EARTHLINK ANNOUNCES SECOND QUARTER 2012 RESULTS
Continued Improvement in Revenue Trajectory
ATLANTA — August 2, 2012 — EarthLink, Inc. (NASDAQ: ELNK) today announced financial results for its second quarter ended June 30, 2012. Highlights for the second quarter include:
- Net loss of $(1.1) million or $(0.01) per share
- Adjusted EBITDA (a non-GAAP measure) of $66.4 million
- Net cash provided by operating activities of $22.2 million
- Unlevered free cash flow (a non-GAAP measure) of $41.9 million
- Ending cash and marketable securities of $258.0 million
These results include an $8.3 million increase in reserves for regulatory audits.
"We are making good progress in the transformation of platforms, products and people to position EarthLink for long-term success as an IT services company," said EarthLink Chairman and Chief Executive Officer Rolla P. Huff. "Our business is trending in the right direction towards growth. We continue to invest in IT services and integration to support our future, while evolving our organizational structure and distribution channels to fuel our growth."
Financial and Operating Results
EarthLink reported total company revenue of $338.2 million in the second quarter of 2012, a 2% decrease from the prior quarter and a 7% decrease from the year-ago quarter. Business services comprised 76% of EarthLink's revenue in the second quarter of 2012, up from 74% in the year-ago quarter. Business services revenue declined $2.8 million, or 1%, from the 2 prior quarter, narrowing the declines in this segment. The company's consumer services segment continues to perform well, with higher-margin broadband services accounting for 68% of consumer access revenue in the second quarter of 2012, up from 67% in the prior quarter and 65% in the year-ago quarter. Subscriber churn in the consumer segment was 2.3% in the second quarter of 2012, as compared to 2.5% in the prior quarter and 2.6% in the year-ago quarter.
EarthLink's selling, general and administrative expenses were $106.4 million, or 31% of revenue, in the second quarter of 2012, as compared to expenses of $110.1 million in the prior quarter and $113.8 million in the year-ago quarter.
Profitability and Other Financial Measures
Net loss was $(1.1) million, or $(0.01) per share, in the second quarter of 2012, as compared to net income of $7.3 million, or $0.07 per share, in the prior quarter, and $6.5 million, or $0.06 per share, in the year-ago quarter.
EarthLink generated Adjusted EBITDA (a non-GAAP measure, see definition in "Non-GAAP Measures" below) of $66.4 million in the second quarter of 2012, versus Adjusted EBITDA of $77.6 million in the prior quarter and $88.9 million in the year-ago quarter.
EarthLink's second quarter 2012 net loss and Adjusted EBITDA reflect an $8.3 million charge recorded within cost of revenue to increase the company's reserves for regulatory audits, primarily an audit currently being conducted by the Universal Service Administration Company on Federal Universal Service Fund assessments and payments in the legacy ITC^DeltaCom business.
Balance Sheet and Cash Flow
Net cash provided by (used in) operating activities was $22.2 million during the second quarter of 2012, compared to $66.2 million in the prior quarter and ($9.0) million in the year-ago quarter. EarthLink generated unlevered free cash flow (a non-GAAP measure, see definition in "Non-GAAP Measures" below) of $41.9 million during the second quarter of 2012, compared to $45.9 million in the prior quarter and $66.2 million in the year-ago quarter.
As of June 30, 2012, the company reported cash and marketable securities of $258.0 million. Capital expenditures were $24.5 million for the second quarter of 2012. During the second quarter of 2012, the company made $5.3 million of dividend payments to shareholders, 3 repurchased 0.7 million shares of common stock at an average price of $7.37 per share and made $30.4 million of scheduled semi-annual interest payments on long-term debt.
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 revised financial guidance for the full year 2012. Management now expects Adjusted EBITDA of $275 million to $285 million, capital expenditures of $115 million to $125 million, and net loss of $(4) million to $(1) million for the full year 2012.
Also today, EarthLink announced that President and Chief Operating Officer Joseph M. Wetzel will depart from the company on December 31, 2012 in conjunction with the expected launch of major components of EarthLink's new integrated OSS platform.
"Joe Wetzel has been an instrumental part of EarthLink's transformation over the past five years. His leadership and expertise in operational optimization has been a critical driver in moving our company forward," said Huff. "Our Board of Directors and I appreciate Joe's willingness to see EarthLink through the complex and substantial transformation and integration that has been underway the past two years."
Wetzel's responsibilities will be transitioned to operating level executives with functional accountability directly to Huff. Wetzel, 56, joined the company in August of 2007. "It has been an honor to be part of the EarthLink team," commented Wetzel. "With our business well positioned for the future and a strong leadership team in place, the timing is right for me to make this transition."
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 intangible assets, and restructuring, acquisition and integration-related costs. 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 4 intangible assets, and restructuring, acquisition and integration-related costs, 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 3 of the Consolidated Financial Highlights for a discussion of the presentation, comparability and use of such financial measures.
Conference Call for Analysts and Investors
Conference Call Details
Thursday, August 2, 2012, at 8:30 a.m. ET hosted by EarthLink's Chairman and Chief Executive Officer Rolla P. Huff, President and Chief Operating Officer Joseph M. Wetzel, 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 should reference the conference ID number 10239463 or "EarthLink's 2nd Quarter 2012 Conference Call," and dial in 10 minutes prior to scheduled start time.
A live Webcast of the conference call will be available at: http://ir.earthlink.net/
An investor presentation to accompany the conference call and webcast will be available
Replay available from 11:30 a.m. ET on August 2 through midnight on September 12, 2012.
Dial toll-free 855-859-2056. The replay confirmation code is 10239463.
The Webcast will be archived on the company's website at: http://ir.earthlink.net/events.cfm
Download the Second Quarter 2012 Financial Statements
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 (1) that we may not be able to execute our strategy to grow our business services revenue, especially revenue from advanced products, in an expeditious manner, which could 5 adversely impact our results of operations and cash flows; (2) that we may be unsuccessful or experience delays in integrating acquisitions into our business while we develop our Business Services advanced product portfolio, which could result in operating difficulties, losses and other adverse consequences; (3) that we may be unable to successfully identify, manage and assimilate future acquisitions, which could adversely affect our results of operations; (4) 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; (5) that our failure to achieve operating efficiencies will adversely affect our results of operations; (6) that unfavorable general economic conditions could harm our business; (7) that we face significant competition in the communications and managed IT services industry that could reduce our profitability; (8) that decisions by 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; (9) 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; (10) that our operating performance will suffer if we are not offered competitive rates for the access services we need to provide our long distance services; (11) that we may experience reductions in switched access and reciprocal compensation revenue; (12) that failure to obtain and maintain necessary permits and rights-of-way could interfere with our network infrastructure and operations; (13) that we have substantial business relationships with several large telecommunications carriers, and some of our customer agreements may not continue due to financial difficulty, acquisitions, non-renewal, or other factors, which could adversely affect our revenue and results of operations; (14) that our commercial and alliance arrangements may not be renewed or may not generate expected benefits, which could adversely affect our results of operations; (15) that our consumer business is dependent on the availability of third-party network service providers; (16) that we face significant competition in the Internet industry that could reduce our profitability; (17) that the continued decline of our consumer access subscribers, combined with the change in mix of our consumer access base from narrowband to broadband, will adversely affect our results of operations; (18) that potential regulation of Internet service providers could adversely affect our operations; (19) that we may be unable to hire and retain sufficient qualified personnel, including Business Services sales personnel, and that the loss of any of our key executive officers could adversely affect us; (20) that privacy concerns relating to our business could damage our reputation and deter current and potential users from using our services; (21) that security breaches could damage our reputation and harm our operating results; (22) 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; (23) that our business depends on effective business support systems and processes; (24) that government regulations could adversely affect our business or force us to change our business practices and that we are subject to regulatory audits; (25) that our business may suffer if third parties are unable to provide services or terminate their relationships with us; (26) that we may not be able to protect our intellectual property; (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 if we are unable to successfully defend against legal actions, we could face substantial liabilities or suffer harm to our financial and operational prospects; (29) 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; (30) 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; (31) that our indebtedness could adversely affect our financial health and limit our ability to react to changes in our industry; (32) that we may require additional capital to support business growth, and this capital may not be available to us on acceptable terms, or at all; (33) that we may reduce, or cease payment of, quarterly cash dividends; (34) that our stock price may be volatile; and (35) that provisions of our third 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, 2011.
About EarthLinkClick Here To Print This Press Release
EarthLink, Inc. (NASDAQ: ELNK) is a leading IT services and communications provider to more than 150,000 businesses and one million consumers nationwide. EarthLink empowers customers with managed services including cloud computing, managed and private cloud, and virtualization services such as managed hosting and cloud workspace. EarthLink also offers a robust portfolio of IT security, application hosting, colocation and IT support services. The company operates an extensive network spanning 29,421 route fiber miles with 90 metro fiber rings and 8 secure data centers providing ubiquitous nationwide data and voice IP service coverage across more than 90 percent of the country. Founded in 1994, EarthLink's award-winning reputation for outstanding service and product innovation is supported by an experienced team of professionals focused on best-in-class customer care. For more information, visit EarthLink's website at www.earthlink.net.