EarthLink Holdings Corp.
Oct 26, 2010

EarthLink Announces Third Quarter 2010 Results

ATLANTA, Oct 26, 2010 /PRNewswire via COMTEX News Network/ -- EarthLink, Inc. (Nasdaq: ELNK) today announced financial results for its third quarter ended September 30, 2010. Highlights of today's announcement include:

"Today we are pleased to report on the continued health of our consumer business. We are also encouraged to see momentum building within our New Edge Networks subsidiary, which reported modest top line revenue growth this quarter. Clearly, the diligence and discipline with which we have run EarthLink over the last several years have optimized cash generation. This execution was the key enabling factor in our announcement of the acquisition of Deltacom on October 1, 2010," explained EarthLink Chairman and Chief Executive Officer Rolla P. Huff.

"The Deltacom acquisition is a transformative transaction for EarthLink as it will reposition the company as a leading IP infrastructure and managed services provider with long-term strategic relevance. Importantly, this transaction will offer a career path to many of the talented EarthLink employees who have made this transformation possible, while also serving to lower the risk profile of the consumer business. Given the strong ongoing performance of the consumer business and the strength of our balance sheet, post-transaction EarthLink will maintain the ability to deploy capital organically and strategically to create additional shareholder value," added Huff.

Financial and Operating Results

EarthLink's revenue declines in its consumer business continued to attenuate. For the third quarter of 2010, EarthLink reported revenue of $145.2 million, a 5 percent decline from the second quarter of 2010 and a 17 percent decline from the third quarter of 2009. Broadband services comprised a growing percentage of EarthLink's revenue mix, representing 61 percent of the company's revenue in the third quarter of 2010, an increase from 57 percent in the year-ago quarter. Gross subscriber additions during the third quarter were 77,000, up from 67,000 in the second quarter of 2010 and down from 108,000 in the year-ago quarter. Over 70 percent of the company's third quarter gross adds were for broadband services.

EarthLink's consumer business continues to experience increases in customer tenure and loyalty, with 89 percent of the company's consumer narrowband and DSL customers having two or more years of tenure and 54 percent having five or more years of tenure in the third quarter of 2010. These tenure rates are up from 80 percent and 39 percent, respectively, in the year-ago quarter. Increased customer tenure is the main factor driving continued improvements in the company's monthly subscriber churn. In the third quarter of 2010, EarthLink reported churn of 3.0 percent, nominally higher than the 2.9 percent in the second quarter of 2010 due to expected seasonal customer behavior, and a significant improvement from 3.6 percent churn in the year-ago quarter. Net subscriber losses were 95,000 in the third quarter of 2010, improved from net subscriber losses of 109,000 in the second quarter of 2010 and 146,000 in the year-ago quarter.

A more tenured customer base combined with more efficient processes and technologies continued to have a positive impact on the company's cost structure. EarthLink's total sales and marketing, operations, customer support, and general and administrative expenses were $43.4 million for the third quarter of 2010, flat versus the second quarter of 2010 due to the timing of sales and marketing programs as well as transaction-related diligence costs, and a 20 percent reduction from comparable expenses in the year-ago quarter.

Profitability and Other Financial Measures

EarthLink's net income was $21.4 million, or $0.20 per share, for the third quarter of 2010, as compared to net income of $28.0 million, or $0.26 per share, in the second quarter of 2010 and $29.9 million, or $0.28 per share, in the year-ago quarter. Third quarter 2010 earnings per share was $0.22 (a non-GAAP measure, see definition in "Non-GAAP Measures" below) prior to the impact of acquisition-related costs associated with the Deltacom acquisition announcement. The company reported $50.9 million in Adjusted EBITDA (a non-GAAP measure, see definition in "Non-GAAP Measures" below) in the third quarter of 2010. EarthLink's Adjusted EBITDA was $56.7 million in the second quarter of 2010 and $60.9 million in the third quarter of 2009.

Balance Sheet and Cash Flow

During the third quarter of 2010 EarthLink generated free cash flow (a non-GAAP measure, see definition in "Non-GAAP Measures" below) of $48.0 million, as compared to $54.0 million in the second quarter of 2010 and $55.3 million in the third quarter of 2009.

EarthLink used $3.0 million of cash for capital expenditures and $17.4 million for dividend payments in the quarter. The company ended the third quarter of 2010 with $770.6 million in cash and marketable securities, an increase of $30.5 million from the prior quarter.

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 reaffirmed the full year 2010 guidance it issued on October 1, 2010 in conjunction with its announcement of the acquisition of Deltacom. EarthLink continues to expect 2010 Adjusted EBITDA of $207 million to $211 million; free cash flow of $193 million to $201 million, based upon the aforementioned Adjusted EBITDA guidance combined with $10 million to $14 million in estimated capital expenditures; and net income of $94 million to $97 million for the full year 2010. This guidance does not reflect any potential financial impact if the Deltacom transaction were to close prior to January 1, 2011.

Non-GAAP Measures

Adjusted EBITDA is defined as net income before interest expense and other, net, income taxes, depreciation and amortization, stock-based compensation expense, gain (loss) on investments, net, impairment of goodwill and intangible assets, and restructuring and acquisition-related costs. Free cash flow is defined as net income before interest expense and other, net, income taxes, depreciation and amortization, stock-based compensation expense, gain (loss) on investments, net, impairment of goodwill and intangible assets, and restructuring and acquisition-related costs, less cash used for purchases of property and equipment and purchases of subscriber bases. Net income per share excluding Deltacom acquisition-related costs is defined as net income before certain costs incurred in connection with the Deltacom acquisition, such as transaction costs and certain pre-acquisition costs.

Adjusted EBITDA, free cash flow and net income per share excluding Deltacom acquisition-related costs 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 2 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 26, 2010, at 8:30 a.m. ET 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 11:30 a.m. ET on October 26 through midnight on November 2.

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

The replay confirmation code is 17651758.

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 provider of IP services to consumers and businesses across the country, Atlanta-based EarthLink has earned an award-winning reputation for outstanding customer service and product innovation. The company's New Edge Networks subsidiary provides MPLS services to business customers nationwide. Learn more about EarthLink by calling (800) EARTHLINK or visiting EarthLink's website at http://www.earthlink.net.

Cautionary Information Regarding Forward-Looking Statements

This press release includes "forward-looking" statements (rather than historical facts) that are subject to risks and uncertainties that could cause actual results to differ materially from those described. Although we believe that the expectations expressed in these forward-looking statements are reasonable, we cannot promise that our expectations will turn out to be correct. Our actual results could be materially different from and worse than our expectations. We disclaim any obligation to update any forward-looking statements contained herein, except as may be required pursuant to applicable law. With respect to forward-looking statements in this press release, the company seeks the protections afforded by the Private Securities Litigation Reform Act of 1995. These risks and uncertainties include (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 reductions 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 our commercial and alliance arrangements may not be renewed or may not generate expected benefits, which could adversely affect our results of operations; (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, particularly in light of recent workforce and cost reduction initiatives and in a recovering economy, and the loss of any of our key executive officers could adversely affect us; (9) that we may be unsuccessful in making and integrating acquisitions into our business, which could result in operating difficulties, losses and other adverse consequences; (10) 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; (11) that our business may suffer if third parties used for customer service and technical support and certain billing services are unable to provide these services or terminate their relationships with us; (12) that interruption or failure of our network and information systems and other technologies could impair our ability to provide our services, which could damage our reputation and harm our operating results; (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 if we are unable to successfully defend against legal actions we could face substantial liabilities; (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 we may have exposure to greater than anticipated tax liabilities and the use of our net operating losses and certain other tax attributes could be limited in the future; (22) that we may reduce or cease payment of quarterly dividends; (23) that our stock price may be volatile; (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 also include matters relating to our pending acquisition of ITC^DeltaCom, including, without limitation, the receipt of required regulatory approvals; the ability to realize estimated synergies, cost savings and growth opportunities; the possibility that the anticipated benefits from the acquisition cannot be fully realized or may take longer or present greater cost to realize than expected; our ability to successfully integrate the operations of ITC^DeltaCom upon its acquisition without detracting from our current operations; the retention of key ITC^DeltaCom employees; and our success in investing in additional strategic opportunities. These risks and uncertainties further include our potential future exposure to regulatory, general economic and other conditions that could adversely impact the operations of ITC^DeltaCom as a subsidiary of EarthLink, including ITC^DeltaCom's dependence on new product development, rapid technological and market changes, ITC^DeltaCom's dependence upon rights-of-way and other third party agreements, risks related to future growth and rapid expansion, customer attrition, delays or difficulties in deployment and implementation of collocation arrangements and facilities, appeals of or failures by third parties to comply with rulings of governmental entities, inability to meet installation schedules and adverse changes in the regulatory or legislative environment; operating and financial restrictions imposed by covenants in ITC^DeltaCom's outstanding senior secured notes; and other unforeseen difficulties that may occur. 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, 2009.

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


                                            Three Months Ended September
                                                         30,
                                            ----------------------------
                                                  2009                2010
                                                  ----                ----
    Revenues:
      Access and service                      $156,731            $130,522
      Value-added services                      17,790              14,636
                                                ------              ------
        Total revenues                         174,521             145,158

    Operating costs and expenses:
      Cost of revenues                          66,885              56,985
      Sales and marketing                       13,840              11,667
      Operations and customer support           23,569              18,603
      General and administrative                16,472              13,102
      Amortization of intangible
       assets                                    2,039                 890
      Restructuring and acquisition-
       related costs (1)                           (97)              1,921
                                                   ---               -----
        Total operating costs and
         expenses                              122,708             103,168

    Income from operations                      51,813              41,990
    Gain on investments, net                        35                   -
    Interest expense and other, net             (5,067)             (5,466)
                                                ------              ------
        Income before income taxes              46,781              36,524
    Income tax provision                       (16,914)            (15,139)
                                               -------             -------
        Net income                             $29,867             $21,385
                                               =======             =======

    Net income per share
      Basic                                      $0.28               $0.20
                                                 =====               =====
      Diluted                                    $0.28               $0.20
                                                 =====               =====

    Weighted average common shares
     outstanding
      Basic                                    106,615             108,220
                                               =======             =======
      Diluted                                  107,943             109,473
                                               =======             =======



                                            Nine Months Ended September
                                                        30,
                                           ---------------------------
                                                 2009               2010
                                                 ----               ----
    Revenues:
      Access and service                     $502,347           $409,607
      Value-added services                     56,834             45,816
                                               ------             ------
        Total revenues                        559,181            455,423

    Operating costs and expenses:
      Cost of revenues                        211,720            175,817
      Sales and marketing                      45,405             34,591
      Operations and customer support          75,255             57,190
      General and administrative               51,503             40,218
      Amortization of intangible
       assets                                   6,224              3,386
      Restructuring and acquisition-
       related costs (1)                        5,318              3,267
                                                -----              -----
        Total operating costs and
         expenses                             395,425            314,469

    Income from operations                    163,756            140,954
    Gain on investments, net                      305                572
    Interest expense and other, net           (14,458)           (16,241)
                                              -------            -------
        Income before income taxes            149,603            125,285
    Income tax provision                      (55,754)           (49,113)
                                              -------            -------
        Net income                            $93,849            $76,172
                                              =======            =======

    Net income per share
      Basic                                     $0.88              $0.71
                                                =====              =====
      Diluted                                   $0.87              $0.70
                                                =====              =====

    Weighted average common shares
     outstanding
      Basic                                   106,853            107,968
                                              =======            =======
      Diluted                                 108,052            108,851
                                              =======            =======


 
                       EARTHLINK, INC.
     Reconciliation of Net Income to Adjusted EBITDA (2)
                       (in thousands)


                                       Three Months Ended
                                       ------------------
                                  September 30,    June 30, September 30,
                                              2009           2010     2010
                                              ----           ----     ----

    Net income                             $29,867        $28,040  $21,385
    Income tax provision                    16,914         17,182   15,139
    Depreciation and amortization            6,032          4,577    4,327
    Stock-based compensation
     expense                                 3,136          1,707    2,704
    Gain on investments, net                   (35)          (154)       -
    Interest expense and other,
     net                                     5,067          5,483    5,466
    Restructuring and
     acquisition-related costs
     (1)                                       (97)           (89)   1,921
                                               ---            ---    -----
      Adjusted EBITDA (2)                  $60,884        $56,746  $50,942
                                           =======        =======  =======


 
                       EARTHLINK, INC.
     Reconciliation of Net Income to Free Cash Flow (2)
                       (in thousands)


                                     Three Months Ended
                                     ------------------
                                September 30,    June 30, September 30,
                                            2009           2010     2010
                                            ----           ----     ----

    Net income                           $29,867        $28,040  $21,385
    Income tax provision                  16,914         17,182   15,139
    Depreciation and
     amortization                          6,032          4,577    4,327
    Stock-based compensation
     expense                               3,136          1,707    2,704
    Gain on investments, net                 (35)          (154)       -
    Interest expense and other,
     net                                   5,067          5,483    5,466
    Restructuring and
     acquisition-related costs
     (1)                                     (97)           (89)   1,921
    Purchases of property and
     equipment                            (5,588)        (2,711)  (2,965)
                                          ------         ------   ------
      Free cash flow (2)                 $55,296        $54,035  $47,977
                                         =======        =======  =======


 
                             EARTHLINK, INC.
     Reconciliation of Net Income Per Share to Net Income Per Share
            Excluding Deltacom Acquisition-Related Costs (2)
                (in thousands, except per share amounts)


                                           Three Months
                                               Ended
                                           September 30,    Per Share
                                                       2010  Amount
                                                       ----  ------
    Net income                                      $21,385          $0.20
    Deltacom transaction costs                        2,000           0.02
    Deltacom pre-acquisition costs                      588           0.01
    Net Income excluding Deltacom
     acquisition-related costs (2)                  $23,973          $0.22
                                                    =======          =====

    Diluted weighted average common shares
     outstanding                                    109,473


 
                            EARTHLINK, INC.
     Reconciliation of Guidance Provided in Non-GAAP Measures (2)
                             (in millions)


                                                       Year
                                                      Ending
                                                   December 31,
                                                               2010
                                                               ----
    Net income                                            $94 - $97
    Interest expense and other, net                              21
    Income tax provision                              61 - 62
    Depreciation                                                 14
    Amortization of intangible assets                             4
    Stock-based compensation expense                             10
    Restructuring and acquisition-related
     costs (1)                                                    3
                                                                ---
      Adjusted EBITDA (2)                               $207 - $211
                                                        ===========

                                                       Year
                                                      Ending
                                                   December 31,
                                                               2010
                                                               ----
    Net income                                            $94 - $97
    Interest expense and other, net                              21
    Income tax provision                              61 - 62
    Depreciation                                                 14
    Amortization of intangible assets                             4
    Stock-based compensation expense                             10
    Restructuring and acquisition-related
     costs (1)                                                    3
    Purchases of property and equipment             (14) - (10)
                                                    -----------
      Free cash flow (2)                                $193 - $201
                                                        ===========


 
                                        EARTHLINK, INC.
                     Supplemental Financial Data and Key Operating Metrics


                                          September
                                              30,         December 31,
                                                2009               2009
                                                ----               ----
                                                  (in thousands)
    Balance Sheet Data
    Cash and marketable
     securities                             $654,872           $695,961
    Convertible Senior Notes
     (3)                                     258,750            258,750
    Stockholders' equity                     561,540            734,024

    Employee Data
    Number of employees at end
     of period (4)                               660                623


                                          September
                                              30,         December 31,
                                                2009               2009
                                                ----               ----
    Subscriber Data (5)
    Consumer services
      Narrowband access
       subscribers (6)                     1,329,000          1,225,000
      Broadband access
       subscribers (7)                       832,000            804,000
                                             -------            -------
        Total consumer subscribers         2,161,000          2,029,000

    Business services
      Narrowband access
       subscribers                             9,000              8,000
      Broadband access
       subscribers                            55,000             54,000
      Web hosting accounts                    78,000             75,000
                                              ------             ------
        Total business subscribers           142,000            137,000

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


                                         Three Months Ended September
                                                        30,
                                           ----------------------------
                                                2009               2010
                                                ----               ----
    Subscriber Activity
    Subscribers at beginning of
     period                                2,449,000          1,939,000
    Gross organic subscriber
     additions                               108,000             77,000
    Adjustment (8)                                 -                  -
    Churn                                   (254,000)          (172,000)
    Subscribers at end of
     period                                2,303,000          1,844,000
                                           =========          =========

    Churn Rate (9)                               3.6%               3.0%

    Consumer Data
    Average subscribers (10)               2,207,000          1,761,000
    ARPU (11)                                 $20.87             $21.11
    Churn rate (9)                               3.7%               3.1%

    Business Data
    Average subscribers (10)                 144,000            130,000
    ARPU (11)                                 $84.08             $86.40
    Churn rate (9)                               2.5%               1.7%



                                                            September
                                          June 30,              30,
                                                2010              2010
                                                ----              ----
                                          (in thousands)
    Balance Sheet Data
    Cash and marketable
     securities                             $740,100          $770,555
    Convertible Senior Notes
     (3)                                     255,791           255,791
    Stockholders' equity                     757,899           764,922

    Employee Data
    Number of employees at end
     of period (4)                               576               560


                                                            September
                                          June 30,              30,
                                                2010              2010
                                                ----              ----
    Subscriber Data (5)
    Consumer services
      Narrowband access
       subscribers (6)                     1,060,000           988,000
      Broadband access
       subscribers (7)                       748,000           727,000
                                             -------           -------
        Total consumer subscribers         1,808,000         1,715,000

    Business services
      Narrowband access
       subscribers                             8,000             8,000
      Broadband access
       subscribers                            53,000            53,000
      Web hosting accounts                    70,000            68,000
                                              ------            ------
        Total business subscribers           131,000           129,000

    Total subscribers at end of
     period                                1,939,000         1,844,000
                                           =========         =========


                                         Nine Months Ended September
                                                        30,
                                           ---------------------------
                                                2009              2010
                                                ----              ----
    Subscriber Activity
    Subscribers at beginning of
     period                                2,806,000         2,166,000
    Gross organic subscriber
     additions                               344,000           220,000
    Adjustment (8)                            (7,000)                -
    Churn                                   (840,000)         (542,000)
    Subscribers at end of
     period                                2,303,000         1,844,000
                                           =========         =========

    Churn Rate (9)                               3.7%              3.0%

    Consumer Data
    Average subscribers (10)               2,382,000         1,864,000
    ARPU (11)                                 $20.77            $21.19
    Churn rate (9)                               3.8%              3.1%

    Business Data
    Average subscribers (10)                 152,000           132,000
    ARPU (11)                                 $82.98            $84.05
    Churn rate (9)                               2.8%              1.8%


 
                                         EARTHLINK, INC.
                        Supplemental Schedule of Segment Information (12)
                                         (in thousands)


                              Three Months Ended Nine Months Ended September
                                 September 30,               30,
                             ------------------ ---------------------------
                               2009             2010     2009        2010
                               ----             ----     ----        ----
    Consumer Services
      Revenues
        Access and service $120,935          $97,399 $390,204    $311,149
        Value-added
         services            17,241           14,128   55,140      44,247
                             ------           ------   ------      ------
        Total revenues      138,176          111,527  445,344     355,396
      Cost of revenues       45,211           35,434  144,890     113,402
                             ------           ------  -------     -------
      Gross margin           92,965           76,093  300,454     241,994
      Segment operating
       expenses              31,039           22,376  101,617      69,589
      Segment income
       from operations      $61,926          $53,717 $198,837    $172,405
                            =======          ======= ========    ========

    Business Services
      Revenues
        Access and service  $35,796          $33,123 $112,143     $98,458
        Value-added
         services               549              508    1,694       1,569
                                ---              ---    -----       -----
        Total revenues       36,345           33,631  113,837     100,027
      Cost of revenues       21,674           21,551   66,830      62,415
                             ------           ------   ------      ------
      Gross margin           14,671           12,080   47,007      37,612
      Segment operating
       expenses              10,257           10,506   31,339      30,896
      Segment income
       from operations       $4,414           $1,574  $15,668      $6,716
                             ======           ======  =======      ======

    Consolidated
      Revenues
        Access and service $156,731         $130,522 $502,347    $409,607
        Value-added
         services            17,790           14,636   56,834      45,816
                             ------           ------   ------      ------
        Total revenues      174,521          145,158  559,181     455,423
      Cost of revenues       66,885           56,985  211,720     175,817
                             ------           ------  -------     -------
      Gross margin          107,636           88,173  347,461     279,606
      Direct segment
       operating
       expenses              41,296           32,882  132,956     100,485
                             ------           ------  -------     -------
      Segment income
       from operations       66,340           55,291  214,505     179,121
      Stock-based
       compensation
       expense                3,136            2,704   10,552       7,078
      Amortization of
       intangible assets      2,039              890    6,224       3,386
      Restructuring and
       acquisition-
       related costs (1)        (97)           1,921    5,318       3,267
      Other operating
       expenses               9,449            7,786   28,655      24,436
                              -----            -----   ------      ------
      Income from
       operations           $51,813          $41,990 $163,756    $140,954
                            =======          ======= ========    ========


 

                                          EARTHLINK, INC.
                          Footnotes to Consolidated Financial Highlights

                Restructuring and acquisition-related costs consisted of the
    1.                  following for the periods presented:

                     Three Months Ended                  Nine Months Ended
                        September 30,                       September 30,
                        -------------                       -------------
                    2009             2010              2009             2010
                    ----             ----              ----             ----
                                         (in thousands)
    Acquisition-
    related costs   $-              $2,000              $-            $2,000

    Facility exit
    and restructuring
    costs           (97)             (79)            5,318             1,267
                    ---              ---             -----             -----
                    $(97)          $1,921            $5,318            $3,67
                    ====           ======            ======            ======

 
      Acquisition-related costs consist of investment banker fees
       incurred in connection with EarthLink's pending acquisition of
       ITC^DeltaCom, Inc.

      Facility exit and restructuring costs consist of costs incurred
       for EarthLink's restructuring plans. 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 2007 and 2008. 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.

          Adjusted EBITDA is defined as net income before interest expense and other,
    2.    net, income taxes, depreciation and amortization, stock-based
      compensation, gain (loss) on investments, net, impairment of
       goodwill and intangible assets, and restructuring and
       acquisition-related costs.
      Free cash flow is defined as net income before interest expense
       and other, net, income taxes, depreciation and amortization,
       stock-based
      compensation, gain (loss) on investments, net, impairment of
       goodwill and intangible assets, and restructuring and
       acquisition-related costs,
      less purchases cash used for of property and equipment and
       purchases of subscriber bases. Net income per share excluding
       Deltacom
      acquisition-related costs is defined as net income before
       certain costs incurred in connection with the Deltacom
       acquisition, which include
      transaction costs and certain
       pre-acquisition costs.

      Adjusted EBITDA, free cash flow and net income per share
       excluding Deltacom acquisition-related costs 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.
       Management
      believes that excluding the effects of the items noted above
       enables investors to better understand and analyze the current
       period's results
      and provides a better measure of
       comparability.

          The principal amount of the Convertible Senior Notes was $258.8 million,
    3.    $258.8 million, $255.8 million and $255.8 million as of September 30,
      2009, December 31, 2009, June 30, 2010 and September 30, 2010,
       respectively. The unamortized discount was $29.7 million, $26.5
       million,
      $19.6 million and $16.2 million as of September 30, 2009, December 31, 2009, June 30, 2010 and September 30, 2010, respectively. The net
      carrying value was $229.0 million, $232.2 million, $236.2
       million and $239.6 million as of September 30, 2009, December
       31, 2009, June 30, 2010
      and September 30, 2010,
       respectively.

          Represents full-time
    4.    equivalents.

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

          Narrowband access subscribers include customers who subscribe to our
    6.    premium and value priced dial-up Internet access services and customers
      who subscribe to our premium
       email only service.

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

          During the nine months ended September 30, 2009, EarthLink removed
    8.    approximately 7,000 satellite subscribers from its broadband subscriber
      count and total subscriber count as a result of the sale of
       these subscriber accounts.

          Churn rate is used to measure the rate at which subscribers discontinue
    9.    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.

          Average subscribers for the three month periods is calculated by averaging
    10.   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.

          ARPU represents the average monthly revenue per user (subscriber). ARPU is
    11.   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.

          The Company reports segment information along the same lines that its chief
    12.   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-over-Internet protocol 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 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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