Atlanta, July 26, 2007 – EarthLink, Inc. (NASDAQ: ELNK) today announced financial results for its second quarter ended June 30, 2007.
Consolidated highlights for the quarter include:
"While EarthLink continues to see robust cash generation from our core access business, we have been challenged in achieving planned results in our emerging growth initiatives," said Rolla P. Huff, EarthLink president and chief executive officer. "Over the past four weeks, I have had an opportunity todo initial reviews of each of our business units, as well as the Helio investment".
"These initial reviews are confirming that we have a number of opportunities that are largely within our control to create meaningful shareholder value in the near term. These opportunities are centered around implementing a more focused business strategy and sizing our cost structure to fit our current business. I look forward to sharing our initial decisions and their impact on cash flow, no later than the end of the third quarter."
Kevin Dotts, EarthLink Chief Financial Officer stated, "Our ability to generate substantial cash in our core business is stronger than ever. During the second quarter, we generated record adjusted EBITDA from core access services of $68.3 million.The strength of our core business puts us in a very good position as we evaluate our current strategy and future course of action."
Operating and Financial Results
EarthLink Revenue and Subscribers
For the quarter, consolidated revenues decreased to $312.2 million, or 6.0 percent, compared to the second quarter of 2006. This decrease was driven primarily by declines in our consumer services, partially offset by growth in our business services.
For the second quarter, revenue from the business services segment increased to $48.1 million, or 6.0 percent, primarily due to New Edge Networks.
For the quarter, revenue from the consumer services segment decreased to $264.1 million, or 7.9 percent. Contributing to this change was a 10.2 percent decline to $231.7 million in our access services driven by declines in premium narrowband and broadband services, partially offset by growth in our value narrowband and voice access services. Additionally, positively impacting consumer services was a 13.5 percent increase to $32.4 million in value-added services revenue – the second-highest quarterly revenue for that segment in the company's history. The increase in value-added services revenue was driven primarily by growth in the sales of security-related products.
During the second quarter of 2007, EarthLink's overall subscribers declined by 177,000 net subscribers (excluding the previously announced removal of 753,000 Embarq subscribers) compared to the first quarter of 2007. This was primarily due to a decline in consumer premium and value narrowband access subscribers partially offset by growth in voice and municipal Wi-Fi subscribers.
EarthLink Profitability and Other Financial Measures
EarthLink's core access services continued to generate significant cash for reinvestment into our broadband growth initiatives. During the quarter, adjusted EBITDA from core access services (a non-GAAP measure, see definition in "Non-GAAP Measures" below) reached a record $68.3 million, compared to $64.1 million in the second quarter of 2006. This increase was due to improved operating efficiencies and decreased sales and marketing expenditures. While EarthLink decreased spending in its more mature services, EarthLink increased spending in its strategic growth areas during the second quarter of 2007. For the second quarter of 2007, EarthLink incurred $32.3 million of operating and marketing expenses for its growth initiatives compared to $21.0 million in the second quarter of 2006. This spending is to further develop and market our broadband growth initiatives, including voice, municipal Wi-Fi and business services. Consequently, for the second quarter of 2007, the adjusted EBITDA (a non-GAAP measure, see definition in "Non-GAAP Measures" below) was $36.0 million, a 16.4 percent decrease compared to the second quarter of 2006.
For the quarter, operating income from the consumer services segment was $36.5 million, a decrease of 12.5 percent compared to the prior year second quarter. This decline was primarily due to a decrease in gross margin contribution from narrowband access related to a decrease in narrowband subscribers and revenues.
For the quarter, operating income from the business services segment was $2.5 million, a decrease of 57.9 percent compared to the prior year second quarter. This decline was primarily due to decreases in higher margin legacy access products like business narrowband, DSL and web hosting, partially offset by growth in lower margin products related to New Edge Networks. Another factor contributing to the decline was increased operating and sales and marketing expenditures related primarily to New Edge Networks. Due to the complex nature of selling and provisioning multi-location business broadband products, these products tend to have very long sales and installation cycles. As such, current New Edge Networks marketing expenditures are not expected to generate meaningful benefits of increased customer and revenue growth for several quarters.
The increase in spending related to the growth initiatives noted above coupled with the Helio equity loss of $(40.1) million, resulted in a net loss for the quarter of $(16.3) million, or $(0.13) per share, compared to net income of $16.6 million, or $0.12 per share, in the prior year quarter.
Helio Operating Performance and Profitability
In the second quarter, Helio continued to grow its business and expand its service and device offerings. In the second quarter, Helio exceeded the 100,000 subscriber milestone after only one year of launching the Helio branded service. During the quarter, Helio also launched its fifth exclusive device – the Ocean –its flagship device – the world's first dual slide handset with a full numeric and QWERTY keypad.
Additionally, in the second quarter of 2007, Helio generated $33.2 million in revenue, while its net loss was $(83.8) million during the quarter, as it continued to make investments in infrastructure, products and marketing to support future growth.
EarthLink Balance Sheet and Cash Flow
As a result of the increase in activity related to EarthLink's strategic growth initiatives, free cash flow (a non-GAAP measure, see definition in "Non-GAAP Measures" below) was $21.8 million during the second quarter of 2007 compared to $35.3 million in the second quarter of 2006.
During the second quarter, the company had capital expenditures including subscriber base acquisitions of $14.2 million and the company contributed its remaining $6.0 million capital commitment to Helio under the original partnership agreement. EarthLink ended the quarter with $383.4 million in cash and marketable securities, up 62.3 percent from the prior year second quarter.
Subsequent to the quarter end, EarthLink and SK Telecom entered into a lending arrangement with Helio whereby each could provide up to $100 million in additional funding to Helio, subject to future approval of funding requirements. EarthLink and SK Telecom have each approved initial funding of $30 million, to be made on or about July 27, 2007. This loan will be used by Helio to fund day-to-day operating activities to allow Helio to continue to grow its business.
Adjusted EBITDA is defined as earnings before interest income and other, net, income taxes, depreciation and amortization, stock-based compensation expense under SFAS No. 123(R), net losses of equity affiliate, gain on investments in other companies, and facility exit and restructuring costs.
Adjusted EBITDA from core access services is defined as earnings before interest income and other, net, income taxes, depreciation and amortization, stock-based compensation expense under SFAS No. 123(R), net losses of equity affiliate, gain on investments in other companies, facility exit and restructuring costs, and net investments in growth initiatives.
Free cash flow is defined as income from operations before facility exit and restructuring costs, stock-based compensation expense under SFAS No. 123(R) and depreciation and amortization, less cash used for purchases of property and equipment and purchases of subscriber bases.
Adjusted EBITDA, adjusted EBITDA from core access services 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 1 of the Consolidated Financial Highlights for a discussion of the presentation, comparability and use of such financial performance measures.
These 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.
EarthLink is revising its previously issued guidance for 2007. Based on current results and expectations, excluding the one-time adjustment related to the removal of Embarq subscribers, EarthLink now expects year ending subscribers to decline by 450,000 to 500,000, and the company expects to generate approximately $1.225 billion to $1.240 billion in consolidated revenue. The company is reaffirming its previously issued guidance for adjusted EBITDA from core access services of $190.0 million to $200.0 million and $108.0 million to $118.0 million for adjusted EBITDA for the year. Additionally, the company expects its consolidated net loss to $(110.0) million to $(140.0) million for the year.
The company is also reaffirming its previously issued guidance for Helio. EarthLink expects Helio to end the year with 200,000 to 250,000 subscribers, revenue of $140.0 million to $170.0 million, a net loss for the year of $(330.0) million to $(360.0) million, andEarthLink expects to record an equity loss of $(160.0) million to $(180.0) million reflecting its proportionate share of Helio's expected net loss, net of certain amortization related transactions.
For the third quarter 2007, EarthLink expects consolidated revenues to be $295.0 million to $300.0 million, and adjusted EBITDA to be $20.0 million to $25.0 million. EarthLink expects to record a net loss of $(40.0) million to $(50.0) million for the quarter driven by a Helio equity loss of $(45.0) million to $(50.0) million.
Conference Call for Analysts and Investors
Investors in the U.S. and Canada interested in participating in the conference call on July 26, 2007 at 8:30 a.m. Eastern Daylight Time (EDT) may dial 1-800-706-0730 and reference the EarthLink call. Other international investors may dial 1-706-634-5173 and also reference the EarthLink call. EarthLink recommends dialing into the call approximately 10 minutes prior to the scheduled start time. Investors also will have the opportunity to listen to a live Webcast of the conference call via the Internet at the following site: http://ir.earthlink.net/ A taped replay will be available beginning at 10:30 a.m. EDT on July 26, 2007 through midnight on August 2, 2007 by dialing 1-800-642-1687. International callers should dial 1-706-645-9291. The replay confirmation code is 6321157.
The Webcast of this call will be archived on EarthLink's site at: http://ir.earthlink.net/events.cfm
"EarthLink. We revolve around you™." As the nation's next generation Internet service provider, Atlanta-based EarthLink has earned an award-winning reputation for outstanding customer service and its suite of online products and services. Serving over five million subscribers, EarthLink offers what every user should expect from their Internet experience: high-quality connectivity, minimal online intrusions and customizable features. Whether it's dial-up, high-speed, voice, Web hosting, wireless 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 http://www.earthlink.net.
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 include, without limitation, (1) that we may not successfully enhance existing or develop new products and services in a cost-effective manner to meet customer demand in the rapidly evolving market for Internet, wireless and IP-based voice communications services, including new products and services offered in connection with our voice and municipal broadband network growth initiatives, and we expect these growth initiatives to not be profitable in their early stages; (2) that our service offerings may fail to be competitive with existing and new competitors; (3) that competitive product, price or marketing pressures could cause us to lose existing customers to competitors (churn), or may cause us to reduce prices for our services which could adversely impact average revenue per user; (4) that we may be unsuccessful in making and integrating acquisitions into our business, which could result in operating difficulties, losses and other adverse consequences; (5) that the continued decline of our narrowband revenues could adversely affect our profitability and adversely impact our ability to invest in our growth initiatives; (6) that we may not be able to successfully manage the costs associated with delivering our wireline broadband services, which could adversely affect our ability to grow or sustain revenues and our profitability; (7) that companies may not provide last mile broadband access to us on a wholesale basis or on terms or at prices that allow us to grow and be profitable; (8) that our commercial and alliance arrangements may be terminated or may not be as beneficial as anticipated, which could adversely affect our ability to increase our subscriber base; (9) that our business may suffer if our third-parties for technical and customer support and certain billing services are unable to provide these services, cannot expand to meet our needs or terminate their relationships with us; (10) that service interruptions or impediments could harm our business; (11) that government regulations could force us to change our business practices; (12) that changes in, or interpretations of, laws regarding consumer protection could subject us to liability or cause us to change our practices; (13) that we may not be able to protect our proprietary technologies or successfully defend infringement claims and may be required to enter licensing arrangements on unfavorable terms; (14) 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; (15) that we could face substantial liabilities if we are unable to successfully defend against legal actions; (16) that our business depends on the continued development of effective business support systems, processes and personnel; (17) 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; (18) that we may not be successful in entering into arrangements with municipalities to build out and operate municipal wireless broadband networks and we may not obtain a sufficient number of customer to generate the returns anticipated on our investments to construct and deploy municipal wireless broadband networks; (19) that municipal wireless networks may not perform as expected or may result in unanticipated costs, which could increase our churn and our cost of providing services; (20) that we may experience difficulties in constructing, upgrading and maintaining our municipal wireless network, which could adversely affect customer satisfaction, increase subscriber churn and reduce our revenues; (21) that the market for VoIP services may not develop as anticipated, which would adversely affect our ability to execute our voice strategy; (22) that certain aspects of our VoIP service are not the same as traditional telephone service, which may limit the acceptance of our services by mainstream consumers and our potential for growth; (23) that our E911 emergency services are different from those offered by traditional wireline telephone companies and may expose us to significant liability; (24) that our ability to provide our VoIP service is dependent upon third-party facilities and equipment, the failure of which could cause delays or interruptions of our service, damage our reputation, cause us to lose customers and limit our growth; (25) that we may not realize the benefits we are seeking from our investments in the HELIO joint venture or other investment activities as a result of lower than predicted revenues or subscriber levels of the companies in which we invest, larger funding requirements for those companies or otherwise; (26) that our stock price has been volatile historically and may continue to be volatile; (27) that our indebtedness could adversely affect our financial health and limit our ability to react to changes in our industry or to implement our strategic initiatives; (28) that we may be unable to repurchase our convertible senior notes for cash when required by the holders, including following a fundamental change, or to pay the cash portion of the conversion value upon conversion of any notes by the holders; (29) that the convertible note hedge and warrant transactions may affect the value of our common stock; and (30) that some provisions of Delaware law, our second restated certificate of incorporation and amended and restated bylaws may be deemed to have an anti-takeover effect and may delay or prevent a tender offer to takeover attempt that a stockholder might consider in its best interest. 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, 2006, as amended