EarthLink Announces Fourth Quarter and Full Year 2008 Results
Generates Record Total Year Income from Continuing Operations, Adjusted EBITDA and Free Cash Flow
ATLANTA, Feb. 5 -- EarthLink, Inc. (NASDAQ:ELNK)
today announced financial results for its fourth quarter and full year ended December 31, 2008. Highlights for the fourth quarter include:
-- Income from continuing operations of $27.3 million, or $0.25 per
share, versus $22.6 million, or $0.19 per share, in the fourth quarter
of 2007
-- Net income of $27.2 million, or $0.25 per share
-- Adjusted EBITDA (a non-GAAP measure) of $72.4 million
-- Free cash flow (a non-GAAP measure) of $70.1 million
-- 2008 year-end cash and marketable securities balance of $534.4 million
"I am pleased to report that EarthLink generated $308.9 million in Adjusted EBITDA for the full year 2008, a 66 percent increase over 2007," said Rolla P. Huff, EarthLink's chairman and chief executive officer. "During the course of 2008 we made meaningful progress in optimizing our business model around excellent customer service, continuous operating improvements and shareholder value creation."
Added Huff, "With a healthy balance sheet anchored by $534 million in cash and marketable securities, and a consumer access business that we expect will continue to generate significant cash flow, EarthLink is in a strong financial position. Our company's financial strength and relative value in the technology industry have substantially improved over the past year. As a result, EarthLink has an expanded set of potential strategic alternatives that we are considering."
Financial and Operating Results
EarthLink reported revenue of $216.1 million in the fourth quarter and $955.6 million for the full year 2008. This represents a 23 percent decrease over the prior year quarter and a 21 percent decrease compared to the 2007 full year result. The expected year over year variances were primarily driven by reductions in EarthLink's narrowband and broadband customer base, given the company's revised business focus on more tenured and profitable subscribers.
Total sales and marketing, operations, customer support, and general and administrative expenses for the fourth quarter and full year 2008, were $71.0 million and $328.9 million, respectively. This represents a decrease of 40 percent versus the prior year quarter, and a decrease of 49 percent versus the full year 2007 comparable expenses.
Profitability and Other Financial Measures
EarthLink realized $27.3 million, or $0.25 per share, and $198.1 million, or $1.80 per share, of income from continuing operations in the fourth quarter and full year 2008, respectively, compared to $22.6 million, or $0.19 per share, and a loss of $(54.8) million, or $(0.45) per share, in the fourth quarter and full year 2007, respectively. The fourth quarter and full year 2007 results included $31.2 million and $65.4 million, respectively, of facility exit and restructuring costs, compared to $5.0 million and $9.1 million, respectively, in the fourth quarter and full year 2008. In addition, the fourth quarter and full year 2008 results included a $78.7 million non-cash impairment charge for goodwill and intangible assets, compared to a $4.3 million non-cash impairment charge in the prior year periods, and included an income tax benefit of $56.1 million and $32.2 million, respectively, compared to $1.6 million and $1.2 million, respectively, in the fourth quarter and full year 2007. The income tax benefit during 2008 was primarily due to the partial release of EarthLink's valuation allowance related to its deferred tax assets.
Net income was $27.2 million or $0.25 per share for the fourth quarter, and $189.6 million or $1.72 per share for the full year 2008, compared to a net loss of $(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.
Due to improvements in customer churn and better than expected passive subscriber additions, coupled with reductions in sales and marketing and back office support expenses, EarthLink generated Adjusted EBITDA (a non-GAAP measure, see definition in "Non-GAAP Measures" below) of $72.4 million for the fourth quarter of 2008, a 2 percent increase compared to the fourth quarter of 2007. EarthLink generated Adjusted EBITDA of $308.9 million for the full year 2008, a 66 percent increase compared to the full year 2007.
Balance Sheet and Cash Flow
Free cash flow (a non-GAAP measure, see definition in "Non-GAAP Measures" below) was $70.1 million and $301.9 million during the fourth quarter and the full year 2008, respectively, compared to $59.1 million and $125.1 million during the fourth quarter and the full year 2007, respectively. The company had capital expenditures, including subscriber base acquisitions, of $2.2 million in the fourth quarter and $7.0 million for the full year 2008, down from $12.0 million and $60.8 million during the fourth quarter and full year 2007, respectively.
EarthLink ended the fourth quarter with $534.4 million in cash and marketable securities, an increase of $245.8 million from December 31, 2007.
Non-GAAP Measures
Adjusted EBITDA is defined as income (loss) from continuing operations before interest income (expense) 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, 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 income (expense) 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, 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 5 of the Consolidated Financial Highlights for a discussion of the presentation, comparability and use of such financial performance measures.
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.
As announced in the company's third quarter 2008 earnings press release, for full year 2009 management expects Adjusted EBITDA of $210 million to $225 million. Today, the company is updating its previously presented guidance for free cash flow and income from continuing operations. EarthLink is increasing its full year guidance for free cash flow to $190 million to $215 million, based upon the aforementioned Adjusted EBITDA guidance along with estimated capital expenditures of between $10 million and $20 million. Additionally, EarthLink now expects income from continuing operations to be $75 million to $95 million for full year 2009, with the largest change from the prior guidance related to non-cash book tax rates following the company's aforementioned valuation release in the fourth quarter of 2008.
Conference Call for Analysts and Investors
Conference Call Details
Thursday, February 5, 2009, at 8:30 a.m. EST hosted by EarthLink's
Chairman and Chief Executive Officer, Rolla P. Huff and Chief Financial
Officer, Kevin Dotts.
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 at 11:30 a.m. EST on February 5 through midnight on
February 12.
Dial 800-642-1687 from US and Canada, International callers dial
706-645-9291.
The replay confirmation code is 80008097.
The Webcast will be archived on the company's website at:
http://ir.earthlink.net/events.cfm
About EarthLink
"EarthLink. We revolve around you(TM)." 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 face significant competition which could reduce our profitability; (3) that adverse economic conditions may harm our business; (4) 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; (5) 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; (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 our commercial and alliance arrangements may not be renewed, which could adversely affect our results of operations; (9) 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 expand to meet our needs or terminate their relationships with us; (10) that service interruptions or impediments could harm our business; (11) that government regulations could adversely affect our business or force us to change our business practices; (12) that privacy concerns relating to our technology could damage our reputation and deter current and potential users from using our services; (13) that we may not be able to protect our proprietary technologies; (14) 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; (15) that we could face substantial liabilities if we are unable to successfully defend against legal actions; (16) that our business depends on effective business support systems, processes and personnel; (17) 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; (18) that our VoIP business exposes us to certain risks that could cause us to lose customers, expose us to significant liability or otherwise harm our business; (19) 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; (20) that the use of our net operating losses and certain other tax attributes could be limited in the future; (21) that our stock price has been volatile historically and may continue to be volatile; (22) that our indebtedness could adversely affect our financial health and limit our ability to react to changes in our industry; and (23) 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, 2007.
EARTHLINK, INC.
Unaudited Condensed Consolidated Statements Of Operations
(in thousands, except per share data)
Three Months Ended Twelve Months Ended
December 31, December 31,
--------------- -------------------
2007 2008 2007 2008
---- ---- ---- ----
Revenues:
Access and service $251,215 $193,496 $1,085,132 $855,079
Value-added services 30,774 22,573 130,862 100,498
------ ------ ------- -------
Total revenues 281,989 216,069 1,215,994 955,577
Operating costs and
expenses:
Cost of revenues 104,839 83,265 442,697 360,920
Sales and marketing 44,452 19,299 291,105 98,212
Operations and
customer support 46,917 29,883 221,443 136,797
General and administrative 27,068 21,868 128,412 93,878
Amortization of
intangible assets 3,798 2,196 14,672 13,349
Impairment of goodwill
and intangible assets (1) 4,250 78,672 4,250 78,672
Facility exit and
restructuring costs (2) 31,219 4,973 65,381 9,142
------ ----- ------ -----
Total operating costs and
expenses 262,543 240,156 1,167,960 790,970
Income (loss) from operations 19,446 (24,087) 48,034 164,607
Net losses of equity affiliate - - (111,295) -
Gain (loss) on investments, net 15 (2,969) (5,585) 2,708
Interest income (expense) and
other, net 1,542 (1,747) 12,824 (1,381)
----- ------ ------ ------
Income (loss) from
continuing operations
before income taxes 21,003 (28,803) (56,022) 165,934
Income tax benefit (3) 1,592 56,107 1,227 32,184
----- ------ ----- ------
Income (loss) from
continuing operations 22,595 27,304 (54,795) 198,118
Loss from discontinued
operations, net of tax (4) (32,059) (68) (80,302) (8,506)
------- --- ------- ------
Net income (loss) $(9,464) $27,236 $(135,097) $189,612
======= ======= ========= ========
Basic net income
(loss) per share
Continuing operations $0.19 $0.25 $(0.45) $1.81
Discontinued operations (0.27) (0.00) (0.66) (0.08)
----- ----- ----- -----
Basic net income
(loss) per share $(0.08) $0.25 $(1.11) $1.73
====== ===== ====== =====
Basic weighted
average common
shares outstanding 118,247 108,449 121,633 109,531
======= ======= ======= =======
Diluted net income
(loss) per share
Continuing operations $0.19 $0.25 $(0.45) $1.80
Discontinued operations (0.27) (0.00) (0.66) (0.08)
----- ----- ----- -----
Diluted net income
(loss) per share $(0.08) $0.25 $(1.11) $1.72
====== ===== ====== =====
Diluted weighted
average common
shares outstanding 119,229 109,617 121,633 110,051
======= ======= ======= =======
EARTHLINK, INC.
Reconciliation of Income (Loss) from Continuing Operations to
Adjusted EBITDA (5)
(in thousands)
Three Months Ended Twelve Months Ended
December 31, December 31,
------------------ ------------------
2007 2008 2007 2008
---- ---- ---- ----
Income (loss) from
continuing operations $22,595 $27,304 $(54,795) $198,118
Income tax benefit (1,592) (56,107) (1,227) (32,184)
Depreciation and
amortization 11,629 6,982 48,614 36,333
Stock-based
compensation expense 4,472 5,814 19,553 20,133
Net losses of equity
affiliate - - 111,295 -
Gain (loss) on
investments, net (15) 2,969 5,585 (2,708)
Interest income
(expense) and other,
net (1,542) 1,747 (12,824) 1,381
Impairment of goodwill
and intangible
assets (1) 4,250 78,672 4,250 78,672
Facility exit and
restructuring costs (2) 31,219 4,973 65,381 9,142
------ ----- ------ -----
Adjusted EBITDA (5) $71,016 $72,354 $185,832 $308,887
======= ======= ======== ========
Depreciation - cost
of revenues $3,892 $2,031 $17,194 $11,453
Depreciation - other 3,939 2,755 16,748 11,531
Amortization of
intangible assets 3,798 2,196 14,672 13,349
----- ----- ------ ------
Depreciation and
amortization $11,629 $6,982 $48,614 $36,333
======= ====== ======= =======
EARTHLINK, INC.
Reconciliation of Income (Loss) From Continuing Operations to
Free Cash Flow (5)
(in thousands)
Three Months Ended Twelve Months Ended
December 31, December 31,
------------------ ------------------
2007 2008 2007 2008
---- ---- ---- ----
Income (loss) from
continuing operations $22,595 $27,304 $(54,795) $198,118
Income tax benefit (1,592) (56,107) (1,227) (32,184)
Depreciation and
amortization 11,629 6,982 48,614 36,333
Stock-based
compensation expense 4,472 5,814 19,553 20,133
Net losses of equity
affiliate - - 111,295 -
Gain (loss) on
investments, net (15) 2,969 5,585 (2,708)
Interest income
(expense) and other, net (1,542) 1,747 (12,824) 1,381
Impairment of goodwill
and intangible assets (1) 4,250 78,672 4,250 78,672
Facility exit and
restructuring costs (2) 31,219 4,973 65,381 9,142
Purchases of property
and equipment (11,161) (1,877) (53,478) (5,754)
Purchases of
subscriber bases (789) (352) (7,290) (1,232)
---- ---- ------ ------
Free cash flow (5) $59,066 $70,125 $125,064 $301,901
======= ======= ======== ========
EARTHLINK, INC.
Reconciliation of Guidance Provided in Non-GAAP Measures (5)
(in millions)
Year Ending
December 31,
2009
-----------
Income from continuing
operations $75 - $95
Depreciation 19
Amortization of
intangible assets 9
Stock-based compensation
expense 17
Income tax provision 75 - 70
Interest income
(expense) and other, net 15
-----------
Adjusted EBITDA (5) $210 - $225
===========
Year Ending
December 31,
2009
-----------
Income from continuing
operations $75 - $95
Depreciation 19
Amortization of
intangible assets 9
Stock-based
compensation expense 17
Income tax provision 75 - 70
Interest income
(expense) and other, net 15
Purchases of property
and equipment (20) - (10)
-----------
Free cash flow (5) $190 - $215
===========
EARTHLINK, INC.
Supplemental Financial Data and Key Operating Metrics
December 31, June 30, September 30, December 31,
2007 2008 2008 2008
---- ---- ---- ----
Balance Sheet Data (in thousands)
Cash and marketable
securities $288,595 $441,589 $484,967 $534,373
Long-term debt 258,750 258,750 258,750 258,750
Stockholders' equity 261,473 371,077 411,781 448,485
Employee Data
Number of employees
at end of period (6) 983 857 789 754
December 31, June 30, September 30, December 31,
2007 2008 2008 2008
---- ---- ---- ----
Subscriber Data (7)
Consumer services
Narrowband access
subscribers 2,624,000 2,130,000 1,920,000 1,747,000
Broadband access
subscribers (8) 1,059,000 988,000 933,000 896,000
--------- ------- ------- -------
Total consumer
subscribers 3,683,000 3,118,000 2,853,000 2,643,000
Business services
Narrowband access
subscribers 27,000 24,000 19,000 17,000
Broadband access
subscribers 66,000 63,000 61,000 59,000
Web hosting
accounts 100,000 94,000 91,000 87,000
------- ------ ------ ------
Total business
subscribers 193,000 181,000 171,000 163,000
Total subscribers
at end of period 3,876,000 3,299,000 3,024,000 2,806,000
========= ========= ========= =========
Three Months Ended Twelve Months Ended
December 31, December 31,
------------------ -------------------
2007 2008 2007 2008
---- ---- ---- ----
Subscriber Activity
Subscribers at
beginning of period 4,139,000 3,024,000 5,313,000 3,876,000
Gross organic
Subscriber additions 363,000 114,000 1,994,000 666,000
Acquired subscribers - 6,000 65,000 8,000
Adjustment (9) - - (753,000) (15,000)
Churn (626,000) (338,000) (2,743,000) (1,729,000)
-------- -------- ---------- ----------
Subscribers at end
of period 3,876,000 2,806,000 3,876,000 2,806,000
========= ========= ========= =========
Churn Rate (10) 5.2% 3.9% 5.1% 4.4%
Consumer Data
Average subscribers
(11) 3,817,000 2,747,000 4,321,000 3,130,000
ARPU (12) $20.50 $21.18 $19.77 $20.76
Churn rate (10) 5.3% 3.9% 5.2% 4.4%
Business Data
Average subscribers
(11) 197,000 167,000 207,000 179,000
ARPU (12) $79.87 $82.70 $76.62 $81.64
Churn rate (10) 2.8% 2.7% 2.6% 2.8%
EARTHLINK, INC.
Supplemental Schedule of Segment Information (13)
(in thousands)
Three Months Ended Twelve Months Ended
December 31, December 31,
--------------- -------------------
2007 2008 2007 2008
---- ---- ---- ----
Consumer Services
Revenues
Access and service $204,621 $152,578 $897,423 $682,135
Value-added services 30,094 21,958 127,985 97,741
------ ------ ------- ------
Total revenues 234,715 174,536 1,025,408 779,876
Cost of revenues 75,442 58,798 324,465 259,851
------ ------ ------- -------
Gross margin 159,273 115,738 700,943 520,025
Segment operating
expenses 86,271 42,740 506,975 207,236
------ ------ ------- -------
Segment income from
operations $73,002 $72,998 $193,968 $312,789
======= ======= ======== ========
Business Services
Revenues
Access and service $46,594 $40,918 $187,709 $172,944
Value-added services 680 615 2,877 2,757
--- --- ----- -----
Total revenues 47,274 41,533 190,586 175,701
Cost of revenues 29,397 24,467 118,232 101,069
------ ------ ------- -------
Gross margin 17,877 17,066 72,354 74,632
Segment operating
expenses 13,505 11,968 58,548 51,276
------ ------ ------ ------
Segment income from
operations $4,372 $5,098 $13,806 $23,356
====== ====== ======= =======
Consolidated
Revenues
Access and service $251,215 $193,496 $1,085,132 $855,079
Value-added services 30,774 22,573 130,862 100,498
------ ------ ------- -------
Total revenues 281,989 216,069 1,215,994 955,577
Cost of revenues 104,839 83,265 442,697 360,920
------- ------ ------- -------
Gross margin 177,150 132,804 773,297 594,657
Direct segment
operating expenses 99,776 54,708 565,523 258,512
------ ------ ------- -------
Segment income from
operations 77,374 78,096 207,774 336,145
Stock-based
compensation expense 4,472 5,814 19,553 20,133
Amortization of
intangible assets 3,798 2,196 14,672 13,349
Impairment of goodwill
and intangible assets
(1) 4,250 78,672 4,250 78,672
Facility exit and
restructuring costs (2) 31,219 4,973 65,381 9,142
Other operating expenses 14,189 10,528 55,884 50,242
------ ------ ------ ------
Income (loss) from
operations $19,446 $(24,087) $48,034 $164,607
======= ======== ======= ========
EARTHLINK, INC.
Footnotes to Consolidated Financial Highlights
1. During the fourth quarter of 2008, 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 a
non-cash impairment charge of $78.7 million. EarthLink concluded the
carrying value of its goodwill, customer relationships and trade names
related to the New Edge acquisition were impaired in conjunction with its
annual test of goodwill and intangible assets deemed to have indefinite
lives as well as an updating of 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 and during 2008.
Facility exit and restructuring costs consisted of the following for the
periods presented:
Three Months Ended Twelve Months Ended
December 31, December 31,
------------ ------------
2007 2008 2007 2008
---- ---- ---- ----
(in thousands)
2007 Restructuring Plan
Severance and personnel-
related costs $1,105 $(13) $30,303 $461
Lease termination and
facilities-related costs 11,487 1,456 12,216 4,808
Non-cash asset
impairments 17,134 3,618 20,621 4,132
Other associated costs 383 (88) 1,131 (7)
--- --- ----- --
30,109 4,973 64,271 9,394
Legacy Restructuring Plans 1,110 - 1,110 (252)
----- ----- ----- ----
Total facility exit and
restructuring costs $31,219 $4,973 $65,381 $9,142
======= ====== ======= ======
3. During the fourth quarter of 2008, EarthLink released approximately
$66.0 million of its valuation allowance related to its deferred tax
assets. These deferred tax assets relate primarily to net operating loss
carryforwards which EarthLink determined, in accordance with SFAS No. 109,
"Accounting for Income Taxes," it will more likely than not be able to
utilize due to the generation of sufficient taxable income in the future.
Of the total valuation allowance release, approximately $56.0 million was
recorded as an income tax benefit in the Statement of Operations
and the remainder relates to acquired net operating losses and reduced
goodwill on the Balance Sheet.
4. 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,
------------ ------------
2007 2008 2007 2008
---- ---- ---- ----
(in thousands)
Revenues $729 $- $2,097 $1,305
Operating costs and
expenses (4,918) (35) (33,871) (4,568)
Impairment and other costs (27,870) (246) (48,528) (6,327)
Income tax benefit - 213 - 1,084
------- --- ------ -----
Loss from discontinued
operations, net of tax $(32,059) $(68) $(80,302) $(8,506)
======== ==== ======== =======
5. Adjusted EBITDA is defined as income (loss) from continuing operations
before interest income (expense) 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, net,
impairment of goodwill and intangible assets, and facility exit and
restructuring costs. Free cash flow is defined as income (loss) from
continuing operations before interest income (expense) 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, 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.
6. Represents full-time equivalents.
7. 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.
8. Paying customers who subscribe to EarthLink DSL and Home Phone service
are counted as both a broadband subscriber and a voice subscriber.
9. In April 2007, EarthLink removed 753,000 EarthLink supported Embarq
customers from its broadband subscriber counts due to the expiration of
EarthLink's wholesale contract with Embarq. During the year ended December
31, 2008, EarthLink removed 15,000 EarthLink supported Sprint customers
from its broadband subscriber counts due to the termination of the
wholesale arrangement by Sprint.
10. 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.
11. 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.
12. 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.
13. 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 provides Internet access
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
provides of integrated communications services and related value-added
services to businesses and communications carriers. These services include
managed private IP-based 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 under SFAS No. 123(R),
impairment of goodwill and intangible assets and facility exit and
restructuring costs, as they are not evaluated in the measurement of
segment performance.
