John,
Thank you for your note on EarthLink and for the questions you pose. I will attempt to answer below and apoligize for not getting back to your post earlier.
NASDAQ has a number of requirements for listing on their exchange including the one you listed above concerning net assets. Some of these requirements don't take into consideration the nature of today's market or companies like EarthLink that are growing extremely fast. NASDAQ realizes this and makes allowances for companies who do not meet all of their guidelines. The following is an example of an exemption EarthLink received during our listing process.
When EarthLink went public in January it had been in business less than three years. NASDAQ has a requirement that a company have been in business for a least three years to be listed. How did we get around this requirement? Actually, it was quite easy. We simply filed for an exemption citing fast growth of the Company and were granted an exemption, forthwith.
Now to your specific questions. One of the biggest reasons that EarthLink does not have any "intagible assets" is that we chose to expense all costs associated with customer acquistion in current periods. If we pursued the strategy that Netcom and AOL had of capitalizing customer acquisition costs or that of Mindspring as they have grown to a significant extent though acquisition and have the resulting goodwill on their balance sheets, EarthLink could have captured and capitalized over $20M in customer acquisition costs in just the last twelve months alone. Our conservative approach negatively impacts our current results but will pay off as we continue our trek towards profitability. As a note, we also amortize or capital assets over three years instead of the traditional five, this has a four million incremental hit to earnings in 1997 alone ... but again positions us well over the long haul.
As for NASDAQ listing, if the issue you raise does becomes a problem we will deal with it directly and that an acceptable solution will be found. Throughout EarthLink's short history capitalization has always been a concern and today, although not "blue chip" are in better financial shape than we have ever been.
As for future operating results, I can't speculate on how we will do but consider some of the following. Over the past three quarters our operating loss as a percentage of sales has declined sequentially from 101% to 75% to 53% while gross margins have improved from 31% to 40% to 44% over the same period. We have also had three consecutive quarters of declining operating losses.
During Q197 we also saw the completion of two major infrastructure projects with our new data center and new Lucent telephone switch. The impact of these were fully absorbed in the Company's Q1 operating results and a greater percentage of the increase in revenues should go towards a futher reduction in operating losses.
During our road show our investment bankers were projecting that EarthLink should achieve profitability around the 500K subscriber mark. EarthLink exited March with 272K subscribers and at the end of April, have over 300K.
Regarding your comment on negative working capital, I would like to point out that a large part of our liabilities are made up of deferred income. This is the portion of the access fee that is unused by our memebers at month end. Essentially, we have received the cash or recognized a receivable, but have deferred the appropriate amount of income. Because EarthLink is growing rapidly, this amount grows every month.
In closing, EarthLink, as stated in our prospectus, believes that the proceeds from our IPO would be sufficient to last us the ensuing twelve months. Nothing has changed. With continued rapid growth, combined with increasing operating effeciencies, EarthLink's future losses and cash needed to fund operations should decline. If things go according to plan the statements as set forth will hold true. As disclosed, nothing is for certain. However, all the management and staff at EarthLink are working extremely hard to be the best Internet service provider around and are excited about our future. |
