ATLANTA, Feb. 19, 2014
/PRNewswire/ -- EarthLink Holdings Corp. (NASDAQ: ELNK) today
announced financial results for its fourth quarter and full year
ended December 31, 2013.
Highlights for the fourth quarter include:
- Revenues of $301.8 million
- Net loss of $(279.9) million or
$(2.75) per share (which includes a
$266.3 million non-cash charge to
establish a valuation allowance against deferred tax assets)
- Net loss per share, excluding valuation allowance (a non-GAAP
measure), of $(0.13) per share.
- Adjusted EBITDA (a non-GAAP measure) of $50.1 million
- Net cash provided by operating activities of $40.7 million
- Unlevered Free Cash Flow (a non-GAAP measure) of $16.2 million
- Ending cash balance of $116.6
million
"I am excited to be a part of EarthLink. The company has many
things going for it, including a fantastic customer base, a strong
set of capabilities across information communications and
technology, momentum penetrating the mid-market with technology
solutions and managed services, and the best employees in the
industry," said EarthLink Chief Executive Officer and President
Joseph F. Eazor. "However, we have a
lot of work to do. With a disciplined operational focus, I'm
confident we will improve our business performance."
Financial and Operating Results
EarthLink reported revenue of $301.8
million for the fourth quarter of 2013 and $1.24 billion for the full year 2013. Business
services segment revenue comprised 78% of EarthLink's revenue in
the fourth quarter of 2013. EarthLink's retail emerging
services reached an approximate $328
million annualized revenue run rate in the fourth quarter of
2013. EarthLink's consumer segment churn was a record low of 2.0%
for the fourth quarter of 2013, compared to 2.2% in the third
quarter of 2013 and 2.2% in the fourth quarter of 2012.
Broadband services comprised 70% of consumer access revenue in the
fourth quarter of 2013.
EarthLink's selling, general and administrative expenses were
$105.6 million, or 35% of revenue,
for the fourth quarter of 2013, and $426.1
million, or 34% of revenue, for the full year 2013. This
compares to expenses of $109.1
million, or 33% of revenue, for the fourth quarter of 2012
and $429.1 million, or 32% of
revenue, for the full year 2012.
Profitability and Other Financial Measures
EarthLink reported a net loss of $(279.9)
million, or $(2.75) per share,
in the fourth quarter of 2013 and a net loss of $(538.8) million, or $(5.25) per share, for the full year 2013. These
compared to net income of $0.0
million, or $0.00 per share,
in the fourth quarter of 2012 and $7.5
million, or $0.07 per share,
for the full year 2012. The net loss for the fourth quarter and
full year 2013 includes a $266.3
million non-cash charge to establish a valuation allowance
against deferred tax assets. The net loss for the full year 2013
includes a $256.7 million pre-tax
non-cash impairment charge to goodwill.
EarthLink generated Adjusted EBITDA (a non-GAAP measure, see
definition in "Non-GAAP Measures" below) of $50.1 million in the fourth quarter of 2013 and
$227.1 million for the full year
2013. Included in the company's fourth quarter 2013 results was
approximately $4 million of favorable
dispute and legal settlements, primarily within general and
administrative expenses. The company reported Adjusted EBITDA of
$67.2 million in the fourth quarter
of 2012 and $283.9 million for the
full year 2012. Included in the company's fourth quarter 2012
results was approximately $10 million
of favorable dispute settlements.
Balance Sheet and Cash Flow
Net cash provided by operating activities was $40.7 million in the fourth quarter of 2013 and
$124.2 million for the full year
2013. This compared to net cash provided by operating activities of
$12.5 million in the fourth quarter
of 2012 and $191.1 million for the
full year 2012.
EarthLink generated Unlevered Free Cash Flow (a non-GAAP
measure, see definition in "Non-GAAP Measures" below) of
$16.2 million during the fourth
quarter of 2013 and $83.5 million for
the full year 2013. This compared to Unlevered Free Cash Flow of
$0.1 million during the fourth
quarter of 2012 and $136.5 million
for the full year 2012. EarthLink's capital expenditures were
$34.0 million for the fourth quarter
of 2013 and $143.6 million for the
full year 2013. The company made $5.1
million of dividend payments to shareholders in the fourth
quarter of 2013 for a total of $20.8
million of dividend payments to shareholders during the full
year 2013. EarthLink repurchased 1.2 million shares of common stock
at an average price of $5.02 per
share for the full year 2013.
As of December 31, 2013, the
company had cash of $116.6
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 financial guidance for the full year
2014. Management expects revenue of $1.160
to $1.180 billion; Adjusted EBITDA of $180 million to $195 million; capital
expenditures of $125 million to $135
million; and net loss of $(85)
million to $(95) million for
the full year 2014.
Other Matters
Today, EarthLink also announced that Rolla
P. Huff will retire from the Board of Directors effective on
February 21, 2014. The Board
has appointed current director Dr. Julie A.
Shimer to succeed Huff as interim Chairman of the
Board. Additionally, Marce
Fuller announced her retirement from the Board of Directors
effective upon the election of directors at the 2014 Annual Meeting
of Stockholders. Fuller has served on the EarthLink Board
since October 2001. EarthLink has scheduled its 2014 Annual
Meeting of Stockholders for Tuesday, April
29, 2014 at its Atlanta, GA
headquarters.
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, restructuring,
acquisition and integration-related costs, and loss from
discontinued operations, net of tax. 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,
restructuring, acquisition and integration-related costs, and loss
from discontinued operations, net of tax, less cash used for
purchases of property and equipment. Net Loss Excluding Valuation
Allowance is defined as net loss excluding the non-cash charge to
record valuation allowance against deferred tax assets.
Adjusted EBITDA, Unlevered Free Cash Flow and Net Loss Excluding
Valuation Allowance 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 5 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, February 20, 2014, at
8:30 a.m. ET hosted by EarthLink's
Chief Executive Officer and President Joseph F. Eazor and Chief Financial Officer
Bradley A. Ferguson.
Dial-in Number: 855-590-8814
Participants should reference the conference ID number 46365767 or
"EarthLink's 4th 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
A webcast replay will be available from 11:30 a.m. ET on February
20 through midnight on February 27,
2014. Dial toll-free 855-859-2056. The replay confirmation
code is 46365767. The Webcast will be archived on the company's
website at: http://ir.earthlink.net/events.cfm.
About EarthLink
Founded in 1994, EarthLink (NASDAQ:
ELNK) is a leading IT services and communications provider,
empowering businesses with a fully-managed, end-to-end
communications, IT and virtualization portfolio including cloud
computing, IT security, colocation, enterprise-class hosted
applications and IT support services. EarthLink operates an over
28,000 fiber route mile network, with 90 metro fiber rings and 8
secure data centers providing ubiquitous nationwide data and voice
IP service coverage. EarthLink's service and product innovation
enables the company to design scalable solutions specific to each
client's IT needs, supported by an experienced customer care
team. The company also offers award-winning high-speed,
wireless and dial-up Internet services to residential customers
across the U.S. For more information, visit
www.earthlinkbusiness.com or follow @EarthLinkBiz.
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 a leading IT services and communications
provider, which could adversely affect our results of operations
and cash flows; (2) that we may not be able to grow revenues from
our growth products and services to offset declining revenues from
our traditional products and services, which could adversely affect
our results of operations and cash flows; (3) that our failure to
achieve operating efficiencies will adversely affect our results of
operations; (4) that as a result of our continuing review of our
business, we may have to undertake further restructuring plans that
would require additional charges, including incurring facility exit
and restructuring charges; (5) that we may be unsuccessful
integrating acquisitions into our business, which could result in
operating difficulties, losses and other adverse consequences; (6)
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; (7) that unfavorable general
economic conditions could harm our business; (8) that we may be
unable to successfully identify, manage and assimilate future
acquisitions, which could adversely affect our results of
operations; (9) that we face significant competition in the
communications and IT services industry that could reduce our
profitability; (10) that failure to retain existing customers could
adversely affect our results of operations and cash flows; (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) 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 will
adversely affect our results of operations; (23) that potential
regulation of Internet service providers could adversely affect our
operations; (24) that cyber security breaches could harm our
business; (25) that privacy concerns relating to our business could
damage our reputation and deter current and potential users from
using our services; (26) that interruption or failure of our
network, information systems or other technologies could impair our
ability to provide our services, which could damage our reputation
and harm our operating results; (27) that our business depends on
effective business support systems and processes; (28) 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; (29) 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; (30) that we may not be able to protect our
intellectual property; (31) 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; (32) that
government regulations could adversely affect our business or force
us to change our business practices; (33) that our business may
suffer if third parties are unable to provide services or terminate
their relationships with us; (34) 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; (35) that we may not realize our deferred tax
assets, we may have exposure to greater than anticipated tax
liabilities and we may be limited in the use of our net operating
losses and certain other tax attributes in the future; (36) that
our indebtedness could adversely affect our financial health and
limit our ability to react to changes in our industry; (37) that we
may require substantial capital to support business growth, and
this capital may not be available to us on acceptable terms, or at
all; (38) that our debt agreements include restrictive covenants,
and failure to comply with these covenants could trigger
acceleration of payment of outstanding indebtedness; (39) that we
may reduce, or cease payment of, quarterly cash dividends; (40)
that our stock price may be volatile; (41) that provisions of our
certificate of incorporation, bylaws and other elements of our
capital structure could limit our share price and delay a change of
control of the company; and (42) that our bylaws designate the
Court of Chancery of the State of
Delaware as the sole and exclusive forum for certain types
of actions and proceedings that may be initiated by our
stockholders, which could limit our stockholders' flexibility in
obtaining a judicial forum for disputes with us or our directors,
officers or employees. 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 HOLDINGS
CORP.
Unaudited
Condensed Consolidated Statements Of Operations
(in thousands,
except per share data)
|
|
|
Three Months
Ended
|
|
Twelve Months
Ended
|
|
December 31,
|
|
December
31,
|
|
2012
|
|
2013
|
|
2012
|
|
2013
|
|
|
|
|
|
|
|
|
|
Revenues
|
$
|
328,726
|
|
|
$
|
301,839
|
|
|
$
|
1,335,135
|
|
|
$
|
1,240,606
|
|
|
Operating costs and
expenses:
|
|
|
|
|
|
|
|
|
Cost of revenues
(exclusive of depreciation and amortization
shown
separately below)
|
154,672
|
|
|
150,178
|
|
|
632,616
|
|
|
600,742
|
|
|
Selling, general and
administrative (exclusive of depreciation and
amortization shown separately below)
|
109,126
|
|
|
105,601
|
|
|
429,087
|
|
|
426,070
|
|
|
Depreciation and
amortization
|
46,362
|
|
|
48,800
|
|
|
183,165
|
|
|
183,114
|
|
|
Impairment of
goodwill (1)
|
—
|
|
|
—
|
|
|
—
|
|
|
255,599
|
|
|
Restructuring,
acquisition and integration-related costs (2)
|
4,508
|
|
|
11,562
|
|
|
18,244
|
|
|
40,030
|
|
|
Total operating costs
and expenses
|
314,668
|
|
|
316,141
|
|
|
1,263,112
|
|
|
1,505,555
|
|
|
Income (loss) from
operations
|
14,058
|
|
|
(14,302)
|
|
|
72,023
|
|
|
(264,949)
|
|
|
Interest expense and
other, net
|
(15,157)
|
|
|
(13,972)
|
|
|
(63,416)
|
|
|
(60,686)
|
|
|
Income (loss) from
continuing operations before income taxes
|
(1,099)
|
|
|
(28,274)
|
|
|
8,607
|
|
|
(325,635)
|
|
|
Income tax benefit
(provision) (3)
|
1,809
|
|
|
(251,260)
|
|
|
1,331
|
|
|
(211,231)
|
|
|
Income (loss) from
continuing operations
|
710
|
|
|
(279,534)
|
|
|
9,938
|
|
|
(536,866)
|
|
|
Loss from
discontinued operations, net of tax (4)
|
(719)
|
|
|
(339)
|
|
|
(2,418)
|
|
|
(1,961)
|
|
|
Net income
(loss)
|
$
|
(9)
|
|
|
$
|
(279,873)
|
|
|
$
|
7,520
|
|
|
$
|
(538,827)
|
|
|
|
|
|
|
|
|
|
|
Basic net income
(loss) per share
|
|
|
|
|
|
|
|
|
Continuing
operations
|
$
|
0.01
|
|
|
$
|
(2.74)
|
|
|
$
|
0.09
|
|
|
$
|
(5.23)
|
|
|
Discontinued
operations
|
(0.01)
|
|
|
—
|
|
|
(0.02)
|
|
|
(0.02)
|
|
|
Basic net income
(loss) per share
|
$
|
—
|
|
|
$
|
(2.75)
|
|
|
$
|
0.07
|
|
|
$
|
(5.25)
|
|
|
Basic weighted
average common shares outstanding
|
103,393
|
|
|
101,901
|
|
|
105,221
|
|
|
102,599
|
|
|
|
|
|
|
|
|
|
|
Diluted net income
(loss) per share
|
|
|
|
|
|
|
|
|
Continuing
operations
|
$
|
0.01
|
|
|
$
|
(2.74)
|
|
|
$
|
0.09
|
|
|
$
|
(5.23)
|
|
|
Discontinued
operations
|
(0.01)
|
|
|
—
|
|
|
(0.02)
|
|
|
(0.02)
|
|
|
Diluted net income
(loss) per share
|
$
|
—
|
|
|
$
|
(2.75)
|
|
|
$
|
0.07
|
|
|
$
|
(5.25)
|
|
|
Diluted weighted
average common shares outstanding
|
103,393
|
|
|
101,901
|
|
|
105,983
|
|
|
102,599
|
|
|
|
|
|
|
|
|
|
|
Dividends declared
per share
|
$
|
0.05
|
|
|
$
|
0.05
|
|
|
$
|
0.20
|
|
|
$
|
0.20
|
|
|
EARTHLINK HOLDINGS
CORP.
Unaudited
Condensed Consolidated Balance Sheets
(in thousands,
except per share data)
|
|
|
December 31,
2012
|
|
December 31,
2013
|
|
ASSETS
|
|
Current
assets:
|
|
|
|
|
Cash and cash
equivalents
|
$
|
157,621
|
|
|
$
|
116,636
|
|
|
Marketable
securities
|
42,073
|
|
|
—
|
|
|
Restricted
cash
|
1,013
|
|
|
—
|
|
|
Accounts receivable,
net of allowance of $7,872 and $8,615 as of December 31,
2012
and
2013, respectively
|
112,765
|
|
|
100,792
|
|
|
Prepaid
expenses
|
17,171
|
|
|
15,945
|
|
|
Deferred income
taxes, net
|
15,954
|
|
|
549
|
|
|
Other current
assets
|
20,303
|
|
|
13,930
|
|
|
Total current
assets
|
366,900
|
|
|
247,852
|
|
|
Long-term marketable
securities
|
4,778
|
|
|
—
|
|
|
Property and
equipment, net
|
418,966
|
|
|
438,321
|
|
|
Long-term deferred
income taxes, net
|
195,012
|
|
|
—
|
|
|
Goodwill
|
379,415
|
|
|
139,215
|
|
|
Other intangible
assets, net
|
214,685
|
|
|
155,428
|
|
|
Other long-term
assets
|
19,654
|
|
|
26,502
|
|
|
Total
assets
|
$
|
1,599,410
|
|
|
$
|
1,007,318
|
|
|
LIABILITIES AND
STOCKHOLDERS' EQUITY
|
|
Current
liabilities:
|
|
|
|
|
Accounts
payable
|
$
|
18,792
|
|
|
$
|
33,440
|
|
|
Accrued payroll and
related expenses
|
31,003
|
|
|
35,041
|
|
|
Other accrued
liabilities
|
129,572
|
|
|
88,225
|
|
|
Deferred
revenue
|
51,690
|
|
|
49,689
|
|
|
Current portion of
long-term debt and capital lease obligations
|
1,375
|
|
|
1,489
|
|
|
Total current
liabilities
|
232,432
|
|
|
207,884
|
|
|
Long-term debt and
capital lease obligations
|
614,890
|
|
|
606,442
|
|
|
Long-term deferred
income taxes, net
|
—
|
|
|
2,221
|
|
|
Other long-term
liabilities
|
33,284
|
|
|
28,553
|
|
|
Total
liabilities
|
880,606
|
|
|
845,100
|
|
|
Stockholders'
equity:
|
|
|
|
|
Preferred stock,
$0.01 par value, 100,000 shares authorized, 0 shares issued
and
outstanding as of December 31, 2012 and 2013
|
—
|
|
|
—
|
|
|
Common stock, $0.01
par value, 300,000 shares authorized, 196,919 and
197,491
shares
issued as of December 31, 2012 and 2013, respectively, and 102,739
and
101,876
shares outstanding as of December 31, 2012 and 2013,
respectively
|
1,969
|
|
|
1,975
|
|
|
Additional paid-in
capital
|
2,057,974
|
|
|
2,047,607
|
|
|
Accumulated
deficit
|
(606,148)
|
|
|
(1,144,975)
|
|
|
Treasury stock, at
cost, 94,180 and 95,615 shares as of December 31, 2012 and
2013,
respectively
|
(735,003)
|
|
|
(742,389)
|
|
|
Accumulated other
comprehensive income
|
12
|
|
|
—
|
|
|
Total stockholders'
equity
|
718,804
|
|
|
162,218
|
|
|
Total liabilities and
stockholders' equity
|
$
|
1,599,410
|
|
|
$
|
1,007,318
|
|
|
EARTHLINK HOLDINGS
CORP.
Reconciliation of
Net Income (Loss) to Adjusted EBITDA (5)
(in
thousands)
|
|
|
Three Months
Ended
|
|
Twelve Months
Ended
|
|
December
31,
|
|
September
30,
|
|
December
31,
|
|
December
31,
|
|
December
31,
|
|
2012
|
|
2013
|
|
2013
|
|
2012
|
|
2013
|
|
|
|
|
|
|
|
Net income
(loss)
|
$
|
(9)
|
|
|
$
|
(11,338)
|
|
|
$
|
(279,873)
|
|
|
$
|
7,520
|
|
|
$
|
(538,827)
|
|
|
Interest expense and
other, net
|
15,157
|
|
|
13,985
|
|
|
13,972
|
|
|
63,416
|
|
|
60,686
|
|
|
Income tax provision
(benefit) (3)
|
(1,809)
|
|
|
(4,582)
|
|
|
251,260
|
|
|
(1,331)
|
|
|
211,231
|
|
|
Depreciation and
amortization
|
46,362
|
|
|
46,689
|
|
|
48,800
|
|
|
183,165
|
|
|
183,114
|
|
|
Stock-based
compensation expense
|
2,259
|
|
|
1,238
|
|
|
4,057
|
|
|
10,462
|
|
|
13,275
|
|
|
Impairment of
goodwill (1)
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
255,599
|
|
|
Restructuring,
acquisition and integration-related costs (2)
|
4,508
|
|
|
9,928
|
|
|
11,562
|
|
|
18,244
|
|
|
40,030
|
|
|
Loss from
discontinued operations, net of tax (4)
|
719
|
|
|
225
|
|
|
339
|
|
|
2,418
|
|
|
1,961
|
|
|
Adjusted EBITDA
(5)
|
$
|
67,187
|
|
|
$
|
56,145
|
|
|
$
|
50,117
|
|
|
$
|
283,894
|
|
|
$
|
227,069
|
|
|
EARTHLINK HOLDINGS
CORP.
Reconciliation of
Guidance Provided in Non-GAAP Measure (5)
(in
millions)
|
|
|
Year
Ending
|
|
December 31,
2014
|
|
|
|
Net loss
|
($95) -
($85)
|
|
Interest expense and
other, net
|
57
|
|
Income tax
benefit
|
(2) - (1)
|
|
Depreciation and
amortization
|
188 - 192
|
|
Stock-based
compensation expense
|
15
|
|
Restructuring,
acquisition and integration-related costs
|
17
|
|
Adjusted EBITDA
(5)
|
$180 -
$195
|
|
EARTHLINK HOLDINGS
CORP.
Reconciliation of
Net Loss to Net Loss Excluding Valuation Allowance
(5)
(in thousands,
except per share data)
|
|
|
Three Months
Ended
|
|
Per
Share
|
|
December 31,
2013
|
|
Amount
|
|
|
|
|
|
Net loss
|
$
|
(279,873)
|
|
|
$
|
(2.75)
|
|
|
Valuation
allowance
|
266,339
|
|
|
2.61
|
|
|
Net Loss Excluding
Valuation Allowance (5)
|
$
|
(13,534)
|
|
|
$
|
(0.13)
|
|
|
|
|
|
|
EARTHLINK HOLDINGS
CORP.
Reconciliation of
Net Income (Loss) to Unlevered Free Cash Flow (5)
(in
thousands)
|
|
|
Three Months
Ended
|
|
Twelve Months
Ended
|
|
December
31,
|
|
September
30,
|
|
December
31,
|
|
December
31,
|
|
December
31,
|
|
2012
|
|
2013
|
|
2013
|
|
2012
|
|
2013
|
|
|
|
|
|
|
|
|
|
|
|
Net income
(loss)
|
$
|
(9)
|
|
|
$
|
(11,338)
|
|
|
$
|
(279,873)
|
|
|
$
|
7,520
|
|
|
$
|
(538,827)
|
|
|
Interest expense and
other, net
|
15,157
|
|
|
13,985
|
|
|
13,972
|
|
|
63,416
|
|
|
60,686
|
|
|
Income tax provision
(benefit) (3)
|
(1,809)
|
|
|
(4,582)
|
|
|
251,260
|
|
|
(1,331)
|
|
|
211,231
|
|
|
Depreciation and
amortization
|
46,362
|
|
|
46,689
|
|
|
48,800
|
|
|
183,165
|
|
|
183,114
|
|
|
Stock-based
compensation expense
|
2,259
|
|
|
1,238
|
|
|
4,057
|
|
|
10,462
|
|
|
13,275
|
|
|
Impairment of
goodwill (1)
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
255,599
|
|
|
Restructuring,
acquisition and integration-related costs (2)
|
4,508
|
|
|
9,928
|
|
|
11,562
|
|
|
18,244
|
|
|
40,030
|
|
|
Loss from
discontinued operations, net of tax (4)
|
719
|
|
|
225
|
|
|
339
|
|
|
2,418
|
|
|
1,961
|
|
|
Purchases of property
and equipment
|
(66,631)
|
|
|
(32,792)
|
|
|
(33,967)
|
|
|
(147,360)
|
|
|
(143,614)
|
|
|
Unlevered Free Cash
Flow (5)
|
$
|
556
|
|
|
$
|
23,353
|
|
|
$
|
16,150
|
|
|
$
|
136,534
|
|
|
$
|
83,455
|
|
|
EARTHLINK HOLDINGS
CORP.
Reconciliation of
Net Cash Flows from Operating Activities to Unlevered Free Cash
Flow (5)
(in
thousands)
|
|
|
Three Months
Ended
|
|
Twelve Months
Ended
|
|
December
31,
|
|
September
30,
|
|
December
31,
|
|
December
31,
|
|
December
31,
|
|
2012
|
|
2013
|
|
2013
|
|
2012
|
|
2013
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by
operating activities
|
$
|
12,527
|
|
|
$
|
39,890
|
|
|
$
|
40,726
|
|
|
$
|
191,055
|
|
|
$
|
124,156
|
|
|
Income tax provision
(benefit) (3)
|
(1,809)
|
|
|
(4,582)
|
|
|
251,260
|
|
|
(1,331)
|
|
|
211,231
|
|
|
Non-cash income
taxes
|
(911)
|
|
|
4,603
|
|
|
(253,076)
|
|
|
107
|
|
|
(212,870)
|
|
|
Interest expense and
other, net
|
15,157
|
|
|
13,985
|
|
|
13,972
|
|
|
63,416
|
|
|
60,686
|
|
|
Amortization of debt
discount, premium and issuance costs
|
475
|
|
|
(996)
|
|
|
(1,017)
|
|
|
1,945
|
|
|
(2,061)
|
|
|
Restructuring,
acquisition and integration-related costs (2)
|
4,508
|
|
|
9,928
|
|
|
11,562
|
|
|
18,244
|
|
|
40,030
|
|
|
Changes in operating
assets and liabilities
|
36,060
|
|
|
(6,910)
|
|
|
(13,612)
|
|
|
7,930
|
|
|
5,662
|
|
|
Purchases of property
and equipment
|
(66,631)
|
|
|
(32,792)
|
|
|
(33,967)
|
|
|
(147,360)
|
|
|
(143,614)
|
|
|
Other, net
|
1,180
|
|
|
227
|
|
|
302
|
|
|
2,528
|
|
|
235
|
|
|
Unlevered Free Cash
Flow (5)
|
$
|
556
|
|
|
$
|
23,353
|
|
|
$
|
16,150
|
|
|
$
|
136,534
|
|
|
$
|
83,455
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in
investing activities
|
$
|
(65,110)
|
|
|
$
|
(20,311)
|
|
|
$
|
(33,967)
|
|
|
$
|
(163,836)
|
|
|
$
|
(112,500)
|
|
|
Net cash used in
financing activities
|
$
|
(51,589)
|
|
|
$
|
(17,576)
|
|
|
$
|
(6,026)
|
|
|
$
|
(81,381)
|
|
|
$
|
(52,641)
|
|
|
EARTHLINK HOLDINGS
CORP.
Supplemental
Schedule of Segment Information (6)
(in
thousands)
|
|
|
Three Months
Ended
|
|
Twelve Months
Ended
|
|
December
31,
|
|
December
31,
|
|
2012
|
|
2013
|
|
2012
|
|
2013
|
|
|
|
|
|
|
|
|
|
Business
Services
|
|
|
|
|
|
|
|
|
Revenues
|
$
|
253,549
|
|
|
$
|
235,730
|
|
|
$
|
1,017,425
|
|
|
$
|
964,227
|
|
|
Cost of revenues
(excluding depreciation and amortization)
|
129,524
|
|
|
127,299
|
|
|
527,514
|
|
|
506,245
|
|
|
Gross
margin
|
124,025
|
|
|
108,431
|
|
|
489,911
|
|
|
457,982
|
|
|
Direct segment
operating expenses
|
84,612
|
|
|
87,980
|
|
|
332,542
|
|
|
342,630
|
|
|
Segment operating
income
|
$
|
39,413
|
|
|
$
|
20,451
|
|
|
$
|
157,369
|
|
|
$
|
115,352
|
|
|
Consumer
Services
|
|
|
|
|
|
|
|
|
Revenues
|
$
|
75,177
|
|
|
$
|
66,109
|
|
|
$
|
317,710
|
|
|
$
|
276,379
|
|
|
Cost of revenues
(excluding depreciation and amortization)
|
25,148
|
|
|
22,879
|
|
|
105,102
|
|
|
94,497
|
|
|
Gross
margin
|
50,029
|
|
|
43,230
|
|
|
212,608
|
|
|
181,882
|
|
|
Direct segment
operating expenses
|
17,177
|
|
|
12,005
|
|
|
67,526
|
|
|
50,623
|
|
|
Segment operating
income
|
$
|
32,852
|
|
|
$
|
31,225
|
|
|
$
|
145,082
|
|
|
$
|
131,259
|
|
|
Consolidated
|
|
|
|
|
|
|
|
|
Revenues
|
$
|
328,726
|
|
|
$
|
301,839
|
|
|
$
|
1,335,135
|
|
|
$
|
1,240,606
|
|
|
Cost of
revenues
|
154,672
|
|
|
150,178
|
|
|
632,616
|
|
|
600,742
|
|
|
Gross
margin
|
174,054
|
|
|
151,661
|
|
|
702,519
|
|
|
639,864
|
|
|
Direct segment
operating expenses
|
101,789
|
|
|
99,985
|
|
|
400,068
|
|
|
393,253
|
|
|
Segment operating
income
|
72,265
|
|
|
51,676
|
|
|
302,451
|
|
|
246,611
|
|
|
Depreciation and
amortization
|
46,362
|
|
|
48,800
|
|
|
183,165
|
|
|
183,114
|
|
|
Impairment of
goodwill
|
—
|
|
|
—
|
|
|
—
|
|
|
255,599
|
|
|
Restructuring,
acquisition and integration-related costs
|
4,508
|
|
|
11,562
|
|
|
18,244
|
|
|
40,030
|
|
|
Corporate operating
expenses
|
7,337
|
|
|
5,616
|
|
|
29,019
|
|
|
32,817
|
|
|
Income (loss) from
operations
|
$
|
14,058
|
|
|
$
|
(14,302)
|
|
|
$
|
72,023
|
|
|
$
|
(264,949)
|
|
|
EARTHLINK HOLDINGS
CORP.
Supplemental
Schedule of Revenue Detail
(in
thousands)
|
|
|
Three Months
Ended
|
|
Twelve Months
Ended
|
|
December
31,
|
|
December
31,
|
|
2012
|
|
2013
|
|
2012
|
|
2013
|
|
|
|
|
|
|
|
|
|
Business
Services
|
|
|
|
|
|
|
|
|
Retail
services
|
$
|
209,824
|
|
|
$
|
194,039
|
|
|
$
|
845,664
|
|
|
$
|
793,940
|
|
|
Wholesale
services
|
38,987
|
|
|
36,791
|
|
|
151,910
|
|
|
151,071
|
|
|
Other
services
|
4,738
|
|
|
4,900
|
|
|
19,851
|
|
|
19,216
|
|
|
Total
revenues
|
253,549
|
|
|
235,730
|
|
|
1,017,425
|
|
|
964,227
|
|
|
Consumer
Services
|
|
|
|
|
|
|
|
|
Access
services
|
63,091
|
|
|
54,713
|
|
|
269,533
|
|
|
231,448
|
|
|
Value-added
services
|
12,086
|
|
|
11,396
|
|
|
48,177
|
|
|
44,931
|
|
|
Total
revenues
|
75,177
|
|
|
66,109
|
|
|
317,710
|
|
|
276,379
|
|
|
Total
Revenues
|
$
|
328,726
|
|
|
$
|
301,839
|
|
|
$
|
1,335,135
|
|
|
$
|
1,240,606
|
|
|
EARTHLINK HOLDINGS
CORP.
Supplemental
Financial Data
|
|
|
December
31,
|
|
June
30,
|
|
September
30,
|
|
December
31,
|
|
2012
|
|
2013
|
|
2013
|
|
2013
|
|
Balance Sheet
Data
|
(in
thousands)
|
|
Cash and marketable
securities
|
$
|
204,472
|
|
|
$
|
141,936
|
|
|
$
|
115,903
|
|
|
$
|
116,636
|
|
|
Debt (7)
|
592,300
|
|
|
600,000
|
|
|
600,000
|
|
|
600,000
|
|
|
Stockholders'
equity
|
718,804
|
|
|
465,338
|
|
|
444,074
|
|
|
162,218
|
|
|
|
|
|
|
|
|
|
|
Employee
Data
|
|
|
|
|
|
|
|
|
Number of employees
at end of period (8)
|
3,203
|
|
|
2,999
|
|
|
3,053
|
|
|
3,035
|
|
|
EARTHLINK HOLDINGS
CORP.
Consumer Services
Operating Metrics
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31,
|
|
|
June
30,
|
|
|
September
30,
|
|
|
December
31,
|
|
|
2012
|
|
|
2013
|
|
|
2013
|
|
|
2013
|
|
|
Consumer
Subscriber Detail
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Narrowband access
subscribers
|
626,000
|
|
|
580,000
|
|
|
561,000
|
|
|
544,000
|
|
|
Broadband access
subscribers
|
513,000
|
|
|
475,000
|
|
|
452,000
|
|
|
432,000
|
|
|
Total consumer
subscribers
|
1,139,000
|
|
|
1,055,000
|
|
|
1,013,000
|
|
|
976,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
December
31,
|
|
|
June
30,
|
|
|
September
30,
|
|
|
December
31,
|
|
|
2012
|
|
|
2013
|
|
|
2013
|
|
|
2013
|
|
|
Consumer
Subscriber Activity
|
|
|
|
|
|
|
|
|
|
|
|
|
Subscribers at
beginning of period
|
1,185,000
|
|
|
1,095,000
|
|
|
1,055,000
|
|
|
1,013,000
|
|
|
Gross organic
subscriber additions
|
32,000
|
|
|
27,000
|
|
|
27,000
|
|
|
21,000
|
|
|
Churn
|
(78,000)
|
|
|
(67,000)
|
|
|
(69,000)
|
|
|
(58,000)
|
|
|
Subscribers at end of
period
|
1,139,000
|
|
|
1,055,000
|
|
|
1,013,000
|
|
|
976,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer
Metrics
|
|
|
|
|
|
|
|
|
|
|
|
|
Average consumer
subscribers (9)
|
1,161,000
|
|
|
1,075,000
|
|
|
1,034,000
|
|
|
994,000
|
|
|
ARPU (10)
|
$
|
21.57
|
|
|
$
|
21.74
|
|
|
$
|
21.91
|
|
|
$
|
22.15
|
|
|
Churn rate
(11)
|
2.2
|
%
|
|
2.1
|
%
|
|
2.2
|
%
|
|
2.0
|
%
|
|
EARTHLINK HOLDINGS
CORP.
Footnotes to
Consolidated Financial Highlights
|
|
|
|
1.
|
During the first
quarter of 2013, the Company recognized a $256.7 million non-cash
impairment charge to goodwill related to its Business Services
reporting unit, of which $255.6 million is included in continuing
operations and $1.1 million is reflected in discontinued
operations. 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
December 31,
|
|
Twelve Months
Ended December 31,
|
|
2012
|
|
2013
|
|
2012
|
|
2013
|
|
|
|
|
|
|
|
|
|
Integration-related
costs
|
$
|
3,508
|
|
|
$
|
5,944
|
|
|
$
|
10,452
|
|
|
$
|
21,622
|
|
|
Severance, retention
and other employee costs
|
956
|
|
|
5,126
|
|
|
6,067
|
|
|
14,844
|
|
|
Transaction-related
costs
|
33
|
|
|
36
|
|
|
1,399
|
|
|
1,021
|
|
|
Facility-related
costs
|
(12)
|
|
|
456
|
|
|
479
|
|
|
2,328
|
|
|
Legacy plan
restructuring costs
|
23
|
|
|
—
|
|
|
(153)
|
|
|
215
|
|
|
Restructuring,
acquisition and integration-related
costs
|
$
|
4,508
|
|
|
$
|
11,562
|
|
|
$
|
18,244
|
|
|
$
|
40,030
|
|
|
Restructuring,
acquisition and integration-related costs consist of costs related
to restructuring, acquisition and integration-related activities.
Such costs include: 1) integration-related costs, such as system
conversion, rebranding costs and integration-related consulting and
employee costs; 2) severance, retention and other employee
termination costs associated with acquisition and integration
activities and with certain voluntary employee separations; 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. The Company
expects to incur restructuring, acquisition and integration-related
costs of approximately $7 million in the first quarter of 2014 and
$17 million for the full year 2014. The Company expects these costs
to generally decline throughout the year.
|
|
|
|
3.
|
The income tax
provision for the three and twelve months ended December 31, 2013,
includes a $266.3 million non-cash charge to record a valuation
allowance against the Company's deferred tax assets. During the
fourth quarter of 2013, the Company determined it will not be able
to fully realize its deferred tax assets in the future.
|
|
|
|
4.
|
The operating results
of the Company's telecom systems business acquired as part of
ITC^DeltaCom have been separately presented as discontinued
operations for all periods presented. On August 2, 2013, the
Company sold its ITC^DeltaCom telecom systems business. The Company
has no significant continuing involvement in the operations or
significant continuing direct cash flows. The telecom systems
results of operations were previously included in the Company's
Business Services segment.
|
|
|
|
5.
|
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,
restructuring, acquisition and integration-related costs, and loss
from discontinued operations, net of tax. 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, restructuring, acquisition and
integration-related costs, and loss from discontinued operations,
net of tax, less cash used for purchases of property and equipment.
Net Loss Excluding Valuation Allowance is defined as net loss
excluding the non-cash charge to record a valuation allowance
against deferred tax assets.
|
|
|
|
Adjusted EBITDA,
Unlevered Free Cash Flow and Net Loss Excluding Valuation Allowance
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 Excluding Valuation Allowance
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 Excluding Valuation Allowance 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.
|
|
|
|
6.
|
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 broad range of data, voice and IT
services to retail and wholesale 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 IT
services provided to business customers; (2) wholesale
services, which includes the sale of transmission capacity to other
telecommunications carriers and businesses; and (3) other
services, which primarily consists of web hosting. The Company's IT
services, which are included within its retail services, include
data centers, virtualization, security, applications,
premises-based solutions, managed solutions and support services.
The Company presents its Consumer Services revenue in the following
two categories: (1) access services, which includes 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 and email
storage; 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.
|
|
|
|
7.
|
Debt represents the
principal amount of EarthLink's Senior Notes, EarthLink's Senior
Secured Notes and ITC^DeltaCom's Senior Secured Notes. Below is a
summary of the carrying amount of EarthLink's debt (in
thousands):
|
|
|
December
31,
|
|
June
30,
|
|
September
30,
|
|
December
31,
|
|
|
2012
|
|
2013
|
|
2013
|
|
2013
|
|
ITC^DeltaCom Senior
Secured Notes - Principal
|
$
|
292,300
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
ITC^DeltaCom Senior
Secured Notes - Premium
|
15,694
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
EarthLink Senior
Notes - Principal
|
300,000
|
|
|
300,000
|
|
|
300,000
|
|
|
300,000
|
|
|
EarthLink Senior
Notes - Discount
|
(8,818)
|
|
|
(8,302)
|
|
|
(8,035)
|
|
|
(7,762)
|
|
|
EarthLink Senior
Secured Notes
|
—
|
|
|
300,000
|
|
|
300,000
|
|
|
300,000
|
|
|
Carrying amount of
debt
|
$
|
599,176
|
|
|
$
|
591,698
|
|
|
$
|
591,965
|
|
|
$
|
592,238
|
|
|
8.
|
Represents full-time
equivalents.
|
|
|
|
9.
|
Average subscribers
for the three month periods is calculated by averaging the ending
monthly subscribers or accounts for the four months preceding and
including the end of the quarterly period.
|
|
|
|
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.
|
SOURCE EarthLink, Inc.