EarthLink Holdings Corp.
Oct 27, 2009

EarthLink Announces Third Quarter 2009 Results

ATLANTA, Oct 27, 2009 /PRNewswire-FirstCall via COMTEX News Network/ -- EarthLink, Inc. (Nasdaq: ELNK) today announced financial results for its third quarter ended September 30, 2009. Highlights for the third quarter include:

    --  Net income of $29.9 million or $0.28 per share
    --  Adjusted EBITDA (a non-GAAP measure) of $60.9 million
    --  Free cash flow (a non-GAAP measure) of $55.3 million
    --  Ending cash and marketable securities balance of $654.9 million

    --  Increased and narrowed full year 2009 Adjusted EBITDA (a non-GAAP
        measure) guidance to $243 million - $248 million

"We are pleased with our third quarter operating performance," stated EarthLink Chairman and Chief Executive Officer Rolla P. Huff. "Adjusted EBITDA, free cash flow and net income all came in at the high end of our estimates and as a result, we are slightly raising our full year 2009 guidance. This increased guidance includes the cost of fourth quarter productivity enhancements and the resulting cost rightsizing that continues to occur in our business. These fourth quarter initiatives are part of our ongoing and proactive efforts to reduce our cost structure."

"Last week, we announced the approval of our second consecutive quarterly dividend payment," added Huff. "We believe our financial strength and future cash flow continue to provide our company meaningful flexibility in considering value creating options for our shareholders."

Financial and Operating Results

Revenue for the third quarter of 2009 was $174.5 million, a decline of 6 percent from the second quarter of 2009 and 24 percent from the year-ago quarter. The pace of revenue declines in EarthLink's consumer business continues to decelerate as this quarter the company reported single digit million dollar sequential revenue declines in its consumer segment.

EarthLink reported net subscriber losses of 146,000 for the quarter, a decrease from 149,000 in the second quarter of 2009 and 275,000 in the year-ago quarter. Subscriber churn was flat with the second quarter of 2009 at 3.6%, and an improvement from 4.2% in the third quarter of 2008.

These trends represent the increasing tenure of EarthLink's customer base and ongoing shift to broadband products offsetting seasonally lower churn in the second quarter. In the third quarter of 2009, 80% of EarthLink's consumer customers had two or more years of tenure with the company, nearly 40% had five or more years of tenure, and broadband products comprised 57% of EarthLink's revenue.

Total sales and marketing, operations, customer support, and general and administrative expenses for the third quarter were $53.9 million, down 2 percent versus the prior quarter and 32 percent from the year-ago quarter. EarthLink continues to invest opportunistically in select marketing channels which are generating positive lifetime value customers and to implement cost reduction initiatives to align costs with the revenue trends.

Profitability and Other Financial Measures

EarthLink realized $29.9 million, or $0.28 per share, of income from continuing operations in the third quarter of 2009, down from $31.5 million, or $0.29 per share, in the second quarter of 2009, and from $52.6 million, or $0.47 per share, in the third quarter of 2008.

Net income was $29.9 million, or $0.28 per share, for the third quarter of 2009 as compared to $31.5 million, or $0.29 per share, in the prior quarter, and $51.9 million, or $0.46 per share, in the year-ago quarter. Included in the change from the year-ago quarter was a $9.0 million increase in the company's income tax provision, primarily due to an increase in non-cash deferred taxes resulting from the use of the company's net operating loss carryforwards (NOLs) and a $4.3 million decrease in gain on investments, net.

The decelerating revenue declines, combined with continued reductions in cost of revenues, 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 $60.9 million for the third quarter of 2009, as compared to $68.5 million in the second quarter of 2009 and $74.0 million in the third quarter of 2008.

Balance Sheet and Cash Flow

Free cash flow (a non-GAAP measure, see definition in "Non-GAAP Measures" below) was $55.3 million during the third quarter of 2009, compared to $66.6 million during the second quarter of 2009 and $71.6 million in the third quarter of 2008. During the quarter, EarthLink made $15.0 million of dividend payments and had capital expenditures of $5.6 million. EarthLink ended the third quarter with $654.9 million in cash and marketable securities, an increase of $44.5 million from June 30, 2009.

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 is raising and narrowing the ranges on its previously announced guidance for the full year 2009. Management now expects 2009 Adjusted EBITDA of $243 million to $248 million and 2009 free cash flow of $225 million to $235 million, based upon the aforementioned Adjusted EBITDA guidance combined with $13 million to $18 million in estimated capital expenditures. Additionally, EarthLink now expects to generate income from continuing operations of $110 million to $115 million for full year 2009.

Payment of Quarterly Dividend

On October 21, 2009, EarthLink announced that its Board of Directors had approved payment of its quarterly cash dividend on its common stock in the amount of $0.14 per share to be paid on December 23, 2009 to shareholders of record on December 9, 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, 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, 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 4 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 27, 2009, at 8:30 a.m. EDT 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.

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 October 27 through midnight on November 3.

Dial 800-642-1687 from US and Canada, International callers dial 706-645-9291.

The replay confirmation code is 33409322.

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

2010 Annual Meeting of Stockholders

EarthLink's 2010 Annual Meeting of Stockholders is scheduled for May 4, 2010.

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 and we will have less ability in the future to implement offsetting cost reductions; (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 we may reduce, or cease payment of, quarterly cash dividends; (23) that our indebtedness could adversely affect our financial health and limit our ability to react to changes in our industry; and (24) 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       Nine Months
                                                Ended            Ended
                                            September 30,    September 30,
                                         -----------------  ------------------
                                          2008      2009     2008      2009
                                          -----     -----    -----     -----
    Revenues:
      Access and service               $206,693  $156,731  $661,583  $502,347
      Value-added services               24,138    17,790    77,925    56,834
                                          -----     -----     -----     -----
        Total revenues                  230,831   174,521   739,508   559,181

    Operating costs
     and expenses:
      Cost of revenues                   87,616    66,885   277,655   211,720
      Sales and marketing                22,191    13,840    78,913    45,405
      Operations and
       customer support                  34,048    23,569   106,914    75,255
      General and administrative         23,316    16,472    72,010    51,503
      Amortization of
       intangible assets                  3,153     2,039    11,153     6,224
      Facility exit and
       restructuring costs (1)            1,078       (97)    4,169     5,318
                                          -----     -----     -----     -----
        Total operating
         costs and expenses             171,402   122,708   550,814   395,425

    Income from operations               59,429    51,813   188,694   163,756
    Gain on investments, net              4,352        35     5,677       305
    Interest expense and
     other, net (2)                      (3,281)   (5,067)   (7,804)  (14,458)
                                          -----     -----     -----     -----
        Income from continuing
         operations before income taxes  60,500    46,781   186,567   149,603
    Income tax provision                 (7,924)  (16,914)  (23,923)  (55,754)
                                          -----     -----     -----     -----
        Income from continuing
         operations                      52,576    29,867   162,644    93,849
    Loss from discontinued
     operations, net of tax (3)            (681)        -    (8,438)        -
                                          -----     -----     -----     -----
        Net income                      $51,895   $29,867  $154,206   $93,849
                                          =====     =====     =====     =====

    Basic net income per share
      Continuing operations               $0.48     $0.28     $1.48     $0.88
      Discontinued operations             (0.01)        -     (0.08)        -
                                          -----     -----     -----     -----
      Basic net income per share          $0.47     $0.28     $1.40     $0.88
                                          =====     =====     =====     =====
      Basic weighted average common
       shares outstanding               110,153   106,615   109,895   106,853
                                          =====     =====     =====     =====

    Diluted net
     income per share
      Continuing operations               $0.47     $0.28     $1.46     $0.87
      Discontinued operations             (0.01)        -     (0.08)        -
                                          -----     -----     -----     -----
      Diluted net income per share        $0.46     $0.28     $1.38     $0.87
                                          =====     =====     =====     =====
      Diluted weighted average
       common shares outstanding        112,039   107,943   111,534   108,052
                                          =====     =====     =====     =====



                                    EARTHLINK, INC.
    Reconciliation of Income from Continuing Operations to Adjusted EBITDA (4)
                                    (in thousands)

                                                  Three Months Ended
                                                 --------------------
                                   September 30,    June 30,    September 30,
                                        2008          2009           2009
                                       -----         -----          -----

    Income from continuing
     operations                        $52,576      $31,485         $29,867
    Income tax provision                 7,924       17,896          16,914
    Depreciation and amortization        8,881        6,069           6,032
    Stock-based compensation expense     4,597        3,026           3,136
    Gain on investments, net            (4,352)         (11)            (35)
    Interest expense and other, net (2)  3,281        5,100           5,067
    Facility exit and restructuring
     costs (1)                           1,078        4,927             (97)
                                         -----        -----           -----
      Adjusted EBITDA (4)              $73,985      $68,492         $60,884
                                         =====        =====           =====

    Depreciation - cost of revenues     $2,843       $1,996          $1,908
    Depreciation - other                 2,885        2,035           2,085
    Amortization of intangible
     assets                              3,153        2,038           2,039
                                         -----        -----           -----
      Depreciation and amortization     $8,881       $6,069          $6,032
                                         =====        =====           =====



                                   EARTHLINK, INC.
    Reconciliation of Income From Continuing Operations to Free Cash Flow (4)
                                  (in thousands)

                                            Three Months Ended
                                           --------------------
                                September 30,  June 30,      September 30,
                                     2008        2009            2009
                                    -----       -----           -----

    Income from continuing
     operations                   $52,576     $31,485          $29,867
    Income tax provision            7,924      17,896           16,914
    Depreciation and
     amortization                   8,881       6,069            6,032
    Stock-based
     compensation expense           4,597       3,026            3,136
    Gain on investments,
     net                           (4,352)        (11)             (35)
    Interest expense and
     other, net (2)                 3,281       5,100            5,067
    Facility exit and
     restructuring costs (1)        1,078       4,927              (97)
    Purchases of
     property and
     equipment                     (1,619)     (1,927)          (5,588)
    Purchases of
     subscriber bases                (753)          -                -
                                    -----       -----            -----
      Free cash flow (4)          $71,613     $66,565          $55,296
                                    =====       =====            =====



                               EARTHLINK, INC.
     Reconciliation of Guidance Provided in Non-GAAP Measures (4)
                               (in millions)

                                    Year
                                   Ending
                                December 31,
                                    2009
                                   -----
    Income from continuing
     operations                  $110 - $115
    Depreciation                      16
    Amortization of
     intangible assets                 8
    Stock-based
     compensation expense             14
    Income tax provision              70
    Facility exit and
     restructuring costs (1)           5
    Interest expense and
     other, net (2)                   20
                                     -----
      Adjusted EBITDA (4)        $243 - $248
                                     =====



                                    Year
                                   Ending
                                December 31,
                                    2009
                                   -----
    Income from continuing
     operations                  $110 - $115
    Depreciation                      16
    Amortization of
     intangible assets                 8
    Stock-based
     compensation expense             14
    Income tax provision              70
    Facility exit and
     restructuring costs (1)           5
    Interest expense and
     other, net (2)                   20
    Purchases of property
     and equipment                (18) - (13)
                                     -----
      Free cash flow (4)         $225 - $235
                                     =====


                                EARTHLINK, INC.
             Supplemental Financial Data and Key Operating Metrics

                        September 30,  December 31,  June 30,  September 30,
                            2008          2008         2009        2009
                           -----         -----        -----       -----
    Balance Sheet Data                (dollars in thousands)
    Cash and marketable
     securities          $484,967     $534,373      $610,349     $654,872
    Convertible Senior
     Notes (5)            258,750      258,750       258,750      258,750
    Stockholders' equity  452,631      486,475       539,809      561,540

    Employee Data
    Number of employees at
     end of period (6)        789          754           693          660



                        September 30,  December 31,  June 30,  September 30,
                            2008          2008         2009        2009
                           -----         -----        -----       -----
    Subscriber Data (7)
    Consumer services
      Narrowband access
       subscribers      1,920,000    1,747,000     1,456,000    1,329,000
      Broadband access
       subscribers (8)    933,000      896,000       845,000      832,000
                            -----        -----         -----        -----
        Total consumer
         subscribers    2,853,000    2,643,000     2,301,000    2,161,000

    Business services
      Narrowband access
       subscribers         19,000       17,000        11,000        9,000
      Broadband access
       subscribers         61,000       59,000        56,000       55,000
      Web hosting accounts 91,000       87,000        81,000       78,000
                            -----        -----         -----        -----
        Total business
         subscribers      171,000      163,000       148,000      142,000

    Total subscribers at
     end of period      3,024,000    2,806,000     2,449,000    2,303,000
                            =====        =====         =====        =====


                   Three Months Ended     Nine Months Ended
                     September 30,          September 30,
                  -------------------    ------------------
                      2008       2009        2008       2009
                     -----      -----       -----      -----
    Subscriber Activity
    Subscribers
     at beginning
     of period     3,299,000  2,449,000   3,876,000  2,806,000
    Gross organic
     subscriber
     additions       137,000    108,000     552,000    344,000
    Acquired
     subscribers       2,000          -       2,000          -
    Adjustment (9)   (15,000)         -     (15,000)    (7,000)
    Churn           (399,000)  (254,000) (1,391,000)  (840,000)
                        -----      -----       -----      -----
    Subscribers
     at end of
     period        3,024,000  2,303,000   3,024,000  2,303,000
                       =====      =====       =====      =====

    Churn Rate (10)      4.2%       3.6%        4.5%       3.7%

    Consumer Data
    Average sub-
     scribers (11) 2,980,000  2,207,000   3,256,000  2,382,000
    ARPU (12)         $21.00     $20.87      $20.66     $20.77
    Churn rate (10)      4.3%       3.7%        4.6%       3.8%

    Business Data
    Average sub-
     scribers (11)   176,000    144,000     183,000    152,000
    ARPU (12)         $81.50     $84.08      $81.33     $82.98
    Churn rate (10)      3.2%       2.5%        2.8%       2.8%



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

                                Three Months Ended   Nine Months Ended
                                  September 30,        September 30,
                                -----------------   -----------------
                                  2008     2009      2008     2009
                                 -----    -----     -----    -----
    Consumer Services
      Revenues
        Access and service     $164,306 $120,935  $529,557 $390,204
        Value-added services     23,493   17,241    75,783   55,140
                                  -----    -----     -----    -----
        Total revenues          187,799  138,176   605,340  445,344
      Cost of revenues           62,550   45,211   201,053  144,890
                                  -----    -----     -----    -----
      Gross margin              125,249   92,965   404,287  300,454
      Segment operating
       expenses                  49,803   31,039   164,496  101,617
                                  -----    -----     -----    -----
      Segment income from
       operations               $75,446  $61,926  $239,791 $198,837
                                  =====    =====     =====    =====

    Business Services
      Revenues
        Access and service      $42,387  $35,796  $132,026 $112,143
        Value-added services        645      549     2,142    1,694
                                  -----    -----     -----    -----
        Total revenues           43,032   36,345   134,168  113,837
      Cost of revenues           25,066   21,674    76,602   66,830
                                  -----    -----     -----    -----
      Gross margin               17,966   14,671    57,566   47,007
      Segment operating
       expenses                  12,481   10,257    39,308   31,339
                                  -----    -----     -----    -----
      Segment income from
       operations                $5,485   $4,414   $18,258  $15,668
                                  =====    =====     =====    =====

    Consolidated
      Revenues
        Access and service     $206,693 $156,731  $661,583 $502,347
        Value-added services     24,138   17,790    77,925   56,834
                                  -----    -----     -----    -----
        Total revenues          230,831  174,521   739,508  559,181
      Cost of revenues           87,616   66,885   277,655  211,720
                                  -----    -----     -----    -----
      Gross margin              143,215  107,636   461,853  347,461
      Direct segment
       operating expenses        62,284   41,296   203,804  132,956
                                  -----    -----     -----    -----
      Segment income from
       operations                80,931   66,340   258,049  214,505
      Stock-based
       compensation expense       4,597    3,136    14,319   10,552
      Amortization of
       intangible assets          3,153    2,039    11,153    6,224
      Facility exit and
       restructuring costs (1)    1,078      (97)    4,169    5,318
      Other operating expenses   12,674    9,449    39,714   28,655
                                  -----    -----     -----    -----
      Income from operations    $59,429  $51,813  $188,694 $163,756
                                  =====    =====     =====    =====



                                 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. However, since management continues to evaluate EarthLink's
    businesses, there have been and may continue to 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 new accounting guidance
    related to accounting for convertible debt instruments that may be
    settled in cash upon conversion.  The new accounting guidance 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. The new accounting
    guidance requires retrospective application for all periods presented.
    The adoption of the new accounting guidance 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.

    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. Adjusted EBITDA is defined as income from continuing operations before
    interest expense and other, net, income taxes, depreciation and
    amortization, stock-based compensation, 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, 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.

    5. The principal amount of the Notes for all periods presented was $258.8
    million. The unamortized discount was $42.0 million, $39.0 million,
    $32.9 million and $29.7 million as of September 30, 2008, December 31,
    2008, June 30, 2009 and September 30, 2009, respectively. The net
    carrying value was $216.8 million, $219.7 million, $225.8 million and
    $229.0 million as of September 30, 2008, December 31, 2008, June 30, 2009
    and September 30, 2009, respectively.

    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 nine months ended September 30, 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. During the three and nine months ended September 30,
    2008, EarthLink removed approximately 15,000 EarthLink supported Sprint
    customers from its broadband subscriber count and total subscriber count
    due to the termination of a wholesale arrangement by Sprint.

    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. Average
    subscribers for the nine month periods is calculated by averaging the
    ending monthly subscribers or accounts for the ten months preceding and
    including the end of the 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,
    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, Inc.

http://www.earthlink.net

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