Exhibit 99.1
| Investors |
Trey Huffman | |
404-748-6219 | |
huffmanal@elnk.com | |
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| Media |
| Bert Kelly |
| 678-891-0317 |
| bert.kelly@elnk.com |
EARTHLINK REPORTS STRONG FOURTH QUARTER AND FULL YEAR 2015 RESULTS
· Revenue of $260.2 million for the fourth quarter of 2015 and $1,097.3 million for the full year 2015
· Net loss of $(12.3) million, or $(0.12) per share, for the fourth quarter of 2015 and $(43.2) million, or $(0.42) per share, for the full year 2015
· Adjusted EBITDA of $53.9 million for the fourth quarter of 2015 and $242.5 million for the full year 2015
· Net cash provided by operating activities of $41.4 million for the fourth quarter of 2015 and $167.4 million for the full year 2015
· Unlevered Free Cash Flow of $26.8 million for the fourth quarter of 2015 and $155.0 million for the full year 2015
· Ending cash balance of $91.3 million
ATLANTA - Feb. 17, 2016 - EarthLink (EarthLink Holdings Corp., NASDAQ: ELNK), a leading network services provider dedicated to delivering great customer experiences, today announced financial results for its fourth quarter and full year 2015.
“2015 was a year of significant progress for EarthLink,” said EarthLink Chief Executive Officer and President Joseph F. Eazor. “We executed on our business unit strategy and delivered strong financial performance as a result. Going into 2016 we are focusing on activities that pave the way to growth.” Eazor also announced changes to EarthLink’s Board of Directors. “Today we’re also announcing that long-time EarthLink Directors David Koretz and Wayne Wisehart will be retiring from our Board of Directors prior to our annual stockholders meeting in April. We are grateful for their dedication and many contributions to EarthLink since 2008.”
Fourth Quarter 2015 Financial Summary
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Figures in US $ millions, |
| Fourth Quarter |
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except per share |
| 2014 |
| 2015 |
| Change |
| 2015 |
| 2015 |
| Change |
| 2014 |
| 2015 |
| Change |
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Revenues |
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Enterprise/Mid-Market |
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| * | $ | 106.2 |
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| * | $ | 110.0 |
| $ | 106.2 |
| (3.5 | )% |
| * | $ | 445.0 |
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| * |
Small Business |
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| * | 66.5 |
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| * | 72.9 |
| 66.5 |
| (8.8 | )% |
| * | 297.0 |
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| * | ||||
Carrier/Transport |
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| * | 34.3 |
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| * | 34.2 |
| 34.3 |
| 0.3 | % |
| * | 135.9 |
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| * | ||||
Business Services |
| 225.7 |
| 206.9 |
| (8.3 | )% | 217.1 |
| 206.9 |
| (4.7 | )% | 930.9 |
| 877.9 |
| (5.7 | )% | ||||
Consumer Services |
| 58.8 |
| 53.3 |
| (9.4 | )% | 53.8 |
| 53.3 |
| (0.9 | )% | 246.0 |
| 219.3 |
| (10.9 | )% | ||||
Total Revenue |
| 284.5 |
| 260.2 |
| (8.5 | )% | 270.9 |
| 260.2 |
| (3.9 | )% | 1,176.9 |
| 1,097.3 |
| (6.8 | )% | ||||
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Gross Margin |
| 152.8 |
| 138.5 |
| (9.4 | )% | 148.5 |
| 138.5 |
| (6.7 | )% | 619.5 |
| 596.6 |
| (3.7 | )% | ||||
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Operating Expenses |
| 102.0 |
| 88.4 |
| (13.3 | )% | 90.8 |
| 88.4 |
| (2.6 | )% | 419.0 |
| 368.8 |
| (12.0 | )% | ||||
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Net Loss |
| (22.5 | ) | (12.3 | ) | (45.3 | )% | (10.5 | ) | (12.3 | ) | 17.1 | % | (72.8 | ) | (43.2 | ) | (40.7 | )% | ||||
Net Loss per share |
| (0.22 | ) | (0.12 | ) | (45.5 | )% | (0.10 | ) | (0.12 | ) | 20.0 | % | (0.71 | ) | (0.42 | ) | (40.8 | )% | ||||
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Adjusted EBITDA (1) |
| 53.2 |
| 53.9 |
| 1.3 | % | 61.4 |
| 53.9 |
| (12.2 | )% | 213.0 |
| 242.5 |
| 13.8 | % | ||||
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Capital Expenditures |
| 28.6 |
| 27.1 |
| (5.2 | )% | 22.0 |
| 27.1 |
| 23.2 | % | 102.9 |
| 87.5 |
| (15.0 | )% | ||||
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Cash |
| 134.1 |
| 91.3 |
| (31.9 | )% | 87.6 |
| 91.3 |
| 4.2 | % | 134.1 |
| 91.3 |
| (31.9 | )% | ||||
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Gross Debt (2) |
| 600.0 |
| 508.9 |
| (15.2 | )% | 513.9 |
| 508.9 |
| (1.0 | )% | 600.0 |
| 508.9 |
| (15.2 | )% | ||||
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Net Cash Provided by Operating Activities |
| 38.7 |
| 41.4 |
| 7.0 | % | 74.0 |
| 41.4 |
| (44.1 | )% | 140.0 |
| 167.4 |
| 19.6 | % | ||||
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Unlevered Free Cash Flow (1) |
| 24.6 |
| 26.8 |
| 8.9 | % | 39.4 |
| 26.8 |
| (32.0 | )% | 110.2 |
| 155.0 |
| 40.7 | % | ||||
(1) Adjusted EBITDA and Unlevered Free Cash Flow are non-GAAP measures, see definitions in “Non-GAAP Measures” below.
(2) Gross debt excludes unamortized debt issuance costs, unamortized debt discount and capital leases.
* During the third quarter of 2015, the Company implemented certain organizational, operational and reporting changes that resulted in the disaggregation of its Business Services segment into three separate reportable segments: enterprise/mid-market, small business and carrier/transport. Management determined it is impracticable to restate financial information prior to 2015 to conform to the new segment structure. See Consolidated Financial Highlights and Footnote 7 to the Consolidated Financial Highlights for more detail.
Revenue and Cost of Revenue
· Total revenue was $260.2 million during the fourth quarter of 2015, a decline of 8.5% from the fourth quarter of 2014. Total revenue was $1,097.3 million during the full year 2015, a decline of 6.8% from the full year 2014.
· Total Business Services revenue was $206.9 million during the fourth quarter of 2015, a decline of 8.3% from the fourth quarter of 2014. Total Business Services revenue was $877.9 million during the full year 2015, a decline of 5.7% from the full year 2014.
· Total Business Services and company revenue during the fourth quarter of 2015 included $0.9 million of favorable settlements and adjustments compared to $3.9 million during the fourth quarter of 2014 and $1.2 million during the third quarter of 2015. Total company revenue during the full year 2015 included $5.9 million of favorable settlements and adjustments ($5.2 million in Business Services and $0.7 million in Consumer Services) compared to $10.7 million during the full year 2014 (all within Business Services).
· Total company cost of revenue during the fourth quarter of 2015 included $2.2 million of favorable settlements and adjustments compared to $4.4 million of favorable settlements during the fourth quarter of 2014 and $3.9 million during the third quarter of 2015. Total company cost of revenue during the full year 2015 included $12.3 million of favorable settlements and adjustments ($13.0 million favorable in Business Services, offset by $0.7 million unfavorable in Consumer Services) compared to $14.8 million during the full year 2014 (all within Business Services).
Net Loss and Adjusted EBITDA
· Net loss was $(12.3) million during the fourth quarter of 2015. This compares to a net loss of $(22.5) million in the fourth quarter of 2014 and $(10.5) million in the third quarter of 2015. Net loss was $(43.2) million for the full year 2015 compared to a net loss of $(72.8) million for the full year 2014.
· Adjusted EBITDA (a non-GAAP measure, see definition in “Non-GAAP Measures” below) was $53.9 million in the fourth quarter of 2015, a 1.3% increase from the fourth quarter of 2014 and a 12.2% decrease from the third quarter of 2015. Adjusted EBITDA was $242.5 million for the full year 2015 compared to $213.0 million for the full year 2014.
Balance Sheet and Cash Flow
· Net cash provided by operating activities was $41.4 million during the fourth quarter of 2015. This compared to net cash provided by operating activities of $38.7 million in the fourth quarter of 2014 and $74.0 million in the third quarter of 2015. Net cash provided by operating activities was $167.4 million for the full year 2015 compared to $140.0 million for the full year 2014.
· Unlevered Free Cash Flow (a non-GAAP measure, see definition in “Non-GAAP Measures” below) was $26.8 million during the fourth quarter of 2015. This compared to Unlevered Free Cash Flow of $24.6 million in the fourth quarter of 2014 and $39.4 million in the third quarter of
2015. Unlevered Free Cash Flow was $155.0 million for the full year 2015 compared to $110.2 million for the full year 2014.
· EarthLink ended the fourth quarter of 2015 with $91.3 million in cash. During the fourth quarter of 2015, EarthLink made net repayments on gross outstanding debt of $5.0 million and dividend payments of $5.2 million. During the full year 2015, EarthLink made net repayments on gross outstanding debt of $91.1 million and dividend payments of $26.4 million.
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 long-lived assets, restructuring, acquisition and integration-related costs, loss on extinguishment of debt, and gain (loss) from discontinued operations, net of tax. 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 long-lived assets, restructuring, acquisition and integration-related costs, loss on extinguishment of debt, and gain (loss) from discontinued operations, net of tax, 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 6 of the Consolidated Financial Highlights for a discussion of the presentation, comparability and use of such financial measures.
Conference Call for Analysts and Investors
EarthLink’s Fourth Quarter 2015 Conference Call will be held on Thursday, February 18, 2016, at 8:30 a.m. ET and hosted by EarthLink’s Chief Executive Officer and President Joseph F. Eazor and Executive Vice President and Chief Financial Officer Louis M. Alterman.
The dial-in number is: (866) 887-3882.
Participants should reference the conference ID number 27956447 or “EarthLink Fourth Quarter 2015 Earnings Call” and dial in 10 minutes prior to the 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
A webcast replay will be available from 11:30 a.m. ET on February 18, 2016 through midnight on March 17, 2016. Dial toll-free: (855) 859-2056. The replay confirmation code is 27956447. The Webcast will be archived on the company’s website at: http://ir.earthlink.net/events.cfm.
About EarthLink
EarthLink (EarthLink Holdings Corp., NASDAQ: ELNK) is a leading network services provider dedicated to delivering great customer experiences in a cloud connected world. We help thousands of multi-location businesses securely establish critical connections in the cloud. Our solutions for cloud and hybrid networking, security and compliance, and unified communications provide the cost-effective performance and agility to serve customers anytime, anywhere, via any channel, or any device. We operate a nationwide network spanning 29,000+ fiber route miles, with 90 metro fiber rings and secure data centers that provide ubiquitous data and voice IP coverage. To learn why thousands of specialty retailers, restaurants, franchisors, financial institutions, healthcare providers, professional service firms, local governments, residential consumers and other carriers choose to connect with us, visit us at www.earthlink.com, @earthlink, on LinkedIn and Google+.
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, without limitation: (1) that we may not be able to execute our strategy to successfully transition to a leading managed network, security and cloud services provider, which could adversely affect our results of operations and cash flows; (2) that we may not be able to increase revenues from our growth products and services to offset declining revenues from our traditional products and services, which could adversely affect our results of operations and cash flows; (3) 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; (4) that failure to achieve operating efficiencies and otherwise reduce costs would adversely affect our results of operations and cash flows; (5) that we may have to undertake further restructuring plans that would require additional charges; (6) that we may be unable to successfully divest non-strategic products, which could adversely affect our results of operations; (7) that acquisitions we complete could result in operating difficulties, dilution, increased liabilities, diversion of management attention and other adverse consequences, which could adversely affect our results of operations; (8) that we face significant competition in our business markets, which could adversely affect our results of operations; (9) that failure to retain existing customers could adversely affect our results of operations and cash flows; (10) that decisions by legislative or regulatory authorities, including 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; (11) that if we are unable to interconnect with AT&T, Verizon and other incumbent carriers on acceptable terms, our ability to offer competitively priced local telephone services will be adversely affected; (12) that the continued decline in switched access and reciprocal compensation revenue will adversely affect our results of operations; (13) that failure to obtain and maintain necessary permits and rights-of-way could interfere with our network infrastructure and operations; (14) that if our larger carrier customers terminate the service they receive from us, our wholesale revenue and results of operations could be adversely affected; (15) that we obtain a majority of our network equipment and software from a limited number of third-party suppliers; (16) that our commercial and alliance arrangements may not be renewed or may not generate expected benefits, which could adversely affect our results of operations; (17) that our consumer business is dependent on the availability of third-party network service providers; (18) that we face significant competition in the Internet access industry that could reduce our profitability; (19) that the continued decline of our consumer access subscribers will adversely affect our results of operations; (20) that lack of regulation governing wholesale Internet service providers could adversely affect our operations; (21) that cyber security breaches could harm our business; (22) that privacy concerns relating to our business could damage our reputation and deter current and potential users from using our services; (23) that interruption or failure of our network,
information systems or other technologies could impair our ability to provide our services, which could damage our reputation and harm our operating results; (24) that our business depends on effective business support systems and processes; (25) that if we, or other industry participants, are unable to successfully defend against disputes or legal actions, we could face substantial liabilities or suffer harm to our financial and operational prospects; (26) 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; (27) that we may not be able to protect our intellectual property; (28) 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; (29) that unfavorable general economic conditions could harm our business; (30) that government regulations could adversely affect our business or force us to change our business practices; (31) that our business may suffer if third parties are unable to provide services or terminate their relationships with us; (32) that we may be required to recognize impairment charges on our goodwill and other intangible assets, which would adversely affect our results of operations and financial position; (33) that we may have exposure to greater than anticipated tax liabilities and we may be limited in the use of our net operating losses and certain other tax attributes in the future; (34) that our indebtedness could adversely affect our financial health and limit our ability to react to changes in our business and industry; (35) that we may require substantial capital to support business growth, and this capital may not be available to us on acceptable terms, or at all; (36) that our debt agreements include restrictive covenants, and failure to comply with these covenants could trigger acceleration of payment of outstanding indebtedness; (37) that we may reduce, or cease payment of, quarterly cash dividends; (38) that our stock price may be volatile; (39) that provisions of our certificate of incorporation, bylaws and other elements of our capital structure could limit our share price and delay a change of control of the company; and (40) that our bylaws designate the Court of Chancery of the State of Delaware as the sole and exclusive forum for certain types of actions and proceedings that may be initiated by our stockholders, which could limit our stockholders’ flexibility in obtaining a judicial forum for disputes with us or our directors, officers or employees. 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.
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EARTHLINK HOLDINGS CORP.
Unaudited Condensed Consolidated Statements Of Operations
(in thousands, except per share data)
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| Three Months Ended |
| Twelve Months Ended |
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| December 31, |
| December 31, |
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| 2014 |
| 2015 |
| 2014 |
| 2015 |
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Revenues |
| $ | 284,472 |
| $ | 260,237 |
| $ | 1,176,895 |
| $ | 1,097,252 |
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Operating costs and expenses: |
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Cost of revenues (exclusive of depreciation and amortization shown separately below) |
| 131,677 |
| 121,727 |
| 557,436 |
| 500,628 |
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Selling, general and administrative (exclusive of depreciation and amortization shown separately below) |
| 101,989 |
| 88,381 |
| 419,019 |
| 368,763 |
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Depreciation and amortization (1) |
| 47,686 |
| 46,826 |
| 186,872 |
| 188,315 |
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Impairment of long-lived assets (2) |
| 2,974 |
| — |
| 14,334 |
| — |
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Restructuring, acquisition and integration-related costs (3) |
| 9,095 |
| 4,484 |
| 20,088 |
| 19,320 |
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Total operating costs and expenses |
| 293,421 |
| 261,418 |
| 1,197,749 |
| 1,077,026 |
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Income (loss) from operations |
| (8,949 | ) | (1,181 | ) | (20,854 | ) | 20,226 |
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Interest expense and other, net |
| (14,253 | ) | (11,192 | ) | (56,261 | ) | (50,972 | ) | ||||
Loss on extinguishment of debt (4) |
| — |
| — |
| — |
| (9,734 | ) | ||||
Loss from continuing operations before income taxes |
| (23,202 | ) | (12,373 | ) | (77,115 | ) | (40,480 | ) | ||||
Income tax (provision) benefit |
| 1,152 |
| 91 |
| 4,744 |
| (2,730 | ) | ||||
Loss from continuing operations |
| (22,050 | ) | (12,282 | ) | (72,371 | ) | (43,210 | ) | ||||
Loss from discontinued operations, net of tax (5) |
| (442 | ) | — |
| (381 | ) | — |
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Net loss |
| $ | (22,492 | ) | $ | (12,282 | ) | $ | (72,752 | ) | $ | (43,210 | ) |
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Basic and diluted net loss per share |
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Continuing operations |
| $ | (0.22 | ) | $ | (0.12 | ) | $ | (0.71 | ) | $ | (0.42 | ) |
Discontinued operations |
| — |
| — |
| — |
| — |
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Basic and diluted net loss per share |
| $ | (0.22 | ) | $ | (0.12 | ) | $ | (0.71 | ) | $ | (0.42 | ) |
Basic and diluted weighted average common shares outstanding |
| 102,315 |
| 103,862 |
| 102,313 |
| 103,388 |
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Dividends declared per share |
| $ | 0.05 |
| $ | 0.05 |
| $ | 0.20 |
| $ | 0.20 |
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EARTHLINK HOLDINGS CORP.
Unaudited Condensed Consolidated Balance Sheets
(in thousands, except per share data)
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| December 31, |
| December 31, |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
| $ | 134,133 |
| $ | 91,296 |
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Accounts receivable, net of allowance of $6,211 and $3,537 as of December 31, 2014 and 2015, respectively |
| 92,616 |
| 74,724 |
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Prepaid expenses |
| 13,761 |
| 14,187 |
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Other current assets |
| 13,671 |
| 9,724 |
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Total current assets |
| 254,181 |
| 189,931 |
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Property and equipment, net |
| 404,713 |
| 372,504 |
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Goodwill |
| 137,751 |
| 137,751 |
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Other intangible assets, net |
| 91,490 |
| 25,325 |
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Other long-term assets |
| 11,061 |
| 9,141 |
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Total assets |
| $ | 899,196 |
| $ | 734,652 |
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LIABILITIES AND STOCKHOLDERS’ EQUITY |
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Current liabilities: |
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Accounts payable |
| $ | 23,726 |
| $ | 18,442 |
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Accrued payroll and related expenses |
| 50,197 |
| 50,532 |
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Other accrued liabilities |
| 85,181 |
| 64,305 |
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Deferred revenue |
| 43,940 |
| 40,229 |
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Current portion of long-term debt and capital lease obligations |
| 1,537 |
| 6,787 |
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Total current liabilities |
| 204,581 |
| 180,295 |
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Long-term debt and capital lease obligations |
| 595,319 |
| 505,613 |
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Long-term deferred income taxes, net |
| 3,199 |
| 3,876 |
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Other long-term liabilities |
| 21,313 |
| 22,022 |
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Total liabilities |
| 824,412 |
| 711,806 |
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Stockholders’ equity: |
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Preferred stock, $0.01 par value, 100,000 shares authorized, 0 shares issued and outstanding as of December 31, 2014 and 2015 |
| — |
| — |
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Common stock, $0.01 par value, 300,000 shares authorized, 198,623 and 200,207 shares issued as of December 31, 2014 and 2015, respectively, and 102,296 and 103,880 shares outstanding as of December 31, 2014 and 2015, respectively |
| 1,986 |
| 2,002 |
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Additional paid-in capital |
| 2,035,382 |
| 2,026,638 |
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Accumulated deficit |
| (1,217,727 | ) | (1,260,937 | ) | ||
Treasury stock, at cost, 96,327 shares as of December 31, 2014 and 2015 |
| (744,857 | ) | (744,857 | ) | ||
Total stockholders’ equity |
| 74,784 |
| 22,846 |
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Total liabilities and stockholders’ equity |
| $ | 899,196 |
| $ | 734,652 |
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EARTHLINK HOLDINGS CORP.
Reconciliation of Net Loss to Adjusted EBITDA (6)
(in thousands)
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| Three Months Ended |
| Twelve Months Ended |
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|
| December 31, |
| September 30, |
| December 31, |
| December 31, |
| December 31, |
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| 2014 |
| 2015 |
| 2015 |
| 2014 |
| 2015 |
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Net loss |
| $ | (22,492 | ) | $ | (10,523 | ) | $ | (12,282 | ) | $ | (72,752 | ) | $ | (43,210 | ) |
Interest expense and other, net |
| 14,253 |
| 11,731 |
| 11,192 |
| 56,261 |
| 50,972 |
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Income tax provision (benefit) |
| (1,152 | ) | 2,060 |
| (91 | ) | (4,744 | ) | 2,730 |
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Depreciation and amortization (1) |
| 47,686 |
| 46,502 |
| 46,826 |
| 186,872 |
| 188,315 |
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Stock-based compensation expense |
| 2,392 |
| 3,635 |
| 3,730 |
| 12,600 |
| 14,594 |
| |||||
Impairment of long-lived assets (2) |
| 2,974 |
| — |
| — |
| 14,334 |
| — |
| |||||
Restructuring, acquisition and integration-related costs (3) |
| 9,095 |
| 5,486 |
| 4,484 |
| 20,088 |
| 19,320 |
| |||||
Loss on extinguishment of debt (4) |
| — |
| 2,482 |
| — |
| — |
| 9,734 |
| |||||
Loss from discontinued operations, net of tax (5) |
| 442 |
| — |
| — |
| 381 |
| — |
| |||||
Adjusted EBITDA (6) |
| $ | 53,198 |
| $ | 61,373 |
| $ | 53,859 |
| $ | 213,040 |
| $ | 242,455 |
|
EARTHLINK HOLDINGS CORP.
Reconciliation of Net Loss to Unlevered Free Cash Flow (6)
(in thousands)
|
| Three Months Ended |
| Twelve Months Ended |
| |||||||||||
|
| December 31, |
| September 30, |
| December 31, |
| December 31, |
| December 31, |
| |||||
|
| 2014 |
| 2015 |
| 2015 |
| 2014 |
| 2015 |
| |||||
Net loss |
| $ | (22,492 | ) | $ | (10,523 | ) | $ | (12,282 | ) | $ | (72,752 | ) | $ | (43,210 | ) |
Interest expense and other, net |
| 14,253 |
| 11,731 |
| 11,192 |
| 56,261 |
| 50,972 |
| |||||
Income tax provision (benefit) |
| (1,152 | ) | 2,060 |
| (91 | ) | (4,744 | ) | 2,730 |
| |||||
Depreciation and amortization (1) |
| 47,686 |
| 46,502 |
| 46,826 |
| 186,872 |
| 188,315 |
| |||||
Stock-based compensation expense |
| 2,392 |
| 3,635 |
| 3,730 |
| 12,600 |
| 14,594 |
| |||||
Impairment of long-lived assets (2) |
| 2,974 |
| — |
| — |
| 14,334 |
| — |
| |||||
Restructuring, acquisition and integration-related costs (3) |
| 9,095 |
| 5,486 |
| 4,484 |
| 20,088 |
| 19,320 |
| |||||
Loss on extinguishment of debt (4) |
| — |
| 2,482 |
| — |
| — |
| 9,734 |
| |||||
Loss from discontinued operations, net of tax (5) |
| 442 |
| — |
| — |
| 381 |
| — |
| |||||
Purchases of property and equipment |
| (28,624 | ) | (22,011 | ) | (27,055 | ) | (102,863 | ) | (87,468 | ) | |||||
Unlevered Free Cash Flow (6) |
| $ | 24,574 |
| $ | 39,362 |
| $ | 26,804 |
| $ | 110,177 |
| $ | 154,987 |
|
EARTHLINK HOLDINGS CORP.
Reconciliation of Net Cash Provided by Operating Activities to Unlevered Free Cash Flow (6)
(in thousands)
|
| Three Months Ended |
| Twelve Months Ended |
| |||||||||||
|
| December 31, |
| September 30, |
| December 31, |
| December 31, |
| December 31, |
| |||||
|
| 2014 |
| 2015 |
| 2015 |
| 2014 |
| 2015 |
| |||||
Net cash provided by operating activities |
| $ | 38,657 |
| $ | 73,962 |
| $ | 41,359 |
| $ | 139,995 |
| $ | 167,448 |
|
Income tax provision (benefit) |
| (1,152 | ) | 2,060 |
| (91 | ) | (4,744 | ) | 2,730 |
| |||||
Non-cash income taxes |
| (4,530 | ) | (151 | ) | (145 | ) | (591 | ) | (677 | ) | |||||
Interest expense and other, net |
| 14,253 |
| 11,731 |
| 11,192 |
| 56,261 |
| 50,972 |
| |||||
Amortization of debt discount, premium and issuance costs |
| (1,037 | ) | (849 | ) | (831 | ) | (4,104 | ) | (3,703 | ) | |||||
Restructuring, acquisition and integration-related costs (3) |
| 9,095 |
| 5,486 |
| 4,484 |
| 20,088 |
| 19,320 |
| |||||
Changes in operating assets and liabilities |
| (2,578 | ) | (30,951 | ) | (2,324 | ) | 5,673 |
| 6,721 |
| |||||
Purchases of property and equipment |
| (28,624 | ) | (22,011 | ) | (27,055 | ) | (102,863 | ) | (87,468 | ) | |||||
Other, net |
| 490 |
| 85 |
| 215 |
| 462 |
| (356 | ) | |||||
Unlevered Free Cash Flow (6) |
| $ | 24,574 |
| $ | 39,362 |
| $ | 26,804 |
| $ | 110,177 |
| $ | 154,987 |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Net cash used in investing activities |
| $ | (28,624 | ) | $ | (22,011 | ) | $ | (27,055 | ) | $ | (102,777 | ) | $ | (87,468 | ) |
Net cash used in financing activities |
| $ | (5,512 | ) | $ | (51,690 | ) | $ | (10,631 | ) | $ | (19,721 | ) | $ | (122,817 | ) |
EARTHLINK HOLDINGS CORP.
Supplemental Schedule of New Segment Information (7)
(in thousands)
|
| Three Months |
| Twelve Months |
| ||
|
| Ended |
| Ended |
| ||
|
| December 31, 2015 |
| December 31, 2015 |
| ||
Enterprise/Mid-Market |
|
|
|
|
| ||
Revenues |
| $ | 106,159 |
| $ | 444,968 |
|
Cost of revenues (excluding depreciation and amortization) |
| 54,285 |
| 221,347 |
| ||
Gross margin |
| 51,874 |
| 223,621 |
| ||
Small Business |
|
|
|
|
| ||
Revenues |
| 66,462 |
| 297,039 |
| ||
Cost of revenues (excluding depreciation and amortization) |
| 32,863 |
| 139,440 |
| ||
Gross margin |
| 33,599 |
| 157,599 |
| ||
Carrier/Transport |
|
|
|
|
| ||
Revenues |
| 34,299 |
| 135,905 |
| ||
Cost of revenues (excluding depreciation and amortization) |
| 15,855 |
| 61,979 |
| ||
Gross margin |
| 18,444 |
| 73,926 |
| ||
Consumer Services |
|
|
|
|
| ||
Revenues |
| 53,317 |
| 219,340 |
| ||
Cost of revenues (excluding depreciation and amortization) |
| 18,724 |
| 77,862 |
| ||
Gross margin |
| 34,593 |
| 141,478 |
| ||
Consolidated |
|
|
|
|
| ||
Revenues |
| 260,237 |
| 1,097,252 |
| ||
Cost of revenues (excluding depreciation and amortization) |
| 121,727 |
| 500,628 |
| ||
Gross margin |
| 138,510 |
| 596,624 |
| ||
Selling, general and administrative expenses |
| 88,381 |
| 368,763 |
| ||
Depreciation and amortization (1) |
| 46,826 |
| 188,315 |
| ||
Restructuring, acquisition and integration-related costs (3) |
| 4,484 |
| 19,320 |
| ||
Interest expense and other, net |
| 11,192 |
| 50,972 |
| ||
Loss on extinguishment of debt (4) |
| — |
| 9,734 |
| ||
Loss from continuing operations before income taxes |
| $ | (12,373 | ) | $ | (40,480 | ) |
EARTHLINK HOLDINGS CORP.
Supplemental Schedule of Segment Information (7)
(in thousands)
|
| Three Months Ended |
| Twelve Months Ended |
| ||||||||
|
| December 31, |
| December 31, |
| ||||||||
|
| 2014 |
| 2015 |
| 2014 |
| 2015 |
| ||||
Business Services |
|
|
|
|
|
|
|
|
| ||||
Revenues |
| $ | 225,658 |
| $ | 206,920 |
| $ | 930,931 |
| $ | 877,912 |
|
Cost of revenues (excluding depreciation and amortization) |
| 110,919 |
| 103,003 |
| 469,523 |
| 422,766 |
| ||||
Gross margin |
| 114,739 |
| 103,917 |
| 461,408 |
| 455,146 |
| ||||
Direct segment operating expenses |
| 85,459 |
| 75,726 |
| 345,982 |
| 316,220 |
| ||||
Segment operating income |
| $ | 29,280 |
| $ | 28,191 |
| $ | 115,426 |
| $ | 138,926 |
|
Consumer Services |
|
|
|
|
|
|
|
|
| ||||
Revenues |
| $ | 58,814 |
| $ | 53,317 |
| $ | 245,964 |
| $ | 219,340 |
|
Cost of revenues (excluding depreciation and amortization) |
| 20,758 |
| 18,724 |
| 87,913 |
| 77,862 |
| ||||
Gross margin |
| 38,056 |
| 34,593 |
| 158,051 |
| 141,478 |
| ||||
Direct segment operating expenses |
| 10,081 |
| 7,455 |
| 43,615 |
| 30,731 |
| ||||
Segment operating income |
| $ | 27,975 |
| $ | 27,138 |
| $ | 114,436 |
| $ | 110,747 |
|
Consolidated |
|
|
|
|
|
|
|
|
| ||||
Revenues |
| $ | 284,472 |
| $ | 260,237 |
| $ | 1,176,895 |
| $ | 1,097,252 |
|
Cost of revenues (excluding depreciation and amortization) |
| 131,677 |
| 121,727 |
| 557,436 |
| 500,628 |
| ||||
Gross margin |
| 152,795 |
| 138,510 |
| 619,459 |
| 596,624 |
| ||||
Direct segment operating expenses |
| 95,540 |
| 83,181 |
| 389,597 |
| 346,951 |
| ||||
Segment operating income |
| 57,255 |
| 55,329 |
| 229,862 |
| 249,673 |
| ||||
Depreciation and amortization (1) |
| 47,686 |
| 46,826 |
| 186,872 |
| 188,315 |
| ||||
Impairment of long-lived assets (2) |
| 2,974 |
| — |
| 14,334 |
| — |
| ||||
Restructuring, acquisition and integration-related costs (3) |
| 9,095 |
| 4,484 |
| 20,088 |
| 19,320 |
| ||||
Corporate operating expenses |
| 6,449 |
| 5,200 |
| 29,422 |
| 21,812 |
| ||||
Interest expense and other, net |
| 14,253 |
| 11,192 |
| 56,261 |
| 50,972 |
| ||||
Loss on extinguishment of debt (4) |
| — |
| — |
| — |
| 9,734 |
| ||||
Loss from continuing operations before income taxes |
| $ | (23,202 | ) | $ | (12,373 | ) | $ | (77,115 | ) | $ | (40,480 | ) |
EARTHLINK HOLDINGS CORP.
Supplemental Schedule of Revenue Detail
(in thousands)
|
| Three Months Ended |
| Twelve Months Ended |
| ||||||||
|
| December 31, |
| December 31, |
| ||||||||
|
| 2014 |
| 2015 |
| 2014 |
| 2015 |
| ||||
Business Services |
|
|
|
|
|
|
|
|
| ||||
Retail services |
| $ | 183,719 |
| $ | 167,900 |
| $ | 756,747 |
| $ | 722,895 |
|
Wholesale services |
| 36,909 |
| 34,299 |
| 154,109 |
| 135,905 |
| ||||
Other services |
| 5,030 |
| 4,721 |
| 20,075 |
| 19,112 |
| ||||
Total revenues |
| 225,658 |
| 206,920 |
| 930,931 |
| 877,912 |
| ||||
Consumer Services |
|
|
|
|
|
|
|
|
| ||||
Access services |
| 47,343 |
| 41,079 |
| 202,008 |
| 173,389 |
| ||||
Value-added services |
| 11,471 |
| 12,238 |
| 43,956 |
| 45,951 |
| ||||
Total revenues |
| 58,814 |
| 53,317 |
| 245,964 |
| 219,340 |
| ||||
Total Revenues |
| $ | 284,472 |
| $ | 260,237 |
| $ | 1,176,895 |
| $ | 1,097,252 |
|
EARTHLINK HOLDINGS CORP.
Supplemental Financial Data
|
| December 31, |
| September 30, |
| December 31, |
|
|
| 2014 |
| 2015 |
| 2015 |
|
Employee Data |
|
|
|
|
|
|
|
Number of employees at end of period (8) |
| 2,659 |
| 2,144 |
| 2,138 |
|
EARTHLINK HOLDINGS CORP.
Consumer Services Operating Metrics
|
| Three Months Ended |
| |||||||
|
| December 31, |
| September 30, |
| December 31, |
| |||
|
| 2014 |
| 2015 |
| 2015 |
| |||
|
|
|
|
|
|
|
| |||
Average narrowband subscribers (9) |
| 487,000 |
| 466,000 |
| 454,000 |
| |||
Average broadband subscribers (9) |
| 350,000 |
| 298,000 |
| 286,000 |
| |||
Average consumer subscribers (9) |
| 837,000 |
| 764,000 |
| 740,000 |
| |||
|
|
|
|
|
|
|
| |||
ARPU (10) |
| $ | 23.42 |
| $ | 23.48 |
| $ | 24.01 |
|
Churn rate (11) |
| 1.9 | % | 1.7 | % | 1.8 | % | |||
EARTHLINK HOLDINGS CORP.
Footnotes to Consolidated Financial Highlights
(1) Based on the current amount of definite-lived intangible assets, the Company expects to record amortization expense of approximately $23.6 million, $1.3 million and $0.4 million during the years ending December 31, 2016, 2017 and 2018, respectively. Within 2016, the Company expects to record amortization expense of approximately $12 million during the first quarter, $7 million during the second quarter, $4 million during the third quarter and $1 million during the fourth quarter. Actual amortization expense to be reported in future periods could differ materially from these estimates as a result of acquisitions, changes in useful lives and other relevant factors.
(2) During the three and twelve months ended December 31, 2014, the Company recorded $3.0 million and $14.3 million, respectively, for impairment of property and equipment, which consisted of impairment of work in progress for information technology projects not expected to be used.
(3) Restructuring, acquisition and integration-related costs consisted of the following for the periods presented (in thousands):
|
| Three Months Ended December 31, |
| Twelve Months Ended December 31, |
| ||||||||
|
| 2014 |
| 2015 |
| 2014 |
| 2015 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Integration-related costs |
| 1,058 |
| $ | 1,423 |
| $ | 9,043 |
| $ | 5,924 |
| |
Severance, retention and other employee costs |
| 7,292 |
| 2,863 |
| 9,297 |
| 9,798 |
| ||||
Facility-related costs |
| 745 |
| 198 |
| 1,744 |
| 3,598 |
| ||||
Transaction-related costs |
| — |
| — |
| 4 |
| — |
| ||||
Restructuring, acquisition and integration-related costs |
| $ | 9,095 |
| $ | 4,484 |
| $ | 20,088 |
| $ | 19,320 |
|
Restructuring, acquisition and integration-related costs consist of costs related to the Company’s restructuring, acquisition and integration-related activities. Such costs include:1) integration-related costs, such as system conversions, rebranding costs and integration-related consulting and employee costs; 2) severance, retention and other employee termination costs associated with restructuring, acquisition and integration activities and with certain voluntary employee separations; 3) facility-related costs, such as lease termination and asset impairments; and 4) transaction-related costs, which are direct costs incurred to effect a business combination, such as advisory, legal, accounting, valuation and other professional fees.
(4) During the twelve months ended December 31, 2015, the Company recorded $9.7 million for losses on extinguishment of debt. The losses consisted of premiums paid on the Company’s debt repurchases and redemptions, the write-off of unamortized discount on debt and the write-off of unamortized debt issuance costs. In March 2015, the Company repurchased $21.1 million outstanding principal amount of its 8.875% Senior Notes due 2019 (the “Senior Notes”) in the open market. In April 2015, the Company repurchased $5.0 million outstanding principal amount of its Senior Notes in the open market. In June 2015, the Company redeemed $70.0 million aggregate principal amount of its Senior Notes pursuant to terms under the indenture. In August 2015, the Company repurchased $30.0 million aggregate principal amount of its Senior Notes in the open market.
(5) The operating results of the Company’s telecom systems business acquired as part of ITC^DeltaCom have been separately presented as discontinued operations for all periods presented. On August 2, 2013, the Company sold its telecom systems business. The Company has no significant continuing involvement in the operations or significant continuing direct cash flows.
(6) 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 long-lived assets, restructuring, acquisition and integration-related costs, loss on extinguishment of debt, and gain (loss) from discontinued operations, net of tax. 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 long-lived assets, restructuring, acquisition and integration-related costs, loss on extinguishment of debt, and gain (loss) from discontinued operations, net of tax, less cash used for purchases 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.
(7) The Company reports segment information along the same lines that its Chief Operating Decision Maker reviews its operating results in assessing performance and allocating resources. The Company has historically operated two reportable segments, Business Services and Consumer Services. The Company’s Business Services segment provided a broad range of data, voice and managed services to retail and wholesale business customers. The Company’s Consumer Services segment provided nationwide Internet access and related value-added services to residential customers.
During the three months ended September 30, 2015, the Company implemented certain organizational, operational and reporting changes that resulted in the disaggregation of its Business Services segment into three separate reportable segments: Enterprise/Mid-Market, Small Business and Carrier/Transport. The Consumer Services segment was not impacted. The Company’s new reportable segments are strategic business units that are aligned around distinct customer categories. The Company reorganized its business around these business units to optimize operations. The Company began reporting the disaggregated information to its Chief Operating Decision Maker during the three months ended September 30, 2015. As a result, the Company now operates the following four reportable segments:
· Enterprise/Mid-Market. The Company’s Enterprise/Mid-Market segment provides a broad range of data, voice and managed network services to distributed multi-site business customers.
· Small Business. The Company’s Small Business segment provides a broad range of data, voice and managed network services to small, often single-site business customers.
· Carrier/Transport. The Company’s Carrier/Transport segment provides transmission capacity and other data, voice and managed network services to telecommunications carriers and large enterprises.
· Consumer Services. The Company’s Consumer Services segment provides nationwide Internet access and related value-added services to residential customers.
Segment information for the three and twelve months ended December 31, 2014 has not been restated to reflect the Company’s new reportable segment structure. The Company began recording revenue and expense transactions at the new segment level in 2015. Management has determined that it is impracticable to restate financial information prior to 2015 to conform to the new reportable segment structure due to the level of effort required to segment customers that terminated service prior to 2015 and identify the related cost of revenue associated with those customers, as this information is not currently available. For comparability purposes, the Company presented segment results under the Company’s previous reportable segment structure for the three and twelve months ended December 31, 2014 and 2015.
The Company evaluates performance of its new segment structure based on segment gross margin. Segment gross margin includes revenues from external customers and related cost of revenues. Costs excluded from segment gross margin include selling, general and administrative expenses, depreciation and amortization, impairment of goodwill and intangible assets, restructuring, acquisition and integration-related costs, and interest expense and other, net, as they are not considered in the measurement of segment performance.
The Company evaluated performance of its previous segment structure based on segment operating income. Segment operating income includes revenues from external customers, related cost of revenues and operating expenses directly attributable to the segment, which included costs over which segment managers have direct discretionary control, such as advertising and marketing programs, customer support expenses, product development expenses, certain technology and facilities expenses, billing operations and provisions for doubtful accounts. Segment operating income excluded other income and expense items and certain expenses over which segment managers do not have discretionary control. Costs excluded from segment operating income include various corporate expenses (consisting of certain costs such as corporate management, human resources, finance and legal), depreciation and amortization, impairment of goodwill and intangible assets, restructuring, acquisition and integration-related costs, stock-based compensation expense, and interest expense and other, net, as they were not considered in the measurement of segment performance.
(8) Represents full-time equivalents.
(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.
(10) ARPU represents the average monthly revenue per user (subscriber). ARPU is computed by dividing average monthly revenue for the period by the average number of subscribers for the period. Average monthly revenue used to calculate ARPU includes recurring service revenue as well as nonrecurring revenues associated with equipment and other one-time charges associated with initiating or discontinuing services.
(11) Churn rate is used to measure the rate at which subscribers discontinue service on a voluntary or involuntary basis. Churn rate is computed by dividing the average monthly number of subscribers that discontinued service during the period by the average subscribers for the period.