EarthLink Holdings Corp.
May 2, 2016

EarthLink Reports First Quarter 2016 Results

Strong Cash Flow and Debt Reduction Highlight Results


ATLANTA, May 02, 2016 (GLOBE NEWSWIRE) -- EarthLink (EarthLink Holdings Corp.), (NASDAQ:ELNK), a leading network services provider dedicated to delivering great customer experiences, today announced financial results for its first quarter of 2016.

"2016 is a transformational year for EarthLink as we work to become the industry leader in network services in the cloud world," said EarthLink Chief Executive Officer and President Joe Eazor. "In the first quarter, we made progress on our journey and delivered solid financial results, including strong cash flow and further debt reduction."

First Quarter 2016 Financial Summary

 Figures in US $ millions,      Fourth First   
 except per shareFirst Quarter   Quarter Quarter   
  2015 2016 Change 2015 2016 Change 
 Revenues            
 Enterprise/Mid-Market$114.4  $104.7  (8.5)% $106.2  $104.7  (1.4)% 
 Small Business79.0  62.1  (21.5)% 66.5  62.1  (6.6)% 
 Carrier/Transport32.9  36.1  9.7% 34.3  36.1  5.2% 
 Consumer56.1  51.4  (8.4)% 53.3  51.4  (3.6)% 
 Total Revenue282.4  254.3  (10.0)% 260.2  254.3  (2.3 )% 
               
 Gross Margin153.0  139.1  (9.1)% 138.5  139.1  0.4% 
              
 Operating Expenses95.3  81.4  (14.6)% 88.4  81.4  (7.9)% 
              
 Net Income (Loss)(10.5) 7.9   NM (12.3) 7.9   NM 
 Net Income (Loss) per share(0.10) 0.07   NM (0.12) 0.07   NM 
              
 Adjusted EBITDA (1)61.1  61.7  1.0% 53.9  61.7  14.5% 
              
 Capital Expenditures17.5  18.6  6.3% 27.1  18.6  (31.4)% 
              
 Cash108.1  60.7  (43.8)% 91.3  60.7  (33.5)% 
              
 Gross Debt Outstanding (2)578.9  466.9  (19.3)% 508.9  466.9  (8.3)% 
              
 Net Cash Provided by Operating Activities18.9  10.6  (43.9)% 41.4  10.6  (74.4)% 
              
 Unlevered Free Cash Flow (1)43.6  43.2  (0.9)% 26.8  43.2  61.2% 
   
 (1) Adjusted EBITDA and Unlevered Cash Flow are non-GAAP measures, see definitions in "Non-GAAP Measures" below. 
   
 (2) Gross debt outstanding excludes unamortized debt issuance costs, unamortized debt discount and capital leases.
 
   
 NM - Percentage is not meaningful 
              


Revenue and Gross Margin

Net Income (Loss) and Adjusted EBITDA

Balance Sheet and Cash Flow

Non-GAAP Measures
Adjusted EBITDA is defined as net income (loss) before interest expense and other, net, income taxes, depreciation and amortization, stock-based compensation expense, impairment of goodwill and long-lived assets, restructuring, acquisition and integration-related costs, gain on sale of business and loss on extinguishment of debt. Unlevered Free Cash Flow is defined as net income (loss) before interest expense and other, net, income taxes, depreciation and amortization, stock-based compensation expense, impairment of goodwill and long-lived assets, restructuring, acquisition and integration-related costs, gain on sale of business and loss on extinguishment of debt, less cash used for purchases of property and equipment.

Adjusted EBITDA and Unlevered Free Cash Flow are non-GAAP financial 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 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 measures.

Conference Call for Analysts and Investors
EarthLink's First Quarter 2016 Conference Call will be held on Tuesday, May 3, 2016, at 8:30 a.m. ET and hosted by EarthLink's Chief Executive Officer and President Joseph F. Eazor and Executive Vice President and Chief Financial Officer Louis M. Alterman.

The dial-in number is: (866) 887-3882.
Participants should reference the conference ID number 91321780 or "EarthLink First Quarter 2016 Earnings Call" and dial in 10 minutes prior to the scheduled start time.

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

Presentation
An investor presentation to accompany the conference call and webcast will be available at: http://ir.earthlink.net/

Replay
A webcast replay will be available from 11:30 a.m. ET on May 3, 2016 through midnight on June 3, 2016. Dial toll-free: (855) 859-2056. The replay confirmation code is 91321780. The webcast will be archived on the company's website at: http://ir.earthlink.net/events.cfm.

About EarthLink
EarthLink (EarthLink Holdings Corp.), (NASDAQ:ELNK) is a leading network services provider dedicated to delivering great customer experiences in a cloud connected world. We help thousands of multi-location businesses securely establish critical connections in the cloud. Our solutions for cloud and hybrid networking, security and compliance, and unified communications provide the cost-effective performance and agility to serve customers anytime, anywhere, via any channel, or any device. We operate a nationwide network spanning 29,000+ fiber route miles, with 90 metro fiber rings and secure data centers that provide ubiquitous data and voice IP coverage. To learn why thousands of specialty retailers, restaurants, franchisors, financial institutions, healthcare providers, professional service firms, local governments, residential consumers and other carriers choose to connect with us, visit us at www.earthlink.com, @earthlink, on LinkedIn and Google+.

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. With respect to such forward-looking statements, we seek the protections afforded by the Private Securities Litigation Reform Act of 1995. These risks include, without limitation: (1) that we may not be able to execute our strategy to successfully transition to a leading managed network, security and cloud services provider, which could adversely affect our results of operations and cash flows; (2) that we may not be able to increase revenues from our growth products and services to offset declining revenues from our traditional products and services, which could adversely affect our results of operations and cash flows; (3) that if we are unable to adapt to changes in technology and customer demands, we may not remain competitive, and our revenues and operating results could suffer; (4) that failure to achieve operating efficiencies and otherwise reduce costs would adversely affect our results of operations and cash flows; (5) that we may have to undertake further restructuring plans that would require additional charges; (6) that we may be unable to successfully divest non-strategic products, which could adversely affect our results of operations; (7) that acquisitions we complete could result in operating difficulties, dilution, increased liabilities, diversion of management attention and other adverse consequences, which could adversely affect our results of operations; (8) that we face significant competition in our business markets, which could adversely affect our results of operations; (9) that failure to retain existing customers could adversely affect our results of operations and cash flows; (10) that decisions by legislative or regulatory authorities, including the Federal Communications Commission, relieving incumbent carriers of certain regulatory requirements, and possible further deregulation in the future, may restrict our ability to provide services and may increase the costs we incur to provide these services; (11) that if we are unable to interconnect with AT&T, Verizon and other incumbent carriers on acceptable terms, our ability to offer competitively priced local telephone services will be adversely affected; (12) that the continued decline in switched access and reciprocal compensation revenue will adversely affect our results of operations; (13) that failure to obtain and maintain necessary permits and rights-of-way could interfere with our network infrastructure and operations; (14) that if our larger carrier customers terminate the service they receive from us, our wholesale revenue and results of operations could be adversely affected; (15) that we obtain a majority of our network equipment and software from a limited number of third-party suppliers; (16) that work stoppages experienced by other communications companies on whom we rely for service could adversely impact our ability to provision and service our customers; (17) that our commercial and alliance arrangements may not be renewed or may not generate expected benefits, which could adversely affect our results of operations; (18) that our consumer business is dependent on the availability of third-party network service providers; (19) that we face significant competition in the Internet access industry that could reduce our profitability; (20) that the continued decline of our consumer access subscribers will adversely affect our results of operations; (21) that lack of regulation governing wholesale Internet service providers could adversely affect our operations; (22) that cyber security breaches could harm our business; (23) that privacy concerns relating to our business could damage our reputation and deter current and potential users from using our services; (24) that interruption or failure of our network, information systems or other technologies could impair our ability to provide our services, which could damage our reputation and harm our operating results; (25) that our business depends on effective business support systems and processes; (26) that if we, or other industry participants, are unable to successfully defend against disputes or legal actions, we could face substantial liabilities or suffer harm to our financial and operational prospects; (27) 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; (28) that we may not be able to protect our intellectual property; (29) 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; (30) that unfavorable general economic conditions could harm our business; (31) that government regulations could adversely affect our business or force us to change our business practices; (32) that our business may suffer if third parties are unable to provide services or terminate their relationships with us; (33) that we may be required to recognize impairment charges on our goodwill and other intangible assets, which would adversely affect our results of operations and financial position; (34) that we may have exposure to greater than anticipated tax liabilities and we may be limited in the use of our net operating losses and certain other tax attributes in the future; (35) that our indebtedness could adversely affect our financial health and limit our ability to react to changes in our business and industry; (36) that we may require substantial capital to support business growth, and this capital may not be available to us on acceptable terms, or at all; (37) that our debt agreements include restrictive covenants, and failure to comply with these covenants could trigger acceleration of payment of outstanding indebtedness; (38) that we may reduce, or cease payment of, quarterly cash dividends; (39) that our stock price may be volatile; (40) that provisions of our certificate of incorporation, bylaws and other elements of our capital structure could limit our share price and delay a change of control of the company; and (41) that our bylaws designate the Court of Chancery of the State of Delaware as the sole and exclusive forum for certain types of actions and proceedings that may be initiated by our stockholders, which could limit our stockholders' flexibility in obtaining a judicial forum for disputes with us or our directors, officers or employees. 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, 2015.


EARTHLINK HOLDINGS CORP.
Unaudited Condensed Consolidated Statements Of Operations
(in thousands, except per share data)
   
  Three Months Ended
  March 31,
  2015 2016
     
Revenues $282,447  $254,262 
Operating costs and expenses:    
Cost of revenues (exclusive of depreciation and amortization shown separately below) 129,462  115,206 
Selling, general and administrative (exclusive of depreciation and amortization shown separately below) 95,258   81,412 
Depreciation and amortization 47,264  40,199 
Restructuring, acquisition and integration-related costs (1) 5,372  3,013 
Total operating costs and expenses 277,356  239,830 
Income from operations 5,091   14,432 
Gain on sale of business (2)   5,727 
Interest expense and other, net (13,937) (11,109)
Loss on extinguishment of debt (3) (1,286) (232)
Income (loss) before income taxes (10,132) 8,818 
Income tax provision (351) (951)
Net income (loss) $(10,483) $7,867 
     
Net income (loss) per share    
Basic $(0.10) $0.08 
Diluted $(0.10) $0.07 
     
Weighted average common shares outstanding    
Basic  102,611   104,433 
Diluted  102,611   107,700 
     
Dividends declared per share $0.05  $0.05 







EARTHLINK HOLDINGS CORP.
Unaudited Condensed Consolidated Balance Sheets
(in thousands, except per share data)
     
  December 31,
 2015
 March 31,
 2016
ASSETS
Current assets:    
Cash and cash equivalents $91,296  $60,713 
Accounts receivable, net of allowance of $3,537 and $2,984 as of December 31, 2015
 74,724  77,249 
and March 31, 2016, respectively      
Prepaid expenses 14,187  13,884 
Other current assets 9,724  8,898 
Total current assets 189,931  160,744 
Property and equipment, net 372,504  348,171 
Goodwill 137,751  135,489 
Other intangible assets, net 25,325  9,867 
Other long-term assets 9,141  8,559 
Total assets $734,652  $662,830 
     
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:     
Accounts payable $18,442  $11,739 
Accrued payroll and related expenses 50,532  14,681 
Other accrued liabilities 64,305  71,393 
Deferred revenue 40,229  37,904  
Current portion of long-term debt and capital lease obligations 6,787  1,864 
Total current liabilities 180,295   137,581 
Long-term debt and capital lease obligations 505,613  469,003 
Long-term deferred income taxes, net 3,876  4,202 
Other long-term liabilities 22,022  26,427 
Total liabilities 711,806  637,213 
     
Stockholders' equity:    
Preferred stock, $0.01 par value, 100,000 shares authorized, 0 shares issued and      
outstanding as of December 31, 2015 and March 31, 2016    
Common stock, $0.01 par value, 300,000 shares authorized, 200,207 and 201,397 shares      
issued as of December 31, 2015 and March 31, 2016, respectively, and 103,880 and      
105,070 shares outstanding as of December 31, 2015 and March 31, 2016,      
respectively 2,002  2,014 
Additional paid-in capital 2,026,638  2,021,530 
Accumulated deficit (1,260,937) (1,253,070)
Treasury stock, at cost, 96,327 shares as of December 31, 2015 and March 31, 2016 (744,857) (744,857)
Total stockholders' equity 22,846  25,617 
Total liabilities and stockholders' equity $734,652  $662,830 







EARTHLINK HOLDINGS CORP.
Reconciliation of Net Income (Loss) to Adjusted EBITDA (4)
(in thousands)
  
 Three Months Ended
 March 31, December 31,  March 31,
 2015 2015 2016
Net income (loss)$(10,483) $(12,282) $7,867 
Interest expense and other, net13,937  11,192  11,109 
Income tax provision (benefit)351  (91) 951 
Depreciation and amortization 47,264  46,826  40,199 
Stock-based compensation expense3,415  3,730  4,086 
Restructuring, acquisition and integration-related costs (1)5,372  4,484  3,013 
Gain on sale of business (2)    (5,727)
Loss on extinguishment of debt (3)1,286    232 
Adjusted EBITDA (4)$61,142  $53,859  $61,730 


Reconciliation of Net Income (Loss) to Unlevered Free Cash Flow (4)
(in thousands)
  
 Three Months Ended
 March 31, December 31, March 31,
 2015 2015 2016
Net income (loss)$(10,483 ) $(12,282) $7,867 
Interest expense and other, net13,937  11,192  11,109 
Income tax provision (benefit)351  (91) 951 
Depreciation and amortization47,264  46,826  40,199 
Stock-based compensation expense3,415  3,730  4,086 
Restructuring, acquisition and integration-related costs (1)5,372  4,484  3,013 
Gain on sale of business (2)    (5,727)
Loss on extinguishment of debt (3)1,286    232 
Purchases of property and equipment(17,529) (27,055) (18,573)
Unlevered Free Cash Flow (4)$43,613  $26,804  $ 43,157 


Reconciliation of Net Cash Provided by Operating Activities to Unlevered Free Cash Flow (4)
(in thousands)
  
 Three Months Ended
 March 31, December 31, March 31,
 2015 2015 2016
Net cash provided by operating activities$18,865  $41,359  $10,630 
Income tax provision (benefit)351  (91) 951 
Non-cash income taxes(185) (145) (298)
Interest expense and other, net13,937  11,192  11,109 
Amortization of debt discount and debt issuance costs(1,029) (831) (859)
Restructuring, acquisition and integration-related costs (1)5,372  4,484  3,013 
Changes in operating assets and liabilities23,741  (2,324 ) 36,589 
Purchases of property and equipment(17,529) (27,055) (18,573)
Other, net90  215  595 
Unlevered Free Cash Flow (4)$43,613  $26,804  $43,157 
      
Net cash (used in) provided by investing activities$(17,529) $(27,055) $7,427 
Net cash used in financing activities$(27,416) $(10,631) $(48,640)






EARTHLINK HOLDINGS CORP.
Supplemental Schedules of Segment Information (5)
(in thousands)
 
The following table presents segment results for the three months ended March 31, 2015 and 2016:
  
 Three Months Ended
 March 31,
 2015 2016
Enterprise/Mid-Market   
Revenues$114,391  $104,689 
Cost of revenues (excluding depreciation and amortization)56,272  51,571 
Gross margin58,119  53,118 
Small Business   
Revenues79,054  62,133 
Cost of revenues (excluding depreciation and amortization)37,597  29,734 
Gross margin41,457  32,399 
Carrier/Transport   
Revenues32,872  36,069 
Cost of revenues (excluding depreciation and amortization)15,593  15,464 
Gross margin17,279  20,605 
Consumer   
Revenues56,130  51,371 
Cost of revenues (excluding depreciation and amortization)20,000  18,437 
Gross margin36,130  32,934 
Total Segments   
Revenues282,447  254,262 
Cost of revenues (excluding depreciation and amortization)129,462  115,206 
Gross margin$152,985  $139,056 



The following table presents a reconciliation of segment gross margin to consolidated income (loss) before income taxes for the
three months ended March 31, 2015 and 2016:
 Three Months Ended
 March 31,
 2015 2016
Gross margin$152,985  $139,056 
Operating costs and expenses:   
Selling, general and administrative expenses95,258   81,412 
Depreciation and amortization47,264  40,199 
Restructuring, acquisition and integration-related costs5,372   3,013 
Total operating costs and expenses147,894  124,624 
Gain on sale of business   5,727 
Interest expense and other, net(13,937) (11,109)
Loss on extinguishment of debt(1,286) (232)
Income (loss) before income taxes$(10,132) $8,818 






EARTHLINK HOLDINGS CORP.
Supplemental Schedule of Revenue Detail
(in thousands)
  
 Three Months Ended
 March 31,
 2015 2016
    
 (in thousands)
    
Monthly recurring revenues$247,975  $223,402 
Usage revenues27,678  22,458 
Equipment revenues3,724  4,107 
Non-recurring and other revenues3,070  4,295 
Total revenues$282,447  $254,262 




EARTHLINK HOLDINGS CORP.
Supplemental Financial Data
      
 March 31, December 31, March 31,
 2015 2015 2016
      
Number of employees at end of period (6)2,402  2,138  1,895 


EARTHLINK HOLDINGS CORP.
Consumer Operating Metrics
  
 Three Months Ended
 March 31, December 31,  March 31,
 2015 2015 2016
      
Average narrowband subscribers (7) 475,000   454,000    441,000 
Average broadband subscribers (7) 331,000   286,000   275,000 
Average consumer subscribers (7) 806,000   740,000   716,000 
      
ARPU (8)$23.20   $24.01  $23.91 
Churn rate (9)2.1% 1.8%  1.8%


EARTHLINK HOLDINGS CORP.
Footnotes to Consolidated Financial Highlights

1. Restructuring, acquisition and integration-related costs consisted of the following for the periods presented (in thousands):

  Three Months Ended March 31,
  2015 2016
     
Integration-related costs $1,317  $1,779 
Severance, retention and other employee costs 2,901  891 
Facility-related costs 1,154  343 
Restructuring, acquisition and integration-related costs $5,372  $3,013 


Restructuring, acquisition and integration-related costs consist of costs related to the Company's restructuring, acquisition and integration-related activities. Such costs include: 1) integration-related costs, such as system conversions, rebranding costs and integration-related consulting and employee costs; 2) severance, retention and other employee termination costs associated with acquisition and integration activities and with certain voluntary employee separations; and 3) facility-related costs, such as lease termination and asset impairments.

2. On February 1, 2016, the Company sold certain assets related to its IT services product offerings. The primary purpose of the sale was to simplify operations and provide more flexibility to invest in new capabilities and services to drive growth in the Company's core business. The purchase price in the transaction was $29.0 million, subject to post-closing contingencies that could increase or decrease the purchase price by $5.0 million. The Company received $26.0 million of cash upon completion of the sale. The other $3.0 million of consideration was deposited into an escrow account to fund potential indemnification obligations. The Company recognized a pretax gain of $5.7 million and recorded a $2.0 million deferred gain for contingent consideration. The carrying amount of the IT services assets was $17.5 million, which included $11.4 million of property and equipment, $2.3 million of goodwill, $3.5 million of other intangible assets and $0.3 million of other assets and liabilities. Total revenue of the Company's IT services business was approximately $11.8 million and $3.4 million, respectively, during the three months ended March 31, 2015 and 2016. Total revenue of the Company's IT services business included in its Enterprise/Mid-Market segment was $7.9 million and $2.3 million during the during the three months ended March 31, 2015 and 2016, respectively, and total revenue of the Company's IT services business included in its Small Business segment was $3.9 million and $1.1 million during the during the three months ended March 31, 2015 and 2016, respectively.

3. During the three months ended March 31, 2015 and 2016, the Company repurchased $21.1 million and $7.0 million, respectively, outstanding principal of its 8.875% Senior Notes due 2019 and recorded $1.3 million and $0.2 million, respectively, for losses on extinguishment of debt. The losses consisted of premiums paid on the Company's debt repayments, the write-off of unamortized discount on debt and the write-off of unamortized debt issuance costs.

4. Adjusted EBITDA is defined as net income (loss) before interest expense and other, net, income taxes, depreciation and amortization, stock-based compensation expense, impairment of goodwill and long-lived assets, restructuring, acquisition and integration-related costs, gain on sale of business and loss on extinguishment of debt. Unlevered Free Cash Flow is defined as net income (loss) before interest expense and other, net, income taxes, depreciation and amortization, stock-based compensation expense, impairment of goodwill and long-lived assets, restructuring, acquisition and integration-related costs, gain on sale of business and loss on extinguishment of debt, less cash used for purchases of property and equipment.

Adjusted EBITDA and Unlevered Free Cash Flow are non-GAAP measures and are not determined in accordance with U.S. generally accepted accounting principles. These non-GAAP financial measures are commonly used in the industry and are presented because management believes they provide relevant and useful information to investors. Management uses these non-GAAP financial measures to evaluate the performance of its business and determine bonuses. Management believes that excluding the effects of certain non-cash and non-operating items enables investors to better understand and analyze the current period's results and provides a better measure of comparability. There are limitations to using these non-GAAP financial measures. Adjusted EBITDA and Unlevered Free Cash Flow are not indicative of cash provided or used by operating activities and may differ from comparable information provided by other companies.  Adjusted EBITDA and Unlevered Free Cash Flow should not be considered in isolation, as an alternative to, or more meaningful than measures of financial performance determined in accordance with U.S. GAAP.

5. The Company reports segment information along the same lines that its Chief Operating Decision Maker reviews its operating results in assessing performance and allocating resources. The Company's Chief Operating Decision Maker is its Chief Executive Officer. The Company's reportable segments are strategic business units that are aligned around distinct customer categories to optimize operations. The Company operates the following four reportable segments:

The Company evaluates performance of its segments based on segment gross margin. Segment gross margin includes revenues from external customers and related cost of revenues. Costs excluded from segment gross margin include selling, general and administrative expenses, depreciation and amortization, impairment of goodwill and intangible assets, restructuring, acquisition and integration-related costs, gain on sale of business, interest expense and other, net, and loss on extinguishment of debt, as they are not considered in the measurement of segment performance.

6. Represents full-time equivalents.

7. Consumer 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.

8. Consumer 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.

9. Consumer 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.

Investors

Trey Huffman

404-748-6219

huffmanal@elnk.com



Media

Randi Drinkwater

404-709-3404

randi.drinkwater@elnk.com

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Source: EarthLink Holdings Corp.

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