- Net income of $21.4 million or $0.20 per share on a reported basis
- Net income of $0.22 per share excluding Deltacom acquisition-related costs (a non-GAAP measure)
- Adjusted EBITDA (a non-GAAP measure) of $50.9 million
- Free cash flow (a non-GAAP measure) of $48.0 million
- Dividend payments totaling $17.4 million in the quarter
- Ending cash and marketable securities balance of $770.6 million
- Reaffirmed 2010 revised guidance issued on October 1, 2010
"Today we are pleased to report on the continued health of our consumer business. We are also encouraged to see momentum building within our New Edge Networks subsidiary, which reported modest top line revenue growth this quarter. Clearly, the diligence and discipline with which we have run EarthLink over the last several years have optimized cash generation. This execution was the key enabling factor in our announcement of the acquisition of Deltacom on October 1, 2010," explained EarthLink Chairman and Chief Executive Officer Rolla P. Huff.
"The Deltacom acquisition is a transformative transaction for EarthLink as it will reposition the company as a leading IP infrastructure and managed services provider with long-term strategic relevance. Importantly, this transaction will offer a career path to many of the talented EarthLink employees who have made this transformation possible, while also serving to lower the risk profile of the consumer business. Given the strong ongoing performance of the consumer business and the strength of our balance sheet, post-transaction EarthLink will maintain the ability to deploy capital organically and strategically to create additional shareholder value," added Huff.
Financial and Operating Results
EarthLink's revenue declines in its consumer business continued to attenuate. For the third quarter of 2010, EarthLink reported revenue of $145.2 million, a 5 percent decline from the second quarter of 2010 and a 17 percent decline from the third quarter of 2009. Broadband services comprised a growing percentage of EarthLink's revenue mix, representing 61 percent of the company's revenue in the third quarter of 2010, an increase from 57 percent in the year-ago quarter. Gross subscriber additions during the third quarter were 77,000, up from 67,000 in the second quarter of 2010 and down from 108,000 in the year-ago quarter. Over 70 percent of the company's third quarter gross adds were for broadband services.
EarthLink's consumer business continues to experience increases in customer tenure and loyalty, with 89 percent of the company's consumer narrowband and DSL customers having two or more years of tenure and 54 percent having five or more years of tenure in the third quarter of 2010. These tenure rates are up from 80 percent and 39 percent, respectively, in the year-ago quarter. Increased customer tenure is the main factor driving continued improvements in the company's monthly subscriber churn. In the third quarter of 2010, EarthLink reported churn of 3.0 percent, nominally higher than the 2.9 percent in the second quarter of 2010 due to expected seasonal customer behavior, and a significant improvement from 3.6 percent churn in the year-ago quarter. Net subscriber losses were 95,000 in the third quarter of 2010, improved from net subscriber losses of 109,000 in the second quarter of 2010 and 146,000 in the year-ago quarter.
A more tenured customer base combined with more efficient processes and technologies continued to have a positive impact on the company's cost structure. EarthLink's total sales and marketing, operations, customer support, and general and administrative expenses were $43.4 million for the third quarter of 2010, flat versus the second quarter of 2010 due to the timing of sales and marketing programs as well as transaction-related diligence costs, and a 20 percent reduction from comparable expenses in the year-ago quarter.
Profitability and Other Financial Measures
EarthLink's net income was $21.4 million, or $0.20 per share, for the third quarter of 2010, as compared to net income of $28.0 million, or $0.26 per share, in the second quarter of 2010 and $29.9 million, or $0.28 per share, in the year-ago quarter. Third quarter 2010 earnings per share was $0.22 (a non-GAAP measure, see definition in "Non-GAAP Measures" below) prior to the impact of acquisition-related costs associated with the Deltacom acquisition announcement. The company reported $50.9 million in Adjusted EBITDA (a non-GAAP measure, see definition in "Non-GAAP Measures" below) in the third quarter of 2010. EarthLink's Adjusted EBITDA was $56.7 million in the second quarter of 2010 and $60.9 million in the third quarter of 2009.
Balance Sheet and Cash Flow
During the third quarter of 2010 EarthLink generated free cash flow (a non-GAAP measure, see definition in "Non-GAAP Measures" below) of $48.0 million, as compared to $54.0 million in the second quarter of 2010 and $55.3 million in the third quarter of 2009.
EarthLink used $3.0 million of cash for capital expenditures and $17.4 million for dividend payments in the quarter. The company ended the third quarter of 2010 with $770.6 million in cash and marketable securities, an increase of $30.5 million from the prior quarter.
The following statements are forward-looking, and actual results may differ materially. See comments under "Cautionary Information Regarding Forward-Looking Statements" below. EarthLink undertakes no obligation to update these statements.
Today EarthLink reaffirmed the full year 2010 guidance it issued on October 1, 2010 in conjunction with its announcement of the acquisition of Deltacom. EarthLink continues to expect 2010 Adjusted EBITDA of $207 million to $211 million; free cash flow of $193 million to $201 million, based upon the aforementioned Adjusted EBITDA guidance combined with $10 million to $14 million in estimated capital expenditures; and net income of $94 million to $97 million for the full year 2010. This guidance does not reflect any potential financial impact if the Deltacom transaction were to close prior to January 1, 2011.
Adjusted EBITDA is defined as net income before interest expense and other, net, income taxes, depreciation and amortization, stock-based compensation expense, gain (loss) on investments, net, impairment of goodwill and intangible assets, and restructuring and acquisition-related costs. Free cash flow is defined as net income before interest expense and other, net, income taxes, depreciation and amortization, stock-based compensation expense, gain (loss) on investments, net, impairment of goodwill and intangible assets, and restructuring and acquisition-related costs, less cash used for purchases of property and equipment and purchases of subscriber bases. Net income per share excluding Deltacom acquisition-related costs is defined as net income before certain costs incurred in connection with the Deltacom acquisition, such as transaction costs and certain pre-acquisition costs.
Adjusted EBITDA, free cash flow and net income per share excluding Deltacom acquisition-related costs 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 2 of the Consolidated Financial Highlights for a discussion of the presentation, comparability and use of such financial performance measures.
Conference Call for Analysts and Investors
Conference Call Details
Tuesday, October 26, 2010, at 8:30 a.m. ET hosted by EarthLink's Chairman and Chief Executive Officer, Rolla P. Huff and Chief Financial Officer, Bradley A. Ferguson.
U.S. and Canada Dial-in Number: 800-706-0730
International Dial-in Number: 706-634-5173
Participants reference the EarthLink call and dial in 10 minutes prior to scheduled start time.
A live Webcast of the conference call will be available at: http://ir.earthlink.net/index.cfm
Replay available from 11:30 a.m. ET on October 26 through midnight on November 2.
Dial 800-642-1687 from US and Canada, International callers dial 706-645-9291.
The replay confirmation code is 17651758.
The Webcast will be archived on the company's website at: http://ir.earthlink.net/events.cfm
Download the Third Quarter 2010 Financial Results
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 and uncertainties include (1) that the continued decline of our consumer access subscribers, combined with the change in mix of our consumer access subscriber base from narrowband to broadband, will adversely affect our results of operations; (2) that we will have less ability in the future to implement cost reductions to offset our revenue declines, which will adversely affect our results of operations; (3) that we face significant competition which could reduce our profitability; (4) that adverse economic conditions may harm our business; (5) that we may not be able to execute our business strategy for our Business Services segment, which could adversely impact our results of operations and cash flows; (6) that our commercial and alliance arrangements may not be renewed or may not generate expected benefits, which could adversely affect our results of operations; (7) that our business is dependent on the availability of third-party telecommunications service providers; (8) that we may be unable to retain sufficient qualified personnel, particularly in light of recent workforce and cost reduction initiatives and in a recovering economy, and the loss of any of our key executive officers could adversely affect us; (9) that we may be unsuccessful in making and integrating acquisitions into our business, which could result in operating difficulties, losses and other adverse consequences; (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 business may suffer if third parties used for customer service and technical support and certain billing services are unable to provide these services or terminate their relationships with us; (12) that interruption or failure of our network and information systems and other technologies could impair our ability to provide our services, which could damage our reputation and harm our operating results; (13) that government regulations could adversely affect our business or force us to change our business practices; (14) that privacy concerns relating to our business could damage our reputation and deter current and potential users from using our services; (15) that we may not be able to protect our intellectual property; (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 if we are unable to successfully defend against legal actions we could face substantial liabilities; (18) that our business depends on effective business support systems, processes and personnel; (19) 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; (20) that we may be required to recognize additional impairment charges on our goodwill and intangible assets, which would adversely affect our results of operations and financial position; (21) that we may have exposure to greater than anticipated tax liabilities and the use of our net operating losses and certain other tax attributes could be limited in the future; (22) that we may reduce or cease payment of quarterly dividends; (23) that our stock price may be volatile; (24) that our indebtedness could adversely affect our financial health and limit our ability to react to changes in our industry; and (25) 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 also include matters relating to our pending acquisition of ITC^DeltaCom, including, without limitation, the receipt of required regulatory approvals; the ability to realize estimated synergies, cost savings and growth opportunities; the possibility that the anticipated benefits from the acquisition cannot be fully realized or may take longer or present greater cost to realize than expected; our ability to successfully integrate the operations of ITC^DeltaCom upon its acquisition without detracting from our current operations; the retention of key ITC^DeltaCom employees; and our success in investing in additional strategic opportunities. These risks and uncertainties further include our potential future exposure to regulatory, general economic and other conditions that could adversely impact the operations of ITC^DeltaCom as a subsidiary of EarthLink, including ITC^DeltaCom's dependence on new product development, rapid technological and market changes, ITC^DeltaCom's dependence upon rights-of-way and other third party agreements, risks related to future growth and rapid expansion, customer attrition, delays or difficulties in deployment and implementation of collocation arrangements and facilities, appeals of or failures by third parties to comply with rulings of governmental entities, inability to meet installation schedules and adverse changes in the regulatory or legislative environment; operating and financial restrictions imposed by covenants in ITC^DeltaCom's outstanding senior secured notes; and other unforeseen difficulties that may occur. 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, 2009.
"EarthLink. We revolve around you™." As the nation's Internet expert, Atlanta-based EarthLink has earned an award-winning reputation for outstanding customer service and its suite of online products and services. Serving millions of subscribers, EarthLink offers what every user should expect from their ISP: high-quality connectivity, minimal online intrusions and customizable features. Whether it's dial up, high-speed Internet services like DSL and cable Internet, home phone service, 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 Web site at www.EarthLink.net.