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8-K - 8-K - EarthLink Holdings, LLCa11-28653_18k.htm

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 2011 RESULTS

 

ATLANTA — October 27, 2011 — EarthLink, Inc. (NASDAQ: ELNK) today announced financial results for its third quarter ended September 30, 2011.  The company also announced that it is raising its full year 2011 Adjusted EBITDA and Operating Cash Flow guidance.

 

Highlights for the third quarter include:

 

·                  Net income of $7.5 million or $0.07 per share

·                  Adjusted EBITDA (a non-GAAP measure) of $90.5 million

·                  Operating cash flow (a non-GAAP measure) of $60.0 million

·                  Ending cash and cash equivalents balance of $515.3 million

 

“Our business is achieving notable improvements each quarter, and we are executing on our integration plans and synergies ahead of schedule. Our focus now includes positioning our business for growth,” explained EarthLink Chairman and Chief Executive Officer Rolla P. Huff.   “We are making a number of investments in network, capabilities and people to execute on that growth strategy, including launching new nationwide integrated products later this quarter and continuing to build out our managed services infrastructure and capabilities.”

 

Financial and Operating Results

 

EarthLink reported third quarter 2011 revenue of $357.3 million, a 2% decrease from the prior quarter and a 146% increase from the third quarter of 2010, reflecting the acquisitions of ITC^Deltacom and One Communications.

 

Business services represented 74% of EarthLink’s total revenue in the third quarter of 2011, as compared to 23% of revenue in the third quarter of 2010. On a pro forma basis,

 

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EarthLink’s business services segment revenues declined 8% versus the third quarter of 2010. This was an improvement from the 9% pro forma decline in the second quarter of 2011 versus the second quarter of 2010.

 

The company’s consumer segment continues to perform well with broadband services comprising 65% of consumer access revenue in the third quarter of 2011. Subscriber churn in the consumer segment was 2.7% for the seasonally high third quarter of 2011, as compared to 2.6% in the second quarter of 2011 and 3.1% in the third quarter of 2010.

 

EarthLink’s selling, general and administrative expenses were $108.8 million, or 30% of revenue for the third quarter of 2011.

 

Profitability and Other Financial Measures

 

Net income was $7.5 million, or $0.07 per share, in the third quarter of 2011, as compared to $6.5 million, or $0.06 per share, in the second quarter of 2011, and $21.4 million, or $0.20 per share, in the third quarter of 2010.

 

For the third quarter of 2011, EarthLink reported Adjusted EBITDA (a non-GAAP measure, see definition in “Non-GAAP Measures” below) of $90.5 million, as compared to $88.9 million in the second quarter 2011 and $50.9 million in the third quarter of 2010.  The prior year quarter comparison increase reflects the inclusion of Deltacom and One Communications operating results.

 

Balance Sheet and Cash Flow

 

EarthLink generated operating cash flow (a non-GAAP measure, see definition in “Non-GAAP Measures” below) of $60.0 million in the third quarter of 2011, as compared to $66.2 million in the second quarter of 2011 and $48.0 million in the year-ago quarter.

 

As of September 30, 2011, the company reported cash and cash equivalents of $515.3 million, an increase of $24.8 million from the prior quarter ended June 30, 2011. Capital expenditures for the third quarter of 2011 were $30.5 million. Also during the quarter, the company made $5.4 million of dividend payments to shareholders and repurchased 0.5 million shares of common stock at an average price of $6.82 per share. The company repurchased an additional 0.7 million shares of common stock with cash settlement in the first week of October at an average price of $6.47 per share.

 

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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 announced updated guidance that raises its estimates for the full year 2011. Management now expects Adjusted EBITDA of $325 million to $330 million; operating cash flow of $210 million to $225 million; capital expenditures of $105 million to $115 million; and net income of $29 million to $33 million for the full year 2011.

 

Non-GAAP Measures

 

Adjusted EBITDA is defined as net income 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 restructuring and acquisition-related costs.  Operating cash flow is defined as net income 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 restructuring and acquisition-related costs, less cash used for purchases of property and equipment and purchases of subscriber bases.

 

Adjusted EBITDA and operating 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.

 

Conference Call for Analysts and Investors

 

Conference Call Details

Thursday, October 27, 2011, at 8:30 a.m. ET  hosted by EarthLink’s Chairman and Chief Executive Officer Rolla P. Huff, President and Chief Operating Officer Joseph M. Wetzel, 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 11:30 a.m. ET on October 28 through midnight on November 10, 2011.

To access the replay, dial toll-free 855-859-2056, and enter confirmation code 16319008.

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

 

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About EarthLink

 

EarthLink, Inc (NASDAQ: ELNK) is a leading provider of Internet Protocol (IP) infrastructure and services to medium-sized and large businesses, enterprise customers, and over 1.6 million customer relationships across the United States. The company has provided Internet access and communications services for decades and has earned an award-winning reputation for both outstanding customer service and product innovation. Their EarthLink Business™ division provides a full complement of voice, data, mobile, cloud hosting and equipment services over a 28,000 mile fiber network and MPLS-based services nationwide. EarthLink Consumer is a leading Internet Service Provider connecting people to the power and possibilities of the Internet. For more information, visit EarthLink’s website 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. With respect to such forward-looking statements, we seek the protections afforded by the Private Securities Litigation Reform Act of 1995. These risks include:(1) that we may not be able to execute our business strategy to grow our business services revenue, which could adversely impact our results of operations and cash flows; (2) that we may be unsuccessful in making and integrating acquisitions into our business, which could result in operating difficulties, losses and other adverse consequences; (3) that if we do not continue to innovate and provide products and services that are useful to individual subscribers and business customers, we may not remain competitive, and our revenues and operating results could suffer; (4) that the continuing effects of adverse economic conditions could harm our business;  (5) that we face significant competition in the communications industry that could reduce our profitability; (6) that decisions by the Federal Communications Commission relieving ILECs  of certain regulatory requirements, and possible further deregulation in the future, may restrict our ability to provide services and may increase the costs we incur to provide these services; (7) that our wholesale services, including our broadband transport services, will be adversely affected by pricing pressure, network overcapacity, service cancellations and other factors; (8) that our operating performance will suffer if we are not offered competitive rates for the access services we need to provide our long distance services; (9) that we may experience reductions in switched access and reciprocal compensation revenue; (10) that our inability to maintain our network infrastructure, portions of which we do not own, could adversely affect our operating results; (11) that if we are unable to interconnect with AT&T, Verizon and other incumbent carriers on acceptable terms, our ability to offer competitively priced local telephone services will be adversely affected; (12) that we may not be able to compete effectively if we are unable to install additional network equipment or convert our network to more advanced technology; (13) that failure to obtain and maintain necessary permits and rights-of-way could interfere with our network infrastructure and operations; (14) that our failure to implement cost reduction initiatives will adversely affect our results of operations; (15) that we face significant competition in the Internet industry that could reduce our profitability; (16) that our consumer business is dependent on the availability of third-party network service providers; (17) that the continued decline of our consumer access subscribers, combined with the change in mix of our consumer access base from narrowband to broadband, will adversely affect our results of operations; (18) that our commercial and alliance arrangements may not be renewed or may not generate expected benefits, which could adversely affect our results of operations; (19) that privacy concerns relating to our business could damage our reputation and deter current and potential users from using our services; (20) that changes in technology in the Internet access industry could cause a decline in our business; (21) that we may be unable to employ sufficient qualified personnel, and the loss of any of our key executive officers could adversely affect us; (22) that interruption or failure of our network and information systems and other technologies could impair our ability to provide our services, which could damage our reputation and harm our operating results; (23) that our business depends on effective business support systems and processes; (24) that government regulations could adversely affect our business or force us to change our business practices; (25) that our business may suffer if third parties used for customer service and technical support and certain billing services are unable to provide these services or terminate their relationships with us; (26) that we may not be able to protect our intellectual property; (27) 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; (28) that if we, or other industry participants, are unable to successfully defend against legal actions, we could face

 

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substantial liabilities or suffer harm to our financial and operational prospects; (29) 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; (30) that we may have to undertake further restructuring plans that would require additional charges, including incurring facility exit and restructuring charges; (31) that we may have exposure to greater than anticipated tax liabilities and the use of our net operating losses and certain other tax attributes could be limited in the future; (32) that we may reduce, or cease payment of, quarterly cash dividends; (33) that our stock price may be volatile; (34) that our indebtedness could adversely affect our financial health and limit our ability to react to changes in our industry; and (35) 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, 2010.

 

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EARTHLINK, INC.

Unaudited Condensed Consolidated Statements Of Operations (1)

(in thousands, except per share data)

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

 

2010

 

2011

 

2010

 

2011

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

$

145,158

 

$

357,290

 

$

455,423

 

$

963,867

 

 

 

 

 

 

 

 

 

 

 

Operating costs and expenses:

 

 

 

 

 

 

 

 

 

Cost of revenues (exclusive of depreciation and amortization shown separately below)

 

55,024

 

161,327

 

170,033

 

429,407

 

Selling, general and administrative (exclusive of depreciation and amortization shown separately below)

 

41,896

 

108,827

 

127,517

 

295,786

 

Depreciation and amortization

 

4,327

 

46,567

 

13,652

 

113,336

 

Restructuring and acquisition-related costs (2)

 

1,921

 

8,966

 

3,267

 

24,517

 

Total operating costs and expenses

 

103,168

 

325,687

 

314,469

 

863,046

 

 

 

 

 

 

 

 

 

 

 

Income from operations

 

41,990

 

31,603

 

140,954

 

100,821

 

Gain on investments, net

 

 

 

572

 

 

Interest expense and other, net

 

(5,466

)

(22,161

)

(16,241

)

(54,197

)

Income before income taxes

 

36,524

 

9,442

 

125,285

 

46,624

 

Income tax provision

 

(15,139

)

(1,937

)

(49,113

)

(16,208

)

Net income

 

$

21,385

 

$

7,505

 

$

76,172

 

$

30,416

 

 

 

 

 

 

 

 

 

 

 

Net income per share

 

 

 

 

 

 

 

 

 

Basic

 

$

0.20

 

$

0.07

 

$

0.71

 

$

0.28

 

Diluted

 

$

0.20

 

$

0.07

 

$

0.70

 

$

0.28

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding

 

 

 

 

 

 

 

 

 

Basic

 

108,220

 

107,794

 

107,968

 

108,585

 

Diluted

 

109,473

 

108,523

 

108,851

 

109,535

 

 

 

 

 

 

 

 

 

 

 

Dividends declared per share

 

$

0.16

 

$

0.05

 

$

0.46

 

$

0.15

 

 



 

EARTHLINK, INC.

Unaudited Condensed Consolidated Balance Sheets

(in thousands, except per share data)

 

 

 

December 31,

 

September 30,

 

 

 

2010

 

2011

 

ASSETS

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

242,952

 

$

515,310

 

Marketable securities

 

307,814

 

 

Restricted cash

 

2,270

 

1,781

 

Accounts receivable, net of allowance of $1,182 and $6,417 as of December 31, 2010 and September 30, 2011, respectively

 

60,216

 

103,795

 

Prepaid expenses

 

12,161

 

15,960

 

Deferred income taxes, net

 

45,661

 

65,435

 

Other current assets

 

14,802

 

18,087

 

Total current assets

 

685,876

 

720,368

 

Long-term marketable securities

 

12,304

 

 

Property and equipment, net

 

241,111

 

384,620

 

Deferred income taxes, net

 

189,037

 

94,976

 

Purchased intangible assets, net

 

135,364

 

297,999

 

Goodwill

 

259,046

 

428,346

 

Other long-term assets

 

1,240

 

22,280

 

Total assets

 

$

1,523,978

 

$

1,948,589

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

Current liabilities:

 

 

 

 

 

Accounts payable

 

$

17,272

 

$

20,881

 

Accrued payroll and related expenses

 

18,402

 

30,978

 

Accrued interest

 

8,622

 

32,712

 

Other accrued liabilities

 

67,007

 

102,571

 

Deferred revenue

 

40,921

 

56,024

 

Current portion of long-term debt and capital lease obligations

 

243,069

 

255,888

 

Total current liabilities

 

395,293

 

499,054

 

 

 

 

 

 

 

Long-term debt and capital lease obligations

 

351,251

 

655,064

 

Other long-term liabilities

 

19,566

 

31,950

 

Total liabilities

 

766,110

 

1,186,068

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

Convertible preferred stock, $0.01 par value, 100,000 shares authorized, 0 shares issued and outstanding as of December 31, 2010 and September 30, 2011

 

 

 

Common stock, $0.01 par value, 300,000 shares authorized, 191,825 and 195,936 shares issued as of December 31, 2010 and September 30, 2011, respectively, and 108,382 and 107,366 shares outstanding as of December 31, 2010 and September 30, 2011, respectively

 

1,918

 

1,959

 

Additional paid-in capital

 

2,061,555

 

2,075,532

 

Accumulated deficit

 

(648,235

)

(617,819

)

Treasury stock, at cost, 83,443 and 88,570 shares as of December 31, 2010 and September 30, 2011, respectively

 

(657,611

)

(697,151

)

Accumulated other comprehensive income

 

241

 

 

Total stockholders’ equity

 

757,868

 

762,521

 

Total liabilities and stockholders’ equity

 

$

1,523,978

 

$

1,948,589

 

 



 

EARTHLINK, INC.

Reconciliation of Net Income to Adjusted EBITDA (3)

(in thousands)

 

 

 

Three Months Ended

 

 

 

September 30,

 

June 30,

 

September 30,

 

 

 

2010

 

2011

 

2011

 

 

 

 

 

 

 

 

 

Net income

 

$

21,385

 

$

6,548

 

$

7,505

 

Interest expense and other, net

 

5,466

 

19,076

 

22,161

 

Income tax provision

 

15,139

 

3,644

 

1,937

 

Depreciation and amortization

 

4,327

 

45,093

 

46,567

 

Stock-based compensation expense

 

2,704

 

3,514

 

3,369

 

Restructuring and acquisition-related costs (2)

 

1,921

 

11,046

 

8,966

 

Adjusted EBITDA (3)

 

$

50,942

 

$

88,921

 

$

90,505

 

 

EARTHLINK, INC.

Reconciliation of Net Income to Operating Cash Flow (3)

(in thousands)

 

 

 

Three Months Ended

 

 

 

September 30,

 

June 30,

 

September 30,

 

 

 

2010

 

2011

 

2011

 

 

 

 

 

 

 

 

 

Net income

 

$

21,385

 

$

6,548

 

$

7,505

 

Interest expense and other, net

 

5,466

 

19,076

 

22,161

 

Income tax provision

 

15,139

 

3,644

 

1,937

 

Depreciation and amortization

 

4,327

 

45,093

 

46,567

 

Stock-based compensation expense

 

2,704

 

3,514

 

3,369

 

Restructuring and acquisition-related costs (2)

 

1,921

 

11,046

 

8,966

 

Purchases of property and equipment

 

(2,965

)

(22,693

)

(30,528

)

Operating cash flow (3)

 

$

47,977

 

$

66,228

 

$

59,977

 

 

EARTHLINK, INC.

Reconciliation of Guidance Provided in Non-GAAP Measures (3)

(in millions)

 

 

 

Year

 

 

 

 

 

 

 

Ending

 

 

 

 

 

 

 

December 31,

 

 

 

 

 

 

 

2011

 

 

 

 

 

Net income

 

$29 - $33

 

 

 

 

 

Interest expense and other, net

 

70

 

 

 

 

 

Income tax provision

 

20 - 21

 

 

 

 

 

Depreciation and amortization

 

163

 

 

 

 

 

Stock-based compensation expense

 

14

 

 

 

 

 

Restructuring and acquisition-related costs (2)

 

29

 

 

 

 

 

Adjusted EBITDA (3)

 

$325 - $330

 

 

 

 

 

 

 

 

Year

 

 

 

 

 

 

 

Ending

 

 

 

 

 

 

 

December 31,

 

 

 

 

 

 

 

2011

 

 

 

 

 

Net income

 

$29 - $33

 

 

 

 

 

Interest expense and other, net

 

70

 

 

 

 

 

Income tax provision

 

20 - 21

 

 

 

 

 

Depreciation and amortization

 

163

 

 

 

 

 

Stock-based compensation expense

 

14

 

 

 

 

 

Restructuring and acquisition-related costs (2)

 

29

 

 

 

 

 

Purchases of property and equipment

 

(115) - (105)

 

 

 

 

 

Operating cash flow (3)

 

$210 - $225

 

 

 

 

 

 



 

EARTHLINK, INC.

Supplemental Financial Data

 

 

 

September 30,

 

December 31,

 

June 30,

 

September 30,

 

 

 

2010

 

2010

 

2011

 

2011

 

 

 

(in thousands)

 

Balance Sheet Data

 

 

 

 

 

 

 

 

 

Cash and marketable securities

 

$

770,555

 

$

563,070

 

$

490,484

 

$

515,310

 

Debt (4)

 

255,791

 

580,791

 

880,591

 

880,591

 

Stockholders’ equity

 

764,922

 

757,868

 

760,886

 

762,521

 

 

 

 

 

 

 

 

 

 

 

Employee Data

 

 

 

 

 

 

 

 

 

Number of employees at end of period (5)

 

560

 

1,870

 

3,214

 

3,201

 

 

EARTHLINK, INC.

Business Services Operating Metrics

 

 

 

September 30,

 

December 31,

 

June 30,

 

September 30,

 

 

 

2010

 

2010

 

2011

 

2011

 

 

 

 

 

 

 

 

 

 

 

Legacy EarthLink Business Metrics (6)

 

 

 

 

 

 

 

 

 

Narrowband access subscribers

 

8,000

 

7,000

 

6,000

 

5,000

 

Broadband access subscribers

 

53,000

 

53,000

 

52,000

 

51,000

 

Web hosting accounts

 

68,000

 

66,000

 

62,000

 

60,000

 

 

 

 

 

 

 

 

 

 

 

EarthLink Business Metrics (7)

 

 

 

 

 

 

 

 

 

Southeast

 

 

 

 

 

 

 

 

 

Total fiber optic route miles (8)

 

 

16,504

 

16,504

 

16,504

 

Colocations

 

 

294

 

296

 

296

 

Voice and data switches

 

 

20

 

20

 

20

 

 

 

 

 

 

 

 

 

 

 

Northeast

 

 

 

 

 

 

 

 

 

Total fiber optic route miles

 

 

 

12,253

 

12,253

 

Colocations

 

 

 

620

 

620

 

Voice and data switches

 

 

 

34

 

34

 

 

 

 

 

 

 

 

 

 

 

National

 

 

 

 

 

 

 

 

 

Colocations

 

 

424

 

424

 

424

 

Voice and data switches

 

 

 

 

1

 

 

 

 

 

 

 

 

 

 

 

Total EarthLink Business (7)

 

 

 

 

 

 

 

 

 

Total fiber optic route miles

 

 

16,504

 

28,757

 

28,757

 

Colocations

 

 

718

 

1,340

 

1,340

 

Voice and data switches

 

 

20

 

54

 

55

 

 

EARTHLINK, INC.

Consumer Services Operating Metrics

 

 

 

September 30,

 

December 31,

 

June 30,

 

September 30,

 

 

 

2010

 

2010

 

2011

 

2011

 

Consumer Subscriber Detail

 

 

 

 

 

 

 

 

 

Narrowband access subscribers

 

988,000

 

932,000

 

826,000

 

780,000

 

Broadband access subscribers

 

727,000

 

704,000

 

652,000

 

630,000

 

Total consumer subscribers

 

1,715,000

 

1,636,000

 

1,478,000

 

1,410,000

 

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

 

2010

 

2011

 

2010

 

2011

 

Consumer Subscriber Activity

 

 

 

 

 

 

 

 

 

Subscribers at beginning of period

 

1,808,000

 

1,478,000

 

2,029,000

 

1,636,000

 

Gross organic subscriber additions

 

72,000

 

49,000

 

206,000

 

136,000

 

Churn

 

(165,000

)

(117,000

)

(520,000

)

(362,000

)

Subscribers at end of period

 

1,715,000

 

1,410,000

 

1,715,000

 

1,410,000

 

 

 

 

 

 

 

 

 

 

 

Consumer Metrics

 

 

 

 

 

 

 

 

 

Average subscribers (9)

 

1,761,000

 

1,442,000

 

1,864,000

 

1,519,000

 

ARPU (10)

 

$

21.11

 

$

21.13

 

$

21.19

 

$

21.07

 

Churn rate (11)

 

3.1

%

2.7

%

3.1

%

2.7

%

 



 

EARTHLINK, INC.

Supplemental Schedule of Segment Information (12)

(in thousands)

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

 

2010

 

2011

 

2010

 

2011

 

Business Services

 

 

 

 

 

 

 

 

 

Revenues

 

$

33,631

 

$

265,743

 

$

100,027

 

$

675,729

 

Cost of revenues

 

20,589

 

132,718

 

59,577

 

339,325

 

Gross margin

 

13,042

 

133,025

 

40,450

 

336,404

 

Segment operating expenses

 

10,313

 

82,154

 

30,019

 

214,484

 

Segment income from operations

 

$

2,729

 

$

50,871

 

$

10,431

 

$

121,920

 

 

 

 

 

 

 

 

 

 

 

Consumer Services

 

 

 

 

 

 

 

 

 

Revenues

 

$

111,527

 

$

91,547

 

$

355,396

 

$

288,138

 

Cost of revenues

 

34,435

 

28,609

 

110,456

 

90,082

 

Gross margin

 

77,092

 

62,938

 

244,940

 

198,056

 

Segment operating expenses

 

21,243

 

17,356

 

66,532

 

53,877

 

Segment income from operations

 

$

55,849

 

$

45,582

 

$

178,408

 

$

144,179

 

 

 

 

 

 

 

 

 

 

 

Consolidated

 

 

 

 

 

 

 

 

 

Revenues

 

$

145,158

 

$

357,290

 

$

455,423

 

$

963,867

 

Cost of revenues

 

55,024

 

161,327

 

170,033

 

429,407

 

Gross margin

 

90,134

 

195,963

 

285,390

 

534,460

 

Direct segment operating expenses

 

31,556

 

99,510

 

96,551

 

268,361

 

Segment income from operations

 

58,578

 

96,453

 

188,839

 

266,099

 

Stock-based compensation expense

 

2,704

 

3,369

 

7,078

 

10,454

 

Depreciation and amortization

 

4,327

 

46,567

 

13,652

 

113,336

 

Restructuring and acquisition-related costs (2)

 

1,921

 

8,966

 

3,267

 

24,517

 

Other operating expenses

 

7,636

 

5,948

 

23,888

 

16,971

 

Income from operations

 

$

41,990

 

$

31,603

 

$

140,954

 

$

100,821

 

 

EARTHLINK, INC.

Supplemental Schedule of Revenue Detail

(in thousands)

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2010

 

2011

 

2010

 

2011

 

 

 

(in thousands)

 

Business Services

 

 

 

 

 

 

 

 

 

Retail services

 

$

17,072

 

$

218,650

 

$

49,829

 

$

546,075

 

Wholesale services

 

8,101

 

37,228

 

24,917

 

98,915

 

Other

 

8,458

 

9,865

 

25,281

 

30,739

 

Total revenues

 

33,631

 

265,743

 

100,027

 

675,729

 

 

 

 

 

 

 

 

 

 

 

Consumer Services

 

 

 

 

 

 

 

 

 

Access services

 

97,399

 

78,520

 

311,149

 

249,380

 

Value-added services

 

14,128

 

13,027

 

44,247

 

38,758

 

Total revenues

 

111,527

 

91,547

 

355,396

 

288,138

 

Total Revenues

 

$

145,158

 

$

357,290

 

$

455,423

 

$

963,867

 

 



 

EARTHLINK, INC.

Footnotes to Consolidated Financial Highlights

 


(1)   On December 8, 2010, EarthLink completed its acquisition of ITC^DeltaCom, a provider of integrated communications services to customers in the southeastern U.S. On April 1, 2011, EarthLink completed its acquisition of One Communications, a privately-held, multi-regional integrated telecommunications solutions provider serving customers in the Northeast, Mid-Atlantic and Upper Midwest. The results of operations of ITC^DeltaCom and One Communications have been included in EarthLink’s consolidated financial statements since the respective acquisition dates.

 

(2)   Restructuring and acquisition-related costs consisted of the following for the periods presented (in thousands):

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2010

 

2011

 

2010

 

2011

 

Transaction-related costs

 

$

2,000

 

$

325

 

$

2,000

 

$

4,867

 

Severance and retention

 

 

3,783

 

 

13,608

 

Facility-related costs

 

 

4,208

 

 

4,688

 

Integration-related costs

 

 

593

 

 

834

 

Acquisition-related costs

 

2,000

 

8,909

 

2,000

 

23,997

 

Facility exit and restructuring costs

 

(79

)

57

 

1,267

 

520

 

Total restructuring and acquisition-related

 

$

1,921

 

$

8,966

 

$

3,267

 

$

24,517

 

 

Acquisition-related costs consist of external costs directly related to EarthLink’s acquisitions, such as advisory, legal, accounting, valuation and other professional fees; employee severance and retention costs; facility-related costs, such as lease termination and asset impairments; and integration-related costs, such as system conversion and rebranding costs.

 

Facility exit and restructuring costs consist of costs incurred for EarthLink’s restructuring plans. 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 2007 and 2008. However, there have been and may continue to be changes in estimates to amounts previously recorded.

 

(3)   Adjusted EBITDA is defined as net income 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 restructuring and acquisition-related costs. Operating cash flow is defined as net income 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 restructuring and acquisition-related costs, less purchases cash used for of property and equipment and purchases of subscriber bases.

 

Adjusted EBITDA and operating 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. Management believes that excluding the effects of the items noted above enables investors to better understand and analyze the current period’s results and provides a better measure of comparability.

 

(4)   Debt represents the principal amount of EarthLink’s Senior Secured Notes, EarthLink’s Convertible Senior Notes and ITC^DeltaCom’s Senior Secured Notes. Below is a summary of the carrying amount of EarthLink’s debt (in thousands):

 

 

 

Sept. 30,

 

Dec. 31,

 

June 30,

 

Sept. 30,

 

 

 

2010

 

2010

 

2011

 

2011

 

EarthLink’s Senior Secured Notes - Principal

 

 

 

300,000

 

300,000

 

EarthLink’s Senior Secured Notes - Discount

 

 

 

(10,226

)

(10,005

)

EarthLink’s Convertible Senior Notes - Principal

 

255,791

 

255,791

 

255,791

 

255,791

 

EarthLink’s Convertible Senior Notes - Discount

 

(16,212

)

(12,722

)

(5,490

)

(1,744

)

ITC^DeltaCom’s Senior Secured Notes - Principal

 

 

325,000

 

324,800

 

324,800

 

ITC^DeltaCom’s Senior Secured Notes - Premium

 

 

26,251

 

24,189

 

23,143

 

Carrying amount of debt

 

239,579

 

594,320

 

889,064

 

891,985

 

 

(5)   Represents full-time equivalents.

 

(6)   Legacy EarthLink business metrics consist of metrics related to services in EarthLink’s Business Services segment prior to the acquisitions of ITC^DeltaCom and One Communications.

 

(7)   EarthLink Business metrics consist of metrics related to the acquired New Edge Networks, ITC^DeltaCom and One Communications businesses, which is included in the Business Services segment.

 

(8)   Includes 12,559 route miles owned or obtained through indefeasible rights to use (IRU) and 3,945 marketed and managed route miles.

 

(9)   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 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.

 

(10) 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.

 

(11) 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.

 

(12) 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, Business Services and Consumer Services. The Company’s Business Services segment provides integrated communications services and related value-added services to businesses and communications carriers. These services include data services, including managed IP-based network services and broadband Internet access services; voice services, including local exchange, long-distance and conference calling; mobile data and voice services; and web hosting. 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-over-Internet protocol services, 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), depreciation and amortization, stock-based compensation expense, impairment of goodwill and intangible assets and restructuring and acquisition-related costs, as they are not evaluated in the measurement of segment performance.