EarthLink Holdings Corp.
Apr 28, 2009

EarthLink Announces First Quarter 2009 Results

ATLANTA, April 28, 2009 /PRNewswire via COMTEX News Network/ -- Beats First Call Consensus EPS Estimates; Raises Full Year Guidance

ATLANTA, April 28 /PRNewswire-FirstCall/ -- EarthLink, Inc. (Nasdaq: ELNK) today announced financial results for its first quarter ended March 31, 2009. Highlights for the first quarter include:

    --  Net income of $32.5 million or $0.30 per share
    --  Adjusted EBITDA (a non-GAAP measure) of $68.9 million
    --  Free cash flow (a non-GAAP measure) of $65.7 million
    --  Ending cash and marketable securities balance of $565.8 million
    --  Repurchased 3.6 million shares of common stock

    --  Increased full year Adjusted EBITDA (a non-GAAP measure) guidance to
        $220 million - $230 million

"In light of the difficult economic environment, we are especially pleased with our first quarter results. Most of our key metrics were in line with, or above expectations," stated EarthLink Chairman and Chief Executive Officer Rolla P. Huff. "Our disciplined approach to continuously re-building and right-sizing our consumer access business is continuing to generate significant cash flow and meaningful shareholder value. Based on subscriber trends and confidence in our ability to manage the cost structure of the business, we continue to expect total year 2009 Adjusted EBITDA margins to be consistent with total year 2008, and are therefore raising our previously announced guidance for full year 2009 results."

Financial and Operating Results

EarthLink reported revenue of $199.1 million in the first quarter of 2009, an 8 percent decrease from the fourth quarter of 2008 and a 24 percent decline compared to the first quarter of 2008. The sequential decline was expected based on historic seasonality in the first quarter, ongoing subscriber mix trends, and changes in the structure of certain partner relationships which contributed to lower revenue but higher gross margin percentages for this quarter.

Total sales and marketing, operations, customer support, and general and administrative expenses for the first quarter were $63.4 million, down 11 percent versus the prior quarter and a 33 percent improvement from the year-ago quarter. Despite the company's lowered investment in marketing spend for demand stimulation; EarthLink reported a sequential increase in gross subscriber adds over the prior quarter for its premium narrowband, value narrowband and DSL products.

Profitability and Other Financial Measures

EarthLink realized $32.5 million, or $0.30 per share, of income from continuing operations in the first quarter of 2009, a 33 percent improvement compared to $24.4 million, or $0.22 per share, in the fourth quarter of 2008, and down from $55.1 million, or $0.50 per share, reported in the first quarter of 2008. Net income was $32.5 million, or $0.30 per share, for the first quarter of 2009, up 33 percent from the prior quarter's net income of $24.4 million, or $0.22 per share, and down from $51.7 million, or $0.47 per share, in the year-ago quarter. The first quarter of 2009 included an income tax provision of $20.9 million, compared with $9.3 million in the first quarter of 2008 and an income tax benefit of $56.1 million in the fourth quarter of 2008 that was due to the partial release of EarthLink's valuation allowance related to its deferred tax assets.

The continued reductions in sales and marketing and back office support expenses resulted in EarthLink generating Adjusted EBITDA (a non-GAAP measure, see definition in "Non-GAAP Measures" below) of $68.9 million for the first quarter of 2009, as compared to $72.4 million in the fourth quarter of 2008 and $82.1 million in the first quarter of 2008.

Balance Sheet and Cash Flow

Free cash flow (a non-GAAP measure, see definition in "Non-GAAP Measures" below) was $65.7 million during the first quarter of 2009, compared to $70.1 million during the fourth quarter of 2008 and $81.7 million in the first quarter of 2008. The company had capital expenditures of $3.1 million in the first quarter of 2009.

EarthLink ended the first quarter with $565.8 million in cash and marketable securities, an increase of $31.5 million from December 31, 2008. EarthLink utilized $22.3 million in cash in the first quarter to repurchase 3.6 million shares of the company's common stock.

"EarthLink continued to opportunistically return cash to shareholders through stock buybacks in an economic environment where most companies are eliminating these types of programs," explained Huff. "We continue to believe that nothing should be off the table as we evaluate our future capital structure alternatives. The strength of our balance sheet during these uncertain economic times provides us the optionality to concurrently evaluate strategic alternatives that would create additional shareholder value. We continue to be disciplined and patient as we consider all of the opportunities available to the company."

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 the company is raising and narrowing its previously announced guidance for 2009. For full year 2009 management now expects Adjusted EBITDA of $220 million to $230 million. Full year guidance for free cash flow is being increased to $200 million to $220 million, based upon the aforementioned Adjusted EBITDA guidance along with $10 million to $20 million in estimated capital expenditures. Additionally, EarthLink now expects to generate income from continuing operations of $90 million to $100 million for full year 2009.

Non-GAAP Measures

Adjusted EBITDA is defined as income from continuing operations before interest expense and other, net, income taxes, depreciation and amortization, stock-based compensation expense under SFAS No. 123(R), gain (loss) on investments, net, impairment of goodwill and intangible assets, and facility exit and restructuring costs.

Free cash flow is defined as income from continuing operations before interest expense and other, net, income taxes, depreciation and amortization, stock-based compensation expense under SFAS No. 123(R), gain (loss) on investments, net, impairment of goodwill and intangible assets, and facility exit and restructuring 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 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, April 28, 2009, at 8:30 a.m. EDT hosted by EarthLink's Chairman and Chief Executive Officer, Rolla P. Huff and Chief Financial Officer, Kevin Dotts.


    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.

Webcast

A live Webcast of the conference call will be available at: http://ir.earthlink.net/index.cfm

Replay

Replay available from at 9:30 a.m. EDT 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 93310805.

The Webcast will be archived on the company's website at: http://ir.earthlink.net/events.cfm

About EarthLink

"EarthLink. We revolve around you(TM)." A leading Internet service provider, Atlanta-based EarthLink has earned an award-winning reputation for outstanding customer service and its suite of online products and services. 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 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 website at 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 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 face significant competition which could reduce our profitability; (3) that adverse economic conditions may harm our business; (4) 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; (5) 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; (6) that we may be unsuccessful in making and integrating acquisitions and investments into our business, which could result in operating difficulties, losses and other adverse consequences; (7) that our business is dependent on the availability of third-party telecommunications service providers; (8) that our commercial and alliance arrangements may not be renewed, which could adversely affect our results of operations; (9) that our business may suffer if third parties used for technical and customer service and technical 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 adversely affect our business or force us to change our business practices; (12) that privacy concerns relating to our business could damage our reputation and deter current and potential users from using our services; (13) that we may not be able to protect our intellectual property; (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 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 our VoIP business exposes us to certain risks that could cause us to lose customers, expose us to significant liability or otherwise harm our business; (19) 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; (20) that the use of our net operating losses and certain other tax attributes could be limited in the future; (21) that our stock price has been volatile historically and may continue to be volatile; (22) that our indebtedness could adversely affect our financial health and limit our ability to react to changes in our industry; and (23) 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, 2008.


                           EARTHLINK, INC.
      Unaudited Condensed Consolidated Statements Of Operations
                (in thousands, except per share data)

                                                    Three Months
                                                   Ended March 31,
                                                 ---------------------
                                                   2008      2009
                                                  ------    ------
    Revenues:
      Access and service                         $234,849  $178,698
      Value-added services                         28,225    20,365
                                                 --------  ---------
        Total revenues                            263,074   199,063

    Operating costs and expenses:
      Cost of revenues                             97,551    75,565
      Sales and marketing                          30,916    17,022
      Operations and customer support              39,224    27,746
      General and administrative                   24,926    18,622
      Amortization of intangible assets             4,013     2,147
      Facility exit and restructuring costs (1)     1,030       488
                                                 --------  ---------

        Total operating costs and expenses        197,660   141,590

    Income from operations                         65,414    57,473
    Gain on investments, net                            -       259
    Interest expense and other, net (2)            (1,041)   (4,291)
                                                 --------  ---------

        Income from continuing operations
         before income taxes                       64,373    53,441
    Income tax provision                           (9,274)  (20,944)
                                                 --------  ---------

        Income from continuing operations          55,099    32,497
    Loss from discontinued operations,
     net of tax (3)                                (3,392)        -
                                                 --------  ---------
        Net income                                $51,707   $32,497
                                                 ========  =========
    Basic net income per share
      Continuing operations                         $0.50     $0.30
      Discontinued operations                       (0.03)        -
                                                 --------  ---------

      Basic net income per share                    $0.47     $0.30
                                                 ========  =========
      Basic weighted average common
       shares outstanding                         109,493   108,071
                                                 ========  =========
    Diluted net income per share
      Continuing operations                         $0.50     $0.30
      Discontinued operations                       (0.03)        -
      Diluted net income per share                  $0.47     $0.30
                                                 ========  =========
      Diluted weighted average common
       shares outstanding                         110,300   109,168
                                                 ========  =========



                                 EARTHLINK, INC.
              Reconciliation of Income from Continuing Operations to
                              Adjusted EBITDA (5)
                                 (in thousands)

                                                Three Months Ended
                                              -----------------------
                                        March 31,    December 31,    March 31,
                                          2008           2008         2009
                                        --------     ------------    ---------

    Income from continuing operations    $55,099        $27,304      $32,497
    Income tax provision (benefit)         9,274        (56,107)      20,944
    Depreciation and amortization         10,482          6,982        6,509
    Stock-based compensation expense       5,152          5,814        4,390
    (Gain) loss on investments, net            -          2,969         (259)
    Interest expense and other, net (2)    1,041          1,747        4,291
    Impairment of goodwill and
     intangible assets (4)                     -         78,672            -
    Facility exit and restructuring
     costs (1)                             1,030          4,973          488
                                         -------        -------      --------
      Adjusted EBITDA (5)                $82,078        $72,354      $68,860
                                         =======        =======      ========

    Depreciation - cost of revenues       $3,436         $2,031       $1,890
    Depreciation - other                   3,033          2,755        2,472
    Amortization of intangible assets      4,013          2,196        2,147
                                         -------        -------      --------
      Depreciation and amortization      $10,482         $6,982       $6,509
                                         =======        =======      ========



                                  EARTHLINK, INC.
           Reconciliation of Income From Continuing Operations to Free
                                   Cash Flow (5)
                                  (in thousands)

                                                   Three Months Ended
                                                 -----------------------
                                        March 31,      December 31,  March 31,
                                          2008            2008         2009
                                        --------      ------------   ---------

    Income from continuing operations    $55,099         $27,304      $32,497
    Income tax provision (benefit)         9,274         (56,107)      20,944
    Depreciation and amortization         10,482           6,982        6,509
    Stock-based compensation expense       5,152           5,814        4,390
    (Gain) loss on investments, net            -           2,969         (259)
    Interest expense and other, net (2)    1,041           1,747        4,291
    Impairment of goodwill and intangible
     assets (4)                                -          78,672            -
    Facility exit and restructuring
     costs (1)                             1,030           4,973          488
    Purchases of property and equipment     (278)         (1,877)      (3,133)
    Purchases of subscriber bases           (117)           (352)           -
                                          -------        -------      --------
      Free cash flow (5)                 $81,683         $70,125      $65,727
                                          =======        =======      ========


                            EARTHLINK, INC.
        Reconciliation of Guidance Provided in Non-GAAP Measures (5)
                            (in millions)

                                                     Year
                                                    Ending
                                                 December 31,
                                                     2009
                                                 ------------
    Income from continuing operations              $90 - $100
    Depreciation                                       19
    Amortization of intangible assets                   9
    Stock-based compensation expense                   15
    Income tax provision                               70
    Interest expense and other, net (2)                17
                                                  -------------
      Adjusted EBITDA (5)                         $220 - $230
                                                  =============

                                                     Year
                                                    Ending
                                                 December 31,
                                                     2009
                                                 ------------
    Income from continuing operations              $90 - $100
    Depreciation                                      19
    Amortization of intangible assets                  9
    Stock-based compensation expense                  15
    Income tax provision                              70
    Interest expense and other, net (2)               17
    Purchases of property and equipment           (20) - (10)
                                                  -------------
      Free cash flow (5)                          $200 - $220
                                                  =============


                                  EARTHLINK, INC.
              Supplemental Financial Data and Key Operating Metrics


                                          March 31,   December 31,  March 31,
                                            2008         2008        2009
                                          ---------   ------------  ---------
    Balance Sheet Data                               (in thousands)
    Cash and marketable securities        $320,023      $534,373   $565,841
    Long-term debt                         258,750       258,750    258,750
    Stockholders' equity                   359,788       486,475    500,097

    Employee Data
    Number of employees at end of period (6)   922           754        717


                                          March 31,   December 31,  March 31,
                                            2008          2008        2009
                                          ---------   ------------  ---------
    Subscriber Data (7)
    Consumer services
      Narrowband access subscribers      2,368,000     1,747,000  1,587,000
      Broadband access subscribers (8)   1,026,000       896,000    856,000
                                         ---------     ---------  ---------
        Total consumer subscribers       3,394,000     2,643,000  2,443,000

    Business services
      Narrowband access subscribers         25,000        17,000     14,000
      Broadband access subscribers          65,000        59,000     57,000
      Web hosting accounts                  97,000        87,000     84,000
                                         ---------     ---------  ---------
        Total business subscribers         187,000       163,000    155,000

    Total subscribers at end of period   3,581,000     2,806,000  2,598,000
                                         =========     =========  =========

                                         Three Months Ended March 31,
                                         ----------------------------
                                             2008          2009
                                            ------        ------
    Subscriber Activity
    Subscribers at beginning of period    3,876,000     2,806,000
    Gross organic subscriber additions      253,000       116,000
    Adjustment (9)                                -        (7,000)
    Churn                                  (548,000)     (317,000)
                                          ---------     ---------
    Subscribers at end of period          3,581,000     2,598,000

    Churn Rate (10)                             4.9%          3.9%

    Consumer Data
    Average subscribers (11)              3,538,000     2,539,000
                                          =========     =========
    ARPU (12)                                $20.38        $20.95
    Churn rate (10)                             5.0%          4.0%

    Business Data
    Average subscribers (11)                190,000       160,000
    ARPU (12)                                $81.88        $82.37
    Churn rate (10)                             2.7%          3.1%



                              EARTHLINK, INC.
                Supplemental Schedule of Segment Information (13)
                              (in thousands)

                                         Three Months Ended March 31,
                                         ----------------------------
                                               2008     2009
                                              ------   ------
    Consumer Services
      Revenues
        Access and service                   $188,971 $139,790
        Value-added services                   27,373   19,772
                                              -------  -------
        Total revenues                        216,344  159,562
      Cost of revenues                         71,173   52,334
                                              -------  -------
      Gross margin                            145,171  107,228
      Segment operating expenses               61,001   37,206
                                              -------  -------

      Segment income from operations          $84,170  $70,022
                                              =======  =======
    Business Services
      Revenues
        Access and service                    $45,878  $38,908
        Value-added services                      852      593
                                              -------  -------
        Total revenues                         46,730   39,501
      Cost of revenues                         26,378   23,231
                                              -------  -------
      Gross margin                             20,352   16,270
      Segment operating expenses               14,871   11,259
                                              -------  -------
      Segment income from operations           $5,481   $5,011
                                              =======  =======
    Consolidated
      Revenues
        Access and service                   $234,849 $178,698
        Value-added services                   28,225   20,365
                                              -------  -------
        Total revenues                        263,074  199,063
      Cost of revenues                         97,551   75,565
                                              -------  -------
      Gross margin                            165,523  123,498
      Direct segment operating expenses        75,872   48,465
                                              -------  -------
      Segment income from operations           89,651   75,033
      Stock-based compensation expense          5,152    4,390
      Amortization of intangible assets         4,013    2,147
      Facility exit and restructuring costs (1) 1,030      488
      Other operating expenses                 14,042   10,535
                                              -------  -------
      Income from operations                  $65,414  $57,473
                                              =======  =======


                                  EARTHLINK, INC.
                  Footnotes to Consolidated Financial Highlights

    1.  In August 2007, EarthLink adopted a restructuring plan (the "2007
        Plan") to reduce costs and improve the efficiency of the Company's
        operations. The 2007 Plan was the result of a comprehensive review of
        operations within and across the Company's functions and businesses.
        Under the 2007 Plan, the Company reduced its workforce by
        approximately 900 employees, closed office facilities in Orlando,
        Florida; Knoxville,  Tennessee; Harrisburg, Pennsylvania; and San
        Francisco, California and consolidated its office facilities in
        Atlanta, Georgia and Pasadena,  California. The 2007 Plan was
        primarily implemented during the later half of 2007 and completed
        during 2008. Management continues to  evaluate EarthLink's businesses
        and, therefore, there may be supplemental provisions for new plan
        initiatives as well as changes in estimates to amounts previously
        recorded.

    2.  On January 1, 2009, the Company adopted Financial Accounting Standards
        Board Staff Position No. APB 14-1, "Accounting for Convertible Debt
        Instruments that May be Settled in Cash Upon Conversion" ("FSP APB 14-
        1"). FSP APB 14-1 requires that the liability and equity components of
        convertible debt instruments that may be settled in cash upon
        conversion (including partial cash settlement) be separately accounted
        for in a manner that reflects an issuer's non-convertible debt
        borrowing rate. The resulting debt discount is accreted over the
        period the convertible debt is expected to be outstanding as
        additional non-cash interest expense. FSP APB 14-1 requires
        retrospective application for all periods presented.  The adoption of
        FSP APB 14-1 on January 1, 2009 affected the accounting for the
        Company's Convertible Senior Notes due November 15, 2026  (the
        "Notes"), which were issued in November 2006. Upon adoption, the
        Company recorded an adjustment to increase additional paid-in capital
        as of the November 2006 issuance date by approximately $62.1 million.
        The Company is accreting the resulting debt discount to interest
        expense over the estimated five-year life of the Notes, which
        represents the first redemption date of November 2011. The Company
        recorded a pre-tax adjustment of approximately $22.3 million to
        retained earnings that represents the debt discount accretion during
        the years ended December 31, 2006, 2007 and 2008 and will recognize
        additional non-cash interest expense of $12.2 million, $13.4 million
        and $12.4 million during the years ending December 31, 2009, 2010 and
        2011, respectively, for accretion of the debt discount.

        The following table presents the adjusted amounts for interest expense
        and other, net, income from continuing operations and net income for
        each quarter in the year ended December 31, 2008 as a result of the
        retrospective application of FSP APB 14-1:



                                              Three Months Ended
                                              ------------------
                                      March 31, June 30  Sept. 30, Dec. 31,
                                        2008      2008      2008    2008
                                      --------- -------  --------- --------
                                                 (in thousands)
    Interest expense and other, net     $1,041   $3,482    $3,281   $4,605
    Income from continuing operations   55,099   54,969    52,576   24,446
    Net income                          51,707   50,604    51,895   24,378


    3.  In November 2007, management concluded that its municipal wireless
        broadband operations were no longer consistent with the Company's
        strategic direction and the Company's Board of Directors authorized
        management to pursue the divestiture of the Company's municipal
        wireless broadband assets. As a result of that decision, the Company
        presented the municipal wireless broadband results of operations as
        discontinued operations. As of December 31, 2008, the Company had
        completed the divestiture of its municipal wireless broadband assets.

    4.  During the fourth quarter of 2008, EarthLink concluded that the
        goodwill and certain of the intangible assets recorded as a result of
        its April 2006 acquisition of New Edge Networks were impaired and
        recorded a non-cash impairment charge of $78.7 million. EarthLink
        concluded the carrying value of its goodwill, customer relationships
        and trade names related to the New Edge acquisition were impaired in
        conjunction with its annual test of goodwill and intangible assets
        deemed to have indefinite lives as well as an updating of its long-
        term outlook.

    5.  Adjusted EBITDA is defined as income from continuing operations before
        interest expense and other, net, income taxes, depreciation and
        amortization, stock-based compensation under SFAS No. 123(R), gain
        (loss) on investments, net, impairment of goodwill and intangible
        assets, and facility exit and restructuring costs.  Free cash flow is
        defined as income from continuing operations before interest expense
        and other, net, income taxes, depreciation and amortization, stock-
        based compensation under SFAS No. 123(R), gain (loss) on investments,
        net, impairment of goodwill and intangible assets, and facility exit
        and restructuring costs, less cash used for purchases of property and
        equipment and purchases of subscriber bases.

        Adjusted EBITDA and free cash flow are non-GAAP measures and are not
        determined in accordance with U.S. generally accepted accounting
        principles. These financial performance measures are not indicative of
        cash provided or used by operating activities and may differ from
        comparable information provided by other companies, and they should
        not be considered in isolation, as an alternative to, or more
        meaningful than measures of financial performance determined in
        accordance with U.S. generally accepted accounting principles. These
        financial performance measures are commonly used in the industry and
        are presented because EarthLink believes they provide relevant and
        useful information to investors. EarthLink utilizes these financial
        performance measures to assess its ability to meet future capital
        expenditures and working capital requirements. EarthLink also uses
        these financial performance measures to evaluate the performance of
        its business, for budget planning purposes and as factors in its
        employee compensation programs.

    6.  Represents full-time equivalents.

    7.  Subscriber counts do not include nonpaying customers. Customers
        receiving service under promotional programs that include periods of
        free service at inception are not included in subscriber counts until
        they become paying customers.

    8.  Paying customers who subscribe to EarthLink DSL and Home Phone service
        are counted as both a broadband subscriber and a voice subscriber.

    9.  During the three months ended March 31, 2009, EarthLink removed
        approximately 7,000 satellite subscribers from its broadband
        subscriber count and total subscriber count as a result of the sale of
        these subscriber accounts.

    10. Churn rate is used to measure the rate at which subscribers
        discontinue service on a voluntary or involuntary basis.  Churn rate
        is computed by dividing the average monthly number of subscribers that
        discontinued service during the period by the average subscribers for
        the period.

    11. Average subscribers for the three month periods is calculated by
        averaging the ending monthly subscribers or accounts for the four
        months preceding and including the end of the quarterly period.

    12. ARPU represents the average monthly revenue per user (subscriber).
        ARPU is computed by dividing average monthly revenue for the period by
        the average number of subscribers for the period. Average monthly
        revenue used to calculate ARPU includes recurring service revenue as
        well as nonrecurring revenues associated with equipment and other one-
        time charges associated with initiating or discontinuing services.

    13. The Company reports segment information along the same lines that its
        chief executive officer reviews its operating results in assessing
        performance and allocating resources. The Company operates two
        reportable segments, Consumer Services and Business Services.  The
        Company's Consumer Services segment provides Internet access services
        and related value-added services to individual customers.  These
        services include dial-up and high-speed Internet access and voice
        services, among others. The Company's Business Services segment
        provides integrated communications services and related value-added
        services to businesses and communications carriers. These services
        include managed private IP-based wide area networks, dedicated
        Internet access and web hosting, among others.

        EarthLink evaluates performance of its operating segments based on
        segment income from operations. Segment income from operations
        includes revenues from external customers, related cost of revenues
        and operating expenses directly attributable to the segment, which
        include  expenses over which segment managers have direct
        discretionary control, such as advertising and marketing programs,
        customer support expenses, site operations expenses, product
        development expenses, certain technology and facilities expenses,
        billing operation and provisions for doubtful accounts. Segment income
        from operations excludes other income and expense items and certain
        expenses that segment managers do not have discretionary control over.
        Costs excluded from segment income from operations include various
        corporate expenses (consisting of certain costs such as corporate
        management, human resources, finance and legal), amortization of
        intangible assets, stock-based compensation expense under SFAS No.
        123(R), impairment of goodwill and intangible assets and facility exit
        and restructuring costs,  as they are not evaluated in the measurement
        of segment performance.

SOURCE EarthLink

http://www.earthlink.net

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