Exhibit 99.1
FOR IMMEDIATE RELEASE
Media
Contact: Dan Greenfield
EarthLink
404-432-6526 (mobile)
greenfie@corp.earthlink.net
Investors
Michael Gallentine
EarthLink
404-748-7153
404-395-5155 (mobile)
gallentineml@corp.earthlink.net
EARTHLINK REPORTS STRONG SECOND QUARTER RESULTS
ATLANTA, JULY 26, 2005– EarthLink, Inc. (NASDAQ: ELNK), the nation’s next generation Internet service provider (ISP), today announced financial results for its second quarter ending June 30, 2005. Highlights for the quarter include:
• Net income of $43.8 million, or $0.31 per share
• Income from operations of $47.9 million
• Adjusted EBITDA (a non-GAAP measure) of $60.1 million
• Free cash flow (a non-GAAP measure) of $55.3 million
• A repurchase of 7.6 million shares of EarthLink common stock
“EarthLink once again delivered strong financial results, driven by management’s focus on operational excellence and its continuing commitment to long-term shareholder value,” said Garry Betty, EarthLink’s president and chief executive officer. “Consistent with this commitment, EarthLink has repurchased 25 percent of the company’s shares over the past three years.”
Betty added, “The stability and success of our existing Internet access business continue to provide the leverage and cash flow to fuel growth opportunities in next generation broadband wireline and wireless voice and data products. Building on our existing voice initiatives, EarthLink announced during the quarter a joint market trial with Covad that will combine the traditional telephone connection with advanced features of VoIP and will enable us to offer DSL services at speeds of 6 Mbps to 10Mbps.”
Second Quarter Financial Results
Subscribers
During the second quarter, EarthLink added ten thousand net subscribers and ended the quarter with 5.4 million total subscribers, a 0.9 percent increase from the second quarter of 2004. EarthLink added 37,000 net broadband subscribers and ended the quarter with 1.5 million broadband customers, an increase of 24.0 percent from a year ago. EarthLink ended the second quarter with 3.8 million total narrowband subscribers, a 5.6 percent decrease from the second quarter of 2004. EarthLink reported a loss of 92,000 premium narrowband subscribers in the second quarter of 2005. During the second quarter of 2005, PeoplePC Online added 69,000 net subscribers. As was previously announced in April, PeoplePC Online passed the one million subscriber milestone and ended the quarter with 1.1 million net subscribers, a 68.5 percent increase from the second quarter of 2004.
Overall, average monthly churn was 4.5 percent during the second quarter of 2005, a decrease from the 4.7 percent churn reported over the prior three quarters, but an increase from the 4.4 percent rate in last year’s second quarter.
Revenues and Gross Margins Before Sales Incentives
Broadband revenues were $112.1 million, an increase of 5.9 percent over the prior year quarter, driven by the growth in broadband subscribers. Web hosting, advertising and other value-added services revenues were $25.2 million, a 16.2 percent improvement compared to the prior year quarter, driven primarily by increased search-related advertising revenues and ancillary services revenues. Narrowband revenues were $188.4 million, a decrease of 14.8 percent from the prior year quarter. The decline in narrowband revenues was largely due to the shift in the mix of our narrowband customer base from premium narrowband subscribers to PeoplePC Online subscribers. For the quarter, total revenues were $325.7 million, a 6.6 percent decrease from the second quarter of 2004.
Gross margins before sales incentives (a non-GAAP measure) expanded to 71.5 percent of total revenues during the second quarter of 2005, a 280 basis point improvement from the prior year quarter. The increase in gross margins before sales incentives was due to continuing improvements in both narrowband and broadband telecommunications costs per subscriber. While gross margins before sales incentives on a percentage basis continued to
expand, gross margins before sales incentives were $232.8 million for the second quarter of 2005, a decrease of 2.7 percent from the second quarter of 2004, driven primarily by lower revenues.
Profitability
EarthLink’s adjusted EBITDA (a non-GAAP measure) was $60.1 million, a $6.6 million decrease from the prior year quarter. The decline in adjusted EBITDA reflects the decrease in gross margins before sales incentives.
Net income for the quarter was $43.8 million, or $0.31 per share, compared to $49.7 million, or $0.31 per share, in the prior year quarter. The decline in net income was primarily attributable to the following items:
• $6.6 million decrease in adjusted EBITDA (noted above)
• $7.6 million increase in income tax expense primarily associated with the realization of net operating loss (NOL) carry-forwards of acquired companies
• $2.1 million increase in losses from equity affiliates related to the SK-EarthLink wireless joint venture
• $1.6 million change in facility exit costs, a non-recurring prior year benefit
These losses were partially offset by the following items:
• $4.0 million decrease in depreciation due primarily to declines in capital expenditures over the past three years and disposed assets as a result of the contact center restructurings
• $3.5 million decrease in acquisition-related amortization attributable to subscriber base assets becoming fully amortized
• $4.6 million increase in interest and other income, net, related to proceeds received from our investments in other companies and higher interest income on our investments in marketable securities
In the second quarter of 2005, EarthLink generated $55.3 million in free cash flow, a $2.8 million decrease from the second quarter of 2004. The decrease in free cash flow from
the second quarter of 2004 was primarily attributable to the decrease in adjusted EBITDA noted above, partially offset by a $3.5 million decrease in capital expenditures.
During the second quarter of 2005, EarthLink repurchased approximately 7.6 million shares of its common stock for $72.0 million in accordance with its share repurchase program. EarthLink had $238.7 million remaining under the program as of June 30, 2005.
EarthLink’s cash and marketable securities were $433.3 million as of June 30, 2005, representing a $9.2 million decrease from the first quarter of 2005.
Non-GAAP Measures
Adjusted EBITDA is defined as earnings before interest income and expense, income taxes, depreciation and amortization, net losses of equity affiliate, gain on investments in other companies, and facility exit costs.
Free cash flow is defined as income from operations before facility exit costs, depreciation and amortization, purchases of property and equipment, and purchases of subscriber bases.
Gross margins before sales incentives, 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 third quarter of 2005, EarthLink expects to report no net change to a net loss of 50,000 subscribers, compared to the end of the second quarter of 2005. Revenues for the quarter are expected to be $315 million to $320 million. Due to expected declines in gross margins and increases in sales and marketing, adjusted EBITDA is expected to be in
the range of $50 million to $55 million. Net income is expected to be in the range of $26 million to $36 million, including an expected equity method loss of $5 million to $10 million attributable to EarthLink’s proportionate share of the losses of the SK-EarthLink joint venture.
For the full year 2005, EarthLink is updating its previously issued guidance. EarthLink expects to report no net change to a net loss of 50,000 subscribers, compared to the end of 2004. The company expects revenues to be approximately $1.3 billion, adjusted EBITDA to be between $205 million and $215 million and net income to be in the range of $125 million to $145 million.
Investors in the U.S. and Canada interested in participating in the conference call on July 26, 2005 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. Investors also will have the opportunity to listen to a live Webcast of the conference call via the Internet at the following site:
http://phx.corporate-ir.net/phoenix.zhtml?c=77594&p=irol-IRHome
A taped replay will be available beginning at 11:30 a.m. EDT on July 26, 2005 through midnight on August 2, 2005 by dialing 1-800-642-1687. International callers should dial 1-706-645-9291. The replay confirmation code is 7036960.
The Webcast of this call will be archived on our site at:
http://phx.corporate-ir.net/phoenix.zhtml?c=77594&p=irol-audioArchives
About EarthLink
“EarthLink. We revolve around youTM.” As the nation’s next generation Internet service provider, Atlanta-based EarthLink has earned an award-winning reputation for outstanding customer service and its suite of online products and services. Serving over five million subscribers, EarthLink offers what every user should expect from their Internet experience: high-quality connectivity, minimal online intrusions, and customizable features. Whether it’s dial-up, high-speed, web hosting, wireless voice and data services, or “EarthLink Extras” like home networking, security or voice over IP, EarthLink provides the tools that best let individuals use and enjoy the Internet on their own terms. Learn more about EarthLink by calling (800) EARTHLINK or visiting EarthLink’s Web site at www.earthlink.net.
# # #
This press release includes “forward-looking” statements (rather than historical facts) that are subject to risks and uncertainties that could cause actual results to differ materially from those described. Although we believe that the expectations expressed in these forward-looking statements are reasonable, we cannot promise that our expectations will turn out to be correct. Our actual results could be materially different from and worse than our expectations. We disclaim any obligation to update any forward-looking statements contained herein, except as may be required pursuant to applicable law. With respect to forward-looking statements in this press release, the company seeks the protections afforded by the Private Securities Litigation Reform Act of 1995. These risks include, without limitation, (1) that we may not be able to successfully implement our broadband strategy which would materially and adversely affect our subscriber growth rates, future overall revenues and profitability; (2) that we may not successfully enhance existing or develop new products and services in a cost-effective manner to meet customer demand in the rapidly evolving market for Internet, wireless and wireline communications services, including our various voice initiatives; (3) that our service offerings may fail to be competitive with existing and new competitors; (4) that competitive product, price, or marketing pressures could cause us to lose existing customers to competitors, or may cause us to reduce prices for our services which would adversely impact average revenue per user; (5) that our commercial and alliance arrangements, including marketing arrangements with Sprint and Dell, may be terminated or may not be as beneficial to us as we anticipate; (6) that the continued decline of our narrowband revenues may adversely affect us; (7) that we may experience significant fluctuations in our operating results and rate of growth and we may not be able to sustain profitability; (8) that our third-party network providers may be unwilling or unable to provide Internet, wireline and wireless telecommunications access; (9) that we may be unable to maintain or increase our customer levels if we do not have uninterrupted and reasonably priced access to local and long distance telecommunications systems for delivering dial-up and/or broadband access, including, specifically, that integrated local exchange carriers and cable companies may not provide last mile broadband access to us on a wholesale basis or on terms or at prices that allow us to grow and be profitable in the broadband market; (10) that service interruptions or impediments could harm our business; (11) that we may not be able to protect our proprietary technologies or successfully defend infringement claims and may be required to enter licensing arrangements on unfavorable terms; (12) 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; (13) that government regulations could force us to change our business practices; (14) that we may not realize the benefits we are seeking from the SK-EarthLink joint venture transaction or other investment activities as a result of lower than predicted revenues or subscriber levels of the companies in which we invest, larger funding requirements for those companies or otherwise; (15) that our third-party providers for technical and customer support may be unable to provide these services on an economical basis or at all; (16) that if we are unable to successfully defend against legal actions, we could face substantial liabilities; (17) that we may be unable to continually develop effective business systems, processes and personnel to support our business; (18) that we may be unable to hire and retain qualified personnel, including our key executive officers; (19) that provisions in our certificate of incorporation, bylaws and shareholder rights plan could limit our share price and delay a change of management; (20) that our stock price has been volatile historically and may continue to be volatile; and (21) that some other unforeseen difficulties may occur. This list is intended to identify some of the principal factors that could cause actual results to differ materially from those described in the forward-looking statements included herein. These factors are not intended to represent a complete list of all risks and uncertainties inherent in the company’s business, and should be read in conjunction with the more detailed cautionary statements and risk factors included in EarthLink’s filings with the Securities and Exchange Commission.
Consolidated Financial Highlights
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| Three Months Ended June 30, |
| Six Months Ended June 30, |
| ||||||||
|
| 2004 |
| 2005 |
| 2004 |
| 2005 |
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| (dollars in thousands, except per share data) |
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Statement of Operations Data |
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Revenues: |
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| ||||
Narrowband access |
| $ | 221,098 |
| $ | 188,432 |
| $ | 448,219 |
| $ | 389,178 |
|
Broadband access |
| 105,835 |
| 112,102 |
| 208,371 |
| 221,074 |
| ||||
Web hosting |
| 12,012 |
| 10,299 |
| 24,639 |
| 21,136 |
| ||||
Advertising and other value-added services |
| 9,642 |
| 14,855 |
| 18,921 |
| 29,040 |
| ||||
Total revenues |
| 348,587 |
| 325,688 |
| 700,150 |
| 660,428 |
| ||||
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Operating costs and expenses: |
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|
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| ||||
Telecommunications service and equipment costs |
| 109,269 |
| 92,839 |
| 225,704 |
| 188,861 |
| ||||
Sales incentives |
| 3,899 |
| 2,050 |
| 5,561 |
| 4,522 |
| ||||
Total cost of revenues |
| 113,168 |
| 94,889 |
| 231,265 |
| 193,383 |
| ||||
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|
|
|
|
| ||||
Sales and marketing |
| 98,161 |
| 93,566 |
| 201,181 |
| 198,500 |
| ||||
Operations and customer support |
| 59,071 |
| 59,434 |
| 134,376 |
| 120,908 |
| ||||
General and administrative |
| 24,421 |
| 26,630 |
| 54,320 |
| 55,437 |
| ||||
Acquisition-related amortization |
| 6,695 |
| 3,236 |
| 14,534 |
| 6,840 |
| ||||
Facility exit costs (1) |
| (1,510 | ) | 80 |
| 28,722 |
| 707 |
| ||||
Total operating costs and expenses |
| 300,006 |
| 277,835 |
| 664,398 |
| 575,775 |
| ||||
|
|
|
|
|
|
|
|
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| ||||
Income from operations |
| 48,581 |
| 47,853 |
| 35,752 |
| 84,653 |
| ||||
Gain on investments in other companies, net |
| — |
| 3,352 |
| — |
| 2,437 |
| ||||
Net losses of equity affiliate |
| — |
| (2,085 | ) | — |
| (2,342 | ) | ||||
Interest income and other, net |
| 1,711 |
| 2,936 |
| 2,746 |
| 5,811 |
| ||||
Income before income taxes |
| 50,292 |
| 52,056 |
| 38,498 |
| 90,559 |
| ||||
Provision for income taxes (2) |
| 630 |
| 8,208 |
| 630 |
| 13,364 |
| ||||
Net income |
| $ | 49,662 |
| $ | 43,848 |
| $ | 37,868 |
| $ | 77,195 |
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| ||||
Basic net income per share |
| $ | 0.32 |
| $ | 0.32 |
| $ | 0.24 |
| $ | 0.54 |
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Diluted net income per share |
| $ | 0.31 |
| $ | 0.31 |
| $ | 0.24 |
| $ | 0.53 |
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Basic weighted average common shares outstanding |
| 156,483 |
| 138,303 |
| 157,403 |
| 142,423 |
| ||||
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Diluted weighted average common shares outstanding |
| 159,680 |
| 140,867 |
| 160,718 |
| 145,134 |
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Other Financial Data |
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Net Earnings Before Facility Exit Costs (a non-GAAP measure) (3): |
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| ||||
Net income |
| $ | 49,662 |
| $ | 43,848 |
| $ | 37,868 |
| $ | 77,195 |
|
Facility exit costs (1) |
| (1,510 | ) | 80 |
| 28,722 |
| 707 |
| ||||
Net earnings before facility exit costs (3) |
| $ | 48,152 |
| $ | 43,928 |
| $ | 66,590 |
| $ | 77,902 |
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| ||||
Diluted earnings per share before facility exit costs (3) |
| $ | 0.30 |
| $ | 0.31 |
| $ | 0.41 |
| $ | 0.54 |
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Earnings Before Interest, Income Taxes, Depreciation and Amortization, Net Losses of Equity Affiliate, Gain on Investments in Other Companies, Net, and Facility Exit Costs (Adjusted EBITDA, a non-GAAP measure) (3): |
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Reconciliation of net income to Adjusted EBITDA (3): |
|
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| ||||
Net income |
| $ | 49,662 |
| $ | 43,848 |
| $ | 37,868 |
| $ | 77,195 |
|
Provision for income taxes (2) |
| 630 |
| 8,208 |
| 630 |
| 13,364 |
| ||||
Depreciation and amortization |
| 19,626 |
| 12,175 |
| 44,900 |
| 25,510 |
| ||||
Gain on investments in other companies, net |
| — |
| (3,352 | ) | — |
| (2,437 | ) | ||||
Net losses of equity affiliate |
| — |
| 2,085 |
| — |
| 2,342 |
| ||||
Interest income and other, net |
| (1,711 | ) | (2,936 | ) | (2,746 | ) | (5,811 | ) | ||||
Facility exit costs (1) |
| (1,510 | ) | 80 |
| 28,722 |
| 707 |
| ||||
Adjusted EBITDA (3) |
| $ | 66,697 |
| $ | 60,108 |
| $ | 109,374 |
| $ | 110,870 |
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Depreciation and amortization: |
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Depreciation - cost of revenues |
| $ | 6,877 |
| $ | 4,663 |
| $ | 14,571 |
| $ | 9,838 |
|
Depreciation - other |
| 6,054 |
| 4,276 |
| 15,795 |
| 8,832 |
| ||||
Acquisition-related amortization |
| 6,695 |
| 3,236 |
| 14,534 |
| 6,840 |
| ||||
Depreciation and amortization |
| $ | 19,626 |
| $ | 12,175 |
| $ | 44,900 |
| $ | 25,510 |
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Gross Margins Before Sales Incentives (a non-GAAP measure) (3): |
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Total revenues |
| $ | 348,587 |
| $ | 325,688 |
| $ | 700,150 |
| $ | 660,428 |
|
|
|
|
|
|
|
|
|
|
| ||||
Total cost of revenues |
| 113,168 |
| 94,889 |
| 231,265 |
| 193,383 |
| ||||
Sales incentives |
| (3,899 | ) | (2,050 | ) | (5,561 | ) | (4,522 | ) | ||||
Telecommunications service and equipment costs |
| 109,269 |
| 92,839 |
| 225,704 |
| 188,861 |
| ||||
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Gross margins before sales incentives (3) |
| $ | 239,318 |
| $ | 232,849 |
| $ | 474,446 |
| $ | 471,567 |
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Gross margins before sales incentives as a percentage of total revenues |
| 69 | % | 71 | % | 68 | % | 71 | % | ||||
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Free Cash Flow (a non-GAAP measure) (3): |
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Reconciliation of income from operations to free cash flow (3): |
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Income from operations |
| $ | 48,581 |
| $ | 47,853 |
| $ | 35,752 |
| $ | 84,653 |
|
Facility exit costs (1) |
| (1,510 | ) | 80 |
| 28,722 |
| 707 |
| ||||
Depreciation and amortization |
| 19,626 |
| 12,175 |
| 44,900 |
| 25,510 |
| ||||
Purchases of property and equipment |
| (8,182 | ) | (4,691 | ) | (12,344 | ) | (16,522 | ) | ||||
Purchases of subscriber bases |
| (427 | ) | (125 | ) | (1,708 | ) | (4,450 | ) | ||||
Free cash flow (3) |
| $ | 58,088 |
| $ | 55,292 |
| $ | 95,322 |
| $ | 89,898 |
|
Other Data
|
| June 30, |
| December 31, |
| March 31, |
| June 30, |
| ||||
|
| 2004 |
| 2004 |
| 2005 |
| 2005 |
| ||||
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Key Operating Data: |
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| ||||
Narrowband subscribers |
| 3,976,000 |
| 3,880,000 |
| 3,776,000 |
| 3,753,000 |
| ||||
Broadband subscribers |
| 1,206,000 |
| 1,364,000 |
| 1,458,000 |
| 1,495,000 |
| ||||
Web hosting accounts |
| 153,000 |
| 144,000 |
| 140,000 |
| 136,000 |
| ||||
Total subscriber count at end of period |
| 5,335,000 |
| 5,388,000 |
| 5,374,000 |
| 5,384,000 |
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| ||||
Number of employees at end of period (4) |
| 1,990 |
| 2,067 |
| 2,003 |
| 1,965 |
| ||||
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| ||||
|
| June 30, |
| December 31, |
| March 31, |
| June 30, |
| ||||
|
| 2004 |
| 2004 |
| 2005 |
| 2005 |
| ||||
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| (in thousands) |
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Balance Sheet Data: |
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| ||||
Cash and marketable securities |
| $ | 510,740 |
| $ | 530,970 |
| $ | 442,555 |
| $ | 433,318 |
|
Stockholders’ equity |
| 540,093 |
| 547,607 |
| 519,478 |
| 500,526 |
| ||||
Reconciliation of Guidance Provided in Non-GAAP Measures (amounts are estimates) (3)
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| Three Months |
| Year |
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| Ending |
| Ending |
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| September 30, |
| December 31, |
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| 2005 |
| 2005 |
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| (in millions) |
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Reconciliation of Net Income to Adjusted EBITDA (3): |
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Net income |
| $26 - $36 |
| $125 - $145 |
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Provision for income taxes |
| 4 |
| 21 |
|
|
|
|
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Depreciation |
| 9 |
| 38 |
|
|
|
|
|
Acquisition-related amortization |
| 3 |
| 13 |
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|
|
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Gain on investments in other companies, net |
| — |
| (2) |
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Net losses of equity affiliate |
| 5 - 10 |
| 10 - 20 |
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Interest income and other, net |
| (2) |
| (10) |
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|
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Adjusted EBITDA (3) |
| $50 - $55 |
| $205 - $215 |
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Footnotes
(1) During the quarter ended March 31, 2004, EarthLink executed a plan to restructure and streamline its contact center operations. In connection with the plan, EarthLink closed contact center operations in Harrisburg, Pennsylvania; Roseville, California; San Jose, California; and Pasadena, California and reduced its contact center operations in Atlanta, Georgia. Approximately 1,140 employees were directly impacted, primarily customer support personnel. As a result of the plan, EarthLink recorded facility exit costs of $30.2 million during the quarter ended March 31, 2004.
EarthLink evaluates and adjusts its estimates for facility exit costs as events occur. Such changes are recorded as facility exit costs. The components of facility exit costs for the periods indicated are as follows:
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| Three Months Ended |
| Six Months Ended |
| ||||||||
|
| June 30, 2004 |
| June 30, 2005 |
| June 30, 2004 |
| June 30, 2005 |
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| (in thousands) |
| ||||||||||
Severance and personnel related costs |
| $ | 87 |
| $ | — |
| $ | 10,667 |
| $ | — |
|
Real estate and telecommunications costs |
| (1,405 | ) | 80 |
| 9,887 |
| 707 |
| ||||
Abandoned and disposed assets |
| (192 | ) | — |
| 8,168 |
| — |
| ||||
Total facility exit costs |
| $ | (1,510 | ) | $ | 80 |
| $ | 28,722 |
| $ | 707 |
|
(2) The provision for income taxes during the three and six months ended June 30, 2005 consisted of $1.3 million and $2.7 million state income and federal and state alternative minimum tax (“AMT”) amounts due, respectively, and the AMT was payable primarily due to the net operating loss carryforward limitations associated with the AMT calculation. The provision for income taxes during the three and six months ended June 30, 2005 also included a non-cash, deferred tax provision of $6.9 million and $10.7 million, respectively, associated with the utilization of net operating loss carryforwards which were acquired in connection with the acquisitions of OneMain.com, Inc., PeoplePC Inc. and Cidco Incorporated.
EarthLink continues to maintain a valuation allowance against its unrealized deferred tax assets, and EarthLink may recognize deferred tax assets in future periods when they are estimated to be realizable. To the extent EarthLink reports income in future periods, EarthLink intends to use its net operating loss carryforwards to the extent available to offset taxable income and reduce cash outflows for income taxes.
(3) Net earnings before facility exit costs, including the related diluted per share amounts, earnings before interest income and expense, income taxes, depreciation and amortization (EBITDA), and net losses of equity affiliate, gain on investments in other companies, net, and facility exit costs (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 costs, investors should use them to analyze and compare companies on the basis of current period operating performance.
Gross margins before sales incentives is also a non-GAAP measure and is not determined in accordance with U.S. generally accepted accounting principles. EarthLink utilizes and has presented gross margins before sales incentives to allow investors to analyze margins on direct telecommunications service and equipment costs incurred to generate revenues. Gross margins before sales incentives 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 and may differ materially from comparable information provided by other companies.
(4) Represents full-time equivalents.
