Eschelon Telecom (ESCH) 8-K Eschelon Telecom, Inc. Announces Third Quarter 2006 Operating Results

Exhibit 99.1

Investor Relations: Geoffrey M. Boyd Chief Financial Officer 612-436-6697
Media Inquiries: Dan Swanson Sr. Director, Field Marketing 612-436-6426

Eschelon Telecom, Inc. Announces Third Quarter 2006 Operating Results

Growth Driven by Record Sales and Customer Line Retention

Minneapolis, MN – November 8, 2006: Eschelon Telecom, Inc., a leading provider of integrated communications services to small and medium sized businesses in the western United States, today announced its results for the third quarter ended September 30, 2006.  Highlights are as follows:

·Continued strong year-over-year revenue and adjusted EBITDA growth of 20.5% and 29.6%, respectively;

·Record line sales and record low average monthly line churn during the third quarter of 2006;

·Year-to-date total line growth of 26.6%;

·Completed first phase of network expansion two months ahead of schedule;

·Ahead of schedule on integration of Oregon Telecom, achieving greater than expected synergies;

·Closed the OneEighty Communications, Inc. acquisition on October 1, 2006;

·Closed the Mountain Telecommunications, Inc. acquisition on November 1, 2006.

Eschelon Telecom, Inc.

Consolidated Financial and Operating Data

(Dollars in Thousands, Except Per Unit Amounts)

										For the nine months ended September 30,
	3Q 2005			2Q 2006			3Q 2006			2005			2006
Total Revenue	$	57,912		$	68,250		$	69,806		$	169,366		$	197,782
Total Gross Profit *	$	33,118		$	39,056		$	39,452		$	91,849		$	112,918
Total Gross Margin (%) *	57		%	57		%	57		%	54		%	57		%
Pro Forma Adjusted Gross Margin (%) **	57		%	57		%	57		%	57		%	57		%
Adjusted EBITDA	$	10,888		$	13,376		$	14,105		$	29,571		$	39,538
Net Loss	$	(12,453	)	$	(599	)	$	(608	)	$	(25,864	)	$	(2,790	)
Capital Expenditures	$	8,697		$	11,602		$	12,781		$	27,061		$	33,404
Cash and Equivalents (at end of period)	$	30,824		$	91,876		$	76,965		$	30,824		$	76,965
Voice Lines In Service (at end of period)	265,132			318,138			322,702			265,132			322,702
Data Lines In Service (at end of period)	140,744			177,913			191,190			140,744			191,190
Total Lines In Service (at end of period)	405,876			496,051			513,892			405,876			513,892
Lines On-Net (%) (at end of period)	84.6		%	82.2		%	83.0		%	84.6		%	83.0		%
Lines Sold	29,043			36,343			39,782			82,318			106,865
Average Monthly Line Churn (%)	1.20		%	1.43		%	1.10		%	1.36		%	1.36		%
Average Network Revenue per Line per Month	$	42.31		$	41.36		$	40.91		$	42.37		$	41.27
Total Employees (at end of period)	1,109			1,269			1,250			1,109			1,250
Quota-Carrying Network Service Salespeople (at end of period)	191			273			268			191			268

* Gross profit is defined as revenue less network services expense (excluding depreciation and amortization) and business telephone systems cost of revenue.

**  Excludes impact of Global Crossing settlement in June 2005.

“Eschelon had another good quarter of operating and financial performance.  We achieved record levels of lines sold, lines in service, revenue, adjusted EBITDA, low customer line churn, and maintained strong year-over-year revenue and adjusted EBITDA growth.  We are well into the process of integrating Oregon Telecom, Inc. (“OTI”) and are achieving greater than expected synergies from that acquisition,” said Richard A. Smith, Eschelon’s President and Chief Executive Officer.

“We completed the first phase of our previously-announced three-phase network expansion two months ahead of schedule.  The first phase added 20 network collocations and 60 network services sales associates, allowing us to expand our customer base.  Eschelon will begin work on the second phase of the expansion project to support the planned addition of 60 sales associates in 2007,” said Smith

“On October 1, 2006, we closed on our acquisition of OneEighty Communications, Inc. (“OneEighty”) and on November 1, 2006 we closed on our acquisition of Mountain Telecommunications, Inc.  We expect that through market growth and leveraging investments in existing infrastructure that we will see significant synergies from these acquisitions over the next 12-18 months,” said Smith.

Total revenues for the third quarter of 2006 were $69.8 million, an increase of $1.6 million from the second quarter of 2006 and an increase of $11.9 million from the third quarter of 2005.  The increases were primarily due to the inclusion of OTI, which was acquired on April 1, 2006, and access line growth.

Gross profit for the third quarter of 2006 was $39.5 million, an increase of $0.4 million from the second quarter of 2006 and an increase of $6.3 million from the third quarter of 2005.  The increases were primarily due to the inclusion of OTI and access line growth.

Gross profit as presented is defined as revenue less network services expense (excluding depreciation and amortization) and business telephone systems cost of revenue.  Gross profit is not intended to replace operating income (loss), net income (loss), cash flow and other measures of financial performance reported in accordance with generally accepted accounting principles (“GAAP”) in the United States.  Management uses this definition of gross profit as a measure of operating performance.  Below is a schedule reconciling reported GAAP operating income (loss) to gross profit as presented.

Eschelon Telecom, Inc.

Consolidated Operating Income (Loss) to Gross Profit Reconciliation

(In Thousands)

							For the nine months ended September 30,
	3Q 2005		2Q 2006		3Q 2006		2005			2006
Operating Income (Loss)	$	1,729	$	3,288	$	2,764	$	(2,266	)	$	7,587
Sales, general and administrative expense	22,378		25,973		25,849		67,823			74,521
Depreciation and amortization expense	9,011		9,795		10,839		26,292			30,810
Gross Profit	$	33,118	$	39,056	$	39,452	$	91,849		$	112,918

Sales, general and administrative expenses for the third quarter of 2006 were $25.8 million, a decrease of $0.1 million from the second quarter of 2006 and an increase of $3.5 million from the third quarter of 2005.  The increase from 2005 was primarily due to the inclusion of OTI, an increase in costs associated with the sales force expansion, costs associated with being a public company, operating taxes and share-based compensation.

Adjusted EBITDA for the third quarter of 2006 was $14.1 million, an increase of $0.7 million from the second quarter of 2006 and an increase of $3.2 million from the third quarter of 2005.  Adjusted

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EBITDA is a non-GAAP measure.  Below is a schedule reconciling reported GAAP net loss to EBITDA and Adjusted EBITDA.

Eschelon Telecom, Inc.

Consolidated Net Loss to EBITDA and Adjusted EBITDA Reconciliation

(In Thousands)

										For the nine months ended  September 30,
	3Q 2005			2Q 2006			3Q 2006			2005			2006
Net Loss	$	(12,453	)	$	(599	)	$	(608	)	$	(25,864	)	$	(2,790	)
Interest expense, net	14,529			3,895			3,294			24,110			10,356
Income taxes	—			—			—			—			—
Depreciation and amortization	9,011			9,795			10,839			26,292			30,810
EBITDA	11,087			13,091			13,525			24,538			38,376
Deferred compensation expense	149			292			503			797			1,141
Loss on disposal of assets	212			19			17			258			65
Gain on sale of available-for-sale securities	(100		)	(18		)	—			(199		)	(96		)
Other (income) expense, net	—			(8		)	60			—			52
Global Crossing settlement	—			—			—			4,748			—
Income from discontinued operation	(460		)	—			—			(571		)	—
Adjusted EBITDA	$	10,888		$	13,376		$	14,105		$	29,571		$	39,538

Capital expenditures for the third quarter of 2006 were $12.8 million, an increase of $1.2 million from the second quarter of 2006 and an increase of $4.1 million from the third quarter of 2005.  Capital expenditures typically fluctuate by quarter depending upon timing of major equipment purchases.  The primary drivers for these increases are the collocation expansion and line/customer growth.

Net loss for the third quarter of 2006 was $0.6 million, relatively unchanged from the second quarter of 2006 and down from a loss of $12.5 million in the third quarter of 2005.  The improvement from the third quarter of 2005 is primarily due to 2005 including $10.2 million of interest expense related to the partial redemption of our notes in September 2005.  The improvement is also due to the inclusion of OTI and higher access lines in service.

Cash, restricted cash and available-for-sale securities at September 30, 2006 were $77.0 million, a decrease of $14.9 million from the second quarter of 2006.  This decrease is primarily due to escrowing $9.9 million at the end of September for the acquisition of OneEighty.

Investor Call
Management is holding an investor conference call on Thursday, November 9, 2006 at 10:00 a.m. (CT) to discuss quarterly results.  Investors are invited to participate by dialing (800) 240-2430.  A replay will be available through November 16, 2006 by dialing (800) 405-2236 (pass code 11074677#).

About Eschelon Telecom, Inc.

Eschelon Telecom, Inc. is a facilities-based competitive communications services provider of voice and data services and business telephone systems in 45 markets in the western United States. Headquartered in Minneapolis, Minnesota, the company currently employs approximately 1,300 telecommunications/Internet professionals, serves over 60,000 business customers and has in excess of 550,000 access lines in service throughout its markets in Arizona, California, Colorado, Minnesota, Montana, Nevada, Oregon, Utah and Washington.  For more information, please visit our web site at www.eschelon.com.

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Forward Looking Statements

This announcement contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended.  The forward-looking statements are based on Eschelon Telecom’s current intent, belief and expectations.  These statements are not guarantees of future performance and are subject to certain risks and uncertainties that are difficult to predict.  Actual results may differ materially from these forward-looking statements because of the company’s history of losses, ability to maintain relationships with RBOCs, substantial indebtedness, difficulties inherent in making and integrating acquisitions, intense competition, dependence on key management, changes in government regulations, and other risks that may be described in the company’s filings with the Securities and Exchange Commission.  Existing and prospective investors are cautioned not to place undue reliance on these forward-looking statements, which speak only as of today’s date.  Eschelon Telecom undertakes no obligation to update or revise the information contained in this announcement, whether as a result of new information, future events or circumstances or otherwise.

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Eschelon Telecom, Inc.

Unaudited Consolidated Statement of Operations

(In Thousands)

										For the nine months ended September 30,
	3Q 2005			2Q 2006			3Q 2006			2005			2006
Revenue:
Network services	$	51,181		$	60,920		$	62,373		$	149,944		$	176,078
Business telephone systems	6,731			7,330			7,433			19,422			21,704
Total revenue	57,912			68,250			69,806			169,366			197,782
Costs and expenses:
Network services expense (excluding depreciation and amortization)	20,701			24,780			25,735			65,603			71,278
Business telephone systems cost of revenue	4,093			4,414			4,619			11,914			13,586
Sales, general and administrative	22,378			25,973			25,849			67,823			74,521
Depreciation and amortization	9,011			9,795			10,839			26,292			30,810
Operating income (loss)	1,729			3,288			2,764			(2,266		)	7,587
Other income (expense):
Interest income	269			759			1,482			502			2,474
Interest expense	(14,798		)	(4,654		)	(4,776		)	(24,612		)	(12,830		)
Other income (expense), net	(113		)	8			(78		)	(59		)	(21		)
Loss before taxes	(12,913		)	(599		)	(608		)	(26,435		)	(2,790		)
Income taxes	—			—			—			—			—
Net loss before discontinued operation	(12,913		)	(599		)	(608		)	(26,435		)	(2,790		)
Income from discontinued operation, net of tax	460			—			—			571			—
Net loss	$	(12,453	)	$	(599	)	$	(608	)	$	(25,864	)	$	(2,790	)
Basic and diluted income (loss) per share:
Continuing operations	$	(1.55	)	$	(0.04	)	$	(0.03	)	$	(8.71	)	$	(0.17	)
Discontinued operations	0.06			—			—			0.19			—
Net loss	$	(1.49	)	$	(0.04	)	$	(0.03	)	$	(8.53	)	$	(0.17	)

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Eschelon Telecom, Inc.

Consolidated Balance Sheets

(In Thousands)

	December 31,			September 30,
	2005			2006
				(Unaudited)
Assets
Current assets:
Cash and cash equivalents	$	26,062		$	7,760
Restricted cash	996			728
Available-for-sale securities	4,760			68,477
Accounts receivable, net	22,996			26,239
Other receivables	3,052			4,207
Inventories	2,927			3,437
Prepaid expenses	2,294			13,914
Total current assets	63,087			124,762
Property and equipment, net	126,452			128,501
Other assets	1,506			1,559
Goodwill	7,168			21,869
Intangible assets, net	33,333			40,554
Total assets	$	231,546		$	317,245
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable	$	16,400		$	15,962
Accrued telecommunications costs	4,227			3,226
Accrued office rent	2,035			1,722
Accrued interest expense	2,646			579
Other accrued expenses	5,485			6,732
Deferred revenue	7,921			8,900
Accrued compensation expenses	2,809			3,953
Capital lease obligations, current maturities	2,430			781
Total current liabilities	43,953			41,855
Long-term liabilities:
Other long-term liabilities	251			346
Capital lease obligations, less current maturities	2,964			4,110
Notes payable	92,125			140,138
Total liabilities	139,293			186,449
Stockholders’ equity:
Common stock	146			176
Additional paid-in capital	248,199			288,460
Accumulated other comprehensive income (loss)	56			(3		)
Accumulated deficit	(155,047		)	(157,837		)
Deferred compensation	(1,101		)	—
Total stockholders’ equity	92,253			130,796
Total liabilities and stockholders’ equity	$	231,546		$	317,245

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Eschelon Telecom, Inc.
Unaudited Consolidated Statements of Cash Flows
(In Thousands)

	Nine months ended
	September 30,
	2005			2006
Operating activities
Net loss	$	(25,864	)	$	(2,790	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization expense	26,292			30,810
Other non-cash items	7,940			5,574
Changes in operating assets and liabilities:
Restricted cash	(107		)	268
Accounts receivable	(4,643		)	(1,742		)
Inventories	(106		)	(510		)
Prepaid expenses and other assets	(439		)	(12,669		)
Discontinued assets held for sale, net of liabilities	1,223			—
Accounts payable and accrued expenses	(619		)	(5,516		)
Deferred revenue	526			187
Accrued compensation expense	(293		)	1,016
Net cash provided by operating activities	3,910			14,628
Investing activities
Purchase of subsidiaries, net of cash acquired	—			(19,993		)
Purchase of assets held for sale, net of liabilities	(216		)	—
Purchases of available-for-sale securities	(29,744		)	(84,468		)
Proceeds from sales of available-for-sale securities	20,315			20,800
Purchases of property and equipment	(14,173		)	(20,456		)
Cash paid for customer installation costs	(10,103		)	(11,468		)
Proceeds from sales of assets	238			112
Net cash used in investing activities	(33,683		)	(115,473		)
Financing activities
Proceeds from issuance of notes payable	—			45,600
Payments made on notes and capital lease obligations	(50,780		)	(1,971		)
Proceeds from issuance of stock, net of fees	68,583			40,250
Increase in debt issuance costs	(348		)	(1,336		)
Net cash provided by financing activities	17,455			82,543
Net decrease in cash and cash equivalents	(12,318		)	(18,302		)
Cash and cash equivalents at beginning of period	26,435			26,062
Cash and cash equivalents at end of period	$	14,117		$	7,760
Supplemental cash flow information
Cash paid for interest	$	18,317		$	9,635
Supplemental non-cash activities
Equipment purchases under capital lease	$	2,785		$	1,480
Value of common stock issued to management and certain members of the board of directors	$	27		$	6,045

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