EarthLink Holdings Corp.
Feb 4, 2010

EarthLink Announces Fourth Quarter and Full Year 2009 Results

ATLANTA, Feb 04, 2010 /PRNewswire via COMTEX News Network/ -- EarthLink, Inc. (Nasdaq: ELNK) today announced financial results for its fourth quarter and full year ended December 31, 2009. Highlights for the fourth quarter include:

"The results EarthLink announced today demonstrate continued consistent performance against the strategy we launched two and a half years ago to focus the company on creating shareholder value through strong cash generation in the core business. As a result, our full year 2009 results outperformed relative to expectations," said EarthLink Chairman and Chief Executive Officer Rolla P. Huff. "As we look toward 2010, the full year guidance we are providing is narrower in range and reflects the increasing visibility we believe we have in our business. We will continue our disciplined process of evaluating potential strategic uses of our balance sheet, while we operate our core business with the same discipline and operational excellence our shareholders have come to expect."

Financial and Operating Results

EarthLink reported revenue of $164.5 million in the fourth quarter and $723.7 million for the full year 2009, representing a 24 percent decline from both the fourth quarter of 2008 and the full year 2008. The pace of EarthLink's sequential revenue decline continued to attenuate, with revenue down 6 percent from the third quarter of 2009. Broadband comprised 58% of EarthLink's revenue in the fourth quarter of 2009, up from 54% in the year-ago quarter.

Net subscriber losses were 137,000 in the fourth quarter, an improvement from 146,000 in the third quarter of 2009 and 218,000 in the year-ago quarter. While EarthLink's subscriber losses moderated in the fourth quarter, the company reported strong performance in customer churn reflecting the increasing tenure of its subscriber base. Subscriber churn improved to 3.2% in the fourth quarter of 2009, down from 3.6% in the third quarter of 2009 and 3.9% in the year-ago quarter. In the fourth quarter of 2009, 84% of EarthLink's consumer customers had two or more years of tenure with the company and 43% had five or more years of tenure, with churn rates of 2.9% and 2.0% respectively.

The company continues to aggressively manage expenses to keep costs in line with revenue trends. Total sales and marketing, operations, customer support, and general and administrative expenses were $58.1 million for the fourth quarter and $230.3 million for the full year 2009, an 18% reduction from fourth quarter 2008 expenses and a 30% reduction from full year 2008 expenses.

Profitability and Other Financial Measures

Net income was $193.3 million, or $1.79 per share, in the fourth quarter of 2009 and $287.1 million, or $2.66 per share, for the full year 2009; as compared to $24.4 million, or $0.22 per share in the fourth quarter of 2008, and $178.6 million, or $1.61 per share for the full year 2008.

The fourth quarter and full year 2009 results included a $24.1 million non-cash impairment charge for goodwill and intangible assets, compared to a $78.7 million non-cash impairment charge in the prior year periods, and included an income tax benefit of $181.8 million and $126.1 million, respectively, compared to $56.1 million and $32.2 million, respectively, in the fourth quarter and full year 2008. The income tax benefits were primarily due to releases of EarthLink's valuation allowance related to its deferred tax assets.

EarthLink's strong results in customer retention, combined with its ability to aggressively manage costs ahead of revenue declines, resulted in the company generating Adjusted EBITDA (a non-GAAP measure, see definition in "Non-GAAP Measures" below) of $50.9 million in the fourth quarter of 2009 and $249.1 million for the full year 2009. This compares to Adjusted EBITDA of $72.4 million for the fourth quarter 2008 and $308.9 million for the full year 2008.

Balance Sheet and Cash Flow

EarthLink generated free cash flow (a non-GAAP measure, see definition in "Non-GAAP Measures" below) of $48.4 million during the fourth quarter of 2009 and $236.0 million for the full year 2009; compared to $70.1 million in the fourth quarter of 2008 and $301.9 million in the full year 2008.

Capital expenditures for the company were $2.5 million in the fourth quarter and $13.1 million for the full year. EarthLink made $15.0 million of dividend payments in the fourth quarter, for a total of $30.0 million in dividend payments to shareholders during the full year 2009. Also during the full year 2009, EarthLink repurchased 3.6 million shares of its common stock for $22.3 million. EarthLink ended 2009 with $696.0 million in cash and marketable securities, an increase of $41.1 million over September 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 announced guidance for the full year 2010. Management expects 2010 Adjusted EBITDA of $180 million to $190 million. This narrow guidance range reflects management's increased visibility and confidence as to the near term predictability of the business. Management expects 2010 free cash flow of $160 million to $180 million, based upon the aforementioned Adjusted EBITDA guidance combined with $10 million to $20 million in estimated capital expenditures. Additionally, EarthLink expects to generate income from continuing operations of $75 million to $85 million for the full year 2010.

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 6 of the Consolidated Financial Highlights for a discussion of the presentation, comparability and use of such financial performance measures.

Conference Call for Analysts and Investors

Conference Call Details

Thursday, February 4, 2010, at 8:30 a.m. EST 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 9:30 a.m. EST on February 4 through midnight on February 11.

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

The replay confirmation code is 50573305.

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 will have less ability in the future to implement cost reduction initiatives to offset our revenue declines, which will adversely affect our results of operations; (3) that we face significant competition which could reduce our profitability; (4) that adverse economic conditions may harm our business; (5) that we may not be able to execute our business strategy for our Business Services segment, which could adversely impact our results of operations and cash flows; (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 we may be unable to retain sufficient qualified personnel, and the loss of any of our key executive officers could adversely affect us; (9) 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; (10) that our commercial and alliance arrangements may not be renewed, which could adversely affect our results of operations; (11) 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; (12) that service interruptions or impediments could harm our business; (13) that government regulations could adversely affect our business or force us to change our business practices; (14) that privacy concerns relating to our business could damage our reputation and deter current and potential users from using our services; (15) that we may not be able to protect our intellectual property; (16) 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; (17) that we could face substantial liabilities if we are unable to successfully defend against legal actions; (18) that our business depends on effective business support systems, processes and personnel; (19) 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; (20) 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; (21) that the use of our net operating losses and certain other tax attributes could be limited in the future; (22) that our stock price has been volatile historically and may continue to be volatile; (23) that we may reduce, or cease payment of, quarterly cash dividends; (24) that our indebtedness could adversely affect our financial health and limit our ability to react to changes in our industry; and (25) 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         Twelve Months Ended
                                 December 31,               December 31,
                                 ------------               ------------
                              2008         2009         2008           2009
                              ----         ----         ----           ----
    Revenues:
      Access and service    $193,496     $147,509     $855,079       $649,856
      Value-added services    22,573       17,039      100,498         73,873
                             -------      -------     --------        -------
        Total revenues       216,069      164,548      955,577        723,729

    Operating costs and
     expenses:
      Cost of revenues        83,265       62,035      360,920        273,755
      Sales and marketing     19,299       14,069       98,212         59,474
      Operations and
       customer support       29,883       23,180      136,797         98,435
      General and
       administrative         21,868       20,895       93,878         72,398
      Amortization of
       intangible assets       2,196        1,525       13,349          7,749
      Impairment of
       goodwill and
       intangible assets (1)  78,672       24,145       78,672         24,145
      Facility exit and
       restructuring costs (2) 4,973          297        9,142          5,615
                             -------      -------      -------        -------
        Total operating
         costs and expenses  240,156      146,146      790,970        541,571

    Income (loss) from
     operations              (24,087)      18,402      164,607        182,158
    Gain (loss) on
     investments, net         (2,969)      (1,626)       2,708         (1,321)
    Interest expense and
     other, net (3)           (4,605)      (5,346)     (12,409)       (19,804)
                              -------     -------      -------        -------
        Income (loss) from
         continuing
         operations before
         income taxes         (31,661)     11,430      154,906        161,033
    Income tax benefit (4)     56,107     181,839       32,184        126,085
                              -------     -------      -------        -------
        Income from
         continuing
         operations            24,446     193,269      187,090        287,118
    Loss from discontinued
     operations, net of
     tax (5)                      (68)          -       (8,506)             -
                              -------     -------      -------        -------
        Net income            $24,378    $193,269     $178,584       $287,118
                              =======     =======      =======        =======

    Basic net income per
     share
      Continuing operations     $0.23       $1.80        $1.71          $2.69
      Discontinued operations   (0.00)          -        (0.08)             -
                              -------     -------      -------        -------
      Basic net income per
       share                    $0.22       $1.80        $1.63          $2.69
                              =======     =======      =======        =======
      Basic weighted average
       common shares
       outstanding            108,449     107,075      109,531        106,909
                              =======     =======      =======        =======

    Diluted net income per
     share
      Continuing operations     $0.22       $1.79        $1.68          $2.66
      Discontinued operations   (0.00)          -        (0.08)             -
                              -------     -------      -------        -------
      Diluted net income per
       share                    $0.22       $1.79        $1.61          $2.66
                              =======     =======      =======        =======
      Diluted weighted
       average common
       shares outstanding     109,617     108,178      111,051        108,084
                              =======     =======      =======        =======




                                   EARTHLINK, INC.
    Reconciliation of Income from Continuing Operations to Adjusted EBITDA (6)
                                   (in thousands)

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

    Income from
     continuing
     operations           $24,446      $193,269   $187,090      $287,118
    Income tax
     benefit (4)          (56,107)     (181,839)   (32,184)     (126,085)
    Depreciation and
     amortization           6,982         5,352     36,333        23,962
    Stock-based
     compensation
     expense                5,814         2,679     20,133        13,231
    Gain (loss) on
     investments, net       2,969         1,626     (2,708)        1,321
    Interest expense
     and other, net (3)     4,605         5,346     12,409        19,804
    Impairment of
     goodwill and
     intangible
     assets (1)            78,672        24,145     78,672        24,145
    Facility exit and
     restructuring
     costs (2)              4,973           297      9,142         5,615
                          -------       -------   --------      --------
      Adjusted EBITDA (6) $72,354       $50,875   $308,887      $249,111
                          =======       =======   ========      ========

    Depreciation -
     cost of revenues      $2,031        $2,293    $11,453        $8,087
    Depreciation - other    2,755         1,534     11,531         8,126
    Amortization of
     intangible assets      2,196         1,525     13,349         7,749
                          -------       -------    -------      --------
      Depreciation and
       amortization        $6,982        $5,352    $36,333       $23,962
                          =======       =======    =======      ========



                                  EARTHLINK, INC.
     Reconciliation of Income From Continuing Operations to Free Cash Flow (6)
                                  (in thousands)

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

    Income from
     continuing
     operations           $24,446      $193,269   $187,090      $287,118
    Income tax
     benefit (4)          (56,107)     (181,839)   (32,184)     (126,085)
    Depreciation and
     amortization           6,982         5,352     36,333        23,962
    Stock-based
     compensation
     expense                5,814         2,679     20,133        13,231
    Gain (loss) on
     investments, net       2,969         1,626     (2,708)        1,321
    Interest expense
     and other, net (3)     4,605         5,346     12,409        19,804
    Impairment of
     goodwill and
     intangible
     assets (1)            78,672        24,145     78,672        24,145
    Facility exit and
     restructuring
     costs (2)              4,973           297      9,142         5,615
    Purchases of
     property and
     equipment             (1,877)       (2,471)    (5,754)      (13,119)
    Purchases of
     subscriber bases        (352)            -     (1,232)            -
                          -------       -------   --------      --------
      Free cash flow (6)  $70,125       $48,404   $301,901      $235,992
                          =======       =======   ========      ========



                               EARTHLINK, INC.
        Reconciliation of Guidance Provided in Non-GAAP Measures (6)
                               (in millions)

                                                   Year
                                                  Ending
                                                December 31,
                                                   2010
                                                   ----
    Income from continuing operations           $75 - $85
    Depreciation                                    16
    Amortization of intangible assets                4
    Stock-based compensation expense                14
    Income tax provision                            47
    Facility exit and restructuring costs (2)        2
    Interest expense and other, net                 22
                                                   ---
      Adjusted EBITDA (6)                      $180 - $190
                                               ===========


                                                   Year
                                                  Ending
                                                December 31,
                                                   2010
                                                   ----
    Income from continuing operations           $75 - $85
    Depreciation                                    16
    Amortization of intangible assets                4
    Stock-based compensation expense                14
    Income tax provision                            47
    Interest expense and other, net                 22
    Facility exit and restructuring costs (2)        2
    Purchases of property and equipment        (20) - (10)
                                               -----------
      Free cash flow (6)                       $160 - $180
                                               ===========



                                       EARTHLINK, INC.
                    Supplemental Financial Data and Key Operating Metrics


                         December 31,  June 30,  September 30,   December 31,
                             2008        2009        2009           2009
                             ----        ----        ----           ----
    Balance Sheet Data                (dollars in thousands)
    Cash and marketable
     securities            $534,373    $610,349     $654,872      $695,961
    Convertible Senior
     Notes (7)              258,750     258,750      258,750       258,750
    Stockholders' equity    486,475     539,809      561,540       734,024

    Employee Data
    Number of employees
     at end of period (8)       754         693          660           623


                         December 31,  June 30,  September 30,   December 31,
                            2008         2009        2009           2009
                            ----         ----        ----           ----
     Subscriber Data (9)
     Consumer services
       Narrowband access
        subscribers      1,747,000    1,456,000    1,329,000     1,225,000
       Broadband access
        subscribers (10)   896,000      845,000      832,000       804,000
                         ---------    ---------    ---------     ---------
        Total consumer
         subscribers     2,643,000    2,301,000    2,161,000     2,029,000

     Business services
       Narrowband access
        subscribers         17,000       11,000        9,000         8,000
       Broadband access
        subscribers         59,000       56,000       55,000        54,000
       Web hosting
        accounts            87,000       81,000       78,000        75,000
                         ---------    ---------    ---------     ---------
        Total business
         subscribers       163,000      148,000      142,000       137,000

    Total subscribers
     at end of period    2,806,000    2,449,000    2,303,000     2,166,000
                         =========    =========    =========     =========


                          Three Months Ended         Twelve Months Ended
                             December 31,                December 31,
                         -------------------         -------------------
                          2008          2009         2008          2009
                          ----          ----         ----          ----
    Subscriber Activity
    Subscribers at
     beginning of
     period              3,024,000    2,303,000    3,876,000     2,806,000
    Gross organic
     subscriber
     additions             114,000       75,000      666,000       419,000
    Acquired subscribers     6,000            -        8,000             -
    Adjustment (11)              -            -      (15,000)       (7,000)
    Churn                 (338,000)    (212,000)  (1,729,000)   (1,052,000)
                         ---------     --------   ----------    ----------
    Subscribers at end
     of period           2,806,000    2,166,000    2,806,000     2,166,000
                         =========    =========    =========     =========

    Churn Rate (12)            3.9%         3.2%        4.4%         3.6%

    Consumer Data
    Average
     subscribers (13)    2,747,000    2,093,000    3,130,000    2,310,000
    ARPU (14)               $21.18       $20.72       $20.76       $20.76
    Churn rate (12)            3.9%         3.2%         4.4%         3.6%

    Business Data
    Average
     subscribers (13)      167,000      139,000      179,000      149,000
    ARPU (14)               $82.70       $82.50       $81.64       $82.83
    Churn rate (12)            2.7%         2.0%         2.8%        2.6%



                                    EARTHLINK, INC.
                 Supplemental Schedule of Segment Information (15)
                                    (in thousands)

                                Three Months Ended      Twelve Months Ended
                                   December 31,             December 31,
                                   ------------             ------------
                                2008        2009           2008         2009
                                ----        ----           ----         ----
    Consumer Services
      Revenues
        Access and service   $152,578    $113,565       $682,135    $503,769
        Value-added services   21,958      16,503         97,741      71,643
                              -------     -------       --------    --------
        Total revenues        174,536     130,068        779,876     575,412
      Cost of revenues         58,798      41,680        259,851     186,570
                              -------     -------       --------    --------
      Gross margin            115,738      88,388        520,025     388,842
      Segment operating
       expenses                42,740      29,537        207,236     131,154
                              -------     -------       --------    --------
      Segment income
       from operations        $72,998     $58,851       $312,789    $257,688
                              =======     =======       ========    ========

    Business Services
      Revenues
        Access and service    $40,918     $33,944       $172,944    $146,087
        Value-added services      615         536          2,757       2,230
                              -------     -------       --------    --------
        Total revenues         41,533      34,480        175,701     148,317
      Cost of revenues         24,467      20,355        101,069      87,185
                              -------     -------       --------    --------
      Gross margin             17,066      14,125         74,632      61,132
      Segment operating
       expenses                11,968      10,636         51,276      41,975
                              -------     -------       --------    --------
      Segment income
       from operations         $5,098      $3,489        $23,356     $19,157
                              =======     =======       ========    ========

    Consolidated
      Revenues
        Access and service   $193,496    $147,509      $855,079     $649,856
        Value-added services   22,573      17,039       100,498       73,873
                              -------     -------       -------     --------
        Total revenues        216,069     164,548       955,577      723,729
      Cost of revenues         83,265      62,035       360,920      273,755
                              -------     -------       -------     --------
      Gross margin            132,804     102,513       594,657      449,974
      Direct segment
       operating expenses      54,708      40,173       258,512      173,129
                              -------     -------       -------     --------
      Segment income
       from operations         78,096      62,340       336,145      276,845
      Stock-based
       compensation expense     5,814       2,679        20,133       13,231
      Amortization of
       intangible assets        2,196       1,525        13,349        7,749
      Impairment of
       goodwill and
       intangible assets (1)   78,672      24,145        78,672       24,145
      Facility exit
       and restructuring
       costs (2)                4,973         297         9,142        5,615
      Other operating
       expenses                10,528      15,292        50,242       43,947
                              -------     -------       -------      -------
      Income (loss)
       from operations       $(24,087)    $18,402      $164,607     $182,158
                              =======     =======       =======      =======



                                    EARTHLINK, INC.
                    Footnotes to Consolidated Financial Highlights

    1.  During the fourth quarters of 2008 and 2009, 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 non-cash impairment charges of $78.7 million
        and $24.1 million, respectively. EarthLink concluded the carrying
        value of its goodwill and certain of the intangible assets related
        to the New Edge acquisition were impaired in conjunction with its
        annual tests of goodwill and intangible assets deemed to have
        indefinite lives as well as updating its long-term outlook.

    2.  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. EarthLink
        expects to record approximately $2.0 million of facility exit and
        restructuring costs during the first quarter of 2010 as a result
        of further consolidation in its Atlanta, GA facility.

    3.  On January 1, 2009, the Company adopted new accounting guidance
        related to the 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, recognized
        additional non-cash interest expense of $12.2 million during the year
        ended December 31, 2009, and will recognize additional non-cash
        interest expense of $13.4 million and $12.4 million during the years
        ending December 31, 2010 and 2011, respectively, for accretion of the
        debt discount.

    4.  During the fourth quarters of 2008 and 2009, EarthLink recorded income
        tax benefits in its Statements of Operations of approximately $56.0
        million and $198.7 million, respectively, as a result of releases of
        its valuation allowance related to its deferred tax assets. These
        deferred tax assets relate primarily to net operating loss
        carryforwards which EarthLink determined it will more likely than not
        be able to utilize due to the generation of sufficient taxable income
        in the future.

    5.  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.

    6.  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.

    7.  The principal amount of the Notes for all periods presented was $258.8
        million. The unamortized discount was $39.0 million, $32.9 million
        $29.7 million and $26.5 million as of December 31, 2008, June 30,
        2009, September 30, 2009 and December 31, 2009, respectively. The net
        carrying value was $219.7 million, $225.8 million, $229.0 million and
        $232.2 million as of December 31, 2008, June 30, 2009, September 30,
        2009 and December 31, 2009, respectively.

    8.  Represents full-time equivalents.

    9.  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.

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

    11. During the twelve months ended December 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. During the twelve months ended December 31,
        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.

    12. 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.

    13. 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 twelve month periods is calculated by
        averaging the ending monthly subscribers or accounts for the thirteen
        months preceding and including the end of the period.

    14. 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.

    15. 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.

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