 

 

 

 

 

 

 

Continuing operations

 

$

0.47

 

$

0.28

 

$

1.46

 

$

0.87

 

Discontinued operations

 

(0.01

)

 

(0.08

)

 

Diluted net income per share

 

$

0.46

 

$

0.28

 

$

1.38

 

$

0.87

 

Diluted weighted average common shares outstanding

 

112,039

 

107,943

 

111,534

 

108,052

 

 



 

EARTHLINK, INC.

Reconciliation of Income from Continuing Operations to Adjusted EBITDA (4)

(in thousands)

 

 

 

Three Months Ended

 

 

 

September 30,

 

June 30,

 

September 30,

 

 

 

2008

 

2009

 

2009

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

$

52,576

 

$

31,485

 

$

29,867

 

Income tax provision

 

7,924

 

17,896

 

16,914

 

Depreciation and amortization

 

8,881

 

6,069

 

6,032

 

Stock-based compensation expense

 

4,597

 

3,026

 

3,136

 

Gain on investments, net

 

(4,352

)

(11

)

(35

)

Interest expense and other, net (2)

 

3,281

 

5,100

 

5,067

 

Facility exit and restructuring costs (1)

 

1,078

 

4,927

 

(97

)

Adjusted EBITDA (4)

 

$

73,985

 

$

68,492

 

$

60,884

 

 

 

 

 

 

 

 

 

Depreciation - cost of revenues

 

$

2,843

 

$

1,996

 

$

1,908

 

Depreciation - other

 

2,885

 

2,035

 

2,085

 

Amortization of intangible assets

 

3,153

 

2,038

 

2,039

 

Depreciation and amortization

 

$

8,881

 

$

6,069

 

$

6,032

 

 

EARTHLINK, INC.

Reconciliation of Income From Continuing Operations to Free Cash Flow (4)

(in thousands)

 

 

 

Three Months Ended

 

 

 

September 30,

 

June 30,

 

September 30,

 

 

 

2008

 

2009

 

2009

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

$

52,576

 

$

31,485

 

$

29,867

 

Income tax provision

 

7,924

 

17,896

 

16,914

 

Depreciation and amortization

 

8,881

 

6,069

 

6,032

 

Stock-based compensation expense

 

4,597

 

3,026

 

3,136

 

Gain on investments, net

 

(4,352

)

(11

)

(35

)

Interest expense and other, net (2)

 

3,281

 

5,100

 

5,067

 

Facility exit and restructuring costs (1)

 

1,078

 

4,927

 

(97

)

Purchases of property and equipment

 

(1,619

)

(1,927

)

(5,588

)

Purchases of subscriber bases

 

(753

)

 

 

Free cash flow (4)

 

$

71,613

 

$

66,565

 

$

55,296

 

 

EARTHLINK, INC.

Reconciliation of Guidance Provided in Non-GAAP Measures (4)

(in millions)

 

 

 

Year

 

 

 

 

 

 

 

Ending

 

 

 

 

 

 

 

December 31,

 

 

 

 

 

 

 

2009

 

 

 

 

 

Income from continuing operations

 

$110 - $115

 

 

 

 

 

Depreciation

 

16

 

 

 

 

 

Amortization of intangible assets

 

8

 

 

 

 

 

Stock-based compensation expense

 

14

 

 

 

 

 

Income tax provision

 

70

 

 

 

 

 

Facility exit and restructuring costs (1)

 

5

 

 

 

 

 

Interest expense and other, net (2)

 

20

 

 

 

 

 

Adjusted EBITDA (4)

 

$243 - $248

 

 

 

 

 

 

 

 

Year

 

 

 

 

 

 

 

Ending

 

 

 

 

 

 

 

December 31,

 

 

 

 

 

 

 

2009

 

 

 

 

 

Income from continuing operations

 

$110 - $115

 

 

 

 

 

Depreciation

 

16

 

 

 

 

 

Amortization of intangible assets

 

8

 

 

 

 

 

Stock-based compensation expense

 

14

 

 

 

 

 

Income tax provision

 

70

 

 

 

 

 

Facility exit and restructuring costs (1)

 

5

 

 

 

 

 

Interest expense and other, net (2)

 

20

 

 

 

 

 

Purchases of property and equipment

 

(18) - (13)

 

 

 

 

 

Free cash flow (4)

 

$225 - $235

 

 

 

 

 

 



 

EARTHLINK, INC.

Supplemental Financial Data and Key Operating Metrics

 

 

 

September 30,

 

December 31,

 

June 30,

 

September 30,

 

 

 

2008

 

2008

 

2009

 

2009

 

 

 

(dollars in thousands)

Balance Sheet Data

 

 

 

 

 

 

 

 

 

Cash and marketable securities

 

$

484,967

 

$

534,373

 

$

610,349

 

$

654,872

 

Convertible Senior Notes (5)

 

258,750

 

258,750

 

258,750

 

258,750

 

Stockholders’ equity

 

452,631

 

486,475

 

539,809

 

561,540

 

 

 

 

 

 

 

 

 

 

 

Employee Data

 

 

 

 

 

 

 

 

 

Number of employees at end of period (6)

 

789

 

754

 

693

 

660

 

 

 

 

September 30,

 

December 31,

 

June 30,

 

September 30,

 

 

 

2008

 

2008

 

2009

 

2009

 

Subscriber Data (7)

 

 

 

 

 

 

 

 

 

Consumer services

 

 

 

 

 

 

 

 

 

Narrowband access subscribers

 

1,920,000

 

1,747,000

 

1,456,000

 

1,329,000

 

Broadband access subscribers (8)

 

933,000

 

896,000

 

845,000

 

832,000

 

Total consumer subscribers

 

2,853,000

 

2,643,000

 

2,301,000

 

2,161,000

 

 

 

 

 

 

 

 

 

 

 

Business services

 

 

 

 

 

 

 

 

 

Narrowband access subscribers

 

19,000

 

17,000

 

11,000

 

9,000

 

Broadband access subscribers

 

61,000

 

59,000

 

56,000

 

55,000

 

Web hosting accounts

 

91,000

 

87,000

 

81,000

 

78,000

 

Total business subscribers

 

171,000

 

163,000

 

148,000

 

142,000

 

 

 

 

 

 

 

 

 

 

 

Total subscribers at end of period

 

3,024,000

 

2,806,000

 

2,449,000

 

2,303,000

 

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

 

2008

 

2009

 

2008

 

2009

 

Subscriber Activity

 

 

 

 

 

 

 

 

 

Subscribers at beginning of period

 

3,299,000

 

2,449,000

 

3,876,000

 

2,806,000

 

Gross organic subscriber additions

 

137,000

 

108,000

 

552,000

 

344,000

 

Acquired subscribers

 

2,000

 

 

2,000

 

 

Adjustment (9)

 

(15,000

)

 

(15,000

)

(7,000

)

Churn

 

(399,000

)

(254,000

)

(1,391,000

)

(840,000

)

Subscribers at end of period

 

3,024,000

 

2,303,000

 

3,024,000

 

2,303,000

 

 

 

 

 

 

 

 

 

 

 

Churn Rate (10)

 

4.2

%

3.6

%

4.5

%

3.7

%

 

 

 

 

 

 

 

 

 

 

Consumer Data

 

 

 

 

 

 

 

 

 

Average subscribers (11)

 

2,980,000

 

2,207,000

 

3,256,000

 

2,382,000

 

ARPU (12)

 

$

21.00

 

$

20.87

 

$

20.66

 

$

20.77

 

Churn rate (10)

 

4.3

%

3.7

%

4.6

%

3.8

%

 

 

 

 

 

 

 

 

 

 

Business Data

 

 

 

 

 

 

 

 

 

Average subscribers (11)

 

176,000

 

144,000

 

183,000

 

152,000

 

ARPU (12)

 

$

81.50

 

$

84.08

 

$

81.33

 

$

82.98

 

Churn rate (10)

 

3.2

%

2.5

%

2.8

%

2.8

%

 



 

EARTHLINK, INC.

Supplemental Schedule of Segment Information (13)

(in thousands)

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

 

2008

 

2009

 

2008

 

2009

 

Consumer Services

 

 

 

 

 

 

 

 

 

Revenues

 

 

 

 

 

 

 

 

 

Access and service

 

$

164,306

 

$

120,935

 

$

529,557

 

$

390,204

 

Value-added services

 

23,493

 

17,241

 

75,783

 

55,140

 

Total revenues

 

187,799

 

138,176

 

605,340

 

445,344

 

Cost of revenues

 

62,550

 

45,211

 

201,053

 

144,890

 

Gross margin

 

125,249

 

92,965

 

404,287

 

300,454

 

Segment operating expenses

 

49,803

 

31,039

 

164,496

 

101,617

 

Segment income from operations

 

$

75,446

 

$

61,926

 

$

239,791

 

$

198,837

 

 

 

 

 

 

 

 

 

 

 

Business Services

 

 

 

 

 

 

 

 

 

Revenues

 

 

 

 

 

 

 

 

 

Access and service

 

$

42,387

 

$

35,796

 

$

132,026

 

$

112,143

 

Value-added services

 

645

 

549

 

2,142

 

1,694

 

Total revenues

 

43,032

 

36,345

 

134,168

 

113,837

 

Cost of revenues

 

25,066

 

21,674

 

76,602

 

66,830

 

Gross margin

 

17,966

 

14,671

 

57,566

 

47,007

 

Segment operating expenses

 

12,481

 

10,257

 

39,308

 

31,339

 

Segment income from operations

 

$

5,485

 

$

4,414

 

$

18,258

 

$

15,668

 

 

 

 

 

 

 

 

 

 

 

Consolidated

 

 

 

 

 

 

 

 

 

Revenues

 

 

 

 

 

 

 

 

 

Access and service

 

$

206,693

 

$

156,731

 

$

661,583

 

$

502,347

 

Value-added services

 

24,138

 

17,790

 

77,925

 

56,834

 

Total revenues

 

230,831

 

174,521

 

739,508

 

559,181

 

Cost of revenues

 

87,616

 

66,885

 

277,655

 

211,720

 

Gross margin

 

143,215

 

107,636

 

461,853

 

347,461

 

Direct segment operating expenses

 

62,284

 

41,296

 

203,804

 

132,956

 

Segment income from operations

 

80,931

 

66,340

 

258,049

 

214,505

 

Stock-based compensation expense

 

4,597

 

3,136

 

14,319

 

10,552

 

Amortization of intangible assets

 

3,153

 

2,039

 

11,153

 

6,224

 

Facility exit and restructuring costs (1)

 

1,078

 

(97

)

4,169

 

5,318

 

Other operating expenses

 

12,674

 

9,449

 

39,714

 

28,655

 

Income from operations

 

$

59,429

 

$

51,813

 

$

188,694

 

$

163,756

 

 



 

EARTHLINK, INC.

Footnotes to Consolidated Financial Highlights

 


(1)

In August 2007, EarthLink adopted a restructuring plan (the “2007 Plan”) to reduce costs and improve the efficiency of the Company’s operations. The 2007 Plan was the result of a comprehensive review of operations within and across the Company’s functions and businesses. Under the 2007 Plan, the Company reduced its workforce by approximately 900 employees, closed office facilities in Orlando, Florida; Knoxville, Tennessee; Harrisburg, Pennsylvania; and San Francisco, California and consolidated its office facilities in Atlanta, Georgia and Pasadena, California. The 2007 Plan was primarily implemented during the later half of 2007. However, since management continues to evaluate EarthLink’s businesses, there have been and may continue to be supplemental provisions for new plan initiatives as well as changes in estimates to amounts previously recorded.

 

 

(2)

On January 1, 2009, the Company adopted new accounting guidance related to the accounting for convertible debt instruments that may be settled in cash upon conversion. The new accounting guidance requires that the liability and equity components of convertible debt instruments that may be settled in cash upon conversion (including partial cash settlement) be separately accounted for in a manner that reflects an issuer’s non-convertible debt borrowing rate. The resulting debt discount is accreted over the period the convertible debt is expected to be outstanding as additional non-cash interest expense. The new accounting guidance requires retrospective application for all periods presented. The adoption of the new accounting guidance on January 1, 2009 affected the accounting for the Company’s Convertible Senior Notes due November 15, 2026 (the “Notes”), which were issued in November 2006. Upon adoption, the Company recorded an adjustment to increase additional paid-in capital as of the November 2006 issuance date by approximately $62.1 million. The Company is accreting the resulting debt discount to interest expense over the estimated five-year life of the Notes, which represents the first redemption date of November 2011. The Company recorded a pre-tax adjustment of approximately $22.3 million to retained earnings that represents the debt discount accretion during the years ended December 31, 2006, 2007 and 2008 and will recognize additional non-cash interest expense of $12.2 million, $13.4 million and $12.4 million during the years ending December 31, 2009, 2010 and 2011, respectively, for accretion of the debt discount.

 

 

(3)

In November 2007, management concluded that its municipal wireless broadband operations were no longer consistent with the Company’s strategic direction and the Company’s Board of Directors authorized management to pursue the divestiture of the Company’s municipal wireless broadband assets. As a result of that decision, the Company presented the municipal wireless broadband results of operations as discontinued operations. As of December 31, 2008, the Company had completed the divestiture of its municipal wireless broadband assets.

 

 

(4)

Adjusted EBITDA is defined as income from continuing operations before interest expense and other, net, income taxes, depreciation and amortization, stock-based compensation, gain (loss) on investments, net, impairment of goodwill and intangible assets, and facility exit and restructuring costs. Free cash flow is defined as income from continuing operations before interest expense and other, net, income taxes, depreciation and amortization, stock-based compensation, gain (loss) on investments, net, impairment of goodwill and intangible assets, and facility exit and restructuring 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. 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.

 

 

(5)

The principal amount of the Notes for all periods presented was $258.8 million. The unamortized discount was $42.0 million, $39.0 million, $32.9 million and $29.7 million as of September 30, 2008, December 31, 2008, June 30, 2009 and September 30, 2009, respectively. The net carrying value was $216.8 million, $219.7 million, $225.8 million and $229.0 million as of September 30, 2008, December 31, 2008, June 30, 2009 and September 30, 2009, respectively.

 

 

(6)

Represents full-time equivalents.

 

 

(7)

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.

 

 

(8)

Paying customers who subscribe to EarthLink DSL and Home Phone service are counted as both a broadband subscriber and a voice subscriber.

 

 

(9)

During the nine months ended September 30, 2009, EarthLink removed approximately 7,000 satellite subscribers from its broadband subscriber count and total subscriber count as a result of the sale of these subscriber accounts. During the three and nine months ended September 30, 2008, EarthLink removed approximately 15,000 EarthLink supported Sprint customers from its broadband subscriber count and total subscriber count due to the termination of a wholesale arrangement by Sprint.

 

 

(10)

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.

 

 

(11)

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. Average subscribers for the nine month periods is calculated by averaging the ending monthly subscribers or accounts for the ten months preceding and including the end of the period.

 

 

(12)

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.

 

 

(13)

The Company reports segment information along the same lines that its chief executive officer reviews its operating results in assessing performance and allocating resources. The Company operates two reportable segments, Consumer Services and Business Services. The Company’s Consumer Services segment provides Internet access services and related value-added services to individual customers. These services include dial-up and high-speed Internet access and voice services, among others. The Company’s Business Services segment provides integrated communications services and related value-added services to businesses and communications carriers. These services include managed private IP-based wide area 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, impairment of goodwill and intangible assets and facility exit and restructuring costs, as they are not evaluated in the measurement of segment performance.