2014

EarthLink Announces First Quarter 2013 Results Reports Strong Sales Traction

Increases 2013 Full-Year Revenue and Adjusted EBITDA Guidance

ATLANTA, May 2, 2013 /PRNewswire/ -- EarthLink, Inc. (NASDAQ: ELNK) today announced financial results for its first quarter ended March 31, 2013.

Highlights for the first quarter include:

  • Net loss of $(236.4) million (which includes a pre-tax non-cash goodwill impairment charge of $256.7 million)
  • Net Loss Before Goodwill Impairment (a non-GAAP measure) of $(7.5) million
  • Adjusted EBITDA (a non-GAAP measure) of $61.5 million 
  • Net cash provided by operating activities of $31.8 million
  • Unlevered Free Cash Flow (a non-GAAP measure) of $19.0 million 
  • Increased full year revenue and Adjusted EBITDA guidance

"The first quarter of 2013 was one of substantial progress for our company. We opened several new next-generation data centers, completed the majority of our new unique fiber network routes and had our best quarter of sales bookings since 2011," said EarthLink Chairman and Chief Executive Officer Rolla P. Huff. "We expect this momentum to further accelerate throughout 2013 as we continue to approach the inflection point of sustained positive growth."

Financial and Operating Results

EarthLink's total company revenue in the first quarter of 2013 was $320.0 million, as compared to $331.6 million in the fourth quarter of 2012 and $344.4 million in the first quarter of 2012.  EarthLink's business services revenue was $247.8 million in the first quarter of 2013, compared to $256.5 million in the fourth quarter of 2012 and $260.3 million in the first quarter of 2012. Business services segment revenue, which accounted for 77% of EarthLink's revenue in the first quarter of 2013, declined just 0.8% versus the prior quarter, when normalized for non-recurring settlements.

EarthLink's retail growth business, which includes MPLS, Hosted VoIP and IT Services, reached an approximate $148 million annualized revenue run rate in the first quarter of 2013, reflecting a 21% year-over-year organic growth rate. Total growth product revenues, including Wholesale, reached an approximate $300 million annualized revenue run rate. New recurring sales bookings increased 14% in the first quarter of 2013 versus the prior quarter, and 5% versus the year-ago quarter.  In the first quarter of 2013, 65% of new bookings were comprised of EarthLink's growth products, versus 40% of sales bookings from growth products in the year-ago quarter.

EarthLink's consumer segment continues to perform well, with broadband services comprising 69% of consumer access revenue in the first quarter of 2013. Subscriber churn in the consumer segment was a historical low of 2.2% for the first quarter of 2013 compared to 2.3% in the fourth quarter of 2012 and 2.5% in the first quarter of 2012.

EarthLink's selling, general and administrative expenses were $108.1 million, or 34% of revenue, for the first quarter of 2013, as compared to expenses of $111.3 million, or 34% of revenue, for the fourth quarter of 2012, and $110.1 million, or 32% of revenue, for the year-ago quarter.

Profitability and Other Financial Measures

Net loss was $(236.4) million, or $(2.30) per share, in the first quarter of 2013, as compared to net income of $0.0 million, or $0.00 per share, in the fourth quarter of 2012 and $7.3 million, or $0.07 per share, for the first quarter of 2012. Net Loss Before Goodwill Impairment (a non-GAAP measure, see definition in "Non-GAAP Measures" below) was $(7.5) million, or $(0.07) per share, in the first quarter of 2013. During the first quarter of 2013, EarthLink recorded a $256.7 million pre-tax non-cash impairment charge to goodwill. Following a decline in its market capitalization during the quarter, EarthLink performed an interim goodwill test. The primary factor contributing to the impairment was a change in the discount rate and market multiples used in the analysis.

EarthLink generated Adjusted EBITDA (a non-GAAP measure, see definition in "Non-GAAP Measures" below) of $61.5 million in the first quarter of 2013, as compared to $66.5 million in the fourth quarter of 2012 and $77.6 million in the first quarter of 2012.

Balance Sheet and Cash Flow

Net cash provided by operating activities was $31.8 million in the first quarter of 2013 as compared to $12.5 million in the fourth quarter of 2012 and $66.2 million in the year-ago quarter.

During the first quarter of 2013, EarthLink generated Unlevered Free Cash Flow (a non-GAAP measure, see definition in "Non-GAAP Measures" below) of $19.0 million, as compared to $(0.2) million during the fourth quarter of 2012 and $45.9 million in the first quarter of 2012. EarthLink's capital expenditures were $42.5 million for the first quarter of 2013.

As of March 31, 2013, the company had cash and marketable securities of $192.1 million.

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 increased revenue and Adjusted EBITDA guidance for the full year 2013. Management now expects revenue of $1.255 to $1.268 billion; Adjusted EBITDA of $214 million to $227 million; capital expenditures of $140 million to $155 million; and net loss of $(276) million to $(282) million for the full year 2013. 

Non-GAAP Measures
Adjusted EBITDA is defined as net income (loss) before interest expense and other, net, income taxes, depreciation and amortization, stock-based compensation expense, impairment of goodwill and intangible assets, and restructuring, acquisition and integration-related costs.  Unlevered Free Cash Flow is defined as net income (loss) before interest expense and other, net, income taxes, depreciation and amortization, stock-based compensation expense, impairment of goodwill and intangible assets, and restructuring, acquisition and integration-related costs, less cash used for purchases of property and equipment. Net Loss Before Goodwill Impairment is defined as net loss before impairment of goodwill and estimated tax impact of impairment of goodwill.

Adjusted EBITDA, Unlevered Free Cash Flow and Net Loss Before Goodwill Impairment are non-GAAP financial measures.  They should not be considered in isolation or as an alternative to measures determined in accordance with U.S. generally accepted accounting principles.  Please refer to the Consolidated Financial Highlights for a reconciliation of these non-GAAP financial measures to the most comparable measures reported in accordance with U.S. generally accepted accounting principles and Footnote 3 of the Consolidated Financial Highlights for a discussion of the presentation, comparability and use of such financial measures.

Conference Call for Analysts and Investors

Conference Call Details

Thursday, May 2, 2013, at 8:30 a.m. ET hosted by EarthLink's Chairman and Chief Executive Officer Rolla P. Huff, and Chief Financial Officer Bradley A. Ferguson.

Dial-in Number           800-706-0730

Participants should reference the conference ID number 33812687 or "EarthLink's 1st Quarter 2013 Conference 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/

Presentation
An investor presentation to accompany the conference call and webcast will be available at: http://ir.earthlink.net/

Replay
Replay available from 11:30 a.m. ET on May 2 through 12:00 midnight on May 9, 2013. Dial toll-free 855-859-2056. The replay confirmation code is 33812687.  The Webcast will be archived on the company's website at: http://ir.earthlink.net/events.cfm

About EarthLink

EarthLink, Inc. (NASDAQ: ELNK) is a leading IT services and communications provider to more than 150,000 businesses and one million consumers nationwide. EarthLink empowers customers with managed services including cloud computing, managed and private cloud, and virtualization services such as managed hosting and cloud workspace. EarthLink also offers a robust portfolio of IT security, application hosting, colocation and IT support services. The company operates an extensive network spanning 29,421 route fiber miles with 90 metro fiber rings and 8 secure data centers providing ubiquitous nationwide data and voice IP service coverage across more than 90 percent of the country. Founded in 1994, EarthLink's award-winning reputation for outstanding service and product innovation is supported by an experienced team of professionals focused on best-in-class customer care.  For more information, visit EarthLink's website at www.earthlink.net.

Cautionary Information Regarding Forward-Looking Statements

This press release includes "forward-looking" statements (rather than historical facts) that are subject to risks and uncertainties that could cause actual results to differ materially from those described. Although we believe that the expectations expressed in these forward-looking statements are reasonable, we cannot promise that our expectations will turn out to be correct. Our actual results could be materially different from and worse than our expectations. With respect to such forward-looking statements, we seek the protections afforded by the Private Securities Litigation Reform Act of 1995. These risks include, without limitation (1) that we may not be able to execute our strategy to be an IT services company for small and medium-sized businesses with IT and network security needs, which could adversely affect our results of operations and cash flows; (2) that we may not be able to grow revenues from our evolving Business Services product portfolio to offset declining revenues from our legacy Business Services products and from our Consumer Services segment, which could adversely affect our results of operations and cash flows; (3) that we may not be able to develop the optimal sales model necessary to implement our business strategy; (4) that we may be unsuccessful integrating acquisitions into our business, which could result in operating difficulties, losses and other adverse consequences; (5) that if we are unable to adapt to changes in technology and customer demands, we may not remain competitive, and our revenues and operating results could suffer; (6) that our failure to achieve operating efficiencies will adversely affect our results of operations; (7) 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; (8) that unfavorable general economic conditions could harm our business; (9) that we may be unable to successfully identify, manage and assimilate future acquisitions, which could adversely affect our results of operations; (10) that we face significant competition in the IT services and communications industry that could reduce our profitability; (11) that decisions by legislative or regulatory authorities, including the Federal Communications Commission relieving incumbent carriers of certain regulatory requirements, and possible further deregulation in the future, may restrict our ability to provide services and may increase the costs we incur to provide these services; (12) that if we are unable to interconnect with AT&T, Verizon and other incumbent carriers on acceptable terms, our ability to offer competitively priced local telephone services will be adversely affected; (13) that our operating performance will suffer if we are not offered competitive rates for the access services we need to provide our long distance services; (14) that we may experience reductions in switched access and reciprocal compensation revenue; (15) that failure to obtain and maintain necessary permits and rights-of-way could interfere with our network infrastructure and operations; (16) that we have substantial business relationships with several large telecommunications carriers, and some of our customer agreements may not continue due to financial difficulty, acquisitions, non-renewal or other factors, which could adversely affect our wholesale revenue and results of operations; (17) that we obtain a majority of our network equipment and software from a limited number of third-party suppliers; (18) that work stoppages experienced by other communications companies on whom we rely for service could adversely impact our ability to provision and service our customers; (19) that our commercial and alliance arrangements may not be renewed or may not generate expected benefits, which could adversely affect our results of operations; (20) that our consumer business is dependent on the availability of third-party network service providers; (21) that we face significant competition in the Internet access industry that could reduce our profitability; (22) that the continued decline of our consumer access subscribers, combined with the change in mix of our consumer access base from narrowband to broadband, will adversely affect our results of operations; (23) that potential regulation of Internet service providers could adversely affect our operations; (24) that if we, or other industry participants, are unable to successfully defend against disputes or legal actions, we could face substantial liabilities or suffer harm to our financial and operational prospects; (25) 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; (26) that we may not be able to protect our intellectual property; (27) 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; (28) that our business depends on effective business support systems and processes; (29) that privacy concerns relating to our business could damage our reputation and deter current and potential users from using our services; (30) that cyber security breaches could harm our business; (31) that interruption or failure of our network and information systems and other technologies could impair our ability to provide our services, which could damage our reputation and harm our operating results; (32) that government regulations could adversely affect our business or force us to change our business practices; (33) that regulatory audits have in the past, and could in the future, result in increased costs; (34) that our business may suffer if third parties are unable to provide services or terminate their relationships with us; (35) that we may be required to recognize impairment charges on our goodwill and intangible assets, which would adversely affect our results of operations and financial position;  (36) that we may have exposure to greater than anticipated tax liabilities and the use of our net operating losses and certain other tax attributes could be limited in the future; (37) that our indebtedness could adversely affect our financial health and limit our ability to react to changes in our industry; (38) that we may require substantial capital to support business growth or refinance existing indebtedness, and this capital may not be available to us on acceptable terms, or at all; (39) that our debt agreements include restrictive covenants, and failure to comply with these covenants could trigger acceleration of payment of outstanding indebtedness or inability to borrow funds under our existing credit facility; (40) that we may reduce, or cease payment of, quarterly cash dividends; (41) that our stock price may be volatile; and (42) that provisions of our third restated certificate of incorporation, amended and restated bylaws and other elements of our capital structure could limit our share price and delay a change of control of the company. 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, 2012.

 

EARTHLINK, INC.
Unaudited Condensed Consolidated Statements Of Operations
(in thousands, except per share data)


Three Months Ended March 31,


2012


2013





Revenues

$

344,376



$

320,016


Operating costs and expenses:




Cost of revenues (exclusive of depreciation and amortization

   shown separately below)

159,337



154,424


Selling, general and administrative (exclusive of depreciation

   and amortization shown separately below)

110,069



108,069


Depreciation and amortization

45,254



43,400


Impairment of goodwill (1)



256,700


Restructuring, acquisition and integration-related costs (2)

3,521



11,401


Total operating costs and expenses

318,181



573,994


Income (loss) from operations

26,195



(253,978)


Interest expense and other, net

(15,758)



(14,556)


Income (loss) before income taxes

10,437



(268,534)


Income tax (provision) benefit

(3,174)



32,119


Net income (loss)

$

7,263



$

(236,415)


Net income (loss) per share




Basic

$

0.07



$

(2.30)


Diluted

$

0.07



$

(2.30)


Weighted average common shares outstanding




Basic

106,258



102,913


Diluted

106,926



102,913






Dividends declared per share

$

0.05



$

0.05


 


EARTHLINK, INC.
Unaudited Condensed Consolidated Balance Sheets
(in thousands, except per share data)


December 31,
2012


March 31,
2013





ASSETS

Current assets:




Cash and cash equivalents

$

157,621



$

146,148


Marketable securities

42,073



41,845


Restricted cash

1,013



1,013


Accounts receivable, net of allowance of $7,872 and $8,580

  as of December 31, 2012 and March 31, 2013, respectively

112,765



109,953


Prepaid expenses

17,171



19,023


Deferred income taxes, net

15,954



9,902


Other current assets

20,303



24,042


Total current assets

366,900



351,926


Long-term marketable securities

4,778



4,108


Property and equipment, net

418,966



430,928


Long-term deferred income taxes, net

195,012



232,873


Goodwill

379,415



122,715


Other intangible assets, net

214,685



199,446


Other long-term assets

19,654



19,757


Total assets

$

1,599,410



$

1,361,753



LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:




Accounts payable

$

18,792



$

17,271


Accrued payroll and related expenses

31,003



22,792


Other accrued liabilities

129,572



143,514


Deferred revenue

51,690



51,287


Current portion of long-term debt and capital lease obligations

1,375



1,399


Total current liabilities

232,432



236,263


Long-term debt and capital lease obligations

614,890



613,666


Other long-term liabilities

33,284



32,455


Total liabilities

880,606



882,384


Stockholders' equity:




Convertible preferred stock, $0.01 par value, 100,000

  shares authorized, 0 shares issued and outstanding as of

  December 31, 2012 and March 31, 2013




Common stock, $0.01 par value, 300,000 shares authorized,

196,919 and 197,242 shares issued as of December 31,

 2012 and March 31, 2013, respectively, and 102,739 and

 103,062 shares outstanding as of December 31, 2012 and

 March 31, 2013, respectively

1,969



1,972


Additional paid-in capital

2,057,974



2,054,950


Accumulated deficit

(606,148)



(842,563)


Treasury stock, at cost, 94,180 shares  as of December 31,

2012 and March 31, 2013

(735,003)



(735,003)


Accumulated other comprehensive income

12



13


Total stockholders' equity

718,804



479,369


Total liabilities and stockholders' equity

$

1,599,410



$

1,361,753


 


EARTHLINK, INC.
Reconciliation of Net Income (Loss) to Adjusted EBITDA (3)
(in thousands)


Three Months Ended


March 31,


December 31,


March 31,


2012


2012


2013



Net income (loss)

$

7,263



$

(9)



$

(236,415)


Interest expense and other, net

15,758



15,157



14,556


Income tax (provision) benefit

3,174



(1,842)



(32,119)


Depreciation and amortization

45,254



46,405



43,400


Impairment of goodwill (1)





256,700


Stock-based compensation expense

2,672



2,259



3,969


Restructuring, acquisition and integration-related costs (2)

3,521



4,508



11,401


Adjusted EBITDA (3)

$

77,642



$

66,478



$

61,492


 

EARTHLINK, INC.
Reconciliation of Net Income (Loss) to Unlevered Free Cash Flow (3)
(in thousands)


Three Months Ended


March 31,


December 31,


March 31,


2012


2012


2013







Net income (loss)

$

7,263



$

(9)



$

(236,415)


Interest expense and other, net

15,758



15,157



14,556


Income tax (provision) benefit

3,174



(1,842)



(32,119)


Depreciation and amortization

45,254



46,405



43,400


Impairment of goodwill (1)





256,700


Stock-based compensation expense

2,672



2,259



3,969


Restructuring, acquisition and integration- 

 related costs (2)

3,521



4,508



11,401


Purchases of property and equipment

(31,775)



(66,631)



(42,454)


Unlevered Free Cash Flow (3)

$

45,867



$

(153)



$

19,038


 

EARTHLINK, INC.
Reconciliation of Net Cash Flows from Operating Activities to Unlevered Free Cash Flow (3)
(in thousands)


Three Months Ended


March 31,


December 31,


March 31,


2012


2012


2013







Net cash provided by operating activities

$

66,211



$

12,527



$

31,844


Income tax provision (benefit)

3,174



(1,842)



(32,119)


Non-cash income taxes

(1,244)



(878)



32,248


Interest expense and other, net

15,758



15,157



14,556


Amortization of debt discount, premium and issuance costs

494



475



414


Restructuring, acquisition and integration-related costs (2)

3,521



4,508



11,401


Changes in operating assets and liabilities

(9,989)



36,070



2,763


Purchases of property and equipment

(31,775)



(66,631)



(42,454)


Other, net

(283)



461



385


Unlevered Free Cash Flow (3)

$

45,867



$

(153)



$

19,038








Net cash provided by (used in) investing activities

$

35,224



$

(65,110)



$

24,363


Net cash used in financing activities

$

(10,957)



$

(51,589)



$

(13,362)


 

EARTHLINK, INC.
Reconciliation of Net Loss to Net Loss Before Goodwill Impairment (3)
(in thousands)



Three Months Ended



March 31,



2013




Net loss


$

(236,415)


Impairment of goodwill


256,700


Estimated tax impact *


(27,828)


Net Loss Before Goodwill Impairment (3)


$

(7,543)





Diluted per share amount


$

(0.07)


 

* Impairment of goodwill for purposes of this reconciliation has been reduced by an estimated tax impact.  The tax impact does not necessarily reflect the actual amount that would have resulted had EarthLink not incurred the impairment during the period presented.

 

EARTHLINK, INC.
Reconciliation of Guidance Provided in Non-GAAP Measure (3)
(in millions)



Year Ending


December 31, 2013



Net loss

($282) - ($276)

Interest expense and other, net

60

Income tax benefit

(41) - (36)

Depreciation and amortization

181 - 183

Impairment of goodwill

257

Stock-based compensation expense

17

Restructuring, acquisition and integration-related costs

22

Adjusted EBITDA (3)

$214 - $227

 

EARTHLINK, INC.
Supplemental Schedule of Segment Information (4)
(in thousands)


Three Months Ended


March 31,


2012


2013





Business Services




Revenues

$

260,264



$

247,791


Cost of revenues (excluding depreciation and amortization)

131,818



129,477


Gross margin

128,446



118,314


Direct segment operating expenses

86,024



86,003


Segment operating income

$

42,422



$

32,311


Consumer Services




Revenues

$

84,112



$

72,225


Cost of revenues (excluding depreciation and amortization)

27,519



24,947


Gross margin

56,593



47,278


Direct segment operating expenses

16,399



12,482


Segment operating income

$

40,194



$

34,796


Consolidated




Revenues

$

344,376



$

320,016


Cost of revenues

159,337



154,424


Gross margin

185,039



165,592


Direct segment operating expenses

102,423



98,485


Segment operating income

82,616



67,107


Depreciation and amortization

45,254



43,400


Impairment of goodwill



256,700


Restructuring, acquisition and integration-related costs

3,521



11,401


Corporate operating expenses

7,646



9,584


Income (loss) from operations

$

26,195



$

(253,978)


 

EARTHLINK, INC.
Supplemental Schedule of Revenue Detail
(in thousands)



Three Months Ended


March 31,


2012


2013





Business Services




Retail services

$

214,935



$

201,081


Wholesale services

36,942



38,858


Other services

8,387



7,852


Total revenues

260,264



247,791


Consumer Services




Access services

71,767



60,740


Value-added services

12,345



11,485


Total revenues

84,112



72,225


Total Revenues

$

344,376



$

320,016


 

EARTHLINK, INC.
Supplemental Financial Data


March 31,


December 31,


March 31,


2012


2012


2013

Balance Sheet Data

(in thousands)

Cash and marketable securities

$

270,797



$

204,472



$

192,101


Debt (5)

624,800



592,300



592,300


Stockholders' equity

753,992



718,804



479,369








Employee Data






Number of employees at end of period (6)

3,103



3,205



2,979








 

EARTHLINK, INC.
Consumer Services Operating Metrics


March 31,


December 31,


March 31,


2012


2012


2013

Consumer Subscriber Detail


Narrowband access subscribers

704,000



626,000



602,000


Broadband access subscribers

591,000



526,000



505,000


Total consumer subscribers

1,295,000



1,152,000



1,107,000


 


Three Months Ended


March 31,


December 31,


March 31,


2012


2012


2013

Consumer Subscriber Activity






Subscribers at beginning of year

1,350,000



1,197,000



1,152,000


Gross organic subscriber additions

45,000



34,000



31,000


Churn

(100,000)



(79,000)



(76,000)


Subscribers at end of period

1,295,000



1,152,000



1,107,000








Consumer Metrics






Average consumer subscribers (7)

1,322,000



1,175,000



1,128,000


ARPU (8)

$

21.20



$

21.32



$

21.34


Churn rate (9)

2.5

%


2.3

%


2.2

%













 


EARTHLINK, INC.
Footnotes to Consolidated Financial Highlights

1.   During the three months ended March 31, 2013, the Company recognized a $256.7 million non-cash impairment charge to goodwill related to its Business Services reporting unit. The impairment was based on an analysis of a number of factors after a decline in the Company's market capitalization following the announcement of its fourth quarter 2012 earnings and 2013 financial guidance. The primary factor contributing to the impairment was a change in the discount rate and market multiples as a result of the change in these market conditions, both key assumptions used in the determination of fair value.

2.   Restructuring, acquisition and integration-related costs consisted of the following for the periods presented (in thousands):


Three Months Ended March 31,


2012


2013





Severance and retention costs

$

1,547



$

4,727


Integration-related costs

1,151



5,002


Transaction-related costs

839



104


Facility-related costs

165



1,568


Legacy plan restructuring costs

(181)




Restructuring, acquisition and integration-related costs

$

3,521



$

11,401


Restructuring, acquisition and integration-related costs consist of costs related to EarthLink's restructuring, acquisition and integration-related activities. Such costs include: 1) severance and retention costs;  2) integration-related costs, such as system conversion, rebranding costs and integration-related consulting and employee costs; 3) transaction-related costs, which are direct costs incurred to effect a business combination, such as advisory, legal, accounting, valuation and other professional fees; and 4) facility-related costs, such as lease termination and asset impairments.

3.   Adjusted EBITDA is defined as net income (loss) before interest expense and other, net, income taxes, depreciation and amortization, stock-based compensation, impairment of goodwill and intangible assets, and restructuring, acquisition and integration-related costs.  Unlevered Free Cash Flow is defined as net income (loss) before interest expense and other, net, income taxes, depreciation and amortization, stock-based compensation, impairment of goodwill and intangible assets, and restructuring, acquisition and integration-related costs, less purchases cash used for of property and equipment.  Net Loss Before Goodwill Impairment is defined as net loss before impairment of goodwill and estimated tax impact of impairment of goodwill.

Adjusted EBITDA, Unlevered Free Cash Flow and Net Loss Before Goodwill Impairment are non-GAAP measures and are not determined in accordance with U.S. generally accepted accounting principles. These non-GAAP financial measures are commonly used in the industry and are presented because management believes they provide relevant and useful information to investors. Management uses these non-GAAP financial measures to evaluate the performance of its business and determine bonuses. Management believes that excluding the effects of certain non-cash and non-operating items enables investors to better understand and analyze the current period's results and provides a better measure of comparability. There are limitations to using these non-GAAP financial measures. Adjusted EBITDA, Unlevered Free Cash Flow and Net Loss Before Goodwill Impairment are not indicative of cash provided or used by operating activities and may differ from comparable information provided by other companies.  Adjusted EBITDA, Unlevered Free Cash Flow and Net Loss Before Goodwill Impairment should not be considered in isolation, as an alternative to, or more meaningful than measures of financial performance determined in accordance with U.S. GAAP.

4.   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, Business Services and Consumer Services. The Company's Business Services segment provides a comprehensive suite of communications and technology services, including voice, data, managed network services, cloud hosting and equipment services, to business customers. The Company's Consumer Services segment provides nationwide Internet access and related value-added services to residential customers.

The Company presents its Business Services revenue in the following three categories: (1) retail services, which includes data, voice and managed IT services; (2) wholesale services, which includes the sale of transmission capacity to other telecommunications carriers; and (3) other services, which includes the sale of customer premises equipment and web hosting. The Company presents its Consumer Services revenue in the following two categories: (1) access services, which includes include narrowband and broadband Internet access services and (2) value-added services, which includes revenues from ancillary services sold as add-on features to EarthLink's Internet access services, such as security products, premium email only, home networking, email storage and Internet call waiting; search revenues; and advertising revenues.

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), depreciation and amortization, stock-based compensation expense, impairment of goodwill and intangible assets and restructuring, acquisition and integration-related costs, as they are not evaluated in the measurement of segment performance.

5.   Debt represents the principal amount of EarthLink's Senior Notes, EarthLink's Convertible Senior Notes and ITC^DeltaCom's Senior Secured Notes. Below is a summary of the carrying amount of EarthLink's debt (in thousands):


March 31,


December 31,


March 31,


2012


2012


2013

EarthLink Senior Notes - Principal

$

300,000



$

300,000



$

300,000


EarthLink Senior Notes - Discount

(9,547)



(8,818)



(8,563)


ITC^DeltaCom Senior Secured Notes - Principal

324,800



292,300



292,300


ITC^DeltaCom Senior Secured Notes - Premium

20,914



15,694



14,605


Carrying amount of debt

$

636,167



$

599,176



$

598,342


 

6.   Represents full-time equivalents.

7.   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 period.

8.   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.

9.   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.

SOURCE EarthLink, Inc.



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