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EarthLink Inc. Reports Operating Results (10-Q)

April 30, 2012 | About:
10qk

10qk

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EarthLink Inc. (ELNK) filed Quarterly Report for the period ended 2012-03-31.

Earthlink Inc has a market cap of $850.5 million; its shares were traded at around $8.11 with a P/E ratio of 18.6 and P/S ratio of 0.7. The dividend yield of Earthlink Inc stocks is 2.5%. Earthlink Inc had an annual average earning growth of 3.1% over the past 10 years.

Highlight of Business Operations:

We generated revenues of $344.4 million during the three months ended March 31, 2012, an increase from $243.0 million during the three months ended March 31, 2011, due to the inclusion of revenues from our acquired companies, partially offset by a decrease in Consumer Services revenue and in certain legacy Business Services revenue. Net income was $7.3 million during the three months ended March 31, 2012, a decrease from $16.4 million during the three months ended March 31, 2011, and Adjusted EBITDA (a non-GAAP measure, see Non-GAAP Financial Measures in this Item 2) was $77.6 million during the three months ended March 31, 2012, an increase from $69.7 million during the three months ended March 31, 2011. The increase in Adjusted EBITDA was due to inclusion of Adjusted EBITDA generated from our acquired businesses, partially offset by a decline in Adjusted EBITDA generated from our Consumer Services segment. The decrease in net income was primarily due to depreciation and amortization expense resulting from property and equipment and intangible assets obtained in our acquisition of One Communications and an increase in interest expense resulting from the issuance of new debt securities, partially offset by a decrease in our income tax provision. Unlevered free cash flow (a non-GAAP measure, see Non-GAAP Financial Measures in this Item 2) was $45.9 million during the three months ended March 31, 2012, a decrease from $52.0 million during the three months ended March 31, 2011, which was primarily due to the inclusion of capital expenditures of our acquired companies, partially offset by the inclusion of Adjusted EBITDA generated from our acquired companies.

The increase in Business Services revenue compared to the prior year period was primarily due to $122.5 million of revenues generated from our acquired businesses. On a pro forma basis for the acquisition of One Communications, Business Services revenue decreased $14.9 million, from $275.1 million during the three months ended March 31, 2011 to $260.3 million during the three months ended March 31, 2012. This was due to a decrease in revenues for certain legacy products, including traditional voice, web hosting and lower-end, single site broadband services. Revenues for these legacy products have been decreasing due to competition in the industry, the migration of customers to more advanced services and a decreased emphasis on selling these services.

Our monthly consumer subscriber churn rates decreased from 2.7% during the three months ended March 31, 2011 to 2.5% during the three months ended March 31, 2012, which moderated the decline in average consumer subscribers. Churn rates decreased due to the increased tenure of our subscriber base. We expect our consumer access and service subscriber base and revenues to continue to decrease due to limited sales and marketing activities, competitive pressures and the continued maturation of the market for narrowband Internet access. However, we expect the rate of churn and revenue decline to continue to decelerate as our customer base becomes longer tenured and churn rates go down. Consistent with trends in the Internet access industry, we expect the mix of our consumer access subscriber base to continue to shift from narrowband access to broadband access customers.

The increase in selling, general and administrative expenses compared to the prior year period was due to $43.3 million of selling, general and administrative expenses from our acquired businesses, including One Communications and STS Telecom during the three months ended March 31, 2012. Partially offsetting the increase was a decrease in business services selling, general and administrative expenses due to cost synergies realized from the integration of ITC^DeltaCom. Also partially offsetting this was a decrease in selling, general and administrative expenses in our Consumer Services segment consisting of decreases in personnel-related costs, outsourced labor, advertising expense, bad debt and payment processing fees and legal and professional fees. The decreases resulted from reduced headcount and continued cost reduction initiatives, reduced discretionary sales and marketing spend, and continued benefits as our overall consumer subscriber base has decreased and become longer tenured. Longer-tenured customers have a lower frequency of non-payment and require less customer service and technical support.

The decrease in cash flows from investing activities was primarily due to a change in cash associated with investments in marketable securities. During the three months ended March 31, 2011, we received cash of $319.7 million for sales and maturities of investments in marketable securities as we converted our investments to cash equivalents during the period. During the three months ended March 31, 2012, we used cash of $19.2 million for purchases of marketable securities. Also contributing to the decrease was a $14.0 million increase in capital expenditures, primarily due to the inclusion of capital expenditures of our acquired companies, network and technology center related projects and customer acquisition costs. We continue to focus on investment in our technology infrastructure to support our long-term strategic plans. The overall decrease in cash flows from investing activities was offset by a $22.1 million decrease in cash used for acquisitions, net of cash acquired.

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