EarthLink Announces Fourth Quarter and Full Year 2011 Results

16 Feb, 2012, 07:00 ET from EarthLink, Inc.

ATLANTA, Feb. 16, 2012 /PRNewswire/ -- EarthLink, Inc. (NASDAQ: ELNK) today announced financial results for its fourth quarter and full year ended December 31, 2011.

Highlights for the fourth quarter include:

  • Net income of $4.2 million or $0.04 per share
  • Adjusted EBITDA (a non-GAAP measure) of $81.6 million 
  • Operating cash flow (a non-GAAP measure) of $50.6 million 
  • Ending cash and marketable securities balance of $241.4 million

"We have made significant progress in EarthLink's continuing transformation to an enterprise IT services company," said EarthLink Chairman and Chief Executive Officer Rolla P. Huff.   "During the fourth quarter, we again delivered solid Adjusted EBITDA and operating cash flow, while continuing to execute on our integration plans.  In December, we launched our EarthLink Complete nationwide data, cloud based security, and hosted voice offering.  In 2012, we intend to further expand our IT cloud services.  We believe we are on a trajectory to show quarterly sequential growth in our business segment revenues as we exit this year."

Financial and Operating Results

EarthLink reported revenue of $350.2 million in the fourth quarter and $1.31 billion for the full year 2011, more than doubling from both the fourth quarter of 2010 and the full year 2010 due to the acquisitions of ITC^Deltacom, One Communications and five IT services companies since December 2010.  Business services segment revenue comprised 75% of EarthLink's revenue in the fourth quarter of 2011, up from 36% in the year-ago quarter reflecting the company's acquisitions which are included in the business services segment. EarthLink's consumer segment continues to perform well, with broadband services comprising 66% of consumer access revenue in the fourth quarter of 2011, as compared to 63% in the year ago quarter. Subscriber churn in the consumer segment was 2.6% for the fourth quarter of 2011, as compared to 2.7% in the third quarter of 2011 and 2.8% in the fourth quarter of 2010.  

EarthLink's selling, general and administrative expenses were $110.6 million or 32% of revenue for the fourth quarter of 2011 and $406.4 million or 31% of revenue for the full year 2011. This compares to expenses of $50.9 million, or 31% of revenue in the fourth quarter of 2010, and $178.4 million, or 29% of revenue for full year 2010.

Profitability and Other Financial Measures

Net income was $4.2 million, or $0.04 per share, in the fourth quarter of 2011 and $34.6 million, or $0.32 per share, for the full year 2011. These compared to net income of $5.3 million, or $0.05 per share, in the fourth quarter of 2010, and $81.5 million, or $0.74 per share, for the full year 2010.

EarthLink generated Adjusted EBITDA (a non-GAAP measure, see definition in "Non-GAAP Measures" below) of $81.6 million in the fourth quarter of 2011 and $330.7 million for the full year 2011. This compares to Adjusted EBITDA of $54.2 million for the fourth quarter 2010 and $219.1 million for the full year 2010.

Balance Sheet and Cash Flow

EarthLink generated operating cash flow (a non-GAAP measure, see definition in "Non-GAAP Measures" below) of $50.6 million during the fourth quarter of 2011 and $228.8 million for the full year 2011, compared to $38.9 million in the fourth quarter of 2010 and $195.1 million in the full year 2010.

As of December 31, 2011, the company reported cash and marketable securities of $241.4 million. Capital expenditures were $31.0 million for the fourth quarter of 2011 and $102.0 million for the full year 2011. During the fourth quarter of 2011, the company redeemed $260.0 million of convertible notes, including $255.8 million of principal and $4.2 million of accrued interest. Additionally, the company made $5.6 million of dividend payments to shareholders in the fourth quarter for a total of $22.9 million of dividend payments to shareholders during the full year 2011. EarthLink repurchased 1.3 million shares of common stock at an average price of $6.31 per share in the fourth quarter, and repurchased a total of 6.3 million shares of common stock at an average price of $7.40 per share for the full year 2011.

Business Outlook

The following statements are forward-looking, and actual results may differ materially.  See comments under "Cautionary Information Regarding Forward-Looking Statements" below.  EarthLink undertakes no obligation to update these statements.

Today EarthLink announced guidance for the full year 2012. Management expects Adjusted EBITDA of $285 million to $295 million; operating cash flow of $150 million to $180 million; capital expenditures of $115 million to $135 million; and net income of $3 million to $10 million for the full year 2012.  

Non-GAAP Measures

Adjusted EBITDA is defined as net income before interest expense and other, net, income taxes, depreciation and amortization, stock-based compensation expense, impairment of goodwill and intangible assets, and restructuring and acquisition-related costs.  Operating cash flow is defined as net income before interest expense and other, net, income taxes, depreciation and amortization, stock-based compensation expense, impairment of goodwill and intangible assets, and restructuring and acquisition-related costs, less cash used for purchases of property and equipment.

Adjusted EBITDA and operating 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.

Conference Call for Analysts and Investors

Conference Call Details

Thursday, February 16, 2012, at 8:30 a.m. ET  hosted by EarthLink's Chairman and Chief Executive Officer Rolla P. Huff, President and Chief Operating Officer Joseph M. Wetzel, and Chief Financial Officer Bradley A. Ferguson.

U.S. and Canada Dial-in Number   800-706-0730

International Dial-in Number   706-634-5173

Participants reference the EarthLink call and dial in 10 minutes prior to scheduled start time.

Webcast

A live Webcast of the conference call will be available at: http://ir.earthlink.net

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 February 16 through midnight on March 1, 2012. To access the replay, dial toll-free 855-859-2056 and enter confirmation code 47527459. 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, network and communications provider to more than 150,000 businesses and over one million consumers nationwide. EarthLink empowers customers with managed IT services including cloud computing, data centers, virtualization, security, applications and support services, in addition to nationwide data and voice IP services. The company operates an extensive network including 28,000 route fiber miles, 90 metro fiber rings and 4 secure data centers providing ubiquitous IP coverage across more than 90% of the country. Founded in 1994, the company's award-winning reputation for both 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 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 (1) that we may not be able to execute our strategy to grow our business services revenue, which could adversely impact our results of operations and cash flows; (2) that we may be unsuccessful integrating acquisitions into our business, which could result in operating difficulties, losses and other adverse consequences; (3) that we may be unable to successfully identify, manage and assimilate future acquisitions, which could adversely affect our results of operations; (4) 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; (5) that our failure to achieve operating efficiencies will adversely affect our results of operations; (6) that unfavorable general economic conditions could harm our business; (7) that we face significant competition in the communications and managed IT services industry that could reduce our profitability; (8) that decisions by 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; (9) 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; (10) 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; (11) that we may experience reductions in switched access and reciprocal compensation revenue; (12) that failure to obtain and maintain necessary permits and rights-of-way could interfere with our network infrastructure and operations; (13) that our rights to use the fiber that makes up our network may be affected by the financial health of, or disputes with, our fiber providers; (14) 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 revenue and results of operations; (15) that our commercial and alliance arrangements may not be renewed or may not generate expected benefits, which could adversely affect our results of operations; (16) that our consumer business is dependent on the availability of third-party network service providers; (17) that we face significant competition in the Internet industry that could reduce our profitability; (18) 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; (19) that potential regulation of Internet service providers could adversely affect our operations; (20) 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; (21) that privacy concerns relating to our business could damage our reputation and deter current and potential users from using our services; (22) that security breaches could damage our reputation and harm our operating results; (23) 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; (24) that our business depends on effective business support systems and processes; (25) that government regulations could adversely affect our business or force us to change our business practices; (26) that our business may suffer if third parties are unable to provide services or terminate their relationships with us; (27) that we may not be able to protect our intellectual property; (28) 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; (29) that if we, or other industry participants, are unable to successfully defend against legal actions, we could face substantial liabilities or suffer harm to our financial and operational prospects; (30) 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; (31) 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; (32) that our indebtedness could adversely affect our financial health and limit our ability to react to changes in our industry; (33) that we may require additional capital to support business growth, and this capital may not be available to us on acceptable terms, or at all; (34) that we may reduce, or cease payment of, quarterly cash dividends; (35) that our stock price may be volatile; and (36) 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 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, 2010 and subsequent filings with the SEC.

EARTHLINK, INC.

Unaudited Condensed Consolidated Statements Of Operations (1)

(in thousands, except per share data)

Three Months Ended December 31,

Twelve Months Ended December 31,

2010

2011

2010

2011

Revenues

$ 166,789

$ 350,237

$ 622,212

$ 1,314,104

Operating costs and expenses:

Cost of revenues (exclusive of depreciation and

amortization shown separately below)

64,600

161,079

234,633

590,486

Selling, general and administrative (exclusive of depreciation

and amortization shown separately below)

50,900

110,572

178,417

406,358

Depreciation and amortization

9,738

46,747

23,390

160,083

Impairment of goodwill and intangible assets

1,711

-

1,711

-

Restructuring and acquisition-related costs (2)

19,101

7,551

22,368

32,068

Total operating costs and expenses

146,050

325,949

460,519

1,188,995

Income from operations

20,739

24,288

161,693

125,109

Interest expense and other, net

(7,740)

(16,443)

(23,409)

(70,640)

Income before income taxes

12,999

7,845

138,284

54,469

Income tax provision

(7,691)

(3,694)

(56,804)

(19,902)

Net income

$     5,308

$     4,151

$   81,480

$      34,567

Net income per share

Basic

$       0.05

$       0.04

$       0.75

$          0.32

Diluted

$       0.05

$       0.04

$       0.74

$          0.32

Weighted average common shares outstanding

Basic

108,320

106,650

108,057

108,098

Diluted

111,317

107,202

109,468

108,949

Dividends declared per share

$       0.16

$       0.05

$       0.62

$          0.20

EARTHLINK, INC.

Unaudited Condensed Consolidated Balance Sheets

(in thousands, except per share data)

ASSETS

December 31,

December 31,

2010

2011

Current assets:

Cash and cash equivalents

$        242,952

$        211,783

Marketable securities

307,814

28,606

Restricted cash

2,270

1,781

Accounts receivable, net of allowance of $1,182 and

$7,323 as of December 31, 2010 and 2011, respectively

60,216

114,757

Prepaid expenses

12,161

13,163

Deferred income taxes, net

45,661

38,437

Other current assets

14,802

23,530

Total current assets

685,876

432,057

Long-term marketable securities

12,304

1,001

Property and equipment, net

241,111

389,549

Deferred income taxes, net

189,037

172,376

Goodwill

259,046

378,235

Purchased intangible assets, net

135,364

285,361

Other long-term assets

1,240

21,872

Total assets

$     1,523,978

$     1,680,451

LIABILITIES AND STOCKHOLDERS’ EQUITY

Current liabilities:

Accounts payable

$          17,272

$          15,972

Accrued payroll and related expenses

18,402

28,410

Accrued interest

8,622

11,955

Other accrued liabilities

67,007

116,396

Deferred revenue

40,921

68,182

Current portion of long-term debt and capital lease obligations

243,069

1,655

Total current liabilities

395,293

242,570

Long-term debt and capital lease obligations

351,251

653,765

Other long-term liabilities

19,566

30,972

Total liabilities

766,110

927,307

Stockholders' equity:

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

0 shares issued and outstanding as of December 31, 2010 and December 31, 2011

-

-

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

191,825 and 196,202 shares issued as of December 31, 2010

and 2011, respectively, and 108,382 and 106,193 shares

outstanding as of December 31, 2010 and 2011, respectively

1,918

1,962

Additional paid-in capital

2,061,555

2,071,298

Accumulated deficit

(648,235)

(613,668)

Treasury stock, at cost, 83,443 and 90,009 shares

as of December 31, 2010 and 2011, respectively

(657,611)

(706,434)

Accumulated other comprehensive income (loss)

241

(14)

Total stockholders' equity

757,868

753,144

Total liabilities and stockholders' equity

$     1,523,978

$     1,680,451

EARTHLINK, INC.

Reconciliation of Net Income to Adjusted EBITDA (3)

(in thousands)

Three Months Ended

Twelve Months Ended

December 31,

December 31,

2010

2011

2010

2011

Net income

$            5,308

$   4,151

$   81,480

$   34,567

Interest expense and other, net

7,740

16,443

23,409

70,640

Income tax provision

7,691

3,694

56,804

19,902

Depreciation and amortization

9,738

46,747

23,390

160,083

Stock-based compensation expense

2,882

3,012

9,959

13,466

Impairment of goodwill and intangible assets

1,711

-

1,711

-

Restructuring and acquisition-related costs (2)

19,101

7,551

22,368

32,068

Adjusted EBITDA (3)

$          54,171

$ 81,598

$ 219,121

$ 330,726

EARTHLINK, INC.

Reconciliation of Net Income to Operating Cash Flow (3)

(in thousands)

Three Months Ended

Twelve Months Ended

December 31,

December 31,

2010

2011

2010

2011

Net income

$            5,308

$   4,151

$   81,480

$   34,567

Interest expense and other, net

7,740

16,443

23,409

70,640

Income tax provision

7,691

3,694

56,804

19,902

Depreciation and amortization

9,738

46,747

23,390

160,083

Stock-based compensation expense

2,882

3,012

9,959

13,466

Impairment of goodwill and intangible assets

1,711

-

1,711

-

Restructuring and acquisition-related costs (2)

19,101

7,551

22,368

32,068

Purchases of property and equipment

(15,277)

(31,000)

(24,025)

(101,967)

Operating cash flow (3)

$          38,894

$ 50,598

$ 195,096

$ 228,759

EARTHLINK, INC.

Reconciliation of Guidance Provided in Non-GAAP Measures (3)

(in millions)

Year

Ending

December 31,

2012

Net income

$3 - $10

Interest expense and other, net

64

Income tax provision

3 - 6

Depreciation and amortization

186

Stock-based compensation expense

13

Restructuring and acquisition-related costs (2)

16

Adjusted EBITDA (3)

$285 - $295

Year

Ending

December 31,

2012

Net income

$3 - $10

Interest expense and other, net

64

Income tax provision

3 - 6

Depreciation and amortization

186

Stock-based compensation expense

13

Restructuring and acquisition-related costs (2)

16

Purchases of property and equipment

(135) - (115)

Operating cash flow (3)

$150 - $180

EARTHLINK, INC.

Supplemental Financial Data

December 31,

June 30,

September 30,

December 31,

2010

2011

2011

2011

Balance Sheet Data

(in thousands)

Cash and marketable securities

$        563,070

$  490,484

$             515,310

$        241,390

Debt (4)

580,791

880,591

880,591

624,800

Stockholders' equity

757,868

760,886

762,521

753,144

Employee Data

Number of employees at end of period (5)

1,870

3,214

3,201

3,241

EARTHLINK, INC.

Business Services Operating Metrics

December 31,

June 30,

September 30,

December 31,

2010

2011

2011

2011

Legacy EarthLink Business Metrics (6)

Narrowband access subscribers

7,000

6,000

5,000

5,000

Broadband access subscribers

53,000

52,000

51,000

51,000

Web hosting accounts

66,000

62,000

60,000

58,000

EarthLink Business Metrics (7)

Southeast

Total fiber optic route miles

16,504

16,504

16,504

16,551

Colocations

294

296

296

299

Voice and data switches

20

20

20

21

Northeast

Total fiber optic route miles

-

12,253

12,253

12,253

Colocations

-

620

620

690

Voice and data switches

-

34

34

34

National

Colocations

424

424

424

426

Voice and data switches

-

-

1

1

Total EarthLink Business (7)

Total fiber optic route miles (8)

16,504

28,757

28,757

28,804

Colocations

718

1,340

1,340

1,415

Voice and data switches

20

54

55

56

EARTHLINK, INC.

Consumer Services Operating Metrics

December 31,

June 30,

September 30,

December 31,

2010

2011

2011

2011

Consumer Subscriber Detail

Narrowband access subscribers

932,000

826,000

780,000

741,000

Broadband access subscribers

704,000

652,000

630,000

609,000

Total consumer subscribers

1,636,000

1,478,000

1,410,000

1,350,000

Three Months Ended December 31,

Twelve Months Ended December 31,

2010

2011

2010

2011

Consumer Subscriber Activity

Subscribers at beginning of period

1,715,000

1,410,000

2,029,000

1,636,000

Gross organic subscriber additions

59,000

48,000

265,000

184,000

Churn

(138,000)

(108,000)

(658,000)

(470,000)

Subscribers at end of period

1,636,000

1,350,000

1,636,000

1,350,000

Consumer Metrics

Average subscribers (9)

1,675,000

1,379,000

1,817,000

1,484,000

ARPU (10)

$            21.10

$      21.20

$                 21.16

$            21.10

Churn rate (11)

2.8%

2.6%

3.0%

2.6%

EARTHLINK, INC.

Supplemental Schedule of Segment Information (12)

(in thousands)

Three Months Ended December 31,

Twelve Months Ended December 31,

2010

2011

2010

2011

Business Services

Revenues  

$   60,737

$ 262,530

$ 160,764

$    938,259

Cost of revenues

31,100

133,679

90,677

473,004

Gross margin

29,637

128,851

70,087

465,255

Segment operating expenses

19,821

84,645

50,096

299,129

Segment income from operations

$     9,816

$   44,206

$   19,991

$    166,126

Consumer Services

Revenues  

$ 106,052

$   87,707

$ 461,448

$    375,845

Cost of revenues

33,500

27,400

143,956

117,482

Gross margin

72,552

60,307

317,492

258,363

Segment operating expenses

21,382

16,935

87,660

70,812

Segment income from operations

$   51,170

$   43,372

$ 229,832

$    187,551

Consolidated

Revenues  

$ 166,789

$ 350,237

$ 622,212

$ 1,314,104

Cost of revenues

64,600

161,079

234,633

590,486

Gross margin

102,189

189,158

387,579

723,618

Direct segment operating expenses

41,203

101,580

137,756

369,941

Segment income from operations

60,986

87,578

249,823

353,677

Stock-based compensation expense

2,882

3,012

9,959

13,466

Depreciation and amortization

9,738

46,747

23,390

160,083

Impairment of goodwill and intangible assets

1,711

-

1,711

-

Restructuring and acquisition-related costs (2)

19,101

7,551

22,368

32,068

Other operating expenses

6,815

5,980

30,702

22,951

Income from operations

$   20,739

$   24,288

$ 161,693

$    125,109

EARTHLINK, INC.

Supplemental Schedule of Revenue Detail

(in thousands)

Three Months Ended

Twelve Months Ended

December 31,

December 31,

2010

2011

2010

2011

                      (in thousands)

Business Services

Retail services

$   38,995

$ 214,409

$   88,739

$    760,158

Wholesale services

11,875

37,740

36,792

136,224

Other

9,867

10,381

35,233

41,877

Total revenues

60,737

262,530

160,764

938,259

Consumer Services

Access services

92,025

74,618

403,174

323,998

Value-added services

14,027

13,089

58,274

51,847

Total revenues

106,052

87,707

461,448

375,845

Total Revenues

$ 166,789

$ 350,237

$ 622,212

$ 1,314,104

EARTHLINK, INC.

Footnotes to Consolidated Financial Highlights

1.  On December 8, 2010, EarthLink completed its acquisition of ITC^DeltaCom, a provider of integrated communications services to customers in the southeastern U.S. On April 1, 2011, EarthLink completed its acquisition of One Communications, a privately-held, multi-regional integrated telecommunications solutions provider serving customers in the Northeast, Mid-Atlantic and Upper Midwest. The results of operations of ITC^DeltaCom and One Communications have been included in EarthLink's consolidated financial statements since the respective acquisition dates.    

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

Three Months Ended

Twelve Months Ended

December 31,

December 31,

2010

2011

2010

2011

Transaction-related costs

$   8,164

$      889

$ 10,164

$   5,756

Costs to settle postcombination stock awards

5,742

-

5,742

-

Severance and retention

5,047

2,852

5,047

16,460

Facility-related costs

-

842

-

5,530

Integration-related costs

-

3,210

-

4,044

    Acquisition-related costs

18,953

7,793

20,953

31,790

Facility exit and restructuring costs

148

(242)

1,415

278

    Total restructuring and acquisition-related

$ 19,101

$   7,551

$ 22,368

$ 32,068

Acquisition-related costs consist of external costs directly related to EarthLink's acquisitions, such as advisory, legal, accounting, valuation and other professional fees; employee severance and retention costs; costs to settle stock-based awards attributable to postcombination service; facility-related costs, such as lease termination and asset impairments; and integration-related costs, such as system conversion, rebranding costs and integration related consulting and employee costs.    

Facility exit and restructuring costs consist of costs incurred for EarthLink's restructuring plans. 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 2007 and 2008. However, there have been and may continue to be changes in estimates to amounts previously recorded.    

3.  Adjusted EBITDA is defined as net income before interest expense and other, net, income taxes, depreciation and amortization, stock-based compensation, impairment of goodwill and intangible assets, and restructuring and acquisition-related costs.  Operating cash flow is defined as net income before interest expense and other, net, income taxes, depreciation and amortization, stock-based compensation, impairment of goodwill and intangible assets, and restructuring and acquisition-related costs, less purchases cash used for purchases property and equipment.    

Adjusted EBITDA and operating 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. Management believes that excluding the effects of the items noted above enables investors to better understand and analyze the current period's results and provides a better measure of comparability.  

4.  Debt represents the principal amount of EarthLink's Senior Secured 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):  

Dec. 31,

June 30,

Sept. 30,

Dec. 31,

2010

2011

2011

2011

EarthLink's Senior Notes - Principal

-

300,000

300,000

300,000

EarthLink's Senior Notes - Discount

-

(10,226)

(10,005)

(9,779)

EarthLink's Convertible Senior Notes - Principal

255,791

255,791

255,791

-

EarthLink's Convertible Senior Notes - Discount

(12,722)

(5,490)

(1,744)

-

ITC^DeltaCom's Senior Secured Notes - Principal

325,000

324,800

324,800

324,800

ITC^DeltaCom's Senior Secured Notes - Premium

26,251

24,189

23,143

22,056

Carrying amount of debt

594,320

889,064

891,985

637,077

5.  Represents full-time equivalents.  

6.  Legacy EarthLink business metrics consist of metrics related to services in EarthLink's Business Services segment prior to the acquisitions of ITC^DeltaCom and One Communications.  

7.  EarthLink Business metrics consist of metrics related to the acquired New Edge Networks, ITC^DeltaCom and One Communications businesses, which is included in the Business Services segment.  

8.  includes 3,945 marketed and managed route miles. The remaining route miles are owned or obtained through indefeasible rights to use (IRU).  

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 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.  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.    

12.  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 earns revenue by providing a broad range of data, voice, managed IT and equipment services to businesses, enterprise organizations and communications carriers. The Company presents its Business Services revenue in the following three categories: (1) retail services, which includes data, voice and managed IT services provided to businesses and enterprise organizations; (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's Consumer Services segment earns revenue by providing nationwide Internet access and related value-added services.    

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 and acquisition-related costs, as they are not evaluated in the measurement of segment performance.  

SOURCE EarthLink, Inc.



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