ATLANTA — February 8, 2011 — EarthLink, Inc. (NASDAQ:ELNK, news, filings) today announced financial results for its fourth quarter and full year ended December 31, 2010. EarthLink’s fourth quarter results include the transaction-related expenses associated with the December 8, 2010 closing of the acquisition of ITC^Deltacom as well as the financial impact of 24 days of Deltacom’s operations. EarthLink’s fourth quarter results also include transaction-related expenses associated with the December 20, 2010 announcement of the agreement to acquire One Communications, which is expected to close in the second quarter, and therefore does not include any transaction closing expenses or operating results.
Highlights for the fourth quarter include:
- Record low consumer churn
- Net income of $5.3 million or $0.05 per share; $0.19 per share excluding acquisition-related costs (a non-GAAP measure)
- Adjusted EBITDA (a non-GAAP measure) of $54.2 million
- Free cash flow (a non-GAAP measure) of $38.9 million
- Dividend payments to shareholders of $17.4 million
- Ending cash and marketable securities balance of $563.1 million
- Announced full year 2011 Adjusted EBITDA guidance of $250 million to $260 million
“These results are indicative of the long-term thought process and diligent approach with which EarthLink operates its business. We believe this business discipline and operational rigor will allow us to create value for our shareholders and position us to continue to invest in the future of EarthLink as an IP managed services company with a path for growth,” stated EarthLink Chairman and Chief Executive Officer Rolla P. Huff.
“With the acquisition of Deltacom complete and the One Communications acquisition on track to close in the second quarter of this year, we will have dense fiber network across the eastern half of the United States and a ubiquitous IP footprint that makes us unique in terms of the value proposition we can offer multi-location enterprise customers,” added Huff.
Financial and Operating Results
EarthLink reported revenue of $166.8 million in the fourth quarter and $622.2 million for the full year 2010, representing a 1 percent increase from the fourth quarter of 2009 and down 14 percent from the full year 2009. Business services segment revenue comprised 36% of EarthLink’s revenue in the fourth quarter of 2010, up from 21% in the year-ago quarter due to the inclusion of Deltacom’s revenue. Broadband comprised 63% of EarthLink’s consumer access revenue in the fourth quarter of 2010, up from 59% in the year-ago quarter.
For the company’s consumer segment, net subscriber losses were 79,000 in the fourth quarter, an improvement from 93,000 in the third quarter of 2010 and 132,000 in the year-ago quarter. As EarthLink’s subscriber base continues to increase in tenure, the company reported record performance in consumer customer churn. Consumer subscriber churn improved to 2.8% in the fourth quarter of 2010, down from 3.1% in the third quarter of 2010 and 3.2% in the year-ago quarter. In the fourth quarter of 2010, 90% of EarthLink’s consumer narrowband and DSL customers had two or more years of tenure with the company and 58% had five or more years of tenure, with churn rates of 2.6% and 2.0%, respectively.
The company continues to aggressively manage expenses to keep costs in line with revenue trends. Total sales and marketing, operations, customer support, and general and administrative expenses were $50.9 million for the fourth quarter of 2010 and $178.4 million for the full year 2010, a 10% reduction from fourth quarter 2009 expenses and a 20% reduction from full year 2009 expenses.
Profitability and Other Financial Measures
Net income was $5.3 million, or $0.05 per share, in the fourth quarter of 2010 and $81.5 million, or $0.74 per share, for the full year 2010. Net income excluding acquisition-related costs (a non-GAAP measure, see definition in “Non-GAAP Measures” below) was $21.6 million, or $0.19 per share, in the fourth quarter of 2010 and $98.9 million, or $0.90 per share, for the full year 2010. These compared to net income of $193.3 million, or $1.79 per share, in the fourth quarter of 2009, and $287.1 million, or $2.66 per share, for the full year 2009.
The fourth quarter and full year 2009 results included a $24.1 million non-cash impairment charge for goodwill and intangible assets and included an income tax benefit of $181.8 million and $126.1 million, respectively, primarily due to releases of EarthLink’s valuation allowance related to its deferred tax assets. The fourth quarter and full year 2010 results included a $1.7 million non-cash impairment charge for intangible assets and included an income tax provision of $7.7 million and $56.8 million, respectively.
EarthLink’s strong results in customer retention, combined with its ability to aggressively manage costs ahead of revenue declines, resulted in the company generating Adjusted EBITDA (a non-GAAP measure, see definition in “Non-GAAP Measures” below) of $54.2 million in the fourth quarter of 2010 and $219.1 million for the full year 2010. This compares to Adjusted EBITDA of $50.9 million for the fourth quarter 2009 and $249.1 million for the full year 2009.
Balance Sheet and Cash Flow
EarthLink generated free cash flow (a non-GAAP measure, see definition in “Non-GAAP Measures” below) of $38.9 million during the fourth quarter of 2010 and $195.1 million for the full year 2010, compared to $48.4 million in the fourth quarter of 2009 and $236.0 million in the full year 2009.
EarthLink ended 2010 with $563.1 million in cash and marketable securities, reflecting a decrease of $207.5 million from the prior quarter ended September 30, 2010. The company used $215.0 million of cash during the fourth quarter of 2010 in connection with its acquisition of Deltacom and pending acquisition of One Communications, which included the net cash to acquire Deltacom as well as one-time payments for banker fees, severance and stock award payouts. Capital expenditures for the company were $15.3 million in the fourth quarter and $24.0 million for the full year. EarthLink made $17.4 million of dividend payments in the fourth quarter, for a total of $67.5 million of dividend payments to shareholders during the full year 2010.
Business Outlook
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 announced guidance for the full year 2011, inclusive of the acquisition of Deltacom, but not including the pending acquisition of One Communications. Management expects 2011 Adjusted EBITDA of $250 million to $260 million; free cash flow of $160 million to $185 million; capital expenditures of $75 million to $90 million; and net income of $48 million to $53 million for the full year 2011. Subsequent to the closing of the One Communications acquisition, EarthLink will update its full year guidance.
Non-GAAP Measures
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 acquisition-related costs is defined as net income before acquisition-related costs, including an estimated tax impact.
Adjusted EBITDA, free cash flow and net income per share excluding 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 5 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, February 8, 2011, 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 “EarthLink’s 4th Quarter 2010 Conference” call and dial in 10 minutes prior to scheduled start time.
Webcast
A live Webcast of the conference call will be available at: http://ir.earthlink.net/index.cfm
Replay
Replay available from 11:30 a.m. ET on February 8 through 12:00 midnight on February 15.
Dial 800-642-1687 from US and Canada, International callers dial 706-645-9291.
The replay confirmation code is 40269024.
The Webcast will be archived on the company’s website at: http://ir.earthlink.net/events.cfm
Download the Fourth Quarter and full year ended December 31, 2010 Financial Statements
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, the successful completion of the pending acquisition of One Communications Corp., including the receipt of required regulatory approvals; the ability to realize expected 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 One Communications Corp. upon its acquisition without detracting from our current operations; and other unforeseen difficulties that may occur. These risks and uncertainties also include (1) that we may not be able to execute our business strategy to transition to a leading IP infrastructure and managed services provider, which could adversely impact our results of operations and cash flows; (2) that we may be unsuccessful in making and integrating acquisitions into our business, including integrating ITC^Deltacom, which could result in operating difficulties, losses and other adverse consequences; (3) that we are exposed to additional risks specific to ITC^DeltaCom’s business and industry, which could adversely affect our financial condition, results of operations and cash flows; (4) 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; (5) 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; (6) that we face significant competition which could reduce our profitability; (7) that adverse economic conditions may harm our business; (8) that our commercial and alliance arrangements may not be renewed or may not generate expected benefits, which could adversely affect our results of operations; (9) that our business is dependent on the availability of third-party telecommunications service providers; (10) 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; (11) 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; (12) 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; (13) 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; (14) that government regulations could adversely affect our business or force us to change our business practices; (15) that privacy concerns relating to our business could damage our reputation and deter current and potential users from using our services; (16) that we may not be able to protect our intellectual property; (17) 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; (18) that if we are unable to successfully defend against legal actions we could face substantial liabilities; (19) that our business depends on effective business support systems, processes and personnel; (20) 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; (21) 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; (22) 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; (23) that we may reduce, or cease payment of, quarterly dividends; (24) that our stock price may be volatile; (25) that our indebtedness could adversely affect our financial health and limit our ability to react to changes in our industry; and (26) 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, 2009 and our Form 10-Q for the period ended September 30, 2010.
About EarthLink
EarthLink, Inc. (NASDAQ: ELNK) is a leading provider of Internet Protocol (IP) infrastructure and services to medium-sized and large businesses, enterprise organizations and over 1.5 million consumers across the United States. The company has been providing Internet access and communications services for decades and has earned an award-winning reputation for both outstanding customer service and product innovation. For consumers, EarthLink is a leading Internet Service Provider connecting people to the power and possibilities of the Internet. EarthLink Business™ provides voice, data, mobile and equipment services over a Southeast fiber network and MPLS-based services nationwide. For more information, visit EarthLink’s website www.EarthLink.net.
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