Though still shrinking, ELNK is still generating a lot of cash flow:
EarthLink Still Shrinking, But Profits, Guidance Up (ELNK)
Dan Frommer | April 24, 2008 1:06 PM
At some point, EarthLink (ELNK) will have to figure out how it's going to grow its shrinking dialup/broadband Internet access business. But in the meantime, new CEO Rolla Huff's cost-cutting and fat-trimming are working.
EarthLink reported a $54.4 million Q1 profit this morning, up huge from a $30 million loss during Q1 2007 -- despite Q1 sales dropping 19% year-over-year to $234.8 million. Diluted EPS of 49 cents per share handily beat the Street's 33 cents per share consensus.
And EarthLink raised 2008 guidance: It expects earnings from continuing operations to come in between $153-163 million, up from its previous forecast of $140-155 million.
How'd Huff stop the bleeding? By focusing the company away from cash-burning investments in Helio -- a wireless joint venture with SK Telecom (SKM) that's burned more than half a billion dollars so far, and municipal wi-fi.
In its Q1 release, EarthLink said it had reached agreements with two cities to transfer ownership of their muni wi-fi assets to the city governments, and it will shut down and remove its wi-fi network in New Orleans.
alleyinsider.com
The press release:
EarthLink Announces First Quarter Results
Thursday April 24, 7:00 am ET
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 - News) 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.
Conference Call for Analysts and Investors
Investors in the U.S. and Canada interested in participating in the conference call on April 24, 2008 at 8:30 a.m. Eastern Daylight Time (EDT) may dial 1-800-706-0730 and reference the EarthLink call. Other international investors may dial 1-706-634-5173 and also reference the EarthLink call. EarthLink recommends dialing into the call approximately 10 minutes prior to the scheduled start time.
A taped replay will be available beginning at 10:30 a.m. EDT on April 24, 2008 through midnight on May 1, 2008 by dialing 1-800-642-1687. International callers should dial 1-706-645-9291. The replay confirmation code is 41005794.
The Webcast of this call will be archived on EarthLink's site at: ir.earthlink.net
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 pla (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 Orlanda, 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.
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Source: EarthLink
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