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8-K - 8-K - EarthLink Holdings, LLCa12-17564_18k.htm
EX-99.2 - EX-99.2 - EarthLink Holdings, LLCa12-17564_1ex99d2.htm

Exhibit 99.1

 

Investors

Louis Alterman

404-748-7650

678-472-3252

altermanlo@corp.earthlink.com

 

Media

Michele Sadwick

404-748-7255

404-769-8421

sadwick@corp.earthlink.com

 

EARTHLINK ANNOUNCES SECOND QUARTER 2012 RESULTS

Continued Improvement in Revenue Trajectory

 

ATLANTA — August 2, 2012 — EarthLink, Inc. (NASDAQ: ELNK) today announced financial results for its second quarter ended June 30, 2012.

 

Highlights for the second quarter include:

 

·                  Net loss of $(1.1) million or $(0.01) per share

·                  Adjusted EBITDA (a non-GAAP measure) of $66.4 million

·                  Net cash provided by operating activities of $22.2 million

·                  Unlevered free cash flow (a non-GAAP measure) of $41.9 million

·                  Ending cash and marketable securities of $258.0 million

 

These results include an $8.3 million increase in reserves for regulatory audits.

 

“We are making good progress in the transformation of platforms, products and people to position EarthLink for long-term success as an IT services company,” said EarthLink Chairman and Chief Executive Officer Rolla P. Huff.   “Our business is trending in the right direction towards growth. We continue to invest in IT services and integration to support our future, while evolving our organizational structure and distribution channels to fuel our growth.”

 

Financial and Operating Results

 

EarthLink reported total company revenue of $338.2 million in the second quarter of 2012, a 2% decrease from the prior quarter and a 7% decrease from the year-ago quarter.  Business services comprised 76% of EarthLink’s revenue in the second quarter of 2012, up from 74% in the year-ago quarter. Business services revenue declined $2.8 million, or 1%, from the

 

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prior quarter, narrowing the declines in this segment. The company’s consumer services segment continues to perform well, with higher-margin broadband services accounting for 68% of consumer access revenue in the second quarter of 2012, up from 67% in the prior quarter and 65% in the year-ago quarter. Subscriber churn in the consumer segment was 2.3% in the second quarter of 2012, as compared to 2.5% in the prior quarter and 2.6% in the year-ago quarter.

 

EarthLink’s selling, general and administrative expenses were $106.4 million, or 31% of revenue, in the second quarter of 2012, as compared to expenses of $110.1 million in the prior quarter and $113.8 million in the year-ago quarter.

 

Profitability and Other Financial Measures

 

Net loss was $(1.1) million, or $(0.01) per share, in the second quarter of 2012, as compared to net income of $7.3 million, or $0.07 per share, in the prior quarter, and $6.5 million, or $0.06 per share, in the year-ago quarter.

 

EarthLink generated Adjusted EBITDA (a non-GAAP measure, see definition in “Non-GAAP Measures” below) of $66.4 million in the second quarter of 2012, versus Adjusted EBITDA of $77.6 million in the prior quarter and $88.9 million in the year-ago quarter.

 

EarthLink’s second quarter 2012 net loss and Adjusted EBITDA reflect an $8.3 million charge recorded within cost of revenue to increase the company’s reserves for regulatory audits, primarily an audit currently being conducted by the Universal Service Administration Company on Federal Universal Service Fund assessments and payments in the legacy ITC^DeltaCom business.

 

Balance Sheet and Cash Flow

 

Net cash provided by (used in) operating activities was $22.2 million during the second quarter of 2012, compared to $66.2 million in the prior quarter and ($9.0) million in the year-ago quarter. EarthLink generated unlevered free cash flow (a non-GAAP measure, see definition in “Non-GAAP Measures” below) of $41.9 million during the second quarter of 2012, compared to $45.9 million in the prior quarter and $66.2 million in the year-ago quarter.

 

As of June 30, 2012, the company reported cash and marketable securities of $258.0 million. Capital expenditures were $24.5 million for the second quarter of 2012. During the second quarter of 2012, the company made $5.3 million of dividend payments to shareholders,

 

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repurchased 0.7 million shares of common stock at an average price of $7.37 per share and made $30.4 million of scheduled semi-annual interest payments on long-term debt.

 

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 revised financial guidance for the full year 2012. Management now expects Adjusted EBITDA of $275 million to $285 million, capital expenditures of $115 million to $125 million, and net loss of $(4) million to $(1) million for the full year 2012.

 

Organizational Announcement

 

Also today, EarthLink announced that President and Chief Operating Officer Joseph M. Wetzel will depart from the company on December 31, 2012 in conjunction with the expected launch of major components of EarthLink’s new integrated OSS platform.

 

“Joe Wetzel has been an instrumental part of EarthLink’s transformation over the past five years. His leadership and expertise in operational optimization has been a critical driver in moving our company forward,” said Huff.  “Our Board of Directors and I appreciate Joe’s willingness to see EarthLink through the complex and substantial transformation and integration that has been underway the past two years.”

 

Wetzel’s responsibilities will be transitioned to operating level executives with functional accountability directly to Huff.  Wetzel, 56, joined the company in August of 2007. “It has been an honor to be part of the EarthLink team,” commented Wetzel. “With our business well positioned for the future and a strong leadership team in place, the timing is right for me to make this transition.”

 

Non-GAAP Measures

 

Adjusted EBITDA is defined as net income (loss) before interest expense and other, net, income taxes, depreciation and amortization, stock-based compensation expense, impairment of goodwill and intangible assets, and restructuring, acquisition and integration-related costs.  Unlevered free cash flow is defined as net income (loss) before interest expense and other, net, income taxes, depreciation and amortization, stock-based compensation expense, impairment of goodwill and

 

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intangible assets, and restructuring, acquisition and integration-related costs, less cash used for purchases of property and equipment.

 

Adjusted EBITDA and unlevered free cash flow are non-GAAP financial 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 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 measures.

 

Conference Call for Analysts and Investors

 

Conference Call Details

 

Thursday, August 2, 2012, 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 should reference the conference ID number 10239463 or “EarthLink’s 2nd Quarter 2012 Conference 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/

 

Presentation

 

An investor presentation to accompany the conference call and webcast will be available at: http://ir.earthlink.net/

 

Replay

 

Replay available from 11:30 a.m. ET on August 2 through midnight on September 12, 2012.

 

Dial toll-free 855-859-2056. The replay confirmation code is 10239463.

 

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

 

About EarthLink

 

EarthLink, Inc. (NASDAQ: ELNK) is a leading IT services and communications provider to more than 150,000 businesses and one million consumers nationwide. EarthLink empowers customers with managed services including cloud computing, managed and private cloud, and virtualization services such as managed hosting and cloud workspace. EarthLink also offers a robust portfolio of IT security, application hosting, colocation and IT support services. The company operates an extensive network spanning 28,800 route fiber miles with 90 metro fiber rings and 4 secure data centers providing ubiquitous nationwide data and voice IP service coverage across more than 90 percent of the country. Founded in 1994, EarthLink’s award-winning reputation for outstanding service and product innovation is supported by an experienced team of professionals focused on best-in-class customer care.  For more information, visit 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. 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 strategy to grow our business services revenue, especially revenue from advanced products, in an expeditious manner, which could

 

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adversely impact our results of operations and cash flows; (2) that we may be unsuccessful or experience delays in integrating acquisitions into our business while we develop our Business Services advanced product portfolio, which could result in operating difficulties, losses and other adverse consequences; (3) that we may be unable to successfully identify, manage and assimilate future acquisitions, which could adversely affect our results of operations; (4) that if we are unable to adapt to changes in technology and customer demands, we may not remain competitive, and our revenues and operating results could suffer; (5) that our failure to achieve operating efficiencies will adversely affect our results of operations; (6) that unfavorable general economic conditions could harm our business; (7) that we face significant competition in the communications and managed IT services industry that could reduce our profitability; (8) that decisions by the Federal Communications Commission relieving incumbent carriers 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; (9) 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; (10) 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; (11) that we may experience reductions in switched access and reciprocal compensation revenue; (12) that failure to obtain and maintain necessary permits and rights-of-way could interfere with our network infrastructure and operations; (13) that we have substantial business relationships with several large telecommunications carriers, and some of our customer agreements may not continue due to financial difficulty, acquisitions, non-renewal, or other factors, which could adversely affect our revenue and results of operations; (14) that our commercial and alliance arrangements may not be renewed or may not generate expected benefits, which could adversely affect our results of operations;  (15) that our consumer business is dependent on the availability of third-party network service providers; (16) that we face significant competition in the Internet industry that could reduce our profitability; (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 potential regulation of Internet service providers could adversely affect our operations; (19) that we may be unable to hire and retain sufficient qualified personnel, including Business Services sales personnel, and that the loss of any of our key executive officers could adversely affect us; (20) that privacy concerns relating to our business could damage our reputation and deter current and potential users from using our services; (21) that security breaches could damage our reputation and harm our operating results; (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 and that we are subject to regulatory audits; (25) that our business may suffer if third parties are unable to provide 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 are unable to successfully defend against legal actions, we could face 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 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; (31) that our indebtedness could adversely affect our financial health and limit our ability to react to changes in our industry; (32) that we may require additional capital to support business growth, and this capital may not be available to us on acceptable terms, or at all; (33) that we may reduce, or cease payment of, quarterly cash dividends; (34) that our stock price may be volatile; and (35) that provisions of our third 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, 2011.

 

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EARTHLINK, INC.

Unaudited Condensed Consolidated Statements Of Operations (1)

(in thousands, except per share data)

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

 

2011

 

2012

 

2011

 

2012

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

$

363,559

 

$

338,178

 

$

606,577

 

$

682,554

 

 

 

 

 

 

 

 

 

 

 

Operating costs and expenses:

 

 

 

 

 

 

 

 

 

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

 

164,357

 

168,216

 

268,080

 

327,553

 

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

 

113,795

 

106,436

 

186,959

 

216,505

 

Depreciation and amortization

 

45,093

 

45,980

 

66,769

 

91,234

 

Restructuring, acquisition and integration-related costs (2)

 

11,046

 

3,836

 

15,551

 

7,357

 

Total operating costs and expenses

 

334,291

 

324,468

 

537,359

 

642,649

 

 

 

 

 

 

 

 

 

 

 

Income from operations

 

29,268

 

13,710

 

69,218

 

39,905

 

Interest expense and other, net

 

(19,076

)

(15,709

)

(32,036

)

(31,467

)

Income (loss) before income taxes

 

10,192

 

(1,999

)

37,182

 

8,438

 

Income tax (provision) benefit

 

(3,644

)

893

 

(14,271

)

(2,281

)

Net income (loss)

 

$

6,548

 

$

(1,106

)

$

22,911

 

$

6,157

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) per share

 

 

 

 

 

 

 

 

 

Basic

 

$

0.06

 

$

(0.01

)

$

0.21

 

$

0.06

 

Diluted

 

$

0.06

 

$

(0.01

)

$

0.21

 

$

0.06

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding

 

 

 

 

 

 

 

 

 

Basic

 

109,593

 

106,244

 

108,990

 

106,252

 

Diluted

 

110,490

 

106,244

 

110,051

 

107,036

 

 

 

 

 

 

 

 

 

 

 

Dividends declared per share

 

$

0.05

 

$

0.05

 

$

0.10

 

$

0.10

 

 



 

EARTHLINK, INC.

Unaudited Condensed Consolidated Balance Sheets

(in thousands, except per share data)

 

 

 

December 31,

 

June 30,

 

 

 

2011

 

2012

 

ASSETS

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

211,783

 

$

209,452

 

Marketable securities

 

28,606

 

48,512

 

Restricted cash

 

1,781

 

1,014

 

Accounts receivable, net of allowance of $7,323 and $7,388 as of December 31, 2011 and June 30, 2012, respectively

 

114,757

 

113,688

 

Prepaid expenses

 

13,163

 

18,891

 

Deferred income taxes, net

 

38,437

 

41,678

 

Other current assets

 

23,530

 

20,482

 

Total current assets

 

432,057

 

453,717

 

Long-term marketable securities

 

1,001

 

 

Property and equipment, net

 

389,549

 

386,172

 

Deferred income taxes, net

 

172,376

 

168,900

 

Goodwill

 

378,235

 

379,320

 

Other intangible assets, net

 

285,361

 

249,924

 

Other long-term assets

 

21,872

 

20,509

 

Total assets

 

$

1,680,451

 

$

1,658,542

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

 

$

15,972

 

$

13,256

 

Accrued payroll and related expenses

 

28,410

 

17,745

 

Accrued interest

 

11,955

 

12,120

 

Other accrued liabilities

 

116,396

 

119,367

 

Deferred revenue

 

68,182

 

68,622

 

Current portion of long-term debt and capital lease obligations

 

1,655

 

1,526

 

Total current liabilities

 

242,570

 

232,636

 

 

 

 

 

 

 

Long-term debt and capital lease obligations

 

653,765

 

651,371

 

Other long-term liabilities

 

30,972

 

29,512

 

Total liabilities

 

927,307

 

913,519

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

Convertible preferred stock, $0.01 par value, 100,000 shares authorized, 0 shares issued and outstanding as of December 31, 2011 and June 30, 2012

 

 

 

Common stock, $0.01 par value, 300,000 shares authorized, 196,202 and 196,694 shares issued as of December 31, 2011 and June 30, 2012, respectively, and 106,193 and 105,677 shares outstanding as of December 31, 2011 and June 30, 2012, respectively

 

1,962

 

1,967

 

Additional paid-in capital

 

2,071,298

 

2,064,508

 

Accumulated deficit

 

(613,668

)

(607,511

)

Treasury stock, at cost, 90,009 and 91,017 shares as of December 31, 2011 and June 30, 2012, respectively

 

(706,434

)

(713,938

)

Accumulated other comprehensive loss

 

(14

)

(3

)

Total stockholders’ equity

 

753,144

 

745,023

 

Total liabilities and stockholders’ equity

 

$

1,680,451

 

$

1,658,542

 

 



 

EARTHLINK, INC.

Reconciliation of Net Income (Loss) to Adjusted EBITDA (3)

(in thousands)

 

 

 

Three Months Ended

 

 

 

June 30,

 

March 31,

 

June 30,

 

 

 

2011

 

2012

 

2012

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

6,548

 

$

7,263

 

$

(1,106

)

Interest expense and other, net

 

19,076

 

15,758

 

15,709

 

Income tax provision (benefit)

 

3,644

 

3,174

 

(893

)

Depreciation and amortization

 

45,093

 

45,254

 

45,980

 

Stock-based compensation expense

 

3,514

 

2,672

 

2,868

 

Restructuring, acquisition and integration-related costs (2)

 

11,046

 

3,521

 

3,836

 

Adjusted EBITDA (3)

 

$

88,921

 

$

77,642

 

$

66,394

 

 

EARTHLINK, INC.

Reconciliation of Net Income (Loss) to Unlevered Free Cash Flow (3)

(in thousands)

 

 

 

Three Months Ended

 

 

 

June 30,

 

March 31,

 

June 30,

 

 

 

2011

 

2012

 

2012

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

6,548

 

$

7,263

 

$

(1,106

)

Interest expense and other, net

 

19,076

 

15,758

 

15,709

 

Income tax provision (benefit)

 

3,644

 

3,174

 

(893

)

Depreciation and amortization

 

45,093

 

45,254

 

45,980

 

Stock-based compensation expense

 

3,514

 

2,672

 

2,868

 

Restructuring, acquisition and integration-related costs (2)

 

11,046

 

3,521

 

3,836

 

Purchases of property and equipment

 

(22,693

)

(31,775

)

(24,450

)

Unlevered free cash flow (3)

 

$

66,228

 

$

45,867

 

$

41,944

 

 

EARTHLINK, INC.

Reconciliation of Net Cash Flows from Operating Activities to Unlevered Free Cash Flow (3)

(in thousands)

 

 

 

Three Months Ended

 

 

 

June 30,

 

March 31,

 

June 30,

 

 

 

2011

 

2012

 

2012

 

 

 

 

 

 

 

 

 

Net cash (used in) provided by operating activities

 

$

(8,993

)

$

66,211

 

$

22,251

 

Income tax provision (benefit)

 

3,644

 

3,174

 

(893

)

Non-cash income taxes

 

(2,187

)

(1,244

)

2,848

 

Interest expense and other, net

 

19,076

 

15,759

 

15,709

 

Amortization of debt discount, premium and issuance costs

 

(3,326

)

494

 

479

 

Restructuring, acquisition and integration-related costs (2)

 

11,046

 

3,521

 

3,836

 

Changes in operating assets and liabilities

 

70,084

 

(9,989

)

21,919

 

Purchases of property and equipment

 

(22,693

)

(31,775

)

(24,450

)

Other, net

 

(423

)

(284

)

245

 

Unlevered free cash flow (3)

 

$

66,228

 

$

45,867

 

$

41,944

 

 

EARTHLINK, INC.

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

(in millions)

 

 

 

Year

 

 

 

Ending

 

 

 

December 31,

 

 

 

2012

 

Net loss

 

($4) - ($1)

 

Interest expense and other, net

 

63

 

Income tax provision

 

 

Depreciation and amortization

 

185 - 192

 

Stock-based compensation expense

 

13

 

Restructuring, acquisition and integration-related costs (2)

 

18

 

Adjusted EBITDA (3)

 

$275 - $285

 

 



 

EARTHLINK, INC.

Supplemental Schedule of Segment Information (4)

(in thousands)

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

 

2011

 

2012

 

2011

 

2012

 

Business Services

 

 

 

 

 

 

 

 

 

Revenues

 

$

267,613

 

$

257,482

 

$

409,986

 

$

517,746

 

Cost of revenues

 

134,150

 

141,556

 

206,607

 

273,374

 

Gross margin

 

133,463

 

115,926

 

203,379

 

244,372

 

Segment operating expenses

 

87,586

 

81,890

 

132,330

 

167,291

 

Segment income from operations

 

$

45,877

 

$

34,036

 

$

71,049

 

$

77,081

 

 

 

 

 

 

 

 

 

 

 

Consumer Services

 

 

 

 

 

 

 

 

 

Revenues

 

$

95,946

 

$

80,696

 

$

196,591

 

$

164,808

 

Cost of revenues

 

30,207

 

26,660

 

61,473

 

54,179

 

Gross margin

 

65,739

 

54,036

 

135,118

 

110,629

 

Segment operating expenses

 

17,207

 

16,202

 

36,521

 

31,797

 

Segment income from operations

 

$

48,532

 

$

37,834

 

$

98,597

 

$

78,832

 

 

 

 

 

 

 

 

 

 

 

Consolidated

 

 

 

 

 

 

 

 

 

Revenues

 

$

363,559

 

$

338,178

 

$

606,577

 

$

682,554

 

Cost of revenues

 

164,357

 

168,216

 

268,080

 

327,553

 

Gross margin

 

199,202

 

169,962

 

338,497

 

355,001

 

Direct segment operating expenses

 

104,793

 

98,092

 

168,851

 

199,088

 

Segment income from operations

 

94,409

 

71,870

 

169,646

 

155,913

 

Stock-based compensation expense

 

3,514

 

2,868

 

7,085

 

5,540

 

Depreciation and amortization

 

45,093

 

45,980

 

66,769

 

91,234

 

Restructuring, acquisition and integration-related costs (2)

 

11,046

 

3,836

 

15,551

 

7,357

 

Other operating expenses

 

5,488

 

5,476

 

11,023

 

11,877

 

Income from operations

 

$

29,268

 

$

13,710

 

$

69,218

 

$

39,905

 

 

EARTHLINK, INC.

Supplemental Schedule of Revenue Detail

(in thousands)

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2011

 

2012

 

2011

 

2012

 

Business Services

 

 

 

 

 

 

 

 

 

Retail services

 

$

219,008

 

$

209,300

 

$

325,328

 

$

421,816

 

Wholesale services

 

37,585

 

38,026

 

62,380

 

75,755

 

Other

 

11,020

 

10,156

 

22,278

 

20,175

 

Total revenues

 

267,613

 

257,482

 

409,986

 

517,746

 

 

 

 

 

 

 

 

 

 

 

Consumer Services

 

 

 

 

 

 

 

 

 

Access services

 

83,403

 

68,735

 

170,860

 

140,502

 

Value-added services

 

12,543

 

11,961

 

25,731

 

24,306

 

Total revenues

 

95,946

 

80,696

 

196,591

 

164,808

 

 

 

 

 

 

 

 

 

 

 

Total Revenues

 

$

363,559

 

$

338,178

 

$

606,577

 

$

682,554

 

 



 

EARTHLINK, INC.

Supplemental Financial Data

 

 

 

June 30,

 

December 31,

 

March 31,

 

June 30,

 

 

 

2011

 

2011

 

2012

 

2012

 

 

 

(in thousands)

 

Balance Sheet Data

 

 

 

 

 

 

 

 

 

Cash and marketable securities

 

$

490,484

 

$

241,390

 

$

270,797

 

$

257,964

 

Debt (5)

 

880,591

 

624,800

 

624,800

 

624,800

 

Stockholders’ equity

 

760,886

 

753,144

 

753,992

 

745,023

 

 

 

 

 

 

 

 

 

 

 

Employee Data

 

 

 

 

 

 

 

 

 

Number of employees at end of period (6)

 

3,214

 

3,241

 

3,103

 

3,120

 

 

EARTHLINK, INC.

Business Services Operating Metrics

 

 

 

June 30,

 

December 31,

 

March 31,

 

June 30,

 

 

 

2011

 

2011

 

2012

 

2012

 

 

 

 

 

 

 

 

 

 

 

Total EarthLink Business

 

 

 

 

 

 

 

 

 

Total fiber optic route miles (7)

 

28,757

 

28,804

 

28,804

 

28,804

 

Colocations

 

1,340

 

1,415

 

1,415

 

1,415

 

Voice and data switches

 

54

 

56

 

56

 

56

 

 

EARTHLINK, INC.

Consumer Services Operating Metrics

 

 

 

June 30,

 

December 31,

 

March 31,

 

June 30,

 

 

 

2011

 

2011

 

2012

 

2012

 

Consumer Subscriber Detail

 

 

 

 

 

 

 

 

 

Narrowband access subscribers

 

826,000

 

741,000

 

704,000

 

676,000

 

Broadband access subscribers

 

652,000

 

609,000

 

591,000

 

568,000

 

Total consumer subscribers

 

1,478,000

 

1,350,000

 

1,295,000

 

1,244,000

 

 

 

 

Three Months Ended

 

 

 

June 30,

 

December 31,

 

March 31,

 

June 30,

 

 

 

2011

 

2011

 

2012

 

2012

 

Consumer Subscriber Activity

 

 

 

 

 

 

 

 

 

Subscribers at beginning of period

 

1,557,000

 

1,410,000

 

1,350,000

 

1,295,000

 

Gross organic subscriber additions

 

38,000

 

48,000

 

45,000

 

37,000

 

Churn

 

(117,000

)

(108,000

)

(100,000

)

(88,000

)

Subscribers at end of period

 

1,478,000

 

1,350,000

 

1,295,000

 

1,244,000

 

 

 

 

 

 

 

 

 

 

 

Consumer Metrics

 

 

 

 

 

 

 

 

 

Average subscribers (8)

 

1,518,000

 

1,379,000

 

1,322,000

 

1,270,000

 

ARPU (9)

 

$

21.07

 

$

21.20

 

$

21.20

 

$

21.17

 

Churn rate (10)

 

2.6

%

2.6

%

2.5

%

2.3

%

 



 

EARTHLINK, INC.

Footnotes to Consolidated Financial Highlights

 


(1)               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 One Communications have been included in EarthLink’s consolidated financial statements since the acquisition date.

 

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

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2011

 

2012

 

2011

 

2012

 

Transaction-related costs

 

$

 2,802

 

$

 154

 

$

 4,542

 

$

 993

 

Severance and retention

 

8,133

 

1,513

 

9,825

 

3,060

 

Facility-related costs

 

 

(10

)

 

155

 

Integration-related costs

 

658

 

2,179

 

721

 

3,330

 

Acquisition and integration-related costs

 

11,593

 

3,836

 

15,088

 

7,538

 

Facility exit and restructuring costs

 

(547

)

 

463

 

(181

)

Total restructuring, acquisition and integration-related costs

 

$

11,046

 

$

3,836

 

$

15,551

 

$

7,357

 

 

Acquisition and integration-related costs consist of 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, rebranding costs and integration related consulting and employee costs.  EarthLink expects to incur approximately $7.0 million and $4.0 million of acquisition and integration-related costs in the third quarter of 2012 and fourth quarter of 2012, respectively.

 

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 (loss) before interest expense and other, net, income taxes, depreciation and amortization, stock-based compensation, impairment of goodwill and intangible assets, and restructuring, acquisition and integration-related costs.  Unlevered Free Cash Flow is defined as net income (loss) before interest expense and other, net, income taxes, depreciation and amortization, stock-based compensation, impairment of goodwill and intangible assets, and restructuring, acquisition and integration-related costs, less purchases cash used for of property and equipment.

 

Adjusted EBITDA and Unlevered Free Cash Flow are non-GAAP measures and are not determined in accordance with U.S. generally accepted accounting principles. These non-GAAP financial measures are commonly used in the industry and are presented because management believes they provide relevant and useful information to investors. Management uses these non-GAAP financial measures to evaluate the performance of its business and determine bonuses. Management believes that excluding the effects of certain non-cash and non-operating items enables investors to better understand and analyze the current period’s results and provides a better measure of comparability. There are limitations to using these non-GAAP financial measures. Adjusted EBITDA and Unlevered Free Cash Flow are not indicative of cash provided or used by operating activities and may differ from comparable information provided by other companies.  Adjusted EBITDA and Unlevered Free Cash Flow should not be considered in isolation, as an alternative to, or more meaningful than measures of financial performance determined in accordance with U.S. GAAP.

 

(4)               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 a comprehensive suite of communications and technology services, including voice, data, managed network services, cloud hosting and equipment services, to business customers. The Company’s Consumer Services segment provides nationwide Internet access and related value-added services to residential customers.

 

The Company presents its Business Services revenue in the following three categories: (1) retail services, which includes data, voice and managed IT services; (2) wholesale services, which includes the sale of transmission capacity to other telecommunications carriers; and (3) other services, which includes the sale of customer premises equipment and web hosting. The Company presents its Consumer Services revenue in the following two categories: (1) access services, which includes include narrowband and broadband Internet access services and (2) value-added services, which includes revenues from ancillary services sold as add-on features to EarthLink’s Internet access services, such as security products, premium email only, home networking, email storage and Internet call waiting; search revenues; and advertising revenues.

 

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, acquisition and integration-related costs, as they are not evaluated in the measurement of segment performance.

 

(5)               Debt represents the principal amount of EarthLink’s Senior 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):

 

 

 

June 30,

 

December 31,

 

March 31,

 

June 30,

 

 

 

2011

 

2011

 

2012

 

2012

 

EarthLink Senior Notes - Principal

 

300,000

 

300,000

 

300,000

 

300,000

 

EarthLink Senior Notes - Discount

 

(10,226

)

(9,779

)

(9,547

)

(9,310

)

EarthLink Convertible Senior Notes - Principal

 

255,791

 

 

 

 

EarthLink Convertible Senior Notes - Discount

 

(5,490

)

 

 

 

ITC^DeltaCom Senior Secured Notes - Principal

 

324,800

 

324,800

 

324,800

 

324,800

 

ITC^DeltaCom Senior Secured Notes - Premium

 

24,189

 

22,056

 

20,914

 

19,780

 

Carrying amount of debt

 

889,064

 

637,077

 

636,167

 

635,270

 

 

(6)               Represents full-time equivalents.

 

(7)               As of June 30, 2011, includes 12,559 route miles owned or obtained through indefeasible rights to use (IRU) and 3,945 marketed and managed route miles. As of June 30, 2012, includes 24,859 route miles owned or obtained through indefeasible rights to use (IRU) and 3,945 marketed and managed route miles.

 

(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.  Average subscribers for the six month periods is calculated by averaging the ending monthly subscribers or accounts for the seven months preceding and including the end of the 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)   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.