Exhibit 99.1
Media
Michele Sadwick
404-748-7255
404-769-8421 (mobile)
sadwick@corp.earthlink.net
Investors
Louis Alterman
404-748-7650
678-472-3252 (mobile)
altermanlo@corp.earthlink.net
EARTHLINK ANNOUNCES THIRD QUARTER 2008 RESULTS
Increases 2008 Guidance and Provides Preliminary 2009 Guidance
ATLANTA, October 28, 2008– EarthLink, Inc. (NASDAQ: ELNK) today announced financial results for its third quarter ended September 30, 2008. Highlights for the quarter include:
· Income from continuing operations of $55.4 million, or $0.49 per share
· Net income of $54.7 million, or $0.49 per share
· Adjusted EBITDA (a non-GAAP measure) of $74.0 million
· Free cash flow (a non-GAAP measure) of $71.6 million
· Increased full year Adjusted EBITDA (a non-GAAP measure) guidance to $290 million - $300 million
“We are pleased to report that EarthLink performed at or above our expectations in most key business drivers during the third quarter. These results reflect our continuous effort to improve our operating processes, our continued increased focus on our more tenured customers, and our ongoing attention to keeping cost structure aligned with revenue,” said EarthLink’s chairman and chief executive officer Rolla P. Huff. “As a result of our business performance through the first nine months of this year, we are raising our full year Adjusted EBITDA (a non-GAAP measure) guidance.”
“We are very cognizant of the current volatility in the financial markets and the impact that is increasingly having on the U.S. economic environment. While it’s important to note that we are not currently experiencing a noticeable positive or negative
impact on our Internet access business metrics, we recognize it may be early in the cycle and that could change. As always, we will continue to closely monitor these metrics for anything that would alter our outlook for 2009.”
Financial and Operating Results
Revenue
Consistent with management’s expectations and given the company’s focus on retaining its tenured Internet access subscribers, total company revenues were $230.8 million, down 22.5 percent compared to the third quarter 2007. The company’s customer base increasingly consists of proportionally more tenured customers, resulting in lower customer support costs and lower total customer churn. As EarthLink’s business strategy has evolved, these cost structure reductions have offset revenue declines and contributed to significantly better operating margins and free cash flow (a non-GAAP measure, see definition in “Non-GAAP Measures” below), as noted below.
Profitability and Other Financial Measures
Reflecting the increasing tenure of the company’s customer base and the reduction in the complexity of its business, EarthLink has experienced lower back office and billing costs, lower bad debt and higher average revenue per subscriber as compared to year-ago levels. EarthLink’s sales and marketing expenses were $22.2 million in the third quarter, down from $71.6 million in the third quarter of 2007 as the company’s spending has become more focused on passive customer acquisition and the retention of its more tenured customers. Operations and customer support expense decreased to $34.0 million in the third quarter of 2008, down 37.6 percent compared to the third quarter of 2007. EarthLink also reported $23.3 million in general and administrative expenses, which represented an 18.6 percent decline over the prior year third quarter.
The company reported $55.4 million, or $0.49 per share, in income from continuing operations in the third quarter of 2008, compared to a loss of $(48.1) million, or $(0.39) per share, in the third quarter of 2007. The prior year quarter included $41.9 million in equity losses related to the company’s former Helio joint venture and $34.2
million of facility exit and restructuring costs related to the company’s 2007 restructuring plan.
EarthLink generated Adjusted EBITDA (a non-GAAP measure, see definition in “Non-GAAP Measures” below) of $74.0 million for the third quarter of 2008, compared to $46.8 million in the third quarter of 2007. This increase was the result of the significant improvement in cost structure and income from continuing operations noted above.
Net income was $54.7 million, or $0.49 per share, for the third quarter of 2008, compared to a net loss of $(79.4) million, or $(0.65) per share, for the third quarter of 2007. The company’s third quarter 2008 results include a loss of ($0.7) million from discontinued operations for the municipal Wi-Fi assets, compared to a loss of ($31.3) million during the third quarter of 2007.
Balance Sheet and Cash Flow
Free cash flow was $71.6 million during the third quarter of 2008 compared to $27.7 million during the third quarter of 2007. This improvement reflects the significant increase in Adjusted EBITDA in the third quarter 2008, coupled with a $16.7 million reduction in capital expenditures compared to the prior year quarter and purchases of subscriber bases in the quarter.
EarthLink ended the third quarter with $485.0 million in cash and marketable securities, an increase of $43.4 million from June 30, 2008.
Non-GAAP Measures
Adjusted EBITDA is defined as income (loss) from continuing operations before interest income (expense) and other, net, income taxes, depreciation and amortization, stock-based compensation expense under SFAS No. 123(R), net losses of equity affiliate, gain (loss) on investments in other companies, net, and facility exit, restructuring and other costs.
Free cash flow is defined as income from continuing operations before interest income (expense) and other, net, income taxes, facility exit, restructuring and other costs, stock-based compensation expense under SFAS No. 123(R), net losses of equity affiliate,
gain (loss) on investments in other companies, net, and depreciation and amortization, less cash used for purchases of property and equipment and purchases of subscriber bases.
Adjusted EBITDA and free cash flow are non-GAAP financial performance measures. They should not be considered in isolation or as an alternative to measures determined in accordance with U.S. generally accepted accounting principles. Please refer to the Consolidated Financial Highlights for a reconciliation of these non-GAAP financial performance measures to the most comparable measures reported in accordance with U.S. generally accepted accounting principles and Footnote 3 of the Consolidated Financial Highlights for a discussion of the presentation, comparability and use of such financial performance measures.
Business Outlook
These statements are forward-looking, and actual results may differ materially. See comments under “Cautionary Information Regarding Forward-Looking Statements” below. EarthLink undertakes no obligation to update these statements.
For the full year 2008, management is increasing its previously issued guidance. During the first nine months of 2008, EarthLink experienced better than expected passive subscriber additions and better than expected customer churn. Cost structure improvements also surpassed internal expectations through the third quarter. As a result, management now expects full year 2008 Adjusted EBITDA of $290 million to $300 million, free cash flow of $270 million to $290 million, and income from continuing operations of $200 million to $210 million.
Management is also announcing preliminary full year 2009 guidance. The company expects full year 2009 Adjusted EBITDA of $210 million to $225 million, free cash flow of $180 million to $205 million, and income from continuing operations of $135 million to $155 million.
Explained Huff, “Our focus for 2009 will be to continue to keep our cost structure aligned with our revenue profile. Our 2009 guidance reflects our intention to maintain EBITDA as a percent of revenue that is in line with 2008 ratios. We expect total subscriber base churn to continue to attenuate and remain within historical tenure cohort
bands. Our guidance acknowledges the potential pressure on 2009 ARPU based on the current economic climate, particularly in our business services group which is primarily focused on small and mid-sized business customers.”
Conference Call for Analysts and Investors
Investors in the U.S. and Canada interested in participating in the conference call on October 28, 2008 at 8:30 a.m. Eastern Daylight Time (EDT) may dial 1-800-706-0730 and reference the EarthLink call. Other international investors may dial 1-706-634-5173 and also reference the EarthLink call. EarthLink recommends dialing into the call approximately 10 minutes prior to the scheduled start time.
A replay will be available beginning at 11:30 a.m. EDT on October 28, 2008 through midnight on November 4, 2008 by dialing 1-800-642-1687. International callers should dial 1-706-645-9291. The replay confirmation code is 67249445.
The Webcast of this call will be archived on EarthLink’s site at: http://ir.earthlink.net/events.cfm
About EarthLink
“EarthLink. We revolve around you™.” A leading Internet service provider, Atlanta-based EarthLink has earned an award-winning reputation for outstanding customer service and its suite of online products and services. 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, voice, web hosting or “EarthLink Extras” like home networking or security, EarthLink connects people to the power and possibilities of the Internet. Learn more about EarthLink by calling (800) EARTHLINK or visiting 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. 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 changes to our business strategy will reduce our revenues; (2) that the continued decline of our consumer access services revenues could adversely affect our profitability; (3) that prices for certain of our consumer access services have been decreasing, which could adversely affect our revenues and profitability; (4) that adverse economic conditions may harm our business, particularly our business services segment; (5) that as a result of our continuing review of our business, we may have to undertake further restructuring plans that would require additional charges including incurring facility exit and restructuring charges; (6) that we face significant competition which could reduce our market share and reduce our profitability; (7) that we may be unsuccessful in making and integrating acquisitions and investments into our business, which could result in operating difficulties, losses and other adverse consequences; (8) that we may not be able to successfully manage the costs associated with delivering our broadband services, which could adversely affect our results of operations; (9) that companies may not provide access to us on a wholesale basis or on reasonable terms or prices, which could cause our operating results to suffer; (10) that if we do not continue to innovate and provide products and services that are useful to subscribers, we may not remain competitive, and our revenues and operating results could suffer; (11) that our commercial and alliance arrangements may be terminated or may not be as beneficial as anticipated, which could adversely affect our ability to retain or increase our subscriber base; (12) that our business may suffer if third parties used for technical and customer support and certain billing services are unable to provide these services, cannot expand to meet our needs or terminate their relationships with us; (13) that service interruptions or impediments could harm our business; (14) that government regulations could adversely affect our business or force us to change our business practices; (15) that we may not be able to protect our proprietary technologies; (16) 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; (17) that we could face substantial liabilities if we are unable to successfully defend against legal actions; (18) that our business depends on the continued development of effective business support systems, processes and personnel; (19) that we may be unable to hire and retain sufficient qualified personnel, and the loss of any of our key executive officers could adversely affect us; (20) that our VoIP business exposes us to certain risks that could cause us to lose customers, expose us to significant liability or otherwise harm our business; (21) that the use of our net operating losses and certain other tax attributes could be limited in the future; (22) that our stock price has been volatile historically and may continue to be volatile; (23) that our indebtedness could adversely affect our financial health and limit our ability to react to changes in our industry; and (24) 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, 2007.
EARTHLINK, INC.
Unaudited Condensed Consolidated Statements Of Operations
(in thousands, except per share data)
| | Three Months Ended September 30, | | Nine Months Ended September 30, | |
| | 2007 | | 2008 | | 2007 | | 2008 | |
Revenues: | | | | | | | | | |
Access and service | | $ | 265,442 | | $ | 206,693 | | $ | 833,916 | | $ | 661,583 | |
Value-added services | | 32,550 | | 24,138 | | 100,089 | | 77,925 | |
Total revenues | | 297,992 | | 230,831 | | 934,005 | | 739,508 | |
| | | | | | | | | |
Operating costs and expenses: | | | | | | | | | |
Service and equipment costs | | 105,954 | | 86,917 | | 324,344 | | 275,626 | |
Sales incentives | | 3,801 | | 699 | | 13,515 | | 2,029 | |
Total cost of revenues | | 109,755 | | 87,616 | | 337,859 | | 277,655 | |
| | | | | | | | | |
Sales and marketing | | 71,584 | | 22,191 | | 246,653 | | 78,913 | |
Operations and customer support | | 54,561 | | 34,048 | | 174,525 | | 106,914 | |
General and administrative | | 28,652 | | 23,316 | | 101,344 | | 72,010 | |
Amortization of intangible assets | | 3,836 | | 3,153 | | 10,874 | | 11,153 | |
Facility exit, restructuring and other costs (1) | | 34,162 | | 1,078 | | 34,162 | | 4,169 | |
Total operating costs and expenses | | 302,550 | | 171,402 | | 905,417 | | 550,814 | |
| | | | | | | | | |
Income from operations | | (4,558 | ) | 59,429 | | 28,588 | | 188,694 | |
Net losses of equity affiliate | | (41,895 | ) | — | | (111,295 | ) | — | |
Gain (loss) on investments in other companies, net | | (5,810 | ) | 4,352 | | (5,600 | ) | 5,677 | |
Interest income (expense) and other, net | | 4,182 | | (490 | ) | 11,282 | | 366 | |
Income (loss) from continuing operations before income taxes | | (48,081 | ) | 63,291 | | (77,025 | ) | 194,737 | |
Income tax benefit (provision) | | 30 | | (7,924 | ) | (365 | ) | (23,923 | ) |
Income (loss) from continuing operations | | (48,051 | ) | 55,367 | | (77,390 | ) | 170,814 | |
Loss from discontinued operations, net of tax (2) | | (31,330 | ) | (681 | ) | (48,243 | ) | (8,438 | ) |
Net income (loss) | | $ | (79,381 | ) | $ | 54,686 | | $ | (125,633 | ) | $ | 162,376 | |
| | | | | | | | | |
Basic net income (loss) per share | | | | | | | | | |
Continuing operations | | $ | (0.39 | ) | $ | 0.50 | | $ | (0.63 | ) | $ | 1.55 | |
Discontinued operations | | (0.26 | ) | (0.01 | ) | (0.39 | ) | (0.08 | ) |
Basic net income (loss) per share | | $ | (0.65 | ) | $ | 0.50 | | $ | (1.02 | ) | $ | 1.48 | |
Basic weighted average common shares outstanding | | 121,864 | | 110,153 | | 122,772 | | 109,895 | |
| | | | | | | | | |
Diluted net income (loss) per share | | | | | | | | | |
Continuing operations | | $ | (0.39 | ) | $ | 0.49 | | $ | (0.63 | ) | $ | 1.53 | |
Discontinued operations | | (0.26 | ) | (0.01 | ) | (0.39 | ) | (0.08 | ) |
Diluted net income (loss) per share | | $ | (0.65 | ) | $ | 0.49 | | $ | (1.02 | ) | $ | 1.46 | |
Diluted weighted average common shares outstanding | | 121,864 | | 112,039 | | 122,772 | | 111,534 | |
EARTHLINK, INC.
Reconciliation of Income (Loss) from Continuing Operations to Adjusted EBITDA (3)
(in thousands)
| | Three Months Ended September 30, | | Nine Months Ended September 30, | |
| | 2007 | | 2008 | | 2007 | | 2008 | |
| | | | | | | | | |
Income (loss) from continuing operations | | $ | (48,051 | ) | $ | 55,367 | | $ | (77,390 | ) | $ | 170,814 | |
Income tax benefit (provision) | | (30 | ) | 7,924 | | 365 | | 23,923 | |
Depreciation and amortization | | 12,870 | | 8,881 | | 36,985 | | 29,351 | |
Stock-based compensation expense | | 4,303 | | 4,597 | | 15,081 | | 14,319 | |
Net losses of equity affiliate | | 41,895 | | — | | 111,295 | | — | |
Gain (loss) on investments in other companies, net | | 5,810 | | (4,352 | ) | 5,600 | | (5,677 | ) |
Interest income (expense) and other, net | | (4,182 | ) | 490 | | (11,282 | ) | (366 | ) |
Facility exit, restructuring and other costs (1) | | 34,162 | | 1,078 | | 34,162 | | 4,169 | |
Adjusted EBITDA (3) | | $ | 46,777 | | $ | 73,985 | | $ | 114,816 | | $ | 236,533 | |
| | | | | | | | | |
Depreciation - cost of revenues | | $ | 4,164 | | $ | 2,843 | | $ | 13,303 | | $ | 9,422 | |
Depreciation - other | | 4,870 | | 2,885 | | 12,808 | | 8,776 | |
Amortization of intangible assets | | 3,836 | | 3,153 | | 10,874 | | 11,153 | |
Depreciation and amortization | | $ | 12,870 | | $ | 8,881 | | $ | 36,985 | | $ | 29,351 | |
EARTHLINK, INC.
Reconciliation of Income (Loss) From Continuing Operations to Free Cash Flow (3)
(in thousands)
| | Three Months Ended September 30, | | Nine Months Ended September 30, | |
| | 2007 | | 2008 | | 2007 | | 2008 | |
| | | | | | | | | |
Income (loss) from continuing operations | | $ | (48,051 | ) | $ | 55,367 | | $ | (77,390 | ) | $ | 170,814 | |
Income tax benefit (provision) | | (30 | ) | 7,924 | | 365 | | 23,923 | |
Depreciation and amortization | | 12,870 | | 8,881 | | 36,985 | | 29,351 | |
Stock-based compensation expense | | 4,303 | | 4,597 | | 15,081 | | 14,319 | |
Net losses of equity affiliate | | 41,895 | | — | | 111,295 | | — | |
Gain (loss) on investments in other companies, net | | 5,810 | | (4,352 | ) | 5,600 | | (5,677 | ) |
Interest income (expense) and other, net | | (4,182 | ) | 490 | | (11,282 | ) | (366 | ) |
Facility exit, restructuring and other costs (1) | | 34,162 | | 1,078 | | 34,162 | | 4,169 | |
Purchases of property and equipment | | (15,489 | ) | (1,619 | ) | (42,317 | ) | (3,877 | ) |
Purchases of subscriber bases | | (3,552 | ) | (753 | ) | (6,501 | ) | (880 | ) |
Free cash flow (3) | | $ | 27,736 | | $ | 71,613 | | $ | 65,998 | | $ | 231,776 | |
EARTHLINK, INC.
Reconciliation of Guidance Provided in Non-GAAP Measures (3)
(in millions) | | | | |
| | Year | | Year | | | | | |
| | Ending | | Ending | | | | | |
| | December 31, | | December 31, | | | | | |
| | 2008 | | 2009 | | | | | |
Income from continuing operations | | $200 - $210 | | $135 - $155 | | | | | |
Depreciation | | 24 | | 20 | | | | | |
Amortization of intangible assets | | 15 | | 12 | | | | | |
Stock-based compensation expense | | 20 | | 17 | | | | | |
Income tax provision | | 29 | | 25 - 20 | | | | | |
Facility exit, restructuring and other costs (1) | | 9 | | — | | | | | |
Interest income (expense) and other, net | | (7) | | 1 | | | | | |
Adjusted EBITDA (3) | | $290 - $300 | | $210 - $225 | | | | | |
| | | | | | | | | |
| | Year | | Year | | | | | |
| | Ending | | Ending | | | | | |
| | December 31, | | December 31, | | | | | |
| | 2008 | | 2009 | | | | | |
Income from continuing operations | | $200 - $210 | | $135 - $155 | | | | | |
Depreciation | | 24 | | 20 | | | | | |
Amortization of intangible assets | | 15 | | 12 | | | | | |
Stock-based compensation expense | | 20 | | 17 | | | | | |
Income tax provision | | 29 | | 25 - 20 | | | | | |
Facility exit, restructuring and other costs (1) | | 9 | | — | | | | | |
Interest income (expense) and other, net | | (7) | | 1 | | | | | |
Purchases of property and equipment | | (20) - (10) | | (30) - (20) | | | | | |
Free cash flow (3) | | $270 - $290 | | $180 - $205 | | | | | |
EARTHLINK, INC.
Supplemental Financial Data and Key Operating Metrics
| | September 30, | | December 31, | | June 30, | | September 30, | |
| | 2007 | | 2007 | | 2008 | | 2008 | |
| | (in thousands) | |
Balance Sheet Data | | | | | | | | | |
Cash and marketable securities | | $ | 333,849 | | $ | 288,595 | | $ | 441,589 | | $ | 484,967 | |
Long-term debt | | 258,750 | | 258,750 | | 258,750 | | 258,750 | |
Stockholders’ equity | | 324,686 | | 261,473 | | 371,077 | | 411,781 | |
| | | | | | | | | |
Employee Data | | | | | | | | | |
Number of employees at end of period (4) | | 1,405 | | 983 | | 857 | | 789 | |
| | | | | | | | | | | | | |
| | September 30, | | December 31, | | June 30, | | September 30, | |
| | 2007 | | 2007 | | 2008 | | 2008 | |
Subscriber Data (5) | | | | | | | | | |
Consumer services | | | | | | | | | |
Narrowband access subscribers | | 2,856,000 | | 2,624,000 | | 2,130,000 | | 1,920,000 | |
Broadband access subscribers (6) | | 1,081,000 | | 1,059,000 | | 988,000 | | 933,000 | |
Total consumer subscribers | | 3,937,000 | | 3,683,000 | | 3,118,000 | | 2,853,000 | |
| | | | | | | | | |
Business services | | | | | | | | | |
Narrowband access subscribers | | 30,000 | | 27,000 | | 24,000 | | 19,000 | |
Broadband access subscribers | | 69,000 | | 66,000 | | 63,000 | | 61,000 | |
Web hosting accounts | | 103,000 | | 100,000 | | 94,000 | | 91,000 | |
Total business subscribers | | 202,000 | | 193,000 | | 181,000 | | 171,000 | |
| | | | | | | | | |
Total subscribers at end of period | | 4,139,000 | | 3,876,000 | | 3,299,000 | | 3,024,000 | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, | |
| | 2007 | | 2008 | | 2007 | | 2008 | |
Subscriber Activity | | | | | | | | | |
Subscribers at beginning of period | | 4,337,000 | | 3,299,000 | | 5,313,000 | | 3,876,000 | |
Gross organic subscriber additions | | 491,000 | | 137,000 | | 1,628,000 | | 552,000 | |
Acquired subscribers | | 31,000 | | 2,000 | | 65,000 | | 2,000 | |
Adjustment (7) | | — | | (15,000 | ) | (753,000 | ) | (15,000 | ) |
Churn | | (720,000 | ) | (399,000 | ) | (2,114,000 | ) | (1,391,000 | ) |
Subscribers at end of period | | 4,139,000 | | 3,024,000 | | 4,139,000 | | 3,024,000 | |
| | | | | | | | | |
Churn Rate (8) | | 5.7 | % | 4.2 | % | 5.0 | % | 4.5 | % |
| | | | | | | | | |
Consumer Data | | | | | | | | | |
Average subscribers (9) | | 4,022,000 | | 2,980,000 | | 4,485,000 | | 3,256,000 | |
ARPU (10) | | $ | 20.76 | | $ | 21.00 | | $ | 19.59 | | $ | 20.66 | |
Churn rate (8) | | 5.9 | % | 4.3 | % | 5.1 | % | 4.6 | % |
| | | | | | | | | |
Business Data | | | | | | | | | |
Average subscribers (9) | | 204,000 | | 176,000 | | 211,000 | | 183,000 | |
ARPU (10) | | $ | 77.56 | | $ | 81.50 | | $ | 75.58 | | $ | 81.33 | |
Churn rate (8) | | 2.4 | % | 3.2 | % | 2.6 | % | 2.8 | % |
EARTHLINK, INC.
Supplemental Schedule of Segment Information (11)
(in thousands)
| | Three Months Ended September 30, | | Nine Months Ended September 30, | |
| | 2007 | | 2008 | | 2007 | | 2008 | |
Consumer Services | | | | | | | | | |
Revenues | | | | | | | | | |
Access and service | | $ | 218,609 | | $ | 164,306 | | $ | 692,801 | | $ | 529,557 | |
Value-added services | | 31,912 | | 23,493 | | 97,891 | | 75,783 | |
Total revenues | | 250,521 | | 187,799 | | 790,692 | | 605,340 | |
Cost of revenues | | 80,395 | | 62,550 | | 249,024 | | 201,053 | |
Gross margin | | 170,126 | | 125,249 | | 541,668 | | 404,287 | |
Segment operating expenses | | 126,631 | | 49,803 | | 417,914 | | 164,496 | |
Segment income from operations | | $ | 43,495 | | $ | 75,446 | | $ | 123,754 | | $ | 239,791 | |
| | | | | | | | | |
Business Services | | | | | | | | | |
Revenues | | | | | | | | | |
Access and service | | $ | 46,833 | | $ | 42,387 | | $ | 141,115 | | $ | 132,026 | |
Value-added services | | 638 | | 645 | | 2,198 | | 2,142 | |
Total revenues | | 47,471 | | 43,032 | | 143,313 | | 134,168 | |
Cost of revenues | | 29,360 | | 25,066 | | 88,835 | | 76,602 | |
Gross margin | | 18,111 | | 17,966 | | 54,478 | | 57,566 | |
Segment operating expenses | | 12,253 | | 12,481 | | 45,040 | | 39,308 | |
Segment income from operations | | $ | 5,858 | | $ | 5,485 | | $ | 9,438 | | $ | 18,258 | |
| | | | | | | | | |
Consolidated | | | | | | | | | |
Revenues | | | | | | | | | |
Access and service | | $ | 265,442 | | $ | 206,693 | | $ | 833,916 | | $ | 661,583 | |
Value-added services | | 32,550 | | 24,138 | | 100,089 | | 77,925 | |
Total revenues | | 297,992 | | 230,831 | | 934,005 | | 739,508 | |
Cost of revenues | | 109,755 | | 87,616 | | 337,859 | | 277,655 | |
Gross margin | | 188,237 | | 143,215 | | 596,146 | | 461,853 | |
Direct segment operating expenses | | 138,884 | | 62,284 | | 462,954 | | 203,804 | |
Segment income from operations | | 49,353 | | 80,931 | | 133,192 | | 258,049 | |
Stock-based compensation expense | | 4,303 | | 4,597 | | 15,081 | | 14,319 | |
Amortization of intangible assets | | 3,836 | | 3,153 | | 10,874 | | 11,153 | |
Facility exit, restructuring and other costs (1) | | 34,162 | | 1,078 | | 34,162 | | 4,169 | |
Other operating expenses | | 11,610 | | 12,674 | | 44,487 | | 39,714 | |
Income from operations | | $ | (4,558 | ) | $ | 59,429 | | $ | 28,588 | | $ | 188,694 | |
EARTHLINK, INC.
Footnotes to Consolidated Financial Highlights
1. | Facility exit, restructuring and other costs consisted of the following for the periods presented: |
| | Three Months Ended | | Nine Months Ended | |
| | September 30, | | September 30, | |
| | 2007 | | 2008 | | 2007 | | 2008 | |
| | (in thousands) | |
Facility exit and restructuring costs for the 2007 Plan | | $ | 34,162 | | $ | 1,159 | | $ | 34,162 | | $ | 4,421 | |
Facility exit and restructuring costs for Legacy Plans | | — | | (81 | ) | — | | (252 | ) |
| | $ | 34,162 | | $ | 1,078 | | $ | 34,162 | | $ | 4,169 | |
| 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 is consolidating its office facilities in Atlanta, Georgia and Pasadena, California. The 2007 Plan was primarily implemented during the later half of 2007 and is expected to be completed during 2008. As a result of the 2007 Plan, EarthLink recorded $1.2 million and $4.4 million of facility exit and restructuring costs during the three and nine months ended September 30, 2008, respectively. |
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2. | The Company has reflected its municipal wireless broadband results of operations as discontinued operations for all periods presented. |
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| The following is summarized results of operations related to the Company’s discontinued operations for the periods presented: |
| | Three Months Ended | | Nine Months Ended | |
| | September 30, | | September 30, | |
| | 2007 | | 2008 | | 2007 | | 2008 | |
| | (in thousands) | |
Revenues | | $ | 771 | | $ | 18 | | $ | 1,368 | | $ | 1,306 | |
Operating costs and expenses | | (11,443 | ) | (842 | ) | (28,953 | ) | (4,534 | ) |
Impairment and other costs | | (20,658 | ) | (128 | ) | (20,658 | ) | (6,081 | ) |
Income tax benefit | | — | | 271 | | — | | 871 | |
Loss from discontinued operations, net of tax | | $ | (31,330 | ) | $ | (681 | ) | $ | (48,243 | ) | $ | (8,438 | ) |
3. | Adjusted EBITDA is defined as income (loss) from continuing operations before interest income (expense) and other, net, income taxes, depreciation and amortization, stock-based compensation under SFAS No. 123(R), net losses of equity affiliate, gain (loss) on investments in other companies, net, and facility exit, restructuring and other costs. Free cash flow is defined as income (loss) from continuing operations before interest income (expense) and other, net, income taxes, depreciation and amortization, stock-based compensation under SFAS No. 123(R), net losses of equity affiliate, gain (loss) on investments in other companies, net, and facility exit, restructuring and other costs, less cash used for purchases of property and equipment and purchases of subscriber bases. |
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| 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. |
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4. | Represents full-time equivalents. |
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5. | Subscriber counts do not include nonpaying customers. Customers receiving service under promotional programs that include periods of free service at inception are not included in subscriber counts until they become paying customers. |
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6. | Paying customers who subscribe to EarthLink DSL and Home Phone service are counted as both a broadband subscriber and a voice subscriber. |
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7. | In April 2007, EarthLink removed 753,000 EarthLink supported Embarq customers from its broadband subscriber counts due to the expiration of EarthLink’s wholesale contract with Embarq. During the three months ended September 30, 2008, EarthLink removed 15,000 EarthLink supported Sprint customers from its broadband subscriber counts due to the termination of the wholesale arrangement by Sprint. |
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8. | 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. |
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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 quarterly 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. |
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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. |
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11. | EarthLink’s business segments are strategic business units that are managed based upon differences in customers, services and marketing channels. EarthLink’s Consumer Services segment is a provider of integrated communications services and related value-added services to individual customers. These services include dial-up Internet access, high-speed Internet access and voice service, among others. EarthLink’s Business Services segment is a provider of integrated communications services and related value-added services to businesses and communications carriers. These services include managed data networks, dedicated Internet access and web hosting, among others. |
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| EarthLink evaluates performance of its operating segments based on segment income from operations. Segment income from operations includes revenues from external customers, related cost of revenues and operating expenses directly attributable to the segment, which include expenses over which segment managers have direct discretionary control, such as advertising and marketing programs, customer support expenses, site operations expenses, product development expenses, certain technology and facilities expenses, billing operation and provisions for doubtful accounts. Segment income from operations excludes other income and expense items and certain expenses that segment managers do not have discretionary control over. Costs excluded from segment income from operations include various corporate expenses (consisting of certain costs such as corporate management, human resources, finance and legal), amortization of intangible assets, stock- based compensation expense under SFAS No. 123(R) and facility exit and restructuring costs, as they are not evaluated in the measurement of segment performance. |
