February 9, 2006; 12:21 PM
EarthLink, Inc. (Nasdaq: ELNK), the nation's next generation Internet service provider (ISP), today announced financial results for its fourth quarter and full year ending December 31, 2005. Highlights for the quarter and year include:
- Net income of $29.2 million, or $0.22 per share
- Income from operations of $36.8 million
- Adjusted EBITDA (a non-GAAP measure) of $47.3 million
- Free cash flow (a non-GAAP measure) of $38.2 million
- Full year net income of $142.8 million
- Full year adjusted EBITDA of $213.7 million
- Full year income from operations of $164.5 million
- Full year free cash flow of $173.1 million
"Last year, we had an ambitious agenda, and we delivered with a series of
initiatives that are reshaping our position in the marketplace and redefining
what it means to be an ISP," said Garry Betty, EarthLink's chief executive
officer. "Building on the strength of our core access business, we are
evolving into a total communications company that will deliver an expanding
portfolio of voice, data and wireless services to residential and business
customers."
Betty added, "In particular, EarthLink launched a $440 million wireless
joint venture with SK Telecom called HELIO; was awarded rights to build
municipal Wi-Fi networks in Philadelphia and Anaheim; introduced two new voice
services -- EarthLink trueVoice(SM) and EarthLink DSL and Home Phone Service;
purchased the assets of Aluria, a leading anti-spyware software company; and
finished the year with the execution of a merger agreement to acquire New Edge
Networks, a national provider of secure multi-managed data networks and
dedicated Internet access.
"Taken together, our 2005 initiatives are tremendous opportunities to grow
our business and take advantage of the converging world of wireless and
wireline voice and data services and applications."
Operating and Financial Results
Subscribers
During the fourth quarter of 2005, EarthLink continued to grow its
broadband and value dial-up services. EarthLink maintained its position as
the fastest-growing value narrowband ISP by adding 104,000 net PeoplePC Online
subscribers and strengthened its position as a leading non-facilities based
broadband provider by adding 63,000 net broadband subscribers in the quarter.
EarthLink continued to manage the decline of its premium narrowband subscriber
base, which decreased by 174,000 net customers during the quarter.
EarthLink ended the fourth quarter with 1.2 million PeoplePC Online
subscribers, 2.3 million premium narrowband subscribers, 1.6 million broadband
subscribers and 127,000 web hosting accounts.
Overall, the average monthly churn rate decreased to 4.4 percent during
the fourth quarter, compared to the 4.7 percent average monthly churn rate
experienced in the fourth quarter of 2004 and in the third quarter of 2005.
Revenues and Gross Margins Before Sales Incentives
Broadband revenues were $111.4 million, an increase of 4.9 percent over
the prior year quarter, resulting from the growth in broadband subscribers
partially offset by a decline in overall broadband average revenue per user.
Web hosting, advertising and other value-added services revenues were $29.0
million, a 24.1 percent improvement compared to the prior year quarter, driven
primarily by increases in search-related advertising revenues and ancillary
services revenues, such as Internet Call Waiting and security-related
services. Narrowband revenues were $172.3 million, a decrease of 17.4 percent
compared to the prior year quarter. The decline in narrowband revenues was due
to a decline in average narrowband subscribers and a shift in the mix of
EarthLink's narrowband customer base as premium narrowband subscribers migrate
to broadband and EarthLink continues to add PeoplePC Online subscribers. For
the quarter, total revenues were $312.6 million, a 7.5 percent decrease from
the fourth quarter of 2004.
For the year, total revenues were $1.3 billion, a decrease of 6.7 percent
compared to 2004. The overall decrease was primarily due to changes in
customer mix and a decline in retail DSL pricing and the transfer of EarthLink
Wireless subscribers to HELIO. Premium narrowband subscribers continued to
migrate to broadband services while EarthLink continued to add lower revenue
value narrowband subscribers. Additionally, in 2005 EarthLink reduced prices
for its retail DSL broadband service and continued to generate more net
subscriber additions in its lower revenue retail cable and wholesale broadband
services.
Gross margins before sales incentives (a non-GAAP measure) increased to a
record 72.0 percent of total revenues during the fourth quarter of 2005, a 210
basis point improvement from the prior year quarter. The increase in gross
margins before sales incentives was due to continuing improvements in both
narrowband and broadband telecommunications costs per subscriber and the shift
in the mix of our broadband customer base to higher margin wholesale DSL and
certain retail cable subscribers. While gross margins before sales incentives
on a percentage basis continued to increase, gross margins before sales
incentives were $225.0 million for the fourth quarter of 2005, a decrease of
4.8 percent from the fourth quarter of 2004.
For the full year 2005, gross margins before sales incentives improved to
71.6 percent of total revenues, a 280 basis point increase compared to the
full year 2004. The increase in gross margins before sales incentives was
also due to continuing improvements in both narrowband and broadband
telecommunications costs per subscriber and the shift in the mix of our
broadband customer base to higher margin wholesale DSL and certain retail
cable subscribers. While gross margins before sales incentives on a
percentage basis continued to increase, gross margins before sales incentives
were $923.4 million for the full year 2005, a decrease of 2.9 percent from the
full year 2004.
Profitability
For the fourth quarter of 2005, adjusted EBITDA (a non-GAAP measure) was
$47.3 million, a 12.0 percent decrease compared to the fourth quarter of 2004.
This decline was a result of the decrease in gross margins before sales
incentives, partially offset by lower sales and marketing expenditures related
to lower gross subscriber additions and lower support costs in the fourth
quarter of 2005.
For the year, adjusted EBITDA was $213.7 million, a decrease of 2.1
percent compared to 2004. The decline in adjusted EBITDA was primarily due to
the decrease in gross margins before sales incentives, partially offset by
lower sales and marketing expenditures due to lower gross subscriber additions
in 2005 and lower overall support costs in 2005.
Net income for the quarter was $29.2 million, or $0.22 per share, compared
to $35.6 million, or $0.23 per share, in the prior year quarter. The decrease
in net income was primarily attributable to the following:
- $8.7 million of losses from equity affiliate recorded in the current
year quarter related to the HELIO (formerly SK-EarthLink) wireless
joint venture,
- $6.5 million decrease in adjusted EBITDA, and
- $1.0 million increase in income tax expense primarily associated with
the realization of net operating loss (NOL) carry-forwards of acquired
companies.
These items were partially offset by the following:
- $4.4 million decrease in depreciation due primarily to declines in
capital expenditures over the past three years,
- $2.5 million increase in interest income and other, net, related to
interest earned on investments in marketable securities
- $1.1 million favorable change in gain on investments, net, and
- $2.3 million decrease in acquisition-related amortization attributable
to subscriber base assets becoming fully amortized.
For the year, net income was a record $142.8 million, or $1.02 per share,
compared to $111.0 million, or $0.70 per share, for 2004. The increase in net
income was primarily attributable to the following:
- $26.3 million net reduction in expense related to facility exit costs
recorded in 2004,
- $20.0 million decrease in depreciation due primarily to declines in
capital expenditures over the past three years,
- $12.1 million decrease in acquisition-related amortization attributable
to subscriber base assets becoming fully amortized,
- $7.4 million increase in interest income and other, net, related to
interest earned on investments in marketable securities, and
- $4.3 million favorable change in gain (loss) on investments in other
companies, net, due to distributions received and fewer investment
write-downs in 2005.
These items were partially offset by the following:
- $18.0 million increase in income tax expense primarily associated with
an increase in taxable income and the realization of net operating loss
(NOL) carry-forwards of acquired companies,
- $15.6 million of losses from equity affiliate recorded in 2005 related
to the HELIO wireless joint venture, and
- $4.7 million decrease in adjusted EBITDA
Balance Sheet and Cash Flow
In the fourth quarter of 2005, EarthLink generated $38.2 million in free
cash flow (a non-GAAP measure), a $6.7 million decrease from the fourth
quarter of 2004, primarily related to the decrease in adjusted EBITDA during
the fourth quarter of 2005 compared to the fourth quarter of 2004.
For the full year 2005, EarthLink generated $173.1 million in free cash
flow, a $12.9 million decrease from 2004. The decrease in free cash flow was
primarily related to the decrease in adjusted EBITDA noted above, a $4.3
million increase in cash used to acquire subscriber bases from other ISPs, and
a $4.0 million increase in capital expenditures associated with the
introduction of EarthLink's voice services.
During the fourth quarter of 2005, EarthLink repurchased approximately 1.0
million shares of its common stock for $11.2 million in accordance with its
share repurchase program.
For the full year 2005, EarthLink repurchased approximately 20.5 million
shares of its common stock for $192.6 million in accordance with its share
repurchase program. Additionally, in 2005, EarthLink invested $82.0 million
of cash in the HELIO wireless joint venture.
EarthLink's cash and marketable securities were $422.1 million as of
December 31, 2005, representing a $21.2 million increase from the third
quarter of 2005.
Other Highlights
The fourth quarter of 2005 was a significant milestone as EarthLink
expanded its Voice over Internet Protocol (VoIP) offerings with two new
services -- EarthLink trueVoice and EarthLink DSL and Home Phone Service.
EarthLink trueVoice is a plug-and-play VoIP solution that can be installed in
minutes and includes enhanced calling features like voicemail, call waiting,
caller ID, and call forwarding, just to name of few.
In late December, EarthLink introduced EarthLink DSL and Home Phone
Service as part of a market trial in Dallas, San Francisco, San Jose and
Seattle. This service gives EarthLink the ability to bundle phone service
along with 8.0 mbps high-speed Internet access, all for $69.95 a month.
Taking advantage of the next-generation Digital Subscriber Line Access
Multiplexer (DSLAM) technology, this new, easy-to-use offering, EarthLink Home
Phone Service marries the "last mile" of traditional telephone copper wiring
with the advanced features of VoIP.
EarthLink was also selected by the cities of Philadelphia and Anaheim to
develop and implement city-wide municipal Wi-Fi broadband networks. These
public-private partnerships will enable EarthLink to offer customers a more
affordable option for high-speed Internet service. Under the agreements,
EarthLink would finance, build and manage the wireless networks offering
access speeds of up to 1.0 mbps, and EarthLink would also enable other
providers to purchase capacity on the network.
Finally, in December, EarthLink announced an agreement to acquire New Edge
Networks, a privately-held, single-source national provider of managed private
wide area networks and dedicated Internet access for multi-location businesses
and communications companies. Expected to operate as a wholly-owned
subsidiary of EarthLink, the Vancouver, Washington-based company represents a
growth platform for EarthLink. It adds to EarthLink's existing suite of
services for small businesses and enables EarthLink to compete in the rapidly
expanding Small and Medium Enterprise (SME) networking market.
Non-GAAP Measures
Adjusted EBITDA is defined as earnings before interest income and expense,
income taxes, depreciation and amortization, net losses of equity affiliate,
gain (loss) on investments in other companies, net, and facility exit and
restructuring costs.
Free cash flow is defined as income from operations before facility exit
and restructuring costs and depreciation and amortization, less cash used for
purchases of property and equipment and purchases of subscriber bases.
Gross margins before sales incentives, adjusted EBITDA, and free cash flow
are non-GAAP financial performance measures. They should not be considered in
isolation or as an alternative to measures determined in accordance with U.S.
generally accepted accounting principles. Please refer to the Consolidated
Financial Highlights for a reconciliation of these non-GAAP financial
performance measures to the most comparable measures reported in accordance
with U.S. generally accepted accounting principles and Footnote 3 of the
Consolidated Financial Highlights for a discussion of the presentation,
comparability and use of such financial performance measures.
Conference Call for Analysts and Investors to Discuss 2005 Results
Investors in the U.S. and Canada interested in participating in the
conference call on February 9, 2006 at 8:30 a.m. EST may dial 1-800-706-0730
and reference the EarthLink call. Other international investors may dial 1-
706-634-5173 and also reference the EarthLink call. EarthLink recommends
dialing into the call approximately 10 minutes prior to the scheduled start
time. Investors will also have the opportunity to listen to a live Webcast of
the conference call via the Internet at the following site:
http://phx.corporate-ir.net/phoenix.zhtml?c=77594&p=irol-IRHome .
A taped replay will be available beginning at 11:30 a.m. EST on February
9, 2006 through midnight on February 16, 2006 by dialing 1-800-642-1687.
International callers should dial 1-706-645-9291. The replay confirmation code
is 3813277.
The Webcast of this call will be archived on our site at:
http://phx.corporate-ir.net/phoenix.zhtml?c=77594&p=irol-audioArchives .
Business Outlook
In light of the significant growth initiatives presented by EarthLink's
current and proposed investments in municipal Wi-Fi broadband, voice, and SME
services, as well as its investment in the wireless joint-venture, HELIO,
EarthLink's and HELIO's executive teams will host a half-day meeting with the
investment community on February 23, 2006 in New York, New York. The purpose
of this meeting is to present and discuss these strategic initiatives and
EarthLink's narrowband and broadband access operations. Executives presenting
for EarthLink will include Garry Betty - chief executive officer; Don Berryman
- president, municipal networks; Kevin Dotts - chief financial officer; Mike
Lunsford - president, access and voice; and Bill Heys - president, small to
medium enterprises. Presenting for HELIO will be Sky Dayton - chief executive
officer; and Todd Tappin - chief financial officer.
At this event, management also expects to provide and discuss first
quarter and full-year 2006 guidance reflecting these opportunities and
investments.
The investment community meeting is scheduled to begin at 8:00 a.m. EST on
February 23, 2006, and is expected to conclude at approximately 12:30 p.m.
EST. For investment community professionals interested in attending, the
meeting will be held at:
The Sofitel, New York
45 West 44th Street
New York, New York 10036
If you would like to attend, please respond to Mike Gallentine - vice
president, investor relations, at gallentineml@corp.earthlink.net indicating
your expected attendance. Due to space constraints, attendance will be limited
to the first 100 investment community professionals responding.
Investors in the U.S. and Canada interested in listening to the
presentations on February 23, 2006 may dial (800) 706-0730 and reference the
EarthLink investment community meeting. Other international investors may dial
(706) 634-5173 and also reference the EarthLink Investment Community meeting.
EarthLink recommends dialing into the call approximately 10 minutes prior to
the scheduled start time.
A listen-only audio with powerpoint slides of the meeting will be
available at:
https://www.livemeeting.com/cc/vcc-ic01/join?id=ic01-
EarthLink+Meeting&role=attend&pw=EarthLink+Meeting.
(Due to length of URL, please cut and paste into browser)
Subject: EarthLink Investment Community Meeting
Meeting URL: https://www.livemeeting.com/cc/vcc-ic01/join
Meeting ID: ic01-EarthLink Meeting
Meeting Key: EarthLink Meeting
FIRST TIME USERS: Install the Windows-based Meeting Console before the
meeting:
http://r.office.microsoft.com/r/rlidLiveMeeting?p1=7&p2=en_US&p3=LMInfo&p4=Dow
nloadWindowsConsole.
(Due to length of URL, please cut and paste into browser)
A taped audio-only replay will be available beginning at 3:00 p.m. EST on
February 23, 2006 through midnight on March 2, 2006 by dialing (800) 642-1687.
International callers should dial (706) 645-9291. The replay confirmation code
is 4109599.
The Webcast of the audio portion of the investment community meeting will
be archived on EarthLink's site at:
http://phx.corporate-ir.net/phoenix.zhtml?c=77594&p=irol-audioArchives.
A news release outlining 2006 guidance and the topics to be discussed at
the meeting will be issued at 5:00 p.m. EST on February 22 and will be posted
on EarthLink's website at:
http://phx.corporate-ir.net/phoenix.zhtml?c=77594&p=irol-news.
About EarthLink
"EarthLink. We revolve around you(tm)." As the nation's next generation
Internet service provider, Atlanta-based EarthLink has earned an
award-winning reputation for outstanding customer service and its suite of
online products and services. Serving over five million subscribers,
EarthLink offers what every user should expect from their Internet
experience: high-quality connectivity, minimal online intrusions and
customizable features. Whether it's dial-up, high-speed, voice, web hosting,
wireless or "EarthLink Extras" like home networking or security, EarthLink
connects people to the power and possibilities of the Internet. Learn more
about EarthLink by calling (800) EARTHLINK or visiting EarthLink's Web site
at http://www.EarthLink.net. <http://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 we may
be unable to successfully enhance existing or develop new products and
services in a cost-effective manner to meet customer demand in the rapidly
evolving market for Internet, wireless and wireline communications services,
including new products and services offered in connection with our voice and
municipal broadband network initiatives; (2) that we may not realize the
benefits we are seeking from our investments in the HELIO joint venture with
SK Telecom Co., Ltd. or our other investment activities, as a result of lower
than predicted revenues or subscriber levels of the companies in which we
invest, larger funding requirements for those companies or otherwise; (3) that
our service offerings may fail to be competitive with existing and new
competitors; (4) that competitive product, price or marketing pressures could
cause us to lose existing customers to competitors, or may cause us to reduce
prices for our services which would adversely impact average revenue per user;
(5) that we may experience significant fluctuations in our operating results
and rate of growth and may not be able to sustain profitability; (6) that we
may not be successful in making and integrating acquisitions and investments
into our business, which would result in operating difficulties; (7) that the
continued decline of our narrowband revenues may adversely affect us; (8) that
we may not be able to successfully implement our broadband strategy which
would materially and adversely affect our subscriber growth rates, future
overall revenues and profitability; (9) that we may be unable to maintain or
increase our customer levels if integrated local exchange carriers and cable
companies do not provide last mile broadband access to us on a wholesale basis
or on terms or at prices that allow us to grow and be profitable in the
broadband market, especially as a result of the recent U.S. Supreme Court
ruling and FCC order concerning wholesale broadband access; (10) that our
commercial and alliance arrangements, including marketing arrangements with
Sprint and Dell, may be terminated or may not be as beneficial to us as we
anticipate; (11) that the market for VoIP services may not develop as
anticipated; (12) that we may not generate the returns anticipated on our
investments to construct and deploy municipal wireless broadband networks;
(13) that our third-party network providers may be unable or unwilling to
provide Internet, wireline and wireless telecommunications access; (14) that
our dependence on a limited number of third parties to provide equipment and
services may adversely impact our ability to procure equipment and services;
(15) that our third-party providers for technical and customer support and
billing services may be unable to provide these services on an economical
basis or at all; (16) that service interruptions or impediments could harm our
business; (17) that business failures in the telecommunications industry may
inhibit our ability to manage our costs; (18) that government regulations
could force us to change our business practices; (19) that we may be unable
to protect our proprietary technologies or successfully defend infringement
claims and that we may be required to enter licensing arrangements on
unfavorable terms; (20) 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; (21) that
we could face substantial liabilities if we are unable to successfully defend
against legal actions; (22) that we may not be able to continually develop
effective business systems, processes and personnel to support our business;
(23) that we may be unable to hire and retain qualified personnel, including
our key executive officers; (24) that our stock price has been volatile and
may continue to be volatile; (25) that provisions in our certificate of
incorporation, bylaws and shareholder rights plan could limit our share price
and delay a change of management; and (26) that some other unforeseen
difficulties may occur. This list is intended to identify some of the
principal factors that could cause actual results to differ materially from
those described in the forward-looking statements included herein. These
factors are not intended to represent a complete list of all risks and
uncertainties inherent in the company's business, and should be read in
conjunction with the more detailed cautionary statements and risk factors
included in EarthLink's filings with the Securities and Exchange Commission.
Consolidated Financial Highlights
Three Months Ended Twelve Months Ended
December 31, December 31,
2004 2005 2004 2005
(dollars in thousands, except per share data)
Statement of Operations Data
Revenues:
Narrowband access $208,559 $172,337 $874,010 $742,757
Broadband access 106,177 111,354 419,411 441,736
Web hosting 11,226 9,595 47,547 40,670
Advertising and other value-
added services 12,116 19,362 41,234 64,909
Total revenues 338,078 312,648 1,382,202 1,290,072
Operating costs and expenses:
Telecommunications service
and equipment costs 101,798 87,637 431,162 366,654
Sales incentives 2,331 1,579 10,040 8,323
Total cost of revenues 104,129 89,216 441,202 374,977
Sales and marketing 105,279 98,923 417,250 390,172
Operations and customer
support 60,476 55,178 255,192 233,907
General and administrative 26,669 29,845 105,043 112,173
Acquisition-related
amortization 4,946 2,599 24,363 12,267
Facility exit and
restructuring costs (1) (597) 72 28,394 2,080
Total operating costs and
expenses 300,902 275,833 1,271,444 1,125,576
Income from operations 37,176 36,815 110,758 164,496
Gain (loss) on investments in
other companies, net (694) 440 (1,420) 2,877
Net losses of equity affiliate - (8,674) - (15,608)
Interest income and other, net 1,801 4,280 6,131 13,491
Income before income taxes 38,283 32,861 115,469 165,256
Provision for income taxes (2) 2,694 3,711 4,460 22,476
Net income $35,589 $29,150 $111,009 $142,780
Basic net income per share $0.24 $0.22 $0.72 $1.04
Diluted net income per share $0.23 $0.22 $0.70 $1.02
Basic weighted average common
shares outstanding 149,233 131,008 154,233 137,080
Diluted weighted average
common shares outstanding 153,665 134,687 157,815 139,950
Other Financial Data
Net Earnings Before Facility Exit and Restructuring Costs
(a non-GAAP measure) (3):
Net income $35,589 $29,150 $111,009 $142,780
Facility exit and
restructuring costs (1) (597) 72 28,394 2,080
Net earnings before facility
exit and restructuring
costs (3) $34,992 $29,222 $139,403 $144,860
Diluted earnings per share
before facility exit and
restructuring costs (3) $0.23 $0.22 $0.88 $1.04
Earnings Before Interest; Income Taxes; Depreciation and Amortization; Net
Losses of Equity Affiliate; Gain (Loss) on Investments in Other Companies,
Net; and Facility Exit and Restructuring Costs (Adjusted EBITDA, a non-
GAAP measure) (3):
Reconciliation of net income
to Adjusted EBITDA (3):
Net income $35,589 $29,150 $111,009 $142,780
Provision for income taxes (2) 2,694 3,711 4,460 22,476
Depreciation and amortization 17,214 10,434 79,219 47,138
Gain (loss) on investments
in other companies, net 694 (440) 1,420 (2,877)
Net losses of equity affiliate - 8,674 - 15,608
Interest income and other, net (1,801) (4,280) (6,131) (13,491)
Facility exit and
restructuring costs (1) (597) 72 28,394 2,080
Adjusted EBITDA (3) $53,793 $47,321 $218,371 $213,714
Depreciation and amortization:
Depreciation - cost of
revenues $6,588 $4,631 $27,313 $18,907
Depreciation - other 5,680 3,204 27,543 15,964
Acquisition-related
amortization 4,946 2,599 24,363 12,267
Depreciation and
amortization $17,214 $10,434 $79,219 $47,138
Gross Margins Before Sales Incentives (a non-GAAP measure) (3):
Total revenues $338,078 $312,648 $1,382,202 $1,290,072
Total cost of revenues 104,129 89,216 441,202 374,977
Sales incentives (2,331) (1,579) (10,040) (8,323)
Telecommunications service
and equipment costs 101,798 87,637 431,162 366,654
Gross margins before sales
incentives (3) $236,280 $225,011 $951,040 $923,418
Gross margins before sales
incentives as a percentage
of total revenues 69.9% 72.0% 68.8% 71.6%
Free Cash Flow (a non-GAAP measure) (3):
Reconciliation of income from
operations to free cash flow (3):
Income from operations $37,176 $36,815 $110,758 $164,496
Facility exit and
restructuring costs (1) (597) 72 28,394 2,080
Depreciation and amortization 17,214 10,434 79,219 47,138
Purchases of property and
equipment (8,425) (7,220) (29,890) (33,879)
Purchases of subscriber bases (435) (1,884) (2,419) (6,690)
Free cash flow (3) $44,933 $38,217 $186,062 $173,145
Other Data
December 31, September 30, December 31,
2004 2005 2005
Key Operating Data:
Narrowband subscribers 3,880,000 3,650,000 3,580,000
Broadband subscribers 1,364,000 1,544,000 1,608,000
Web hosting accounts 144,000 131,000 127,000
Total subscriber count at end of
period 5,388,000 5,325,000 5,315,000
Number of employees at end of
period (4) 2,067 1,823 1,732
December 31, September 30, December 31,
2004 2005 2005
(in thousands)
Balance Sheet Data:
Cash and marketable securities $530,970 $400,911 $422,119
Stockholders' equity 547,607 490,191 521,864
Footnotes
1. During the quarter ended March 31, 2004, EarthLink executed a plan
to restructure and streamline its contact center operations. In
connection with the plan, EarthLink closed contact center operations in
Harrisburg, Pennsylvania; Roseville, California; San Jose, California;
and Pasadena, California and reduced its contact center operations in
Atlanta, Georgia. Approximately 1,140 employees were directly impacted,
primarily customer support personnel. As a result of the plan,
EarthLink recorded facility exit costs of $30.2 million during the
quarter ended March 31, 2004.
During the quarter ended September 30, 2005, EarthLink executed plans
to further streamline operations by outsourcing certain contact center
and credit and collections activities. Approximately 227 employees were
directly impacted. As a result of the plans, EarthLink recorded
restructuring costs of $1.3 million for severance and personnel related
costs.
EarthLink evaluates and adjusts its estimates for facility exit and
restructuring costs as events occur. Such changes are recorded as
facility exit and restructuring costs. The components of facility exit
and restructuring costs for the periods indicated were as follows:
Three Twelve
Months Ended Months Ended
Dec. 31, Dec. 31, Dec. 31, Dec. 31,
2004 2005 2004 2005
(in thousands)
Severance and personnel related
costs $(61) $60 $10,606 $1,403
Real estate and
telecommunications costs (536) 12 9,223 677
Abandoned and disposed assets - - 8,565 -
Total facility exit costs $(597) $72 $28,394 $2,080
2. The provision for income taxes during the three and twelve months
ended December 31, 2005 consisted of $1.0 million and $5.4 million
state income and federal and state alternative minimum tax ("AMT")
amounts due, respectively, and the AMT was payable primarily due to the
net operating loss carryforward limitations associated with the AMT
calculation. The provision for income taxes during the three and twelve
months ended December 31, 2005 also included non-cash, deferred tax
provisions of $2.7 million and $17.1 million, respectively, associated
with the utilization of net operating loss carryforwards which were
acquired in connection with the acquisitions of OneMain.com, Inc.,
PeoplePC Inc. and Cidco Incorporated.
EarthLink continues to maintain a valuation allowance against its
unrealized deferred tax assets, and EarthLink may recognize deferred
tax assets in future periods when they are estimated to be realizable.
To the extent EarthLink reports income in future periods, EarthLink
intends to use its net operating loss carryforwards to the extent
available to offset taxable income and reduce cash outflows for income
taxes.
3. Net earnings before facility exit and restructuring costs, including
the related diluted per share amounts; earnings before interest
income and expense, income taxes, depreciation and amortization
(EBITDA), and net losses of equity affiliate, gain on investments in
other companies, net, and facility exit and restructuring costs
(Adjusted EBITDA); and free cash flow are non-GAAP measures and are not
determined in accordance with U.S. generally accepted accounting
principles. These financial performance measures are not indicative of
cash provided or used by operating activities and may differ from
comparable information provided by other companies, and they should not
be considered in isolation, as an alternative to, or more meaningful
than measures of financial performance determined in accordance with
U.S. generally accepted accounting principles. These financial
performance measures are commonly used in the industry and are
presented because EarthLink believes they provide relevant and useful
information to investors. EarthLink utilizes these financial
performance measures to assess its ability to meet future capital
expenditures and working capital requirements, to incur indebtedness if
necessary, and to fund continued growth. EarthLink also uses these
financial performance measures to evaluate the performance of its
business, for budget planning purposes and as factors in its employee
compensation programs. Since the elements of these financial
performance measures are determined using the accrual basis of
accounting and exclude the effects of certain capital, financing,
acquisition-related, and facility exit and restructuring costs,
investors should use them to analyze and compare companies on the basis
of current period operating performance.
Gross margins before sales incentives is also a non-GAAP measure and
is not determined in accordance with U.S. generally accepted accounting
principles. EarthLink utilizes and has presented gross margins before
sales incentives to allow investors to analyze margins on direct
telecommunications service and equipment costs incurred to generate
revenues. Gross margins before sales incentives 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 and may differ materially from
comparable information provided by other companies.
4. Represents full-time equivalents.
PRESS BY MONTH
EDITOR'S DESK
SUBMIT PRESS
