ATLANTA, Aug. 4, 2014 /PRNewswire/ -- EarthLink Holdings
Corp. (NASDAQ: ELNK) today announced financial results for its
second quarter of 2014.
"I'm proud of our strong financial results we delivered this
quarter," said EarthLink Chief Executive Officer and President
Joseph F. Eazor. "We are intensely
focused on improving our operations and cash flow generation. Our
results this quarter reflect the team's good progress so far. We
are still early in this process and we expect to continue to make
additional run rate improvements."
|
Second Quarter
2014 Financial Summary
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Figures in US $
millions,
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First
|
|
Second
|
|
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|
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except per
share
|
Second
Quarter
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|
|
Quarter
|
|
Quarter
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|
|
|
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2013
|
|
|
2014
|
|
|
Change
|
|
2014
|
|
2014
|
|
Change
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Business
Services
|
$
|
243.3
|
|
|
$
|
234.2
|
|
|
(3.7)
|
%
|
|
$
|
234.0
|
|
|
$
|
234.2
|
|
|
0.1
|
%
|
|
|
Consumer
Services
|
70.1
|
|
|
63.1
|
|
|
(10.0)
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%
|
|
63.3
|
|
|
63.1
|
|
|
(0.3)
|
%
|
|
|
Total
Revenue
|
313.4
|
|
|
297.4
|
|
|
(5.1)
|
%
|
|
297.3
|
|
|
297.4
|
|
|
—
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Gross
Margin
|
160.5
|
|
|
153.2
|
|
|
(4.5)
|
%
|
|
151.4
|
|
|
153.2
|
|
|
1.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Expenses
|
105.0
|
|
|
104.6
|
|
|
(0.4)
|
%
|
|
106.5
|
|
|
104.6
|
|
|
(1.8)
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss
|
(11.2)
|
|
|
(21.8)
|
|
|
94.6
|
%
|
|
(26.5)
|
|
|
(21.8)
|
|
|
(17.7)
|
%
|
|
|
Net Loss per
share
|
|
(0.11)
|
|
|
|
(0.21)
|
|
|
90.9
|
%
|
|
(0.26)
|
|
|
|
(0.21)
|
|
|
(19.2)
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted Net Loss
(1) (2)
|
(11.2)
|
|
|
(16.4)
|
|
|
46.4
|
%
|
|
(21.1)
|
|
|
(16.4)
|
|
|
(22.3)
|
%
|
|
|
Adjusted Net Loss per
share (1) (2)
|
|
(0.11)
|
|
|
|
(0.16)
|
|
|
45.5
|
%
|
|
(0.21)
|
|
|
|
(0.16)
|
|
|
(23.8)
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Adjusted EBITDA
(2)
|
59.5
|
|
|
50.9
|
|
|
(14.5)
|
%
|
|
49.9
|
|
|
50.9
|
|
|
2.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Capital
Expenditures
|
34.4
|
|
|
26.0
|
|
|
(24.4)
|
%
|
|
23.4
|
|
|
26.0
|
|
|
11.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and Marketable
Securities
|
141.9
|
|
|
98.5
|
|
|
(30.6)
|
%
|
|
108.5
|
|
|
98.5
|
|
|
(9.2)
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Cash Provided by
Operating Activities
|
11.7
|
|
|
18.0
|
|
|
53.8
|
%
|
|
21.3
|
|
|
18.0
|
|
|
(15.5)
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unlevered Free Cash
Flow (2)
|
25.1
|
|
|
24.9
|
|
|
(0.8)
|
%
|
|
26.5
|
|
|
24.9
|
|
|
(6.0)
|
%
|
|
|
|
|
|
(1) Q1
2014 Adjusted Net Loss excludes a one-time fixed asset impairment
of $5.3 million and Q2 2014 Adjusted Net Loss excludes a one-time
fixed asset impairment of $5.4 million.
|
|
|
(2)
Adjusted Net Loss, Adjusted Net Loss per Share, Adjusted EBITDA and
Unlevered Cash Flow are non-GAAP measures, see definitions in
"Non-GAAP Measures" below.
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Revenue
- EarthLink's total revenue for the second quarter of 2014 was
$297.4 million, a decline of 5.1%
from the prior year quarter. The revenue trajectory continued to
show improvement versus the 6.1% year-over-year decline the company
reported in the first quarter of 2014.
- Business Services revenue declined 3.7% from the second quarter
of 2013, an improvement versus the 4.3% year-over-year decline
reported in the first quarter of 2014. The company's sales teams
continued to make progress extending the terms of contracts with
existing customers.
- The Consumer Services revenue profile was aided by targeted
price actions during the quarter. Consumer Services churn in the
second quarter is commensurate with an increase in ARPU. We expect
consumer churn to continue to moderate in future periods.
Net Loss and Adjusted EBITDA
- Net loss was $(21.8) million in
the second quarter. This amount includes one-time non-cash charges
of $5.4 million to record impairment
of certain fixed assets. This compares to a net loss of
$(11.2) million in the second quarter
of 2013 and $(26.5) million in the
first quarter of 2014.
- Adjusted EBITDA (a non-GAAP measure, see definition in
"Non-GAAP Measures" below) was $50.9
million in the second quarter, a 2% increase from the first
quarter of 2014, and a 15% decrease from the second quarter of
2013.
Balance Sheet and Cash Flow
- Net cash provided by operating activities was $18.0 million. EarthLink ended the second quarter
with $98.5 million in cash. This
compared to net cash provided by operating activities of
$11.7 million in the second quarter
of 2013 and $21.3 million in the
first quarter of 2014. EarthLink made interest payments of
$24.5 million during the second
quarter and repurchased 0.7 million shares of common stock for
$2.2 million.
- EarthLink generated Unlevered Free Cash Flow (a non-GAAP
measure, see definition in "Non-GAAP Measures" below) of
$24.9 million during the second
quarter of 2014. This compared to Unlevered Free Cash Flow of
$25.1 million in the second quarter
of 2013 and $26.5 million in the
first quarter of 2014.
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 long-lived assets, restructuring,
acquisition and integration-related costs, and gain (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 long-lived assets,
restructuring, acquisition and integration-related costs, and gain
(loss) from discontinued operations, net of tax, less cash used for
purchases of property and equipment. Adjusted Net Loss is defined
as net loss excluding the non-cash charge to record valuation
allowance against deferred tax assets, the non-cash impairment of
goodwill and estimated tax impact and the non-cash impairment of
long-lived assets.
Adjusted EBITDA, Unlevered Free Cash Flow and Adjusted Net Loss
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 4 of the Consolidated Financial Highlights for a
discussion of the presentation, comparability and use of such
financial measures.
Conference Call for Analysts and Investors
EarthLink's
Second Quarter 2014 Conference Call will be held on Tuesday, August 5, 2014 at 8:30 a.m. ET and hosted by EarthLink's Chief
Executive Officer and President Joseph F.
Eazor and Executive Vice President and Chief Financial
Officer Bradley A. Ferguson.
The dial-in number is: (866) 887-3882.
Participants should reference the conference ID number
72905401 or "EarthLink Second Quarter 2014 Earnings Call"
and dial in 10 minutes prior to the 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 August 5 through midnight on September 5, 2014. Dial toll-free: (855)
859-2056. The replay confirmation code is 72905401. The Webcast
will be archived on the company's website
at: http://ir.earthlink.net/events.cfm.
About EarthLink
Founded in 1994, EarthLink Holdings
Corp. (NASDAQ: ELNK) is a leading managed network and cloud
services 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 @EarthLink.
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) we may not be able to execute our
strategy to be a leading managed network services provider, which
could adversely affect our results of operations and cash flows;
(2) 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) our failure to achieve operating
efficiencies will adversely affect our results of operations; (4)
as a result of our continuing review of our business, we may
determine to undertake further restructuring plans that would
require additional charges, including incurring facility exit and
restructuring charges; (5) we may be unsuccessful integrating
acquisitions into our business, which could result in operating
difficulties, losses and other adverse consequences; (6) 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) unfavorable general economic conditions could
harm our business; (8) we may be unable to successfully identify,
manage and assimilate future acquisitions, which could adversely
affect our results of operations; (9) we face significant
competition in the communications and IT services industry that
could reduce our profitability; (10) failure to retain existing
customers could adversely affect our results of operations and cash
flows; (11) 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) 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) 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) 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) 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) we
obtain a majority of our network equipment and software from a
limited number of third-party suppliers; (18) 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) 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) we face significant competition in the
Internet access industry that could reduce our profitability; (22)
the continued decline of our consumer access subscribers will
adversely affect our results of operations; (23) potential
regulation of Internet service providers could adversely affect our
operations; (24) cyber security breaches could harm our business;
(25) privacy concerns relating to our business could damage our
reputation and deter current and potential users from using our
services; (26) 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) our business depends on effective business
support systems and processes; (28) 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) 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) we may not be able to
protect our intellectual property; (31) 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)
government regulations could adversely affect our business or force
us to change our business practices; (33) our business may suffer
if third parties are unable to provide services or terminate their
relationships with us; (34) 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) 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) our indebtedness could
adversely affect our financial health and limit our ability to
react to changes in our industry; (37) 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) our debt
agreements include restrictive covenants, and failure to comply
with these covenants could trigger acceleration of payment of
outstanding indebtedness or limit our ability to draw on our
revolving credit facility; (39) we may reduce, or cease payment of,
quarterly cash dividends; (40) our stock price may be volatile;
(41) 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) 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, 2013.
EARTHLINK HOLDINGS
CORP. Unaudited
Condensed Consolidated Statements Of
Operations (in
thousands, except per share data)
|
|
|
|
|
Three Months
Ended
|
|
Six Months
Ended
|
|
June 30,
|
|
June 30,
|
|
2013
|
|
2014
|
|
2013
|
|
2014
|
|
|
|
|
|
|
|
|
Revenues
|
$
|
313,401
|
|
|
$
|
297,358
|
|
|
$
|
630,189
|
|
|
$
|
594,678
|
|
Operating costs and
expenses:
|
|
|
|
|
|
|
|
Cost of revenues
(exclusive of depreciation and amortization shown separately
below)
|
152,938
|
|
|
144,188
|
|
|
305,804
|
|
|
290,064
|
|
Selling, general and
administrative (exclusive of depreciation and amortization shown
separately below)
|
104,980
|
|
|
104,598
|
|
|
211,558
|
|
|
211,082
|
|
Depreciation and
amortization
|
44,270
|
|
|
45,615
|
|
|
87,625
|
|
|
92,470
|
|
Impairment of goodwill
and long-lived assets (1)
|
—
|
|
|
5,437
|
|
|
255,599
|
|
|
10,771
|
|
Restructuring,
acquisition and integration-related costs (2)
|
7,278
|
|
|
4,908
|
|
|
18,540
|
|
|
9,885
|
|
Total operating costs
and expenses
|
309,466
|
|
|
304,746
|
|
|
879,126
|
|
|
614,272
|
|
Income (loss) from
operations
|
3,935
|
|
|
(7,388)
|
|
|
(248,937)
|
|
|
(19,594)
|
|
Interest expense and
other, net
|
(18,173)
|
|
|
(14,082)
|
|
|
(32,729)
|
|
|
(28,038)
|
|
Loss from continuing
operations before income taxes
|
(14,238)
|
|
|
(21,470)
|
|
|
(281,666)
|
|
|
(47,632)
|
|
Income tax benefit
(provision)
|
3,329
|
|
|
(374)
|
|
|
35,447
|
|
|
(737)
|
|
Loss from continuing
operations
|
(10,909)
|
|
|
(21,844)
|
|
|
(246,219)
|
|
|
(48,369)
|
|
Gain (loss) from
discontinued operations, net of tax (3)
|
(292)
|
|
|
6
|
|
|
(1,397)
|
|
|
61
|
|
Net loss
|
$
|
(11,201)
|
|
|
$
|
(21,838)
|
|
|
$
|
(247,616)
|
|
|
$
|
(48,308)
|
|
|
|
|
|
|
|
|
|
Basic and diluted net
loss per share
|
|
|
|
|
|
|
|
Continuing
operations
|
$
|
(0.11)
|
|
|
$
|
(0.21)
|
|
|
$
|
(2.39)
|
|
|
$
|
(0.47)
|
|
Discontinued
operations
|
—
|
|
|
—
|
|
|
(0.01)
|
|
|
—
|
|
Basic and diluted net
loss per share
|
$
|
(0.11)
|
|
|
$
|
(0.21)
|
|
|
$
|
(2.40)
|
|
|
$
|
(0.47)
|
|
Basic and diluted
weighted average common shares outstanding
|
103,011
|
|
|
102,354
|
|
|
102,963
|
|
|
102,335
|
|
|
|
|
|
|
|
|
|
Dividends declared
per share
|
$
|
0.05
|
|
|
$
|
0.05
|
|
|
$
|
0.10
|
|
|
$
|
0.10
|
|
EARTHLINK HOLDINGS
CORP. Unaudited
Condensed Consolidated Balance Sheets (in thousands, except per share
data)
|
|
|
|
|
|
December 31,
2013
|
|
June 30,
2014
|
ASSETS
|
Current
assets:
|
|
|
|
Cash and cash
equivalents
|
$
|
116,636
|
|
|
$
|
98,452
|
|
Accounts receivable,
net of allowance of $8,615 and $7,746 as of December 31, 2013 and
June 30, 2014, respectively
|
100,792
|
|
|
104,947
|
|
Prepaid
expenses
|
15,945
|
|
|
17,345
|
|
Deferred income taxes,
net
|
549
|
|
|
402
|
|
Other current
assets
|
13,930
|
|
|
15,315
|
|
Total current
assets
|
247,852
|
|
|
236,461
|
|
Property and
equipment, net
|
438,321
|
|
|
415,707
|
|
Goodwill
|
139,215
|
|
|
137,725
|
|
Other intangible
assets, net
|
155,428
|
|
|
123,500
|
|
Other long-term
assets
|
26,502
|
|
|
24,448
|
|
Total
assets
|
$
|
1,007,318
|
|
|
$
|
937,841
|
|
LIABILITIES AND
STOCKHOLDERS' EQUITY
|
Current
liabilities:
|
|
|
|
Accounts
payable
|
$
|
33,440
|
|
|
$
|
26,872
|
|
Accrued payroll and
related expenses
|
35,041
|
|
|
28,488
|
|
Other accrued
liabilities
|
88,225
|
|
|
94,996
|
|
Deferred
revenue
|
49,689
|
|
|
46,275
|
|
Current portion of
long-term debt and capital lease obligations
|
1,489
|
|
|
1,473
|
|
Total current
liabilities
|
207,884
|
|
|
198,104
|
|
Long-term debt and
capital lease obligations
|
606,442
|
|
|
606,536
|
|
Long-term deferred
income taxes, net
|
2,221
|
|
|
3,298
|
|
Other long-term
liabilities
|
28,553
|
|
|
24,959
|
|
Total
liabilities
|
845,100
|
|
|
832,897
|
|
|
|
|
|
Stockholders'
equity:
|
|
|
|
Preferred stock, $0.01
par value, 100,000 shares authorized, 0 shares issued and
outstanding as of December 31, 2013 and June 30, 2014
|
—
|
|
|
—
|
|
Common stock, $0.01
par value, 300,000 shares authorized, 197,491 and 198,527 shares
issued as of December 31, 2013 and June 30, 2014, respectively, and
101,876 and 102,248 shares outstanding as of December 31, 2013 and
June 30, 2014, respectively
|
1,975
|
|
|
1,985
|
|
Additional paid-in
capital
|
2,047,607
|
|
|
2,040,880
|
|
Accumulated
deficit
|
(1,144,975)
|
|
|
(1,193,283)
|
|
Treasury stock, at
cost, 95,615 shares and 96,279 shares as of December 31, 2013 and
June 30, 2014, respectively
|
(742,389)
|
|
|
(744,638)
|
|
Total stockholders'
equity
|
162,218
|
|
|
104,944
|
|
Total liabilities and
stockholders' equity
|
$
|
1,007,318
|
|
|
$
|
937,841
|
|
EARTHLINK HOLDINGS
CORP. Reconciliation of
Net Loss to Adjusted EBITDA (4) (in thousands)
|
|
|
|
Three Months
Ended
|
|
June
30,
|
|
March
31,
|
|
June
30,
|
|
2013
|
|
2014
|
|
2014
|
|
|
Net loss
|
$
|
(11,201)
|
|
|
$
|
(26,470)
|
|
|
$
|
(21,838)
|
|
Interest expense and
other, net
|
18,173
|
|
|
13,956
|
|
|
14,082
|
|
Income tax provision
(benefit)
|
(3,329)
|
|
|
363
|
|
|
374
|
|
Depreciation and
amortization
|
44,270
|
|
|
46,855
|
|
|
45,615
|
|
Stock-based
compensation expense
|
4,010
|
|
|
4,943
|
|
|
2,335
|
|
Impairment of
goodwill and long-lived assets (1)
|
—
|
|
|
5,334
|
|
|
5,437
|
|
Restructuring,
acquisition and integration-related costs (2)
|
7,278
|
|
|
4,977
|
|
|
4,908
|
|
(Gain) loss from
discontinued operations, net of tax (3)
|
292
|
|
|
(55)
|
|
|
(6)
|
|
Adjusted EBITDA
(4)
|
$
|
59,493
|
|
|
$
|
49,903
|
|
|
$
|
50,907
|
|
EARTHLINK HOLDINGS
CORP. Reconciliation of
Net Loss to Adjusted Net Loss (4) (in thousands, except per share
data)
|
|
|
|
Three Months
Ended
|
|
June
30,
|
|
March
31,
|
|
June
30,
|
|
2013
|
|
2014
|
|
2014
|
|
|
Net loss
|
$
|
(11,201)
|
|
|
$
|
(26,470)
|
|
|
$
|
(21,838)
|
|
Impairment of
goodwill and long-lived assets (1)
|
—
|
|
|
5,334
|
|
|
5,437
|
|
Adjusted Net Loss
(4)
|
$
|
(11,201)
|
|
|
$
|
(21,136)
|
|
|
$
|
(16,401)
|
|
|
|
|
|
|
|
Basic and diluted
weighted average common shares outstanding
|
103,011
|
|
|
102,312
|
|
|
102,354
|
|
Adjusted Net Loss per
Share
|
$
|
(0.11)
|
|
|
$
|
(0.21)
|
|
|
$
|
(0.16)
|
|
EARTHLINK HOLDINGS
CORP. Reconciliation of
Net Loss to Unlevered Free Cash Flow (4) (in thousands)
|
|
|
|
Three Months
Ended
|
|
June
30,
|
|
March
31,
|
|
June
30,
|
|
2013
|
|
2014
|
|
2014
|
|
|
|
|
|
|
Net loss
|
$
|
(11,201)
|
|
|
$
|
(26,470)
|
|
|
$
|
(21,838)
|
|
Interest expense and
other, net
|
18,173
|
|
|
13,956
|
|
|
14,082
|
|
Income tax provision
(benefit)
|
(3,329)
|
|
|
363
|
|
|
374
|
|
Depreciation and
amortization
|
44,270
|
|
|
46,855
|
|
|
45,615
|
|
Stock-based
compensation expense
|
4,010
|
|
|
4,943
|
|
|
2,335
|
|
Impairment of
goodwill and long-lived assets (1)
|
—
|
|
|
5,334
|
|
|
5,437
|
|
Restructuring,
acquisition and integration-related costs (2)
|
7,278
|
|
|
4,977
|
|
|
4,908
|
|
(Gain) loss from
discontinued operations, net of tax (3)
|
292
|
|
|
(55)
|
|
|
(6)
|
|
Purchases of property
and equipment
|
(34,401)
|
|
|
(23,384)
|
|
|
(25,965)
|
|
Unlevered Free Cash
Flow (4)
|
$
|
25,092
|
|
|
$
|
26,519
|
|
|
$
|
24,942
|
|
EARTHLINK HOLDINGS
CORP. Reconciliation of
Net Cash Flows from Operating Activities to Unlevered Free Cash
Flow (4) (in
thousands)
|
|
|
|
Three Months
Ended
|
|
June
30,
|
|
March
31,
|
|
June
30,
|
|
2013
|
|
2014
|
|
2014
|
|
|
|
|
|
|
Net cash provided by
operating activities
|
$
|
11,696
|
|
|
$
|
21,306
|
|
|
$
|
17,969
|
|
Income tax provision
(benefit)
|
(3,329)
|
|
|
363
|
|
|
374
|
|
Non-cash income
taxes
|
3,356
|
|
|
(210)
|
|
|
(242)
|
|
Interest expense and
other, net
|
18,173
|
|
|
13,956
|
|
|
14,082
|
|
Amortization of debt
discount, premium and issuance costs
|
(462)
|
|
|
(1,016)
|
|
|
(1,022)
|
|
Restructuring,
acquisition and integration-related costs (2)
|
7,278
|
|
|
4,977
|
|
|
4,908
|
|
Changes in operating
assets and liabilities
|
24,566
|
|
|
10,437
|
|
|
14,732
|
|
Purchases of property
and equipment
|
(34,401)
|
|
|
(23,384)
|
|
|
(25,965)
|
|
Other, net
|
(1,785)
|
|
|
90
|
|
|
106
|
|
Unlevered Free Cash
Flow (4)
|
$
|
25,092
|
|
|
$
|
26,519
|
|
|
$
|
24,942
|
|
|
|
|
|
|
|
Net cash used in
investing activities
|
$
|
(15,471)
|
|
|
$
|
(23,384)
|
|
|
$
|
(25,379)
|
|
Net cash used in
financing activities
|
$
|
(28,473)
|
|
|
$
|
(6,045)
|
|
|
$
|
(2,651)
|
|
EARTHLINK HOLDINGS
CORP. Supplemental
Schedule of Segment Information (5) (in thousands)
|
|
|
|
|
|
Three Months
Ended
|
|
Six Months
Ended
|
|
June 30,
|
|
June 30,
|
|
2013
|
|
2014
|
|
2013
|
|
2014
|
|
|
|
|
|
|
|
|
Business
Services
|
|
|
|
|
|
|
|
Revenues
|
$
|
243,308
|
|
|
$
|
234,216
|
|
|
$
|
487,871
|
|
|
$
|
468,219
|
|
Cost of revenues
(excluding depreciation and amortization)
|
129,598
|
|
|
121,555
|
|
|
257,517
|
|
|
244,819
|
|
Gross
margin
|
113,710
|
|
|
112,661
|
|
|
230,354
|
|
|
223,400
|
|
Direct segment
operating expenses
|
83,282
|
|
|
86,834
|
|
|
167,794
|
|
|
172,445
|
|
Segment operating
income
|
$
|
30,428
|
|
|
$
|
25,827
|
|
|
$
|
62,560
|
|
|
$
|
50,955
|
|
Consumer
Services
|
|
|
|
|
|
|
|
Revenues
|
$
|
70,093
|
|
|
$
|
63,142
|
|
|
$
|
142,318
|
|
|
$
|
126,459
|
|
Cost of revenues
(excluding depreciation and amortization)
|
23,340
|
|
|
22,633
|
|
|
48,287
|
|
|
45,245
|
|
Gross
margin
|
46,753
|
|
|
40,509
|
|
|
94,031
|
|
|
81,214
|
|
Direct segment
operating expenses
|
13,380
|
|
|
11,401
|
|
|
25,879
|
|
|
22,961
|
|
Segment operating
income
|
$
|
33,373
|
|
|
$
|
29,108
|
|
|
$
|
68,152
|
|
|
$
|
58,253
|
|
Consolidated
|
|
|
|
|
|
|
|
Revenues
|
$
|
313,401
|
|
|
$
|
297,358
|
|
|
$
|
630,189
|
|
|
$
|
594,678
|
|
Cost of
revenues
|
152,938
|
|
|
144,188
|
|
|
305,804
|
|
|
290,064
|
|
Gross
margin
|
160,463
|
|
|
153,170
|
|
|
324,385
|
|
|
304,614
|
|
Direct segment
operating expenses
|
96,662
|
|
|
98,235
|
|
|
193,673
|
|
|
195,406
|
|
Segment operating
income
|
63,801
|
|
|
54,935
|
|
|
130,712
|
|
|
109,208
|
|
Depreciation and
amortization
|
44,270
|
|
|
45,615
|
|
|
87,625
|
|
|
92,470
|
|
Impairment of goodwill
and long-lived assets (1)
|
—
|
|
|
5,437
|
|
|
255,599
|
|
|
10,771
|
|
Restructuring,
acquisition and integration-related costs (2)
|
7,278
|
|
|
4,908
|
|
|
18,540
|
|
|
9,885
|
|
Corporate operating
expenses
|
8,318
|
|
|
6,363
|
|
|
17,885
|
|
|
15,676
|
|
Income (loss) from
operations
|
$
|
3,935
|
|
|
$
|
(7,388)
|
|
|
$
|
(248,937)
|
|
|
$
|
(19,594)
|
|
EARTHLINK HOLDINGS
CORP Supplemental
Schedule of Revenue Detail (in thousands)
|
|
|
|
|
|
Three Months
Ended
|
|
Six Months
Ended
|
|
June 30,
|
|
June 30,
|
|
2013
|
|
2014
|
|
2013
|
|
2014
|
|
|
|
|
|
|
|
|
Business
Services
|
|
|
|
|
|
|
|
Retail
services
|
$
|
199,431
|
|
|
$
|
191,386
|
|
|
$
|
400,512
|
|
|
$
|
383,906
|
|
Wholesale
services
|
39,084
|
|
|
37,970
|
|
|
77,942
|
|
|
74,412
|
|
Other
services
|
4,793
|
|
|
4,860
|
|
|
9,417
|
|
|
9,901
|
|
Total
revenues
|
243,308
|
|
|
234,216
|
|
|
487,871
|
|
|
468,219
|
|
Consumer
Services
|
|
|
|
|
|
|
|
Access
services
|
58,996
|
|
|
52,514
|
|
|
119,736
|
|
|
105,149
|
|
Value-added
services
|
11,097
|
|
|
10,628
|
|
|
22,582
|
|
|
21,310
|
|
Total
revenues
|
70,093
|
|
|
63,142
|
|
|
142,318
|
|
|
126,459
|
|
Total
Revenues
|
$
|
313,401
|
|
|
$
|
297,358
|
|
|
$
|
630,189
|
|
|
$
|
594,678
|
|
EARTHLINK HOLDINGS
CORP. Supplemental
Financial Data
|
|
|
|
|
|
|
|
June
30,
|
|
March
31,
|
|
June
30,
|
|
2013
|
|
2014
|
|
2014
|
Employee
Data
|
|
|
|
|
|
Number of employees
at end of period (6)
|
2,999
|
|
|
2,994
|
|
|
2,981
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EARTHLINK HOLDINGS
CORP. Consumer Services
Operating Metrics
|
|
|
|
Three Months Ended
|
|
June
30,
|
|
March
31,
|
|
June
30,
|
|
2013
|
|
2014
|
|
2014
|
|
|
|
|
|
|
Average narrowband
subscribers (7)
|
591,000
|
|
|
536,000
|
|
|
518,000
|
|
Average broadband
subscribers (7)
|
484,000
|
|
|
421,000
|
|
|
397,000
|
|
Average consumer
subscribers (7)
|
1,075,000
|
|
|
957,000
|
|
|
915,000
|
|
|
|
|
|
|
|
ARPU (8)
|
$
|
21.74
|
|
|
$
|
22.06
|
|
|
$
|
22.99
|
|
Churn rate
(9)
|
2.1
|
%
|
|
2.1
|
%
|
|
2.3
|
%
|
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.
|
|
|
|
During the six months
ended June 30, 2014, the Company recorded $10.8 million for
impairment of property and equipment, which included $5.3 million
recorded during the three months ended March 31, 2014 for
impairment of work in progress for an information technology
project not expected to be used and $5.4 million recorded during
the three months ended June 30, 2014 for impairment of work in
progress and software licenses not expected to be used.
|
|
|
2.
|
Restructuring,
acquisition and integration-related costs consisted of the
following for the periods presented (in thousands):
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
2013
|
|
2014
|
|
2013
|
|
2014
|
|
|
|
|
|
|
|
|
Integration-related
costs
|
5,485
|
|
|
2,762
|
|
|
10,486
|
|
|
6,715
|
|
Severance, retention
and other employee costs
|
1,101
|
|
|
958
|
|
|
5,689
|
|
|
1,966
|
|
Facility-related
costs
|
267
|
|
|
1,186
|
|
|
1,835
|
|
|
1,202
|
|
Transaction-related
costs
|
210
|
|
|
2
|
|
|
315
|
|
|
2
|
|
Legacy plan
restructuring costs
|
215
|
|
|
—
|
|
|
215
|
|
|
—
|
|
Restructuring,
acquisition and integration-related costs
|
$
|
7,278
|
|
|
$
|
4,908
|
|
|
$
|
18,540
|
|
|
$
|
9,885
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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)
facility-related costs, such as lease termination and asset
impairments; and 4) transaction-related costs, which are direct
costs incurred to effect a business combination, such as advisory,
legal, accounting, valuation and other professional
fees.
|
|
|
3.
|
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 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.
|
|
|
4.
|
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 long-lived assets,
restructuring, acquisition and integration-related costs, and gain
(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
long-lived assets, restructuring, acquisition and
integration-related costs, and gain (loss) from discontinued
operations, net of tax, less cash used for purchases of property
and equipment. Adjusted Net Loss is defined as net loss excluding
the non-cash charge to record a valuation allowance against
deferred tax assets, the non-cash impairment of goodwill and
estimated tax impact and the non-cash impairment of long-lived
assets.
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Adjusted EBITDA,
Unlevered Free Cash Flow and Adjusted Net Loss 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
Adjusted Net Loss 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 Adjusted Net Loss 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.
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5.
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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.
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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.
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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.
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6.
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Represents full-time
equivalents.
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7.
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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.
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8.
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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.
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9.
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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.
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SOURCE EarthLink Holdings Corp.