UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of report (Date of earliest event reported): November 2, 2015
EARTHLINK HOLDINGS CORP.
(Exact Name of Registrant as Specified in Its Charter)
Delaware (State of Incorporation) |
|
001-15605 (Commission File Number) |
|
46-4228084 (I.R.S. Employer Identification No.) |
1170 Peachtree Street, Suite 900, Atlanta, Georgia 30309
(Address of principal executive offices) (Zip Code)
(404) 815-0770
(Registrants telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report date)
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:
o Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
o Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
o Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
o Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))
Item 2.02 Results of Operations and Financial Condition
On November 2, 2015, EarthLink Holdings Corp. (the Company) issued a press release announcing its financial results for the three and nine months ended September 30, 2015. A copy of the press release is attached hereto as Exhibit 99.1 to this Current Report on Form 8-K.
In accordance with General Instruction B.2 of Form 8-K, the information furnished in Item 2.02 of this Current Report on Form 8-K and in Exhibit 99.1 attached hereto shall not be deemed filed for the purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liability of that section, nor shall it be deemed incorporated by reference in any filing under the Securities Act of 1933, as amended, except as shall be expressly set forth by specific reference in such a filing.
Item 7.01 Regulation FD Disclosure
In connection with the Companys conference call to be held on November 3, 2015, officers of the Company will be reviewing certain materials regarding financial results for the three and nine months ended September 30, 2015 and guidance for the year ending December 31, 2015. A copy of the materials is attached hereto as Exhibit 99.2 to this Current Report on Form 8-K.
In accordance with General Instruction B.2 of Form 8-K, the information furnished in Item 7.01 of this Current Report on Form 8-K and in Exhibit 99.2 attached hereto shall not be deemed filed for the purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liability of that section, nor shall it be deemed incorporated by reference in any filing under the Securities Act of 1933, as amended, except as shall be expressly set forth by specific reference in such a filing.
Item 9.01 Financial Statements and Exhibits
(d) Exhibits
Exhibit No. |
|
Description |
|
|
|
99.1 |
|
Press release dated November 2, 2015 |
99.2 |
|
Presentation regarding financial results and guidance |
2
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
|
EARTHLINK HOLDINGS CORP. |
|
(Registrant) |
|
|
|
|
|
By: |
/s/ Louis M. Alterman |
|
|
Name: |
Louis M. Alterman |
|
|
Title: |
Executive Vice President, |
|
|
Chief Financial Officer |
Date: November 2, 2015
3
Exhibit Index
Exhibit No. |
|
Description |
|
|
|
99.1 |
|
Press release dated November 2, 2015 |
99.2 |
|
Presentation regarding financial results and guidance |
4
Exhibit 99.1
|
Investors |
|
Trey Huffman |
|
404-748-6219 |
|
678-571-1367 (mobile) |
|
huffmanal@elnk.com |
|
|
|
Media |
|
Bert Kelly |
|
678-891-0317 |
|
404-372-5073 (mobile) |
|
Bert.kelly@elnk.com |
EARTHLINK REPORTS THIRD QUARTER 2015 FINANCIAL RESULTS
STRONG CASH GENERATION ENABLES $45 MILLION DEBT REDUCTION
· Revenue of $270.9 million
· Net loss of $(10.5) million and net loss per share of $(0.10)
· Adjusted EBITDA of $61.4 million
· Net cash provided by operating activities of $74.0 million
· Unlevered Free Cash Flow of $39.4 million
· Repurchased $30 million of outstanding 8.875% debt and made net revolving credit facility repayments of $15 million
· Ending cash balance of $87.6 million
ATLANTA Nov. 2, 2015 - EarthLink Holdings Corp. (NASDAQ: ELNK), a leading managed network, security and cloud solutions provider for multi-location businesses, today announced financial results for the third quarter of 2015.
EarthLink continues to strengthen as we develop our business unit operating model, said EarthLink CEO and President Joseph F. Eazor. The resulting focus in our business units is creating efficiency which helps us sustain robust cash flow. For the third consecutive quarter, we used that cash flow to improve our balance sheet.
Third Quarter 2015 Financial Summary
|
|
|
|
|
|
|
|
Second |
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Third |
|
|
|
Figures in US $ millions, |
|
Third Quarter |
|
|
|
Quarter |
|
Quarter |
|
|
|
except per share |
|
2014 |
|
2015 |
|
Change |
|
2015 |
|
2015 |
|
Change |
|
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
Enterprise/Mid-Market |
|
* |
|
$ |
110.0 |
|
* |
|
$ |
114.4 |
|
$ |
110.0 |
|
(3.8 |
)% |
Small Business |
|
* |
|
72.9 |
|
* |
|
79.0 |
|
72.9 |
|
(7.7 |
)% |
Carrier/Transport |
|
* |
|
34.2 |
|
* |
|
34.1 |
|
34.2 |
|
0.3 |
% |
Business Services |
|
237.1 |
|
217.1 |
|
(8.4 |
)% |
227.6 |
|
217.1 |
|
(4.6 |
)% |
Consumer Services |
|
60.7 |
|
53.8 |
|
(11.4 |
)% |
56.1 |
|
53.8 |
|
(4.1 |
)% |
Total Revenues |
|
297.8 |
|
270.9 |
|
(9.0 |
)% |
283.7 |
|
270.9 |
|
(4.5 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Margin |
|
162.1 |
|
148.5 |
|
(8.4 |
)% |
156.6 |
|
148.5 |
|
(5.2 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses |
|
105.9 |
|
90.8 |
|
(14.3 |
)% |
94.3 |
|
90.8 |
|
(3.7 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss |
|
(2.0 |
) |
(10.5 |
) |
425.0 |
% |
(9.9 |
) |
(10.5 |
) |
6.1 |
% |
Net Loss per share |
|
(0.02 |
) |
(0.10 |
) |
400.0 |
% |
(0.10 |
) |
(0.10 |
) |
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA (1) |
|
59.0 |
|
61.4 |
|
4.1 |
% |
66.1 |
|
61.4 |
|
(7.1 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital Expenditures |
|
24.9 |
|
22.0 |
|
(11.6 |
)% |
20.9 |
|
22.0 |
|
5.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and Marketable Securities |
|
129.6 |
|
87.6 |
|
(32.4 |
)% |
87.4 |
|
87.6 |
|
0.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Debt Outstanding (2) |
|
600.0 |
|
513.9 |
|
(14.4 |
)% |
558.9 |
|
513.9 |
|
(8.1 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Cash Provided by Operating Activities |
|
62.1 |
|
74.0 |
|
19.2 |
% |
33.3 |
|
74.0 |
|
122.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unlevered Free Cash Flow (1) |
|
34.1 |
|
39.4 |
|
15.5 |
% |
45.2 |
|
39.4 |
|
(12.8 |
)% |
|
|
|
|
|
|
|
|
|
|
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|
(1) Adjusted EBITDA and Unlevered Cash Flow are non-GAAP measures, see definitions in Non-GAAP Measures below.
(2) Excludes capital leases.
* During the third quarter of 2015, the Company implemented certain organizational, operational and reporting changes that resulted in the disaggregation of its Business Services segment into three separate reportable segments: enterprise/mid-market, small business and carrier/transport. Management determined it is impracticable to restate financial information prior to 2015 to conform to the new segment structure. See Consolidated Financial Highlights and Footnote 5 to the Consolidated Financial Highlights for more detail.
Revenue
· Total revenue was $270.9 million during the third quarter of 2015, a decline of 9.0% from the prior year quarter.
· Total Business Services revenue was $217.1 million during the third quarter of 2015, a decline of 8.4% from the prior year quarter.
· Business Services and total company revenue during the third quarter of 2015 included $1.2 million of favorable settlements compared to $6.8 million of favorable settlements during the third
quarter of 2014. In the second quarter of 2015, total company revenue included $1.6 million of favorable dispute settlements and reserve adjustments, which consisted of $1.0 million of revenue in Business Services and $0.6 million of revenue in Consumer Services.
Net Loss and Adjusted EBITDA
· Net loss was $(10.5) million during the third quarter of 2015. This compares to a net loss of $(2.0) million in the third quarter of 2014 and $(9.9) million in the second quarter of 2015. The net loss during the third quarter of 2015 included a $2.5 million loss on extinguishment of debt. The net loss during the second quarter of 2015 included a $6.0 million loss on extinguishment of debt.
· Adjusted EBITDA (a non-GAAP measure, see definition in Non-GAAP Measures below) was $61.4 million in the third quarter of 2015, a 4.1% increase from the third quarter of 2014 and a 7.1% decrease from the second quarter of 2015.
Balance Sheet and Cash Flow
· Net cash provided by operating activities was $74.0 million during the third quarter of 2015. This compared to net cash provided by operating activities of $62.1 million in the third quarter of 2014 and $33.3 million in the second quarter of 2015.
· Unlevered Free Cash Flow (a non-GAAP measure, see definition in Non-GAAP Measures below) was $39.4 million during the third quarter of 2015. This compared to Unlevered Free Cash Flow of $34.1 million in the third quarter of 2014 and $45.2 million in the second quarter of 2015.
· EarthLink ended the third quarter of 2015 with $87.6 million in cash. During the third quarter of 2015, EarthLink repurchased $30.0 million of outstanding 8.875% debt for $31.5 million, plus accrued and unpaid interest. EarthLink also made net repayments under its revolving credit facility of $15.0 million.
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, loss on extinguishment of debt, 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, loss on extinguishment of debt, and gain (loss) from discontinued operations, net of tax, less cash used for purchases of property and equipment.
Adjusted EBITDA and Unlevered Free Cash Flow 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
EarthLinks Third Quarter 2015 Conference Call will be held on Tuesday, November 3, 2015, at 8:30 a.m. ET. The conference call will be hosted by EarthLinks Chief Executive Officer and President Joseph F. Eazor and Executive Vice President and Chief Financial Officer Louis M. Alterman.
The dial-in number is: (866) 887-3882.
Participants should reference the conference ID number 13785060 or EarthLink Third Quarter 2015 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 November 3, 2015 through midnight on December 3, 2015. Dial toll-free: (855) 859-2056. The replay confirmation code is 13785060. The Webcast will be archived on the companys website at: http://ir.earthlink.net/events.cfm.
About EarthLink
EarthLink (EarthLink Holdings Corp., NASDAQ: ELNK) provides managed network, security and cloud solutions for multi-location businesses. We help thousands of specialty retailers, restaurants, financial institutions, healthcare providers, professional service firms and local governments deliver a reliable and engaging customer experience in their stores and branch offices. We do so by building and managing MPLS WAN networks, by providing virtualized infrastructure, security, hosted voice, secure WiFi and compliance solutions, and by offering exceptional customer care. We operate a nationwide network spanning more than 28,000 fiber route miles, with 90 metro fiber rings and secure data centers that provide ubiquitous data and voice IP service coverage. Our EarthLink Carrier® division sells facilities-based wholesale telecommunications to other providers and our award-winning Internet services connect hundreds of thousands of residential customers across the U.S. For more, visit www.earthlink.com and follow @earthlink, LinkedIn and Google+.
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 successfully transition to a leading managed network, security and cloud services 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 failure to achieve operating efficiencies would adversely affect our results of operations and cash flows; (4) that we may have to undertake further restructuring plans that would require additional charges; (5) that is we are unable to adapt to changes in technology and customer demands, we may not remain competitive, and our revenues and operating results could suffer; (6) that we may be unable to successfully divest non-strategic products, which could adversely affect our results of operations(7) that we may be unable to successfully make or integrate acquisitions, which could adversely affect our results of operations; (8) that we face significant competition in the communications and managed services industry that could reduce our profitability; (9) that failure to retain existing customers could adversely affect our results of operations and cash flows; (10) 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; (11) 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; (12) 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; (13) that we may experience reductions in switched access and reciprocal compensation revenue; (14) that failure to obtain and maintain necessary permits and rights-of-way could interfere with our network infrastructure and operations; (15) 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; (16) that we obtain a majority of our network equipment and software from a limited number of third-party suppliers; (17) that our commercial and alliance arrangements may not be renewed or may not generate expected benefits, which could adversely affect our results of operations; (18) our consumer business is dependent on the availability of third-party network service providers; (19) that we face significant competition in the Internet access industry that could reduce our profitability; (20) that the continued decline of our consumer access subscribers will adversely affect our results of operations; (21) that potential regulation of Internet service providers could adversely affect our operations; (22) that cyber security breaches could harm our business; (23) that privacy concerns relating to our business could damage our reputation and deter current and potential users from using our services; (24) 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; (25) that our business depends on effective business support systems and processes; (26) 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; (27) 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; (28) that we may not be able to protect our intellectual property; (29) 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; (30) that unfavorable general economic conditions could harm our business; (31) that government regulations could adversely affect our business or force us to change our business practices; (32) that our business may suffer if third parties are unable to provide services or terminate their relationships with us; (33) that we may be required to recognize impairment charges on our goodwill and other intangible assets, which would adversely affect our results of operations and financial position; (34) that 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; (35) that our indebtedness could adversely affect our financial health and limit our ability to react to changes in our business and industry; (36) 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; (37) that our debt agreements include restrictive covenants, and failure to comply with these covenants could trigger acceleration of payment of outstanding indebtedness; (38) that we may reduce, or cease payment of, quarterly cash dividends; (39) that our stock price may be volatile; (40) 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 (41) 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 managements 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, 2014.
# # #
EARTHLINK HOLDINGS CORP.
Unaudited Condensed Consolidated Statements Of Operations
(in thousands, except per share data)
|
|
Three Months Ended |
|
Nine Months Ended |
|
|
|
September 30, |
|
September 30, |
|
|
|
2014 |
|
2015 |
|
2014 |
|
2015 |
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
297,745 |
|
$ |
270,904 |
|
$ |
892,423 |
|
$ |
837,015 |
|
Operating costs and expenses: |
|
|
|
|
|
|
|
|
|
Cost of revenues (exclusive of depreciation and amortization shown separately below) |
|
135,695 |
|
122,391 |
|
425,759 |
|
378,901 |
|
Selling, general and administrative (exclusive of depreciation and amortization shown separately below) |
|
105,948 |
|
90,775 |
|
317,030 |
|
280,382 |
|
Depreciation and amortization |
|
46,716 |
|
46,502 |
|
139,186 |
|
141,489 |
|
Impairment of long-lived assets (1) |
|
589 |
|
|
|
11,360 |
|
|
|
Restructuring, acquisition and integration-related costs (2) |
|
1,108 |
|
5,486 |
|
10,993 |
|
14,836 |
|
Total operating costs and expenses |
|
290,056 |
|
265,154 |
|
904,328 |
|
815,608 |
|
Income (loss) from operations |
|
7,689 |
|
5,750 |
|
(11,905 |
) |
21,407 |
|
Interest expense and other, net |
|
(13,970 |
) |
(11,731 |
) |
(42,008 |
) |
(39,780 |
) |
Loss on extinguishment of debt (3) |
|
|
|
(2,482 |
) |
|
|
(9,734 |
) |
Loss from continuing operations before income taxes |
|
(6,281 |
) |
(8,463 |
) |
(53,913 |
) |
(28,107 |
) |
Income tax benefit (provision) |
|
4,329 |
|
(2,060 |
) |
3,592 |
|
(2,821 |
) |
Loss from continuing operations |
|
(1,952 |
) |
(10,523 |
) |
(50,321 |
) |
(30,928 |
) |
Gain from discontinued operations, net of tax (4) |
|
|
|
|
|
61 |
|
|
|
Net loss |
|
$ |
(1,952 |
) |
$ |
(10,523 |
) |
$ |
(50,260 |
) |
$ |
(30,928 |
) |
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per share |
|
|
|
|
|
|
|
|
|
Continuing operations |
|
$ |
(0.02 |
) |
$ |
(0.10 |
) |
$ |
(0.49 |
) |
$ |
(0.30 |
) |
Discontinued operations |
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per share |
|
$ |
(0.02 |
) |
$ |
(0.10 |
) |
$ |
(0.49 |
) |
$ |
(0.30 |
) |
Basic and diluted weighted average common shares outstanding |
|
102,268 |
|
103,737 |
|
102,312 |
|
103,228 |
|
|
|
|
|
|
|
|
|
|
|
Dividends declared per share |
|
$ |
0.05 |
|
$ |
0.05 |
|
$ |
0.15 |
|
$ |
0.15 |
|
EARTHLINK HOLDINGS CORP.
Unaudited Condensed Consolidated Balance Sheets
(in thousands, except per share data)
|
|
December 31, 2014 |
|
September 30, 2015 |
|
ASSETS |
|
|
|
|
|
Current assets: |
|
|
|
|
|
Cash and cash equivalents |
|
$ |
134,133 |
|
$ |
87,623 |
|
Accounts receivable, net of allowance of $6,211 and $3,862 as of December 31, 2014 and September 30, 2015, respectively |
|
92,616 |
|
82,864 |
|
Prepaid expenses |
|
13,761 |
|
17,120 |
|
Other current assets |
|
13,671 |
|
11,399 |
|
Total current assets |
|
254,181 |
|
199,006 |
|
Property and equipment, net |
|
404,713 |
|
372,948 |
|
Goodwill |
|
137,751 |
|
137,751 |
|
Other intangible assets, net |
|
91,490 |
|
41,617 |
|
Other long-term assets |
|
22,026 |
|
16,704 |
|
Total assets |
|
$ |
910,161 |
|
$ |
768,026 |
|
LIABILITIES AND STOCKHOLDERS EQUITY |
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
Accounts payable |
|
$ |
23,726 |
|
$ |
18,527 |
|
Accrued payroll and related expenses |
|
50,197 |
|
38,988 |
|
Other accrued liabilities |
|
85,181 |
|
81,366 |
|
Deferred revenue |
|
43,940 |
|
41,765 |
|
Current portion of long-term debt and capital lease obligations |
|
1,537 |
|
16,565 |
|
Deferred income taxes, net |
|
751 |
|
650 |
|
Total current liabilities |
|
205,332 |
|
197,861 |
|
Long-term debt and capital lease obligations |
|
606,284 |
|
507,335 |
|
Long-term deferred income taxes, net |
|
2,448 |
|
3,080 |
|
Other long-term liabilities |
|
21,313 |
|
22,624 |
|
Total liabilities |
|
835,377 |
|
730,900 |
|
|
|
|
|
|
|
Stockholders equity: |
|
|
|
|
|
Preferred stock, $0.01 par value, 100,000 shares authorized, 0 shares issued and outstanding as of December 31, 2014 and September 30, 2015 |
|
|
|
|
|
Common stock, $0.01 par value, 300,000 shares authorized, 198,623 and 200,144 shares issued as of December 31, 2014 and September 30, 2015, respectively, and 102,296 and 103,817 shares outstanding as of December 31, 2014 and September 30, 2015, respectively |
|
1,986 |
|
2,001 |
|
Additional paid-in capital |
|
2,035,382 |
|
2,028,637 |
|
Accumulated deficit |
|
(1,217,727 |
) |
(1,248,655 |
) |
Treasury stock, at cost, 96,327 shares as of December 31, 2014 and September 30, 2015 |
|
(744,857 |
) |
(744,857 |
) |
Total stockholders equity |
|
74,784 |
|
37,126 |
|
Total liabilities and stockholders equity |
|
$ |
910,161 |
|
$ |
768,026 |
|
EARTHLINK HOLDINGS CORP.
Reconciliation of Net Loss to Adjusted EBITDA (5)
(in thousands)
|
|
Three Months Ended |
|
|
|
September 30, |
|
June 30, |
|
September 30, |
|
|
|
2014 |
|
2015 |
|
2015 |
|
Net loss |
|
$ |
(1,952 |
) |
$ |
(9,922 |
) |
$ |
(10,523 |
) |
Interest expense and other, net |
|
13,970 |
|
14,112 |
|
11,731 |
|
Income tax provision (benefit) |
|
(4,329 |
) |
410 |
|
2,060 |
|
Depreciation and amortization |
|
46,716 |
|
47,723 |
|
46,502 |
|
Impairment of long-lived assets (1) |
|
589 |
|
|
|
|
|
Stock-based compensation expense |
|
2,930 |
|
3,814 |
|
3,635 |
|
Restructuring, acquisition and integration-related costs (2) |
|
1,108 |
|
3,978 |
|
5,486 |
|
Loss on extinguishment of debt (3) |
|
|
|
5,966 |
|
2,482 |
|
Adjusted EBITDA (5) |
|
$ |
59,032 |
|
$ |
66,081 |
|
$ |
61,373 |
|
Reconciliation of Net Loss to Unlevered Free Cash Flow (5)
(in thousands)
|
|
Three Months Ended |
|
|
|
September 30, |
|
June 30, |
|
September 30, |
|
|
|
2014 |
|
2015 |
|
2015 |
|
Net loss |
|
$ |
(1,952 |
) |
$ |
(9,922 |
) |
$ |
(10,523 |
) |
Interest expense and other, net |
|
13,970 |
|
14,112 |
|
11,731 |
|
Income tax provision (benefit) |
|
(4,329 |
) |
410 |
|
2,060 |
|
Depreciation and amortization |
|
46,716 |
|
47,723 |
|
46,502 |
|
Impairment of long-lived assets (1) |
|
589 |
|
|
|
|
|
Stock-based compensation expense |
|
2,930 |
|
3,814 |
|
3,635 |
|
Restructuring, acquisition and integration-related costs (2) |
|
1,108 |
|
3,978 |
|
5,486 |
|
Loss on extinguishment of debt (3) |
|
|
|
5,966 |
|
2,482 |
|
Purchases of property and equipment |
|
(24,890 |
) |
(20,873 |
) |
(22,011 |
) |
Unlevered Free Cash Flow (5) |
|
$ |
34,142 |
|
$ |
45,208 |
|
$ |
39,362 |
|
Reconciliation of Net Cash Provided by Operating Activities to Unlevered Free Cash Flow (5)
(in thousands)
|
|
Three Months Ended |
|
|
|
September 30, |
|
June 30, |
|
September 30, |
|
|
|
2014 |
|
2015 |
|
2015 |
|
Net cash provided by operating activities |
|
$ |
62,063 |
|
$ |
33,262 |
|
$ |
73,962 |
|
Income tax provision (benefit) |
|
(4,329 |
) |
410 |
|
2,060 |
|
Non-cash income taxes |
|
4,391 |
|
(196 |
) |
(151 |
) |
Interest expense and other, net |
|
13,970 |
|
14,112 |
|
11,731 |
|
Amortization of debt discount and debt issuance costs |
|
(1,029 |
) |
(994 |
) |
(849 |
) |
Restructuring, acquisition and integration-related costs (2) |
|
1,108 |
|
3,978 |
|
5,486 |
|
Changes in operating assets and liabilities |
|
(16,918 |
) |
16,255 |
|
(30,951 |
) |
Purchases of property and equipment |
|
(24,890 |
) |
(20,873 |
) |
(22,011 |
) |
Other, net |
|
(224 |
) |
(746 |
) |
85 |
|
Unlevered Free Cash Flow (5) |
|
$ |
34,142 |
|
$ |
45,208 |
|
$ |
39,362 |
|
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
$ |
(25,390 |
) |
$ |
(20,873 |
) |
$ |
(22,011 |
) |
Net cash used in financing activities |
|
$ |
(5,513 |
) |
$ |
(33,080 |
) |
$ |
(51,690 |
) |
EARTHLINK HOLDINGS CORP.
Supplemental Schedule of New Segment Information (6)
(in thousands)
|
|
Three Months |
|
Nine Months |
|
|
|
Ended |
|
Ended |
|
|
|
September 30, 2015 |
|
September 30, 2015 |
|
Enterprise/Mid-Market |
|
|
|
|
|
Revenues |
|
$ |
110,051 |
|
$ |
338,809 |
|
Cost of revenues (excluding depreciation and amortization) |
|
54,574 |
|
167,062 |
|
Gross margin |
|
55,477 |
|
171,747 |
|
Small Business |
|
|
|
|
|
Revenues |
|
72,876 |
|
230,577 |
|
Cost of revenues (excluding depreciation and amortization) |
|
34,059 |
|
106,577 |
|
Gross margin |
|
38,817 |
|
124,000 |
|
Carrier/Transport |
|
|
|
|
|
Revenues |
|
34,190 |
|
101,606 |
|
Cost of revenues (excluding depreciation and amortization) |
|
14,839 |
|
46,124 |
|
Gross margin |
|
19,351 |
|
55,482 |
|
Consumer Services |
|
|
|
|
|
Revenues |
|
53,787 |
|
166,023 |
|
Cost of revenues (excluding depreciation and amortization) |
|
18,919 |
|
59,138 |
|
Gross margin |
|
34,868 |
|
106,885 |
|
Consolidated |
|
|
|
|
|
Revenues |
|
270,904 |
|
837,015 |
|
Cost of revenues (excluding depreciation and amortization) |
|
122,391 |
|
378,901 |
|
Gross margin |
|
148,513 |
|
458,114 |
|
Selling, general and administrative expenses |
|
90,775 |
|
280,382 |
|
Depreciation and amortization |
|
46,502 |
|
141,489 |
|
Restructuring, acquisition and integration-related costs |
|
5,486 |
|
14,836 |
|
Interest expense and other, net |
|
11,731 |
|
39,780 |
|
Loss on extinguishment of debt |
|
2,482 |
|
9,734 |
|
Loss from continuing operations before income taxes |
|
$ |
(8,463 |
) |
$ |
(28,107 |
) |
EARTHLINK HOLDINGS CORP.
Supplemental Schedule of Previous Segment Information (6)
(in thousands)
|
|
Three Months Ended |
|
Nine Months Ended |
|
|
|
September 30, |
|
September 30, |
|
|
|
2014 |
|
2015 |
|
2014 |
|
2015 |
|
Business Services |
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
237,054 |
|
$ |
217,117 |
|
$ |
705,273 |
|
$ |
670,992 |
|
Cost of revenues (excluding depreciation and amortization) |
|
113,785 |
|
103,472 |
|
358,604 |
|
319,763 |
|
Gross margin |
|
123,269 |
|
113,645 |
|
346,669 |
|
351,229 |
|
Direct segment operating expenses |
|
88,078 |
|
77,708 |
|
260,523 |
|
240,494 |
|
Segment operating income |
|
$ |
35,191 |
|
$ |
35,937 |
|
$ |
86,146 |
|
$ |
110,735 |
|
Consumer Services |
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
60,691 |
|
$ |
53,787 |
|
$ |
187,150 |
|
$ |
166,023 |
|
Cost of revenues (excluding depreciation and amortization) |
|
21,910 |
|
18,919 |
|
67,155 |
|
59,138 |
|
Gross margin |
|
38,781 |
|
34,868 |
|
119,995 |
|
106,885 |
|
Direct segment operating expenses |
|
10,573 |
|
7,441 |
|
33,534 |
|
23,095 |
|
Segment operating income |
|
$ |
28,208 |
|
$ |
27,427 |
|
$ |
86,461 |
|
$ |
83,790 |
|
Consolidated |
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
297,745 |
|
$ |
270,904 |
|
$ |
892,423 |
|
$ |
837,015 |
|
Cost of revenues (excluding depreciation and amortization) |
|
135,695 |
|
122,391 |
|
425,759 |
|
378,901 |
|
Gross margin |
|
162,050 |
|
148,513 |
|
466,664 |
|
458,114 |
|
Direct segment operating expenses |
|
98,651 |
|
85,149 |
|
294,057 |
|
263,589 |
|
Segment operating income |
|
63,399 |
|
63,364 |
|
172,607 |
|
194,525 |
|
Depreciation and amortization |
|
46,716 |
|
46,502 |
|
139,186 |
|
141,489 |
|
Impairment of long-lived assets (1) |
|
589 |
|
|
|
11,360 |
|
|
|
Restructuring, acquisition and integration-related costs (2) |
|
1,108 |
|
5,486 |
|
10,993 |
|
14,836 |
|
Corporate operating expenses |
|
7,297 |
|
5,626 |
|
22,973 |
|
16,793 |
|
Interest expense and other, net |
|
13,970 |
|
11,731 |
|
42,008 |
|
39,780 |
|
Loss on extinguishment of debt |
|
|
|
2,482 |
|
|
|
9,734 |
|
Loss from continuing operations before income taxes |
|
$ |
(6,281 |
) |
$ |
(8,463 |
) |
$ |
(53,913 |
) |
$ |
(28,107 |
) |
EARTHLINK HOLDINGS CORP.
Supplemental Schedule of Revenue Detail
(in thousands)
|
|
Three Months Ended |
|
Nine Months Ended |
|
|
|
September 30, |
|
September 30, |
|
|
|
2014 |
|
2015 |
|
2014 |
|
2015 |
|
Business Services |
|
|
|
|
|
|
|
|
|
Retail services |
|
$ |
189,122 |
|
$ |
178,207 |
|
$ |
573,028 |
|
$ |
554,995 |
|
Wholesale services |
|
42,788 |
|
34,190 |
|
117,200 |
|
101,606 |
|
Other services |
|
5,144 |
|
4,720 |
|
15,045 |
|
14,391 |
|
Total revenues |
|
237,054 |
|
217,117 |
|
705,273 |
|
670,992 |
|
Consumer Services |
|
|
|
|
|
|
|
|
|
Access services |
|
49,516 |
|
42,392 |
|
154,665 |
|
132,310 |
|
Value-added services |
|
11,175 |
|
11,395 |
|
32,485 |
|
33,713 |
|
Total revenues |
|
60,691 |
|
53,787 |
|
187,150 |
|
166,023 |
|
Total Revenues |
|
$ |
297,745 |
|
$ |
270,904 |
|
$ |
892,423 |
|
$ |
837,015 |
|
EARTHLINK HOLDINGS CORP.
Supplemental Financial Data
|
|
September 30, |
|
June 30, |
|
September 30, |
|
|
|
2014 |
|
2015 |
|
2015 |
|
|
|
|
|
|
|
|
|
Number of employees at end of period (7) |
|
2,843 |
|
2,314 |
|
2,144 |
|
EARTHLINK HOLDINGS CORP.
Consumer Services Operating Metrics
|
|
Three Months Ended |
|
|
|
September 30, |
|
June 30, |
|
September 30, |
|
|
|
2014 |
|
2015 |
|
2015 |
|
|
|
|
|
|
|
|
|
Average narrowband subscribers (8) |
|
501,000 |
|
469,000 |
|
466,000 |
|
Average broadband subscribers (8) |
|
372,000 |
|
313,000 |
|
298,000 |
|
Average consumer subscribers (8) |
|
873,000 |
|
782,000 |
|
764,000 |
|
|
|
|
|
|
|
|
|
ARPU (9) |
|
$ |
23.18 |
|
$ |
23.62 |
|
$ |
23.48 |
|
Churn rate (10) |
|
2.2 |
% |
1.9 |
% |
1.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
EARTHLINK HOLDINGS CORP.
Footnotes to Consolidated Financial Highlights
1. During the three and nine months ended September 30, 2014, the Company recorded $0.6 million and $11.4 million, respectively, for impairment of property and equipment, which consisted of impairment of work in progress for information technology projects 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 September 30, |
|
Nine Months Ended September 30, |
|
|
|
2014 |
|
2015 |
|
2014 |
|
2015 |
|
|
|
|
|
|
|
|
|
|
|
Integration-related costs |
|
$ |
1,270 |
|
$ |
1,526 |
|
$ |
7,985 |
|
$ |
4,501 |
|
Severance, retention and other employee costs |
|
39 |
|
2,986 |
|
2,005 |
|
6,935 |
|
Facility-related costs |
|
(203 |
) |
974 |
|
999 |
|
3,400 |
|
Transaction-related costs |
|
2 |
|
|
|
4 |
|
|
|
Restructuring, acquisition and integration-related costs |
|
$ |
1,108 |
|
$ |
5,486 |
|
$ |
10,993 |
|
$ |
14,836 |
|
Restructuring, acquisition and integration-related costs consist of costs related to the Companys restructuring, acquisition and integration-related activities. Such costs include:1) integration-related costs, such as system conversions, 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. During the three and nine months ended September 30, 2015, the Company recorded $2.5 million and $9.7 million, respectively, for losses on extinguishment of debt. The losses consisted of premiums paid on the Companys debt repurchases and redemptions, the write-off of unamortized discount on debt and the write-off of unamortized debt issuance costs. In March 2015, the Company repurchased $21.1 million outstanding principal of its 8.875% Senior Notes due 2019 (the Senior Notes) in the open market. In April 2015, the Company repurchased $5.0 million outstanding principal of its Senior Notes in the open market. In June 2015, the Company redeemed $70.0 million aggregate principal amount of its Senior Notes pursuant to terms under the indenture. In August 2015, the Company repurchased $30.0 million aggregate principal amount of our Senior Notes in the open market.
4. The operating results of the Companys 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 Companys 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 long-lived assets, restructuring, acquisition and integration-related costs, loss on extinguishment of debt, 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, loss on extinguishment of debt, and gain (loss) from discontinued operations, net of tax, less cash used for purchases of property and equipment.
Adjusted EBITDA and Unlevered Free Cash Flow 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 periods results and provides a better measure of comparability. There are limitations to using these non-GAAP financial measures. Adjusted EBITDA and Unlevered Free Cash Flow are not indicative of cash provided or used by operating activities and may differ from comparable information provided by other companies. Adjusted EBITDA and Unlevered Free Cash Flow 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 Operating Decision Maker reviews its operating results in assessing performance and allocating resources. The Company has historically operated two reportable segments, Business Services and Consumer Services. The Companys Business Services segment provided a broad range of data, voice and managed services to retail and wholesale business customers. The Companys Consumer Services segment provided nationwide Internet access and related value-added services to residential customers.
During the three months ended September 30, 2015, the Company implemented certain organizational, operational and reporting changes that resulted in the disaggregation of its Business Services segment into three separate reportable segments: Enterprise/Mid-Market, Small Business and Carrier/Transport. The Consumer Services segment was not impacted. The Companys new reportable segments are strategic business units that are aligned around distinct customer categories. The Company reorganized its business around these business units to optimize operations. The Company began reporting the disaggregated information to its Chief Operating Decision Maker during the three months ended September 30, 2015. As a result, the Company now operates the following four reportable segments:
· Enterprise/Mid-Market. The Companys Enterprise/Mid-Market segment provides a broad range of data, voice and managed network services to distributed multi-site business customers.
· Small Business. The Companys Small Business segment provides a broad range of data, voice and managed network services to small, often single-site business customers.
· Carrier/Transport. The Companys Carrier/Transport segment provides transmission capacity and other data, voice and managed network services to telecommunications carriers and large enterprises.
· Consumer Services. The Companys Consumer Services segment provides nationwide Internet access and related value-added services to residential customers.
Segment information for the three and nine months ended September 30, 2014 has not been restated to reflect the Companys new reportable segment structure. The Company began recording revenue and expense transactions at the new segment level in 2015. Management has determined that it is impracticable to restate financial information prior to 2015 to conform to the new reportable segment structure due to the level of effort required to segment customers that terminated service prior to 2015 and identify the related cost of revenue associated with those customers, as this information is not currently available. For comparability purposes, the Company presented segment results under the Companys previous reportable segment structure for the three and nine months ended September 30, 2014 and 2015.
The Company evaluates performance of its new segment structure based on segment gross margin. Segment gross margin includes revenues from external customers and related cost of revenues. Costs excluded from segment gross margin include selling, general and administrative expenses, depreciation and amortization, impairment of goodwill and intangible assets, restructuring, acquisition and integration-related costs, and interest expense and other, net, as they are not considered in the measurement of segment performance.
The Company evaluated performance of its previous segment structure based on segment operating income. Segment operating income includes revenues from external customers, related cost of revenues and operating expenses directly attributable to the segment, which included costs over which segment managers have direct discretionary control, such as advertising and marketing programs, customer support expenses, product development expenses, certain technology and facilities expenses, billing operations and provisions for doubtful accounts. Segment operating income excluded other income and expense items and certain expenses over which segment managers do not have discretionary control. Costs excluded from segment operating income include various corporate expenses (consisting of certain costs such as corporate management, human resources, finance and legal), depreciation and amortization, impairment of goodwill and intangible assets, restructuring, acquisition and integration-related costs, stock-based compensation expense, and interest expense and other, net, as they were not considered in the measurement of segment performance.
7. Represents full-time equivalents.
8. 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.
9. 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. Average monthly revenue for the three months ended June 30, 2015 excludes a $0.6 million favorable settlement adjustment recorded during the period.
10. 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.
Exhibit 99.2
[LOGO]
Q3 2015 Earnings Highlights November 3, 2015
Participants Joe Eazor Chief Executive Officer and President Louis Alterman Executive Vice President and Chief Financial Officer Trey Huffman Senior Vice President and Treasurer
Business Unit Operations Update Leverage Fiber Routes. Invest to Drive Growth. Customer Base Operating Strategy Invest in Service capabilities. Revamp Go-to-Market motion to Drive Growth. Consumer Small Business Carrier / Transport Enterprise & Mid-Market Individuals & families Telco providers & large enterprises Small, often single location businesses Distributed multi-location companies Sales wins included Corner Bakery and Hahn Automotive Transforming go-to-market and making investments to improve performance Performing as planned Declines continue to moderate Churn down to record low of 1.7% Strong demand for transport, including demand from Enterprises (non-Carrier) Another near record sales quarter Q315 Results Manage for cash, protect revenue. Churn improved QoQ Improving analytics to manage the business (churn, pricing, etc.) Renewals increased by ~50% from 2014
Continued strong financial performance Adjusted EBITDA(1) of $61 million up 4% over Q3 2014 Continued improvement in Cost-of-Revenue and SG&A cost structure Year-to-date Unlevered Free Cash Flow(1) of $128 million vs. $86 million through Q3 2014 Increasing full year guidance again Adjusted EBITDA and Unlevered Free Cash Flow are Non-GAAP measures. See appendix for additional information on non-GAAP measures. Q3 2015 Financial Highlights Improved balance sheet Repurchased another $30 million of 8-7/8% debt Reduced revolver balance by $15 million Total Gross and Net Debt reduction of $45 million Year-to-date, reduced net debt by $86 million and annual debt service run rate by $10 million
Q3 2015 Business Unit Revenue & Gross Margin Revenue Enterprise & Mid-market customers include mid-market companies and large enterprises. These customers purchase a mix of growth products and mature telecom products. We are transforming our go-to-market motion to accelerate growth in this area. Small Business customers have no more than a few locations. They typically purchase mature telecom services. We are focused on increasing renewals, reducing churn, and sustaining cash flow. Carrier/Transport customers are large enterprises and traditional telecom carriers. Revenues include mature telecom services sold to carriers as well as transport services sold to both enterprises and carriers. EarthLinks transport services have relatively higher margin and are growing as we capitalize on strong demand. Consumer revenues continue to perform as expected, and churn hit record low of 1.7% in Q3 2015. Cost of Revenue & Gross Margin Gross Margin rates for Carrier/Transport have expanded due to favorable changes in product mix. Overall gross margin rates are up from 2014, driven by product mix changes, pricing actions and continued focus on managing network costs . NOTES: For Q1, Q2, and Q3 respectively, Enterprise & Mid-market revenue includes settlements of $1.1M, $0.5M, and $0.6M, and Small Business revenue includes $1.7 M, $0.3M, and $0.4M. For Q3 14, Q4 14, Q1 15, Q2 15, and Q3 15, Carrier/Transport revenue includes settlements and adjustments of $6.8M, $2.9M, $(0.8)M, $0.2M and $0.3M respectively. Consumer revenue includes a revenue adjustment of $0.6 in Q2 15. Cost of Revenue for the business segments includes adjustments and settlements of $4.3M, $3.6M, and $4.4M for Q1, Q2 and Q3 respectively. Consumer Cost of Revenue includes an unfavorable adjustment of $0.5M in Q2. Q3 2014 Q4 2014 Q1 2015 Q2 2015 Q3 2015 Revenue Enterprise & Mid-Market $114.4 $114.4 $110.1 Small Business 78.6 79.0 72.9 Total Retail Revenues $194.2 $188.7 $193.0 $193.4 $183.0 Carrier/Transport 42.8 36.9 33.3 34.1 34.2 Consumer 60.7 58.8 56.1 56.1 53.8 Total Revenues $297.7 $284.5 $282.4 $283.7 $270.9 Gross Margin Enterprise & Mid-Market $58.1 $58.2 $55.5 Small Business 41.3 43.9 38.8 Carrier/Transport 17.4 18.7 19.4 Consumer 36.1 35.9 34.9 Total Gross Margin $162.1 $152.8 $153.0 $156.6 $148.5 Gross Margin (%) Enterprise & Mid-Market 51% 51% 50% Small Business 53% 56% 53% Carrier/Transport 52% 55% 57% Consumer 64% 64% 65% Total Gross Margin (%) 54% 54% 54% 55% 55% (figures in US$ millions) Business Unit
Q3 2015 Operating & Financial Results Adjusted EBITDA Business unit model driving operating efficiency SG&A down 14% from Q3 14 Income from Operations Third straight quarter of positive income from operations Net Loss Q3 includes $2.5 million loss on repurchase of debt and $5.5 million in restructuring Unlevered Free Cash Flow Maintained focus on efficiently managing capital expenses We are willing to make investments with positive return to improve our growth profile Adjusted EBITDA, Adjusted EBITDA Margin and Unlevered Free Cash Flow are Non-GAAP measures. See appendix for additional information on non-GAAP measures. Fully Diluted Weighted Average Shares $ Millions Q3 '14 Q2 '15 Q3 '15 Var to Q2 '15 Total Revenue 297.7 $ 283.7 $ 270.9 $ (12.8) $ Cost of Revenue 135.7 127.0 122.4 (4.6) Total Gross Margin 162.1 $ 156.6 $ 148.5 $ (8.1) $ Gross Margin % 54.4% 55.2% 54.8% -0.4% Selling, G&A Expenses 105.9 94.3 90.8 (3.6) Adjusted EBITDA (1) 59.0 $ 66.1 $ 61.4 $ (4.7) $ Adjusted EBITDA Margin % (1) 19.8% 23.3% 22.7% -0.6% Income from Operations 7.7 $ 10.6 $ 5.8 $ (4.8) $ Net Income/(Loss) (2.0) $ (9.9) $ (10.5) $ (0.6) $ Shares Outstanding (2) 102 103 104 1 Earnings Per Share (0.02) $ (0.10) $ (0.10) $ - $ Capital Expenditures 24.9 20.9 22.0 1.1 Unlevered Free Cash Flow (1) 34.1 45.2 39.4 (5.9)
Balance Sheet Highlights (figures in millions) Q3 '14 Q2 '15 Q3 '15 EarthLink Cash $ 130 $ 87 $ 88 8 7/8% Senior Notes due 2019 300 204 174 (Callable at 104.4. Next call in May 2016 at 102.2) 7 3/8% Senior Secured Notes due 2020 300 300 300 (First call in June 2016 at 105.5) $135 M Credit Facility - (L + 325-350)(4) - 55 40 Total Debt(1) 600 559 514 Net Debt $ 470 $ 472 $ 426 TTM Adjusted EBITDA(2) $ 207 $ 239 $ 241 Total Debt/Adj. EBITDA(2) 2.9x 2.3x 2.1x Net Debt/Adj. EBITDA(2) 2.3x 2.0x 1.8x Annual Run Rate Debt Service $ 49 $ 42 $ 39 TTM Adjusted EBITDA(2)/Annual Debt Svc. 4.2x 5.7x 6.2x Cash Flow Summary (figures in millions) Q3 '15 Beginning Cash & Cash Equivalents $ 87 Adjusted EBITDA(2) 61 Capital Expenditures (22) Integration & Restructuring (4) Senior Notes Repurchase(3) (32) Credit Facility Repayment (15) Dividends (5) Other/Changes in Net Working Capital 16 Ending Cash & Cash Equivalents $ 88 Q3 2015 Balance Sheet and Cash Flow We reduced our debt again in Q3 2015. Year-to-date we have retired $126 million of our 8.875% Senior Notes Reduced gross leverage ratio from 2.9x in Q3 14 to 2.1x in Q3 15 Net leverage ratio now less than 2.0x Reduced annual run rate debt service by $3 million in Q3 2015, and $10 million year-to-date We produced $39 million in Unlevered Free Cash Flow in the quarter. Repurchased $30 million in Senior Notes & reduced Credit Facility balance by $15 million We have paid a dividend for 25 consecutive quarters Excludes capital leases Adjusted EBITDA is a Non-GAAP measure. See appendix for additional information on non-GAAP measures. Payments for repurchases of Senior Notes in Q3 totaled $32M. The payments included $30 million principal and $2 million in premium and interest. As of September 30, 2015, $40 million outstanding Credit Facility debt is recorded on balance sheet as $15 million in short-term debt and $25 million in long-term debt. This image cannot currently be displayed.
2015 Full Year Guidance FY 2015 Original Guidance (as of Feb. 15) FY 2015 Revised Guidance (as of Aug. 15) FY 2015 Guidance (as of Oct. 15) $ Millions Low End High End Low End High End Low End High End Revenue $1,045 $1,065 $1,075 $1,085 $1,085 $1,092 Adjusted EBITDA(1) $195 $210 $225 $235 $235 $241 Capital Expenditures $90 $100 $85 $95 $80 $90 Net Loss $(75) $(65) $(50) $(46) $(48) $(44) Adjusted EBITDA is a Non-GAAP measure. See appendix for additional information on non-GAAP measures
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EarthLink Customers Financial Services Retail Health-care Gov. & Other
EarthLink 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, loss on extinguishment of debt, 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, restructuring, acquisition and integration-related costs, loss on extinguishment of debt, and gain (loss) from discontinued operations, net of tax, less cash used for purchases of property and equipment. Adjusted EBITDA Margin is defined as Adjusted EBITDA divided by total revenue. Adjusted EBITDA, Unlevered Free Cash Flow, and Adjusted EBITDA Margin 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 periods results and provides a better measure of comparability. There are limitations to using these non-GAAP financial measures. Adjusted EBITDA, Unlevered Free Cash Flow, Adjusted EBITDA Margin and Income (Loss) from Operations Before Restructuring 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 EBITDA Margin 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. Non GAAP Information
2015 Guidance Non GAAP Reconciliation Year Ending December 31, 2015 Net loss $(48) - $(44) Interest expense and other, net 51 Income tax provision 3 - 4 Depreciation and amortization 188 Stock-based compensation expense 15 Restructuring, acquisition and integration-related costs 16 - 17 Loss on extinguishment of debt 10 Adjusted EBITDA $235- $241 EARTHLINK HOLDINGS CORP. Reconciliation of Net Loss to Adjusted EBITDA (in millions)
Historical Non GAAP Reconciliations September 30, December 31, March 31, June 30, September 30, 2014 2014 2015 2015 2015 Net loss (1,952) $ (22,492) $ (10,483) $ (9,922) $ (10,523) $ Interest expense and other, net 13,970 14,253 13,937 14,112 11,731 Income tax provision (benefit) (4,329) (1,152) 351 410 2,060 Depreciation and amortization 46,716 47,686 47,264 47,723 46,502 Stock-based compensation expense 2,930 2,392 3,415 3,814 3,635 Impairment of long-lived assets 589 2,974 - - - Restructuring, acquisition and integration-related costs 1,108 9,095 5,372 3,978 5,486 Loss on extinguishment of debt - - 1,286 5,966 2,482 (Gain) loss from discontinued operations, net of tax - 442 - - - Adjusted EBITDA 59,032 $ 53,198 $ 61,142 $ 66,081 $ 61,373 $ Total Revenue 297,745 $ 284,472 $ 282,447 $ 283,664 $ 270,904 $ Adjusted EBITDA Margin 19.8% 18.7% 21.6% 23.3% 22.7% EARTHLINK HOLDINGS CORP. Reconciliation of Net Loss to Adjusted EBITDA (in thousands) Three Months Ended
Additional Non GAAP Reconciliations September 30, December 31, March 31, June 30, September 30, September 30, September 30, September 30, 2014 2014 2015 2015 2015 2013 2014 2015 Net loss (1,952) $ (22,492) $ (10,483) $ (9,922) $ (10,523) $ (258,954) $ (50,260) $ (30,928) $ Interest expense and other, net 13,970 14,253 13,937 14,112 11,731 46,714 42,008 39,780 Income tax provision (benefit) (4,329) (1,152) 351 410 2,060 (40,029) (3,592) 2,821 Depreciation and amortization 46,716 47,686 47,264 47,723 46,502 134,314 139,186 141,489 Stock-based compensation expense 2,930 2,392 3,415 3,814 3,635 9,218 10,208 10,864 Impairment of goodwill and long-lived assets 589 2,974 - - - 255,599 11,360 - Restructuring, acquisition and integration-related costs 1,108 9,095 5,372 3,978 5,486 28,468 10,993 14,836 Loss on extinguishment of debt - - 1,286 5,966 2,482 - - 9,734 (Gain) loss from discontinued operations, net of tax - 442 - - - 1,622 (61) - Purchases of property and equipment (24,890) (28,624) (17,529) (20,873) (22,011) (109,647) (74,239) (60,413) Unlevered Free Cash Flow 34,142 $ 24,574 $ 43,613 $ 45,208 $ 39,362 $ 67,305 $ 85,603 $ 128,183 $ September 30, December 31, March 31, June 30, September 30, September 30, September 30, September 30, 2014 2014 2015 2015 2015 2013 2014 2015 Net cash provided by operating activities 62,063 $ 38,657 $ 18,865 $ 33,262 $ 73,962 $ 83,430 $ 101,338 $ 126,089 $ Income tax provision (benefit) (4,329) (1,152) 351 410 2,060 (10,029) (3,592) 2,821 Non-cash income taxes 4,391 (4,530) (185) (196) (151) 10,206 3,939 (532) Interest expense and other, net 13,970 14,253 15,223 14,112 11,731 46,714 42,008 39,780 Amortization of debt discount and issuance costs (1,029) (1,037) (1,029) (994) (849) (1,044) (3,067) (2,872) Restructuring, acquisition and integration-related costs 1,108 9,095 5,372 3,978 5,486 28,468 10,993 14,836 Changes in operating assets and liabilities (16,918) (2,578) 23,741 16,255 (30,951) 19,274 8,251 9,045 Purchases of property and equipment (24,890) (28,624) (17,529) (20,873) (22,011) (109,647) (74,239) (60,413) Other, net (224) 490 (1,196) (746) 85 (67) (28) (571) Unlevered Free Cash Flow 34,142 $ 24,574 $ 43,613 $ 45,208 $ 39,362 $ 67,305 $ 85,603 $ 128,183 $ Net cash used in investing activities (25,390) (28,624) (17,529) (20,873) (22,011) (78,533) (74,153) (60,413) Net cash used in financing activities (5,513) (5,512) (27,416) (33,080) (51,690) (46,615) (14,209) (112,186) EARTHLINK HOLDINGS CORP. Reconciliation of Net Loss to Unlevered Free Cash Flow (in thousands) Three Months Ended Nine Months Ended Three Months Ended EARTHLINK HOLDINGS CORP Reconciliation of Net Cash Provided by Operating Activities to Unlevered Free Cash Flow (in thousands) Nine Months Ended
Cautionary Information Regarding Forward Looking Statements This presentation 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 successfully transition to a leading managed network, security and cloud services 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 failure to achieve operating efficiencies would adversely affect our results of operations and cash flows; (4) that we may have to undertake further restructuring plans that would require additional charges; (5) that is we are unable to adapt to changes in technology and customer demands, we may not remain competitive, and our revenues and operating results could suffer; (6) that we may be unable to successfully divest non-strategic products, which could adversely affect our results of operations(7) that we may be unable to successfully make or integrate acquisitions, which could adversely affect our results of operations; (8) that we face significant competition in the communications and managed services industry that could reduce our profitability; (9) that failure to retain existing customers could adversely affect our results of operations and cash flows; (10) 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; (11) 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; (12) 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; (13) that we may experience reductions in switched access and reciprocal compensation revenue; (14) that failure to obtain and maintain necessary permits and rights-of-way could interfere with our network infrastructure and operations; (15) 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; (16) that we obtain a majority of our network equipment and software from a limited number of third-party suppliers; (17) that our commercial and alliance arrangements may not be renewed or may not generate expected benefits, which could adversely affect our results of operations; (18) our consumer business is dependent on the availability of third-party network service providers; (19) that we face significant competition in the Internet access industry that could reduce our profitability; (20) that the continued decline of our consumer access subscribers will adversely affect our results of operations; (21) that potential regulation of Internet service providers could adversely affect our operations; (22) that cyber security breaches could harm our business; (23) that privacy concerns relating to our business could damage our reputation and deter current and potential users from using our services; (24) 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; (25) that our business depends on effective business support systems and processes; (26) 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; (27) 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; (28) that we may not be able to protect our intellectual property; (29) 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; (30) that unfavorable general economic conditions could harm our business; (31) that government regulations could adversely affect our business or force us to change our business practices; (32) that our business may suffer if third parties are unable to provide services or terminate their relationships with us; (33) that we may be required to recognize impairment charges on our goodwill and other intangible assets, which would adversely affect our results of operations and financial position; (34) that 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; (35) that our indebtedness could adversely affect our financial health and limit our ability to react to changes in our business and industry; (36) 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; (37) that our debt agreements include restrictive covenants, and failure to comply with these covenants could trigger acceleration of payment of outstanding indebtedness; (38) that we may reduce, or cease payment of, quarterly cash dividends; (39) that our stock price may be volatile; (40) 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 (41) 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 managements 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, 2014.
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EarthLink Holdings Corp. (NASDAQ:ELNK)
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