EarthLink Announces Fourth Quarter and Full Year 2007 Results
Quarter Swings to Income From Continuing Operations and Generates Record Adjusted EBITDA and Free Cash Flow
Expects to Generate Record Income From Continuing Operations and Adjusted EBITDA for the Full Year 2008
ATLANTA, Feb. 7 -- EarthLink, Inc. (NASDAQ:ELNK)
today announced financial results for its fourth quarter and full year ended December 31, 2007. Highlights for the quarter include:
-- Income from continuing operations of $22.6 million, or $0.19 per share
versus a loss of $(17.9) million, or $(0.15) per share in the fourth
quarter 2006
-- Net loss of $(9.5) million, or $(0.08) per share
-- Adjusted EBITDA (a non-GAAP measure) of $71.0 million
-- Free cash flow (a non-GAAP measure) of $59.1 million
-- Repurchased a record 10.1 million shares of EarthLink outstanding
common stock
"We are very pleased with our progress during the fourth quarter," said Rolla P. Huff, EarthLink's chairman and chief executive officer. "Our restructuring efforts are now essentially complete, and have delivered initial results that were above our expectations. This performance reflects the hard work and superb execution by our employees, as they stayed focused on taking care of our customers while our company was substantially reducing our cost structure and improving cash flow. EarthLink's strong operating performance this quarter is their achievement."
"We intend to leverage our experience, focus, and history of award winning customer service, as we seek to execute on our strategy of acquiring bases of access subscribers," Huff added.
"As the increase in our guidance suggests, we expect the trends seen in the fourth quarter will have a positive impact on our 2008 operating performance," added Kevin Dotts, EarthLink's chief financial officer. "We continue to believe EarthLink will realize a six month payback on the restructuring costs," continued Dotts. "EarthLink utilized its strong cash flow to repurchase 10.1 million shares of its common stock during the quarter," Dotts stated.
Financial and Operating Results
In the fourth quarter of 2007, management concluded that the operations of the municipal Wi-Fi assets were no longer consistent with the company's strategic direction and the company committed to a plan to sell its municipal Wi-Fi assets. While the company has no definitive agreements to sell these assets, the company classified the municipal Wi-Fi results of operations and assets as discontinued operations for all periods presented.
Revenue
As part of the restructuring analysis that was done during the third quarter, EarthLink determined that the early life churn profiles of many newly acquired customers resulted in negative financial returns on the investment in customer acquisition cost. EarthLink elected to significantly reduce sales and marketing activities related to new customer acquisition, and focus on the strategic acquisition of existing bases of new subscribers, no longer replacing customer churn, allowing the subscriber base to decline, but generating higher cash returns. As a result, excluding any acquisitions of large customer bases, EarthLink expects its customer base to decline over time. Expected subscriber declines resulted in revenues of $282.0 million and $1.2 billion, for the fourth quarter and full year 2007, respectively, a 14 percent and 7 percent decrease compared to the fourth quarter and full year 2006, respectively. The year over year decrease was primarily due to reductions in its narrowband customer base, partially offset by growth in consumer value added services such as advertising, search and incremental services, and business services.
Profitability and Other Financial Measures
Due to the significant decrease in sales and marketing efforts and a similar reduction in back-office services designed to attract and support new subscribers, EarthLink generated Adjusted EBITDA (a non-GAAP measure, see definition in "Non-GAAP Measures" below) of $71.0 million for the fourth quarter of 2007, a 125 percent increase compared to the fourth quarter of 2006. EarthLink realized Adjusted EBITDA of $185.8 million for the full year 2007, a 19.5 percent increase compared to the full year 2006.
The fourth quarter and full year 2007 results included $35.5 million and $69.6 million, respectively, of facility exit, restructuring and other costs. These fourth quarter charges included $30.1 million of costs related to the corporate restructuring plan announced in August 2007 (including $1.1 million for people-related costs; $11.5 million for facilities-related costs; and $17.1 million for asset impairments primarily related to computer software that will not be deployed); $4.3 million for asset impairments related to purchased intangibles; and a $1.1 million of costs related to a change in lease estimates for a legacy facility exit plan. Additionally, EarthLink reclassified to discontinued operations $20.7 million of charges previously recorded as facility exit restructuring and other costs previously presented in the third quarter of 2007 related to its municipal Wi-Fi assets.
In the third quarter of 2007, EarthLink's investment balance in Helio was reduced to zero. As such, for the fourth quarter of 2007, the company no longer records its proportionate share of the joint venture's net loss. For the previous three quarters of 2007 and the full fiscal year of 2007, EarthLink's proportionate share of Helio's net loss was $111.3 million.
As a result of the significant improvement in Adjusted EBITDA, and a reduction in equity method losses, partially offset by the facility exit, restructuring and other costs, EarthLink realized $22.6 million, or $0.19 per share and $(54.8) million, or $(0.45) per share of income (loss) from continuing operations in the fourth quarter and full year 2007, respectively, compared to $(17.9) million, or $(0.15) per share and $25.0 million, $0.19 per share in the fourth quarter and full year 2006, respectively.
The fourth quarter and full year 2007 included $(32.1) million and $(80.3) million, respectively, of loss from discontinued operations related to the municipal Wi-Fi assets, compared to $(6.9) million and $(20.0) million, respectively, during the fourth quarter and full year 2006. The loss from discontinued operations for the fourth quarter included a $27.6 million impairment charge to reduce the carrying value of the municipal Wi-Fi assets to their estimated fair value. For the year, the loss from discontinued operations also included amounts previously recorded as facility exit and restructuring costs and subsequently reclassified as discontinued operations. Please refer to Footnotes 1 and 2 of the Consolidated Financial Highlights for details of the facility exit, restructuring and other costs and loss from discontinued operations recognized for the periods presented.
As a result, net income (loss), including all restructuring charges and discontinued operations, was $(9.5) million, or $(0.08) per share, and $(135.1) million, or $(1.11) per share, for the fourth quarter and full year 2007, respectively, compared to $(24.8) million, or $(0.20) per share, and $5.0 million, or $0.04 per share, for the fourth quarter and full year 2006, respectively.
Balance Sheet and Cash Flow
Free cash flow (a non-GAAP measure, see definition in "Non-GAAP Measures" below) was $59.1 million during the fourth quarter of 2007 compared to $10.8 million during the fourth quarter of 2006. The improvement was the result of a decrease in capital expenditures and subscriber base acquisitions in the fourth quarter of 2007, coupled with the significant increase in Adjusted EBITDA in the fourth quarter 2007. During the quarter, the company had capital expenditures, including subscriber base acquisitions, of $12.0 million.
The company repurchased 10.1 million shares of its outstanding common stock for $69.4 million and had $201.0 million remaining under its share repurchase program as of December 31, 2007.
EarthLink ended the fourth quarter with $288.6 million in cash and marketable securities, a decrease of $106.2 million from December 31, 2006.
Non-GAAP Measures
Adjusted EBITDA is defined as income (loss) from continuing operations before interest income and other, net, income taxes, depreciation and amortization, stock-based compensation expense under SFAS No. 123( R ), net losses of equity affiliate, gain (loss) on investments in other companies, net, and facility exit, restructuring and other costs.
Free cash flow is defined as income from continuing operations before interest income and other, net, income taxes, facility exit, restructuring and other costs, stock-based compensation expense under SFAS No. 123( R ), net losses of equity affiliate, gain (loss) on investments in other companies, net, and depreciation and amortization, 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 3 of the Consolidated Financial Highlights for a discussion of the presentation, comparability and use of such financial performance measures.
Business Outlook
These 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.
As indicated in our third quarter 2007 earnings release, EarthLink has modified its guidance practices to better reflect how the company manages the business and to better focus investors on the key drivers that create shareholder value. Accordingly, the company is only providing annual Adjusted EBITDA and net income guidance.
For the full year 2008, management expects to generate Adjusted EBITDA of $230 million to $250 million, income from operations of $140 million to $155 million, and free cash flow of $190 million to $220 million.
For 2008, as a result of the utilization of net operating loss carryforwards, the company expects to realize book tax expense of $20 million to $25 million for the year. However, cash disbursed should only be $4 million to $6 million primarily for the company's corporate AMT, and the monies paid will extend our tax asset. The company will continue to evaluate the appropriateness of its remaining deferred tax asset valuation on a regular basis going forward.
Conference Call for Analysts and Investors
Investors in the U.S. and Canada interested in participating in the conference call on February 7, 2008 at 8:30 a.m. Eastern Standard Time (EST) may dial 1-800-706-0730 and reference the EarthLink call. Other international investors may dial 1-706-634-5173 and also reference the EarthLink call. EarthLink recommends dialing into the call approximately 10 minutes prior to the scheduled start time. Investors also will have the opportunity to listen to a live Webcast of the conference call via the Internet at the following site: http://ir.earthlink.net/
A taped replay will be available beginning at 10:30 a.m. EST on February 7, 2008 through midnight on February 14, 2008 by dialing 1-800-642-1687. International callers should dial 1-706-645-9291. The replay confirmation code is 30425318.
The Webcast of this call will be archived on EarthLink's site at: http://ir.earthlink.net/events.cfm
About EarthLink
"EarthLink. We revolve around you(TM)." As the nation's next generation 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, wireless 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 Web site 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 changes to our business strategy may reduce our revenues and profitability; (2) that the continued decline of our consumer access services revenues could adversely affect our profitability; (3) that prices for certain of our customer access services have been decreasing, which could adversely affect our revenues and profitability; (4) that we might not realize the benefits we are seeking from the corporate restructuring plan announced in August 2007 and our corporate restructuring plan might have a negative effect on our efforts to maintain our subscribers and our relationships with our business partners; (5) 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; (6) that we face significant competition which could reduce our market share and reduce our profitability; (7) that we may be unsuccessful in making acquisitions or in integrating acquisitions and investments into our business, which could result in operating difficulties, losses and other adverse consequences; (8) that we may not be able to successfully manage the costs associated with delivering our broadband services, which could adversely affect our ability to grow or sustain revenues and our profitability; (9) that companies may not provide last mile wireline broadband access to us on a wholesale basis or on terms or at prices that allow us to grow and be profitable; (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 commercial and alliance arrangements may be terminated or may not be as beneficial as anticipated, which could adversely affect our ability to increase our subscriber base; (12) that our business may suffer if third parties used for technical and customer support and certain billing services are unable to provide these services, cannot meet our needs or terminate their relationships with us; (13) that service interruptions or impediments could harm our business; (14) that government regulations could force us to change our business practices; (15) that we may not be able to protect our proprietary technologies; (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 the continued development of effective business support systems, processes and personnel; (19) 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; (20) that our VoIP business exposes us to certain risks that could cause us to lose customers, limit our growth, expose us to significant liability or otherwise harm our business; (21) that we may not be able to sell our municipal Wi-Fi assets and that we may incur additional losses related to this business; (22) that we may not realize the benefits we sought from our investment in the HELIO joint venture; (23)that our stock price has been volatile historically and may continue to be volatile; (24) that our indebtedness could adversely affect our financial health and limit our ability to react to changes in our industry; (25) that the convertible notes hedge and warrant transactions may affect the value of our common stock; and (26) 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, 2006, as amended.
EARTHLINK, INC.
Unaudited Condensed Consolidated Statements Of Operations
(in thousands, except per share data)
Three Months Ended Twelve Months Ended
December 31, December 31,
2006 2007 2006 2007
Revenues:
Access and service $295,230 $251,215 $1,180,029 $1,085,132
Value-added services 32,803 $30,774 121,043 130,862
Total revenues 328,033 281,989 1,301,072 1,215,994
Operating costs and expenses:
Service and equipment costs 110,546 103,496 423,239 427,840
Sales incentives 3,428 1,343 10,690 14,857
Total cost of revenues 113,974 104,839 433,929 442,697
Sales and marketing 101,489 44,452 390,551 291,105
Operations and customer
support 61,359 46,917 243,608 221,443
General and administrative 31,769 27,068 125,558 128,412
Amortization of intangible
assets 3,495 3,798 11,902 14,672
Facility exit, restructuring
and other costs (1) - 35,469 (117) 69,631
Total operating costs and
expenses 312,086 262,543 1,205,431 1,167,960
Income from operations 15,947 19,446 95,641 48,034
Net losses of equity affiliate (35,666) - (84,782) (111,295)
Gain (loss) on investments in
other companies, net - 15 377 (5,585)
Interest income and other, net 2,814 1,542 14,636 12,824
Income (loss) from
continuing operations
before income taxes (16,905) 21,003 25,872 (56,022)
Income tax (provision) benefit (955) 1,592 (886) 1,227
Income (loss) from
continuing operations (17,860) 22,595 24,986 (54,795)
Loss from discontinued
operations (2) (6,892) (32,059) (19,999) (80,302)
Net income (loss) $(24,752) $(9,464) $4,987 $(135,097)
Basic net income (loss) per share
Continuing operations $(0.15) $0.19 $0.19 $(0.45)
Discontinued operations (0.06) (0.27) (0.16) (0.66)
Basic net income (loss) per
share $(0.20) $(0.08) $0.04 $(1.11)
Basic weighted average
common shares outstanding 122,654 118,247 128,790 121,633
Diluted net income (loss) per share
Continuing operations $(0.15) $0.19 $0.19 $(0.45)
Discontinued operations (0.06) (0.27) (0.15) (0.66)
Diluted net income (loss)
per share $(0.20) $(0.08) $0.04 $(1.11)
Diluted weighted average
common shares outstanding 122,654 119,229 130,583 121,633
EARTHLINK, INC.
Reconciliation of Income (Loss) from Continuing Operations to Adjusted
EBITDA (3)
(in thousands)
Three Months Ended Twelve Months Ended
December 31, December 31,
2006 2007 2006 2007
Income (loss) from continuing
operations $(17,860) $22,595 $24,986 $(54,795)
Provision (benefit) for income
taxes 955 (1,592) 886 (1,227)
Depreciation and amortization 12,139 11,629 45,740 48,614
Stock-based compensation expense 3,416 4,472 14,241 19,553
Net losses of equity affiliate 35,666 - 84,782 111,295
Gain (loss) on investments in other
companies, net - (15) (377) 5,585
Interest income and other, net (2,814) (1,542) (14,636) (12,824)
Facility exit, restructuring and
other costs (1) - 35,469 (117) 69,631
Adjusted EBITDA (3) $31,502 $71,016 $155,505 $185,832
Depreciation - cost of revenues $4,703 $3,892 $18,359 $17,194
Depreciation - other 3,941 3,939 15,479 16,748
Amortization of intangible assets 3,495 3,798 11,902 14,672
Depreciation and amortization $12,139 $11,629 $45,740 $48,614
EARTHLINK, INC.
Reconciliation of Income (Loss) From Continuing Operations to
Free Cash Flow (3)
(in thousands)
Three Months Ended Twelve Months Ended
December 31, December 31,
2006 2007 2006 2007
Income (loss) from continuing
operations $(17,860) $22,595 $24,986 $(54,795)
Provision (benefit) for income
taxes 955 (1,592) 886 (1,227)
Depreciation and amortization 12,139 11,629 45,740 48,614
Stock-based compensation expense 3,416 4,472 14,241 19,553
Net losses of equity affiliate 35,666 - 84,782 111,295
Gain (loss) on investments in other
companies, net - (15) (377) 5,585
Interest income and other, net (2,814) (1,542) (14,636) (12,824)
Facility exit, restructuring and
other costs (1) - 35,469 (117) 69,631
Purchases of property and equipment (14,457) (11,161) (38,852) (53,478)
Purchases of subscriber bases (6,243) (789) (8,879) (7,290)
Free cash flow (3) $10,802 $59,066 $107,774 $125,064
EARTHLINK, INC.
Reconciliation of Guidance Provided
in Non-GAAP Measures (3)
(in millions)
Year
Ending
December 31,
2008
Income from continuing operations $140 - $155
Depreciation 29
Amortization of intangible assets 15
Stock-based compensation expense 20
Income tax provision 20 - 25
Facility exit, restructuring and other costs (1) 12
Interest income and other, net (6)
Adjusted EBITDA (3) $230 - $250
Year
Ending
December 31,
2008
Income from continuing operations $140 - $155
Depreciation 29
Amortization of intangible assets 15
Stock-based compensation expense 20
Income tax provision 20 - 25
Facility exit, restructuring and other costs 12
Interest income and other, net (6)
Purchases of property and equipment (30) - (40)
Free cash flow (3) $190 - $220
EARTHLINK, INC.
Supplemental Financial Data and Key Operating Metrics
December 31, September 30, December 31,
2006 2007 2007
Balance Sheet Data (in thousands)
Cash and marketable securities $394,776 $333,849 $288,595
Long-term debt 258,750 258,750 258,750
Stockholders' equity 458,664 324,686 261,473
Employee Data
Number of employees at end
of period (4) 2,210 1,426 998
December 31, September 30, December 31,
2006 2007 2007
Subscriber Data (5)
Consumer services
Narrowband access subscribers 3,261,000 2,856,000 2,624,000
Broadband access subscribers (6) 1,831,000 1,081,000 1,059,000
Total consumer subscribers 5,092,000 3,937,000 3,683,000
Business services
Narrowband access subscribers 40,000 30,000 27,000
Broadband access subscribers 69,000 68,000 66,000
Web hosting accounts 112,000 104,000 100,000
Total business subscribers 221,000 202,000 193,000
Total subscribers at end of period 5,313,000 4,139,000 3,876,000
Three Months Ended Twelve Months Ended
December 31, December 31,
2006 2007 2006 2007
Subscriber Activity
Subscribers at beginning of
period 5,310,000 4,139,000 5,315,000 5,313,000
Gross organic subscriber
additions 620,000 363,000 2,717,000 1,994,000
Acquired subscribers 86,000 - 162,000 65,000
Adjustment (7) - - - (753,000)
Churn (703,000) (626,000) (2,881,000) (2,743,000)
Subscribers at end of
period 5,313,000 3,876,000 5,313,000 3,876,000
Churn Rate (8) 4.4% 5.2% 4.6% 5.1%
Consumer Data
Average subscribers (9) 5,094,000 3,817,000 5,123,000 4,321,000
ARPU (10) $18.21 $20.50 $18.52 $19.77
Churn rate (8) 4.5% 5.3% 4.6% 5.2%
Business Data
Average subscribers (9) 225,000 197,000 213,000 207,000
ARPU (10) $73.87 $79.87 $63.61 $76.62
Churn rate (8) 2.7% 2.8% 2.8% 2.6%
EARTHLINK, INC.
Supplemental Schedule of Segment Information (11)
(in thousands)
Three Months Ended Twelve Months Ended
December 31, December 31,
2006 2007 2006 2007
Consumer Services
Revenues
Access and service $246,273 $204,621 $1,021,620 $897,423
Value-added services 31,999 30,094 117,634 127,985
Total revenues 278,272 234,715 1,139,254 1,025,408
Cost of revenues 84,323 75,442 346,129 324,465
Gross margin 193,949 159,273 793,125 700,943
Segment operating expenses 160,105 86,271 638,350 506,975
Segment income from
operations $33,844 $73,002 $154,775 $193,968
Business Services
Revenues
Access and service $48,957 $46,594 $158,409 $187,709
Value-added services 804 680 3,409 2,877
Total revenues 49,761 47,274 161,818 190,586
Cost of revenues 29,651 29,397 87,800 118,232
Gross margin 20,110 17,877 74,018 72,354
Segment operating expenses 17,221 13,505 51,695 58,548
Segment income from
operations $2,889 $4,372 $22,323 $13,806
Consolidated
Revenues
Access and service $295,230 $251,215 $1,180,029 $1,085,132
Value-added services 32,803 30,774 121,043 130,862
Total revenues 328,033 281,989 1,301,072 1,215,994
Cost of revenues 113,974 104,839 433,929 442,697
Gross margin 214,059 177,150 867,143 773,297
Direct segment operating
expenses 177,326 99,776 690,045 565,523
Segment income from
operations 36,733 77,374 177,098 207,774
Stock-based compensation
expense 3,416 4,472 14,241 19,553
Amortization of intangible
assets 3,495 3,798 11,902 14,672
Facility exit, restructuring
and other costs (1) - 35,469 (117) 69,631
Other operating expenses 13,875 14,189 55,431 55,884
Income from operations $15,947 $19,446 $95,641 $48,034
EARTHLINK, INC.
Footnotes to Consolidated Financial Highlights
1. Facility exit, restructuring and other costs consisted of the following
for the periods presented:
Three Months Ended Twelve Months Ended
December 31, December 31,
2006 2007 2006 2007
(in thousands)
Facility exit and restructuring
costs for the 2007 Plan $- $30,109 $- $64,271 **
Facility exit and restructuring
costs for Legacy Plans - 1,110 (117) 1,110
Impairment losses on intangible
assets - 4,250 - 4,250
$- $35,469 $(117) $69,631
** In August 2007, EarthLink adopted a restructuring plan (the "2007
Plan") intended to reduce costs and improve the efficiency of the
Company's operations. The Plan was the result of a comprehensive review
of operations within and across the Company's functions and businesses.
Under the Plan, the Company reduced its workforce by approximately
900 employees, consolidated its office facilities in Atlanta, Georgia
and Pasadena, California and closed office facilities in Orlando,
Florida; Knoxville, Tennessee; Harrisburg, Pennsylvania and San
Francisco, California. The Plan was primarily implemented during the
later half of 2007 and is expected to be completed during the first
quarter of 2008. As a result of the 2007 Plan, EarthLink recorded the
following facility exit and restructuring costs:
Severance
and Asset Other
Benefits Facilities Impairments Costs Total
(in thousands)
Facility exit and
restructuring costs
accrued in Q3 2007 $33,939 $729 $10,381 $9,771 $54,820
Facility exit and
restructuring costs
reclassed to
discontinued
operations (4,741) - (6,894) (9,023) (20,658)
Facility exit and
restructuring costs
accrued in Q4 2007 1,105 11,487 17,134 383 30,109
$30,303 $12,216 $20,621 $1,131 $64,271
2. The Company has reflected its municipal
wireless broadband results of operations as discontinued operations for
all periods presented. The following is summarized results of
operations related to the Company's discontinued operations for the
periods presented:
Three Months Ended Twelve Months Ended
December 31, December 31,
2006 2007 2006 2007
(in thousands)
Revenues $117 $729 $195 $2,097
Operating costs and expenses (7,009) (4,918) (20,194) (33,871)
Facility exit and
restructuring costs - (287) - (20,945)
Impairment charges - (27,583) - (27,583)
Loss from discontinued
operations $(6,892) $(32,059) $(19,999) $(80,302)
3. Adjusted EBITDA is defined as income (loss) from continuing operations
before interest income and other, net, income taxes, depreciation and
amortization, stock-based compensation under SFAS No. 123( R ), net
losses of equity affiliate, gain (loss) on investments in other
companies, net, and facility exit, restructuring and other costs. Free
cash flow is defined as income (loss) from continuing operations before
interest income and other, net, income taxes, depreciation and
amortization, stock-based compensation under SFAS No. 123( R ), net
losses of equity affiliate, gain (loss) on investments in other
companies, net, and facility exit, restructuring and other 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, to incur indebtedness if
necessary, and to fund continued growth. 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. Since the elements of these financial
performance measures are determined using the accrual basis of
accounting and exclude the effects of certain capital, financing,
acquisition- related, and facility exit, restructuring and other costs,
investors should use them to analyze and compare companies on the basis
of current period operating performance.
4. Represents full-time equivalents.
5. 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.
6. Paying customers who subscribe to EarthLink DSL and Home Phone service
are counted as both a broadband subscriber and a voice subscriber.
7. In April 2007, EarthLink's wholesale contract with Embarq expired. As a
result, EarthLink removed 753,000 EarthLink supported Embarq customers
from its broadband subscriber counts effective April 2007.
8. 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.
Churn rate for the twelve months ended December 31, 2007 does not
include the adjustment for the removal of the 753,000 EarthLink
supported Embarq customers.
9. 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.
10. 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.
11. EarthLink's business segments are strategic business units that are
managed based upon differences in customers, services and marketing
channels. EarthLink's Consumer Services segment is a provider of
integrated communications services and related value-added services to
individual customers. These services include dial-up Internet access,
high-speed Internet access and voice service, among others.
EarthLink's Business Services segment is a provider of integrated
communications services and related value-added services to businesses
and communications carriers. These services include managed data
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
and stock- based compensation expense under SFAS No. 123( R ), as they
are not evaluated in the measurement of segment performance.
