ATLANTA — April 28, 2011 — EarthLink, Inc. (NASDAQ:ELNK, news, filings) today announced financial results for its first quarter ended March 31, 2011. EarthLink's first quarter results do not include any operating results from the acquisition of One Communications which closed on April 1, 2011.
Highlights for the first quarter include:
- Record low consumer churn
- Net income of $16.4 million or $0.15 per share
- Adjusted EBITDA (a non-GAAP measure) of $69.7 million
- Free cash flow (a non-GAAP measure) of $52.0 million
- Repurchased 2.1 million shares of stock
- Dividend payments of $6.2 million
- Ending cash and marketable securities balance of $551.6 million
- Revised full year 2011 Adjusted EBITDA guidance to $305 to $315 million to include One Communications
"Our results reflect the evolution of EarthLink to a leading IP solutions provider with well over half of our revenue in the quarter generated from our EarthLink Business segment. That proportion will increase next quarter as we layer in the One Communications revenue stream," stated EarthLink Chairman and Chief Executive Officer Rolla P. Huff. "At the same time, our EarthLink Consumer business remains strong and continues to generate significant cash flow. We are pleased that we have been able to add scale to our business while maintaining healthy Adjusted EBITDA results and are on track to achieve the synergy targets outlined with each acquisition. Strategically, we continue to look for ways to leverage our newly-acquired fiber assets and customer bases by expanding our product and service capabilities, allowing us to further improve the growth profile of our business."
Financial and Operating Results
For the first quarter of 2011, EarthLink reported revenue of $243.0 million, an increase of 55 percent from the first quarter of 2010 due to the acquisitions of ITC^DeltaCom and STS Telecom. As a result of these acquisitions and organic growth at the company's legacy New Edge subsidiary, business services comprised 59% of EarthLink's total revenue in the first quarter of 2011, up from 21% in the year-ago quarter. Within the consumer segment, 64% of EarthLink's consumer access revenue was generated from broadband services in the first quarter of 2011, up from 61% in the year-ago quarter.
For the company's consumer segment, net subscriber losses were 79,000 in the first quarter, slightly better than the seasonally low fourth quarter of 2010 and an improvement from 114,000 in the year-ago quarter. This demonstrates the continued attenuation in EarthLink's consumer business driven by the increasing tenure of the customer base and the company's second consecutive quarter of record performance in customer churn. Consumer subscriber churn for the first quarter of 2011 was 2.7%, down from 2.8% in the fourth quarter of 2010 and 3.1% in the first quarter of 2010.
Total sales and marketing, operations, customer support, and general and administrative expenses were $73.2 million for the first quarter of 2011, representing 30% of revenue. These expenses were 31% of revenue in the fourth quarter of 2010 and 28% of revenue in the first quarter 2010. Total sales and marketing, operations, customer support, and general and administrative expenses for the first quarter of 2011 included $35.7 million attributable to ITC^DeltaCom.
Profitability and Other Financial Measures
Net income in the first quarter of 2011 was $16.4 million, or $0.15 per share, as compared to net income of $5.3 million, or $0.05 per share, in the fourth quarter of 2010, and $26.7 million, or $0.25 per share, in the first quarter of 2010.
The inclusion of ITC^DeltaCom's results for the first quarter of 2011, EarthLink's ability to layer on revenue streams while aggressively managing costs and synergy opportunities, and historically high customer retention resulted in the company generating Adjusted EBITDA (a non-GAAP measure, see definition in "Non-GAAP Measures" below) of $69.7 million in the first quarter of 2011, as compared to $54.2 million in the fourth quarter 2010 and $57.3 million in the first quarter of 2010.
Balance Sheet and Cash Flow
During the first quarter of 2011, EarthLink generated free cash flow (a non-GAAP measure, see definition in "Non-GAAP Measures" below) of $52.0 million as compared to $38.9 million in the fourth quarter of 2010 and $54.2 million in the year-ago quarter.
The company ended the first quarter of 2011 with $551.6 million in cash and marketable securities, a decrease of $11.4 million from the prior quarter ended December 31, 2010. Capital expenditures were $17.7 million for the first quarter of 2011. Also during the quarter, EarthLink used approximately $30.0 million of cash for its acquisition of STS Telecom, repurchased 2.1 million shares of common stock at an average price of $7.99 per share and made $6.2 million of dividend payments to shareholders. Subsequent to quarter-end, EarthLink used approximately $337.0 million of cash in connection with the closing of its acquisition of One Communications on April 1, 2011.
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 updated guidance for the full year 2011 inclusive of the acquisition of One Communications which closed on April 1, 2011. Management now expects 2011 Adjusted EBITDA of $305 million to $315 million; free cash flow of $175 million to $200 million; capital expenditures of $115 million to $130 million; and net income of $13 million to $20 million for the full year 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.
Adjusted EBITDA and free cash flow are non-GAAP financial performance measures. They should not be considered in isolation or as an alternative to measures determined in accordance with U.S. generally accepted accounting principles. Please refer to the Consolidated Financial Highlights for a reconciliation of these non-GAAP financial performance measures to the most comparable measures reported in accordance with U.S. generally accepted accounting principles and Footnote 3 of the Consolidated Financial Highlights for a discussion of the presentation, comparability and use of such financial performance measures.
Conference Call for Analysts and Investors
Conference Call Details
Thursday, April 28, 2011, at 8:30 a.m. ET hosted by EarthLink's Chairman and Chief Executive Officer Rolla P. Huff, President and Chief Operating Officer Joseph M. Wetzel, 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/events.cfm
Replay available from 11:30 a.m. ET on April 28 through midnight on May 5.
Dial 800-642-1687 from US and Canada, International callers dial 706-645-9291.
The replay confirmation code is 59102682.
The Webcast will be archived on the company's website at: http://ir.earthlink.net/events.cfm
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 (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, which could result in operating difficulties, losses and other adverse consequences; (3) that the continuing effects of adverse economic conditions could harm our business; (4) that if we do not continue to innovate and provide products and services that are useful to individual subscribers and business customers, we may not remain competitive, and our revenues and operating results could suffer; (5) that our failure to implement cost reduction initiatives will adversely affect our results of operations; (6) that we will require a significant amount of cash, which may not be available to us, to service our debt and fund our other liquidity needs; (7) that we face significant competition in the Internet industry that could reduce our profitability; (8) that our consumer business is dependent on the availability of third-party network service providers; (9) that the continued decline of our consumer access subscribers, combined with the change in mix of our consumer access base from narrowband to broadband, will adversely affect our results of operations; (10) that our commercial and alliance arrangements may not be renewed or may not generate expected benefits, which could adversely affect our results of operations; (11) that privacy concerns relating to our business could damage our reputation and deter current and potential users from using our services; (12) that changes in technology in the Internet access industry could cause a decline in our business; (13) that we face significant competition in the communications industry that could reduce our profitability; (14) that decisions by the Federal Communications Commission relieving ILECs 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; (15) that our wholesale services, including our broadband transport services, will be adversely affected by pricing pressure, network overcapacity, service cancellations and other factors; (16) that our operating performance will suffer if we are not offered competitive rates for the access services we need to provide our long distance services; (17) that we may experience reductions in switched access and reciprocal compensation revenue; (18) that our inability to maintain our network infrastructure, portions of which we do not own, could adversely affect our operating results; (19) 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; (20) that we may not be able to compete effectively if we are unable to install additional network equipment or convert our network to more advanced technology; (21) that failure to obtain and maintain necessary permits and rights-of-way could interfere with our network infrastructure and operations; (22) that we may be unable to retain sufficient qualified personnel, and the loss of any of our key executive officers could adversely affect us; (23) 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; (24) that our business depends on effective business support systems and processes; (25) that government regulations could adversely affect our business or force us to change our business practices; (26) 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; (27) that we may not be able to protect our intellectual property; (28) 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; (29) that if we, or other industry participants, are unable to successfully defend against legal actions, we could face substantial liabilities or suffer harm to our financial and operational prospects; (30) 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; (31) that we may have to undertake further restructuring plans that would require additional charges, including incurring facility exit and restructuring charges; (32) 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; (33) that we may reduce, or cease payment of, quarterly cash dividends; (34) that our stock price may be volatile; (35) that our indebtedness could adversely affect our financial health and limit our ability to react to changes in our industry; and (36) 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, 2010.
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.