EarthLink Announces Fourth Quarter and Full Year 2009 Results
ATLANTA, Feb. 4 /PRNewswire-FirstCall/ -- EarthLink, Inc. (Nasdaq: ELNK) today announced financial results for its fourth quarter and full year ended December 31, 2009. Highlights for the fourth quarter include:
- Net income of $193.3 million or $1.79 per share
- Adjusted EBITDA (a non-GAAP measure) of $50.9 million
- Free cash flow (a non-GAAP measure) of $48.4 million
- Dividend payments to shareholders of $15.0 million
- Ending cash and marketable securities balance of $696.0 million
- Announced full year 2010 Adjusted EBITDA (a non-GAAP measure) guidance of $180 million to $190 million
"The results EarthLink announced today demonstrate continued consistent performance against the strategy we launched two and a half years ago to focus the company on creating shareholder value through strong cash generation in the core business. As a result, our full year 2009 results outperformed relative to expectations," said EarthLink Chairman and Chief Executive Officer Rolla P. Huff. "As we look toward 2010, the full year guidance we are providing is narrower in range and reflects the increasing visibility we believe we have in our business. We will continue our disciplined process of evaluating potential strategic uses of our balance sheet, while we operate our core business with the same discipline and operational excellence our shareholders have come to expect."
Financial and Operating Results
EarthLink reported revenue of $164.5 million in the fourth quarter and $723.7 million for the full year 2009, representing a 24 percent decline from both the fourth quarter of 2008 and the full year 2008. The pace of EarthLink's sequential revenue decline continued to attenuate, with revenue down 6 percent from the third quarter of 2009. Broadband comprised 58% of EarthLink's revenue in the fourth quarter of 2009, up from 54% in the year-ago quarter.
Net subscriber losses were 137,000 in the fourth quarter, an improvement from 146,000 in the third quarter of 2009 and 218,000 in the year-ago quarter. While EarthLink's subscriber losses moderated in the fourth quarter, the company reported strong performance in customer churn reflecting the increasing tenure of its subscriber base. Subscriber churn improved to 3.2% in the fourth quarter of 2009, down from 3.6% in the third quarter of 2009 and 3.9% in the year-ago quarter. In the fourth quarter of 2009, 84% of EarthLink's consumer customers had two or more years of tenure with the company and 43% had five or more years of tenure, with churn rates of 2.9% and 2.0% respectively.
The company continues to aggressively manage expenses to keep costs in line with revenue trends. Total sales and marketing, operations, customer support, and general and administrative expenses were $58.1 million for the fourth quarter and $230.3 million for the full year 2009, an 18% reduction from fourth quarter 2008 expenses and a 30% reduction from full year 2008 expenses.
Profitability and Other Financial Measures
Net income was $193.3 million, or $1.79 per share, in the fourth quarter of 2009 and $287.1 million, or $2.66 per share, for the full year 2009; as compared to $24.4 million, or $0.22 per share in the fourth quarter of 2008, and $178.6 million, or $1.61 per share for the full year 2008.
The fourth quarter and full year 2009 results included a $24.1 million non-cash impairment charge for goodwill and intangible assets, compared to a $78.7 million non-cash impairment charge in the prior year periods, and included an income tax benefit of $181.8 million and $126.1 million, respectively, compared to $56.1 million and $32.2 million, respectively, in the fourth quarter and full year 2008. The income tax benefits were primarily due to releases of EarthLink's valuation allowance related to its deferred tax assets.
EarthLink's strong results in customer retention, combined with its ability to aggressively manage costs ahead of revenue declines, resulted in the company generating Adjusted EBITDA (a non-GAAP measure, see definition in "Non-GAAP Measures" below) of $50.9 million in the fourth quarter of 2009 and $249.1 million for the full year 2009. This compares to Adjusted EBITDA of $72.4 million for the fourth quarter 2008 and $308.9 million for the full year 2008.
Balance Sheet and Cash Flow
EarthLink generated free cash flow (a non-GAAP measure, see definition in "Non-GAAP Measures" below) of $48.4 million during the fourth quarter of 2009 and $236.0 million for the full year 2009; compared to $70.1 million in the fourth quarter of 2008 and $301.9 million in the full year 2008.
Capital expenditures for the company were $2.5 million in the fourth quarter and $13.1 million for the full year. EarthLink made $15.0 million of dividend payments in the fourth quarter, for a total of $30.0 million in dividend payments to shareholders during the full year 2009. Also during the full year 2009, EarthLink repurchased 3.6 million shares of its common stock for $22.3 million. EarthLink ended 2009 with $696.0 million in cash and marketable securities, an increase of $41.1 million over September 30, 2009.
Business Outlook
The following statements are forward-looking, and actual results may differ materially. See comments under "Cautionary Information Regarding Forward-Looking Statements" below. EarthLink undertakes no obligation to update these statements.
Today EarthLink announced guidance for the full year 2010. Management expects 2010 Adjusted EBITDA of $180 million to $190 million. This narrow guidance range reflects management's increased visibility and confidence as to the near term predictability of the business. Management expects 2010 free cash flow of $160 million to $180 million, based upon the aforementioned Adjusted EBITDA guidance combined with $10 million to $20 million in estimated capital expenditures. Additionally, EarthLink expects to generate income from continuing operations of $75 million to $85 million for the full year 2010.
Non-GAAP Measures
Adjusted EBITDA is defined as income from continuing operations before interest expense and other, net, income taxes, depreciation and amortization, stock-based compensation expense, gain (loss) on investments, net, impairment of goodwill and intangible assets, and facility exit and restructuring costs.
Free cash flow is defined as income from continuing operations before interest expense and other, net, income taxes, depreciation and amortization, stock-based compensation expense, gain (loss) on investments, net, impairment of goodwill and intangible assets, and facility exit and restructuring costs, less cash used for purchases of property and equipment and purchases of subscriber bases.
Adjusted EBITDA and free cash flow are non-GAAP financial performance measures. They should not be considered in isolation or as an alternative to measures determined in accordance with U.S. generally accepted accounting principles. Please refer to the Consolidated Financial Highlights for a reconciliation of these non-GAAP financial performance measures to the most comparable measures reported in accordance with U.S. generally accepted accounting principles and Footnote 6 of the Consolidated Financial Highlights for a discussion of the presentation, comparability and use of such financial performance measures.
Conference Call for Analysts and Investors
Conference Call Details
Thursday, February 4, 2010, at 8:30 a.m. EST hosted by EarthLink's Chairman and Chief Executive Officer, Rolla P. Huff and Chief Financial Officer, Bradley A. Ferguson.
U.S. and Canada Dial-in Number |
800-706-0730 |
|
International Dial-in Number |
706-634-5173 |
|
Participants reference the EarthLink call and dial in 10 minutes prior to scheduled start time.
Webcast
A live Webcast of the conference call will be available at: http://ir.earthlink.net/index.cfm
Replay
Replay available from 9:30 a.m. EST on February 4 through midnight on February 11.
Dial 800-642-1687 from US and Canada, International callers dial 706-645-9291.
The replay confirmation code is 50573305.
The Webcast will be archived on the company's website at: http://ir.earthlink.net/events.cfm
About EarthLink
"EarthLink. We revolve around you™." A leading Internet service provider, Atlanta-based EarthLink has earned an award-winning reputation for outstanding customer service and its suite of online products and services. EarthLink offers what every user should expect from their Internet experience: high-quality connectivity, minimal online intrusions and customizable features. Whether it's dial up, high speed, voice, web hosting or "EarthLink Extras" like home networking or security, EarthLink connects people to the power and possibilities of the Internet. Learn more about EarthLink by calling (800) EARTHLINK or visiting EarthLink's website at www.EarthLink.net.
Cautionary Information Regarding Forward-Looking Statements
This press release includes "forward-looking" statements (rather than historical facts) that are subject to risks and uncertainties that could cause actual results to differ materially from those described. Although we believe that the expectations expressed in these forward-looking statements are reasonable, we cannot promise that our expectations will turn out to be correct. Our actual results could be materially different from and worse than our expectations. We disclaim any obligation to update any forward-looking statements contained herein, except as may be required pursuant to applicable law. With respect to forward-looking statements in this press release, the company seeks the protections afforded by the Private Securities Litigation Reform Act of 1995. These risks include, without limitation, (1) that the continued decline of our consumer access subscribers, combined with the change in mix of our consumer access subscriber base from narrowband to broadband, will adversely affect our results of operations; (2) that we will have less ability in the future to implement cost reduction initiatives to offset our revenue declines, which will adversely affect our results of operations; (3) that we face significant competition which could reduce our profitability; (4) that adverse economic conditions may harm our business; (5) that we may not be able to execute our business strategy for our Business Services segment, which could adversely impact our results of operations and cash flows; (6) that we may be unsuccessful in making and integrating acquisitions and investments into our business, which could result in operating difficulties, losses and other adverse consequences; (7) that our business is dependent on the availability of third-party telecommunications service providers; (8) that we may be unable to retain sufficient qualified personnel, and the loss of any of our key executive officers could adversely affect us; (9) that if we do not continue to innovate and provide products and services that are useful to subscribers, we may not remain competitive, and our revenues and operating results could suffer; (10) that our commercial and alliance arrangements may not be renewed, which could adversely affect our results of operations; (11) that our business may suffer if third parties used for technical and customer service and technical support and certain billing services are unable to provide these services, cannot expand to meet our needs or terminate their relationships with us; (12) that service interruptions or impediments could harm our business; (13) that government regulations could adversely affect our business or force us to change our business practices; (14) that privacy concerns relating to our business could damage our reputation and deter current and potential users from using our services; (15) that we may not be able to protect our intellectual property; (16) that we may be accused of infringing upon the intellectual property rights of third parties, which is costly to defend and could limit our ability to use certain technologies in the future; (17) that we could face substantial liabilities if we are unable to successfully defend against legal actions; (18) that our business depends on effective business support systems, processes and personnel; (19) that as a result of our continuing review of our business, we may have to undertake further restructuring plans that would require additional charges, including incurring facility exit and restructuring charges; (20) that we may be required to recognize additional impairment charges on our goodwill and intangible assets, which would adversely affect our results of operations and financial position; (21) that the use of our net operating losses and certain other tax attributes could be limited in the future; (22) that our stock price has been volatile historically and may continue to be volatile; (23) that we may reduce, or cease payment of, quarterly cash dividends; (24) that our indebtedness could adversely affect our financial health and limit our ability to react to changes in our industry; and (25) that provisions of our second restated certificate of incorporation, amended and restated bylaws and other elements of our capital structure could limit our share price and delay a change of management. These risks and uncertainties, as well as other risks and uncertainties that could cause our actual results to differ significantly from management's expectations, are not intended to represent a complete list of all risks and uncertainties inherent in our business, and should be read in conjunction with the more detailed cautionary statements and risk factors included in our Annual Report on Form 10-K for the year ended December 31, 2008
EARTHLINK, INC.
Unaudited Condensed Consolidated Statements Of Operations
(in thousands, except per share data)
Three Months Ended Twelve Months Ended
December 31, December 31,
------------ ------------
2008 2009 2008 2009
---- ---- ---- ----
Revenues:
Access and service $193,496 $147,509 $855,079 $649,856
Value-added services 22,573 17,039 100,498 73,873
------- ------- -------- -------
Total revenues 216,069 164,548 955,577 723,729
Operating costs and
expenses:
Cost of revenues 83,265 62,035 360,920 273,755
Sales and marketing 19,299 14,069 98,212 59,474
Operations and
customer support 29,883 23,180 136,797 98,435
General and
administrative 21,868 20,895 93,878 72,398
Amortization of
intangible assets 2,196 1,525 13,349 7,749
Impairment of
goodwill and
intangible assets (1) 78,672 24,145 78,672 24,145
Facility exit and
restructuring costs (2) 4,973 297 9,142 5,615
------- ------- ------- -------
Total operating
costs and expenses 240,156 146,146 790,970 541,571
Income (loss) from
operations (24,087) 18,402 164,607 182,158
Gain (loss) on
investments, net (2,969) (1,626) 2,708 (1,321)
Interest expense and
other, net (3) (4,605) (5,346) (12,409) (19,804)
------- ------- ------- -------
Income (loss) from
continuing
operations before
income taxes (31,661) 11,430 154,906 161,033
Income tax benefit (4) 56,107 181,839 32,184 126,085
------- ------- ------- -------
Income from
continuing
operations 24,446 193,269 187,090 287,118
Loss from discontinued
operations, net of
tax (5) (68) - (8,506) -
------- ------- ------- -------
Net income $24,378 $193,269 $178,584 $287,118
======= ======= ======= =======
Basic net income per
share
Continuing operations $0.23 $1.80 $1.71 $2.69
Discontinued operations (0.00) - (0.08) -
------- ------- ------- -------
Basic net income per
share $0.22 $1.80 $1.63 $2.69
======= ======= ======= =======
Basic weighted average
common shares
outstanding 108,449 107,075 109,531 106,909
======= ======= ======= =======
Diluted net income per
share
Continuing operations $0.22 $1.79 $1.68 $2.66
Discontinued operations (0.00) - (0.08) -
------- ------- ------- -------
Diluted net income per
share $0.22 $1.79 $1.61 $2.66
======= ======= ======= =======
Diluted weighted
average common
shares outstanding 109,617 108,178 111,051 108,084
======= ======= ======= =======
EARTHLINK, INC.
Reconciliation of Income from Continuing Operations to Adjusted EBITDA (6)
(in thousands)
Three Months Ended Twelve Months Ended
December 31, December 31,
------------ ------------
2008 2009 2008 2009
---- ---- ---- ----
Income from
continuing
operations $24,446 $193,269 $187,090 $287,118
Income tax
benefit (4) (56,107) (181,839) (32,184) (126,085)
Depreciation and
amortization 6,982 5,352 36,333 23,962
Stock-based
compensation
expense 5,814 2,679 20,133 13,231
Gain (loss) on
investments, net 2,969 1,626 (2,708) 1,321
Interest expense
and other, net (3) 4,605 5,346 12,409 19,804
Impairment of
goodwill and
intangible
assets (1) 78,672 24,145 78,672 24,145
Facility exit and
restructuring
costs (2) 4,973 297 9,142 5,615
------- ------- -------- --------
Adjusted EBITDA (6) $72,354 $50,875 $308,887 $249,111
======= ======= ======== ========
Depreciation -
cost of revenues $2,031 $2,293 $11,453 $8,087
Depreciation - other 2,755 1,534 11,531 8,126
Amortization of
intangible assets 2,196 1,525 13,349 7,749
------- ------- ------- --------
Depreciation and
amortization $6,982 $5,352 $36,333 $23,962
======= ======= ======= ========
EARTHLINK, INC.
Reconciliation of Income From Continuing Operations to Free Cash Flow (6)
(in thousands)
Three Months Ended Twelve Months Ended
December 31, December 31,
------------ ------------
2008 2009 2008 2009
---- ---- ---- ----
Income from
continuing
operations $24,446 $193,269 $187,090 $287,118
Income tax
benefit (4) (56,107) (181,839) (32,184) (126,085)
Depreciation and
amortization 6,982 5,352 36,333 23,962
Stock-based
compensation
expense 5,814 2,679 20,133 13,231
Gain (loss) on
investments, net 2,969 1,626 (2,708) 1,321
Interest expense
and other, net (3) 4,605 5,346 12,409 19,804
Impairment of
goodwill and
intangible
assets (1) 78,672 24,145 78,672 24,145
Facility exit and
restructuring
costs (2) 4,973 297 9,142 5,615
Purchases of
property and
equipment (1,877) (2,471) (5,754) (13,119)
Purchases of
subscriber bases (352) - (1,232) -
------- ------- -------- --------
Free cash flow (6) $70,125 $48,404 $301,901 $235,992
======= ======= ======== ========
EARTHLINK, INC.
Reconciliation of Guidance Provided in Non-GAAP Measures (6)
(in millions)
Year
Ending
December 31,
2010
----
Income from continuing operations $75 - $85
Depreciation 16
Amortization of intangible assets 4
Stock-based compensation expense 14
Income tax provision 47
Facility exit and restructuring costs (2) 2
Interest expense and other, net 22
---
Adjusted EBITDA (6) $180 - $190
===========
Year
Ending
December 31,
2010
----
Income from continuing operations $75 - $85
Depreciation 16
Amortization of intangible assets 4
Stock-based compensation expense 14
Income tax provision 47
Interest expense and other, net 22
Facility exit and restructuring costs (2) 2
Purchases of property and equipment (20) - (10)
-----------
Free cash flow (6) $160 - $180
===========
EARTHLINK, INC.
Supplemental Financial Data and Key Operating Metrics
December 31, June 30, September 30, December 31,
2008 2009 2009 2009
---- ---- ---- ----
Balance Sheet Data (dollars in thousands)
Cash and marketable
securities $534,373 $610,349 $654,872 $695,961
Convertible Senior
Notes (7) 258,750 258,750 258,750 258,750
Stockholders' equity 486,475 539,809 561,540 734,024
Employee Data
Number of employees
at end of period (8) 754 693 660 623
December 31, June 30, September 30, December 31,
2008 2009 2009 2009
---- ---- ---- ----
Subscriber Data (9)
Consumer services
Narrowband access
subscribers 1,747,000 1,456,000 1,329,000 1,225,000
Broadband access
subscribers (10) 896,000 845,000 832,000 804,000
--------- --------- --------- ---------
Total consumer
subscribers 2,643,000 2,301,000 2,161,000 2,029,000
Business services
Narrowband access
subscribers 17,000 11,000 9,000 8,000
Broadband access
subscribers 59,000 56,000 55,000 54,000
Web hosting
accounts 87,000 81,000 78,000 75,000
--------- --------- --------- ---------
Total business
subscribers 163,000 148,000 142,000 137,000
Total subscribers
at end of period 2,806,000 2,449,000 2,303,000 2,166,000
========= ========= ========= =========
Three Months Ended Twelve Months Ended
December 31, December 31,
------------------- -------------------
2008 2009 2008 2009
---- ---- ---- ----
Subscriber Activity
Subscribers at
beginning of
period 3,024,000 2,303,000 3,876,000 2,806,000
Gross organic
subscriber
additions 114,000 75,000 666,000 419,000
Acquired subscribers 6,000 - 8,000 -
Adjustment (11) - - (15,000) (7,000)
Churn (338,000) (212,000) (1,729,000) (1,052,000)
--------- -------- ---------- ----------
Subscribers at end
of period 2,806,000 2,166,000 2,806,000 2,166,000
========= ========= ========= =========
Churn Rate (12) 3.9% 3.2% 4.4% 3.6%
Consumer Data
Average
subscribers (13) 2,747,000 2,093,000 3,130,000 2,310,000
ARPU (14) $21.18 $20.72 $20.76 $20.76
Churn rate (12) 3.9% 3.2% 4.4% 3.6%
Business Data
Average
subscribers (13) 167,000 139,000 179,000 149,000
ARPU (14) $82.70 $82.50 $81.64 $82.83
Churn rate (12) 2.7% 2.0% 2.8% 2.6%
EARTHLINK, INC.
Supplemental Schedule of Segment Information (15)
(in thousands)
Three Months Ended Twelve Months Ended
December 31, December 31,
------------ ------------
2008 2009 2008 2009
---- ---- ---- ----
Consumer Services
Revenues
Access and service $152,578 $113,565 $682,135 $503,769
Value-added services 21,958 16,503 97,741 71,643
------- ------- -------- --------
Total revenues 174,536 130,068 779,876 575,412
Cost of revenues 58,798 41,680 259,851 186,570
------- ------- -------- --------
Gross margin 115,738 88,388 520,025 388,842
Segment operating
expenses 42,740 29,537 207,236 131,154
------- ------- -------- --------
Segment income
from operations $72,998 $58,851 $312,789 $257,688
======= ======= ======== ========
Business Services
Revenues
Access and service $40,918 $33,944 $172,944 $146,087
Value-added services 615 536 2,757 2,230
------- ------- -------- --------
Total revenues 41,533 34,480 175,701 148,317
Cost of revenues 24,467 20,355 101,069 87,185
------- ------- -------- --------
Gross margin 17,066 14,125 74,632 61,132
Segment operating
expenses 11,968 10,636 51,276 41,975
------- ------- -------- --------
Segment income
from operations $5,098 $3,489 $23,356 $19,157
======= ======= ======== ========
Consolidated
Revenues
Access and service $193,496 $147,509 $855,079 $649,856
Value-added services 22,573 17,039 100,498 73,873
------- ------- ------- --------
Total revenues 216,069 164,548 955,577 723,729
Cost of revenues 83,265 62,035 360,920 273,755
------- ------- ------- --------
Gross margin 132,804 102,513 594,657 449,974
Direct segment
operating expenses 54,708 40,173 258,512 173,129
------- ------- ------- --------
Segment income
from operations 78,096 62,340 336,145 276,845
Stock-based
compensation expense 5,814 2,679 20,133 13,231
Amortization of
intangible assets 2,196 1,525 13,349 7,749
Impairment of
goodwill and
intangible assets (1) 78,672 24,145 78,672 24,145
Facility exit
and restructuring
costs (2) 4,973 297 9,142 5,615
Other operating
expenses 10,528 15,292 50,242 43,947
------- ------- ------- -------
Income (loss)
from operations $(24,087) $18,402 $164,607 $182,158
======= ======= ======= =======
EARTHLINK, INC.
Footnotes to Consolidated Financial Highlights
1. During the fourth quarters of 2008 and 2009, EarthLink concluded
that the goodwill and certain of the intangible assets recorded as
a result of its April 2006 acquisition of New Edge Networks were
impaired and recorded non-cash impairment charges of $78.7 million
and $24.1 million, respectively. EarthLink concluded the carrying
value of its goodwill and certain of the intangible assets related
to the New Edge acquisition were impaired in conjunction with its
annual tests of goodwill and intangible assets deemed to have
indefinite lives as well as updating its long-term outlook.
2. In August 2007, EarthLink adopted a restructuring plan (the "2007
Plan") to reduce costs and improve the efficiency of the Company's
operations. The 2007 Plan was the result of a comprehensive review
of operations within and across the Company's functions and
businesses. Under the 2007 Plan, the Company reduced its workforce by
approximately 900 employees, closed office facilities in Orlando,
Florida; Knoxville, Tennessee; Harrisburg, Pennsylvania; and San
Francisco, California and consolidated its office facilities in
Atlanta, Georgia and Pasadena, California. The 2007 Plan was primarily
implemented during the later half of 2007. However, since management
continues to evaluate EarthLink’s businesses, there have been and may
continue to be supplemental provisions for new plan initiatives as
well as changes in estimates to amounts previously recorded. EarthLink
expects to record approximately $2.0 million of facility exit and
restructuring costs during the first quarter of 2010 as a result
of further consolidation in its Atlanta, GA facility.
3. On January 1, 2009, the Company adopted new accounting guidance
related to the accounting for convertible debt instruments that may
be settled in cash upon conversion. The new accounting guidance
requires that the liability and equity components of convertible
debt instruments that may be settled in cash upon conversion
(including partial cash settlement) be separately accounted for in
a manner that reflects an issuer’s non-convertible debt borrowing
rate. The resulting debt discount is accreted over the period the
convertible debt is expected to be outstanding as additional non-cash
interest expense. The new accounting guidance requires retrospective
application for all periods presented. The adoption of the new
accounting guidance on January 1, 2009 affected the accounting for the
Company’s Convertible Senior Notes due November 15, 2026 (the
"Notes"), which were issued in November 2006. Upon adoption, the
Company recorded an adjustment to increase additional paid-in capital
as of the November 2006 issuance date by approximately $62.1 million.
The Company is accreting the resulting debt discount to interest
expense over the estimated five-year life of the Notes, which
represents the first redemption date of November 2011. The Company
recorded a pre-tax adjustment of approximately $22.3 million to
retained earnings that represents the debt discount accretion during
the years ended December 31, 2006, 2007 and 2008, recognized
additional non-cash interest expense of $12.2 million during the year
ended December 31, 2009, and will recognize additional non-cash
interest expense of $13.4 million and $12.4 million during the years
ending December 31, 2010 and 2011, respectively, for accretion of the
debt discount.
4. During the fourth quarters of 2008 and 2009, EarthLink recorded income
tax benefits in its Statements of Operations of approximately $56.0
million and $198.7 million, respectively, as a result of releases of
its valuation allowance related to its deferred tax assets. These
deferred tax assets relate primarily to net operating loss
carryforwards which EarthLink determined it will more likely than not
be able to utilize due to the generation of sufficient taxable income
in the future.
5. In November 2007, management concluded that its municipal wireless
broadband operations were no longer consistent with the Company's
strategic direction and the Company’s Board of Directors authorized
management to pursue the divestiture of the Company’s municipal
wireless broadband assets. As a result of that decision, the Company
presented the municipal wireless broadband results of operations as
discontinued operations. As of December 31, 2008, the Company had
completed the divestiture of its municipal wireless broadband assets.
6. Adjusted EBITDA is defined as income from continuing operations before
interest expense and other, net, income taxes, depreciation and
amortization, stock-based compensation, gain (loss) on investments,
net, impairment of goodwill and intangible assets, and facility exit
and restructuring costs. Free cash flow is defined as income from
continuing operations before interest expense and other, net, income
taxes, depreciation and amortization, stock-based compensation, gain
(loss) on investments, net, impairment of goodwill and intangible
assets, and facility exit and restructuring costs, less cash used for
purchases of property and equipment and purchases of subscriber bases.
Adjusted EBITDA and free cash flow are non-GAAP measures and are not
determined in accordance with U.S. generally accepted accounting
principles. These financial performance measures are not indicative of
cash provided or used by operating activities and may differ from
comparable information provided by other companies, and they should
not be considered in isolation, as an alternative to, or more
meaningful than measures of financial performance determined in
accordance with U.S. generally accepted accounting principles. These
financial performance measures are commonly used in the industry and
are presented because EarthLink believes they provide relevant and
useful information to investors. EarthLink utilizes these financial
performance measures to assess its ability to meet future capital
expenditures and working capital requirements. EarthLink also uses
these financial performance measures to evaluate the performance of
its business, for budget planning purposes and as factors in its
employee compensation programs.
7. The principal amount of the Notes for all periods presented was $258.8
million. The unamortized discount was $39.0 million, $32.9 million
$29.7 million and $26.5 million as of December 31, 2008, June 30,
2009, September 30, 2009 and December 31, 2009, respectively. The net
carrying value was $219.7 million, $225.8 million, $229.0 million and
$232.2 million as of December 31, 2008, June 30, 2009, September 30,
2009 and December 31, 2009, respectively.
8. Represents full-time equivalents.
9. Subscriber counts do not include nonpaying customers. Customers
receiving service under promotional programs that include periods of
free service at inception are not included in subscriber counts until
they become paying customers.
10. Paying customers who subscribe to EarthLink DSL and Home Phone service
are counted as both a broadband subscriber and a voice subscriber.
11. During the twelve months ended December 31, 2009, EarthLink removed
approximately 7,000 satellite subscribers from its broadband
subscriber count and total subscriber count as a result of the sale of
these subscriber accounts. During the twelve months ended December 31,
2008, EarthLink removed approximately 15,000 EarthLink supported
Sprint customers from its broadband subscriber count and total
subscriber count due to the termination of a wholesale arrangement by
Sprint.
12. Churn rate is used to measure the rate at which subscribers
discontinue service on a voluntary or involuntary basis. Churn rate
is computed by dividing the average monthly number of subscribers that
discontinued service during the period by the average subscribers for
the period.
13. Average subscribers for the three month periods is calculated by
averaging the ending monthly subscribers or accounts for the four
months preceding and including the end of the quarterly period.
Average subscribers for the twelve month periods is calculated by
averaging the ending monthly subscribers or accounts for the thirteen
months preceding and including the end of the period.
14. ARPU represents the average monthly revenue per user (subscriber).
ARPU is computed by dividing average monthly revenue for the period
by the average number of subscribers for the period. Average monthly
revenue used to calculate ARPU includes recurring service revenue as
well as nonrecurring revenues associated with equipment and other
one-time charges associated with initiating or discontinuing services.
15. The Company reports segment information along the same lines that its
chief executive officer reviews its operating results in assessing
performance and allocating resources. The Company operates two
reportable segments, Consumer Services and Business Services. The
Company’s Consumer Services segment provides Internet access services
and related value-added services to individual customers. These
services include dial-up and high-speed Internet access and voice
services, among others. The Company’s Business Services segment
provides integrated communications services and related value-added
services to businesses and communications carriers. These services
include managed private IP-based wide area networks, dedicated
Internet access and web hosting, among others.
EarthLink evaluates performance of its operating segments based
on segment income from operations. Segment income from operations
includes revenues from external customers, related cost of revenues
and operating expenses directly attributable to the segment, which
include expenses over which segment managers have direct discretionary
control, such as advertising and marketing programs, customer support
expenses, site operations expenses, product development expenses,
certain technology and facilities expenses, billing operation and
provisions for doubtful accounts. Segment income from operations
excludes other income and expense items and certain expenses that
segment managers do not have discretionary control over. Costs
excluded from segment income from operations include various corporate
expenses (consisting of certain costs such as corporate management,
human resources, finance and legal), amortization of intangible
assets, stock-based compensation expense, impairment of goodwill and
intangible assets and facility exit and restructuring costs, as they
are not evaluated in the measurement of segment performance.
SOURCE EarthLink, Inc.
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