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EarthLink Announces Fourth Quarter and Full Year 2012 Results

February 19, 2013

ATLANTA, Feb. 19, 2013 /PRNewswire/ — EarthLink, Inc. (NASDAQ: ELNK) today announced financial results for its fourth quarter and full year ended December 31, 2012.

Highlights for the fourth quarter include:

  • Net income of $0.0 million or $0.00 per share
  • Adjusted EBITDA (a non-GAAP measure) of $66.5 million
  • Net cash provided by operating activities of $12.5 million
  • Unlevered free cash flow (a non-GAAP measure) of $(0.2) million
  • Ending cash and marketable securities balance of $204.5 million

“We continue to accelerate our transformation to a nationwide provider of IT services. To capitalize on the growing demand in this rapidly emerging marketplace, we are also continuing the process of optimizing the cost structure in our traditional telecom services, while aggressively investing in our IT services, MPLS and hosted voice growth businesses,” said EarthLink Chairman and Chief Executive Officer Rolla P. Huff. “EarthLink’s go-to-market approach is evolving to put additional focus on larger strategic markets that align with our cloud services and network infrastructure, as well as on customers with the highest propensity to find value in our deep portfolio of IT services.”

Financial and Operating Results
EarthLink reported revenue of $331.6 million for the fourth quarter of 2012 and $1.35 billion for the full year 2012. Fourth quarter revenue included an $8 million credit from a successful customer settlement, as well as a $2 million favorable credit to operating expenses. Business services segment revenue comprised 77% of EarthLink’s revenue in the fourth quarter of 2012. On a pro-forma basis, for the full year 2012 business services segment revenue declined 4.9% over full year 2011, an improvement versus the 7.8% decline in 2011 versus 2010. EarthLink’s retail growth business reached an approximate $140 million annualized revenue run rate in the fourth quarter of 2012, with a year-over-year organic growth rate of approximately 21% percent. EarthLink’s consumer segment continues to perform well. Subscriber churn in the consumer segment was 2.3% for the fourth quarter of 2012 compared to 2.5% in the third quarter of 2012 and 2.6% in the fourth quarter of 2011. Broadband services comprised 68% of consumer access revenue in the fourth quarter of 2012.

EarthLink’s selling, general and administrative expenses were $111.3 million, or 34% of revenue for the fourth quarter of 2012, and $437.8 million, or 33% of revenue for the full year 2012. This compares to expenses of $110.6 million, or 32% of revenue, for the fourth quarter of 2011 and $406.4 million, or 31% of revenue, for the full year 2011.

Profitability and Other Financial Measures
Net income was $0.0 million, or $0.00 per share, in the fourth quarter of 2012 and $7.5 million, or $0.07 per share, for the full year 2012. These compared to net income of $4.2 million, or $0.04 per share, in the fourth quarter of 2011 and $34.6 million, or $0.32 per share, for the full year 2011.

EarthLink generated Adjusted EBITDA (a non-GAAP measure, see definition in “Non-GAAP Measures” below) of $66.5 million in the fourth quarter of 2012 and $280.0 million for the full year 2012. This compares to Adjusted EBITDA of $81.6 million in the fourth quarter of 2011 and $330.7 million for the full year 2011.

Balance Sheet and Cash Flow
Net cash provided by operating activities was $12.5 million in the fourth quarter of 2012 and $191.1 million for the full year 2012. This compared to net cash provided by operating activities of $29.8 million in the fourth quarter of 2011 and $146.2 million for the full year 2011.

EarthLink generated unlevered free cash flow (a non-GAAP measure, see definition in “Non-GAAP Measures” below) of $(0.2) million during the fourth quarter of 2012 and $132.7 million for the full year 2012. This compared to unlevered free cash flow of $50.6 million during the fourth quarter of 2011 and $228.8 million for the full year 2011. EarthLink’s capital expenditures were $66.6 million for the fourth quarter of 2012 and $147.4 million for the full year 2012. The fourth quarter and full year 2012 included $27.2 million of capital expenditures related to the data center and fiber network expansion projects announced in October 2012.

As of December 31, 2012, the company had cash and marketable securities of $204.5 million. The company made $5.2 million of dividend payments to shareholders in the fourth quarter of 2012 for a total of $21.1 million of dividend payments to shareholders during the full year 2012. EarthLink repurchased 1.9 million shares of common stock at an average price of $6.60 per share in the fourth quarter of 2012, and repurchased 3.7 million shares of common stock at an average price of $6.78 per share for the full year 2012. During the fourth quarter of 2012, EarthLink used $33.5 million to redeem $32.5 million aggregate principal amount of its ITC^DeltaCom notes at a redemption price of 103%.

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

Today EarthLink announced guidance for the full year 2013. Management expects revenue of $1.250 to $1.265 billion; Adjusted EBITDA of $210 million to $225 million; capital expenditures of $140 million to $155 million; and net loss of $(45) million to $(40) million for the full year 2013.

Non-GAAP Measures
Adjusted EBITDA is defined as net income (loss) before interest expense and other, net, income taxes, depreciation and amortization, stock-based compensation expense, impairment of goodwill and intangible assets, and restructuring, acquisition and integration-related costs. Unlevered free cash flow is defined as net income (loss) before interest expense and other, net, income taxes, depreciation and amortization, stock-based compensation expense, impairment of goodwill and intangible assets, and restructuring, acquisition and integration-related costs, 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 3 of the Consolidated Financial Highlights for a discussion of the presentation, comparability and use of such financial measures.

Conference Call for Analysts and Investors
Conference Call Details
Tuesday, February 19, 2013, at 8:30 a.m. ET hosted by EarthLink’s Chairman and Chief Executive Officer Rolla P. Huff, and Chief Financial Officer Bradley A. Ferguson.
Dial-in Number 800-706-0730
Participants should reference the conference ID number 94542548 or “EarthLink’s 4(th) Quarter 2012 Conference Call” and dial in 10 minutes prior to scheduled start time.
Webcast
A live Webcast of the conference call will be available at: http://ir.earthlink.net/
Presentation
An investor presentation to accompany the conference call and webcast will be available at: http://ir.earthlink.net/
Replay
Replay available from 11:30 a.m. ET on February 19 through 12:00 p.m. midnight on February 26, 2013. Dial toll-free 855-859-2056. The replay confirmation code is 94542548.
The Webcast will be archived on the company’s website at: http://ir.earthlink.net/events.cfm

2013 Annual Meeting
EarthLink has scheduled its 2013 Annual Meeting of Stockholders for Tuesday, April 23, 2013.

About EarthLink
EarthLink, Inc. (NASDAQ: ELNK) is a leading IT services and communications provider to more than 150,000 businesses and one million consumers nationwide. EarthLink empowers customers with managed services including cloud computing, managed and private cloud, and virtualization services such as managed hosting and cloud workspace. EarthLink also offers a robust portfolio of IT security, application hosting, colocation and IT support services. The company operates an extensive network spanning 28,800 route fiber miles with 90 metro fiber rings and 4 secure data centers providing ubiquitous nationwide data and voice IP service coverage across more than 90 percent of the country. Founded in 1994, EarthLink’s award-winning reputation for outstanding service and product innovation is supported by an experienced team of professionals focused on best-in-class customer care. For more information, visit EarthLink’s website at www.earthlink.net.

Cautionary Information Regarding Forward-Looking Statements
This press release includes “forward-looking” statements (rather than historical facts) that are subject to risks and uncertainties that could cause actual results to differ materially from those described. Although we believe that the expectations expressed in these forward-looking statements are reasonable, we cannot promise that our expectations will turn out to be correct. Our actual results could be materially different from and worse than our expectations. With respect to such forward-looking statements, we seek the protections afforded by the Private Securities Litigation Reform Act of 1995. These risks include, without limitation (1) that we may not be able to execute our strategy to be an IT services company for small and medium-sized businesses with IT and network security needs, which could adversely affect our results of operations and cash flows; (2) that we may not be able to grow revenues from our evolving Business Services product portfolio to offset declining revenues from our legacy Business Services products and from our Consumer Services segment, which could adversely affect our results of operations and cash flows; (3) that we may not be able to develop the optimal sales model necessary to implement our business strategy; (4) that we may be unsuccessful integrating acquisitions into our business, which could result in operating difficulties, losses and other adverse consequences; (5) that if we are unable to adapt to changes in technology and customer demands, we may not remain competitive, and our revenues and operating results could suffer; (6) that our failure to achieve operating efficiencies will adversely affect our results of operations; (7) that as a result of our continuing review of our business, we may have to undertake further restructuring plans that would require additional charges, including incurring facility exit and restructuring charges; (8) that unfavorable general economic conditions could harm our business; (9) that we may be unable to successfully identify, manage and assimilate future acquisitions, which could adversely affect our results of operations; (10) that we face significant competition in the IT services and communications industry that could reduce our profitability; (11) that decisions by legislative and regulatory authorities, including the Federal Communications Commission, relieving incumbent carriers of certain regulatory requirements, and possible further deregulation in the future, may restrict our ability to provide services and may increase the costs we incur to provide these services; (12) that if we are unable to interconnect with AT&T, Verizon and other incumbent carriers on acceptable terms, our ability to offer competitively priced local telephone services will be adversely affected; (13) that our operating performance will suffer if we are not offered competitive rates for the access services we need to provide our long distance services; (14) that we may experience reductions in switched access and reciprocal compensation revenue; (15) that failure to obtain and maintain necessary permits and rights-of-way could interfere with our network infrastructure and operations; (16) that we have substantial business relationships with several large telecommunications carriers, and some of our customer agreements may not continue due to financial difficulty, acquisitions, non-renewal or other factors, which could adversely affect our wholesale revenue and results of operations; (17) that we obtain a majority of our network equipment and software from a limited number of third-party suppliers; (18) that work stoppages experienced by other communications companies on whom we rely for service could adversely impact our ability to provision and service our customers; (19) that our commercial and alliance arrangements may not be renewed or may not generate expected benefits, which could adversely affect our results of operations; (20) that our consumer business is dependent on the availability of third-party network service providers; (21) that we face significant competition in the Internet access industry that could reduce our profitability; (22) that the continued decline of our consumer access subscribers, combined with the change in mix of our consumer access base from narrowband to broadband, will adversely affect our results of operations; (23) that potential regulation of Internet service providers could adversely affect our operations; (24) 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; (25) 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; (26) that we may not be able to protect our intellectual property; (27) 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; (28) that our business depends on effective business support systems and processes; (29) that privacy concerns relating to our business could damage our reputation and deter current and potential users from using our services; (30) that cyber security breaches could harm our business; (31) that interruption or failure of our network and information systems and other technologies could impair our ability to provide our services, which could damage our reputation and harm our operating results; (32) that government regulations could adversely affect our business or force us to change our business practices; (33) that regulatory audits have in the past, and could in the future, result in increased costs; (34) that our business may suffer if third parties are unable to provide services or terminate their relationships with us; (35) that we may be required to recognize impairment charges on our goodwill and intangible assets, which would adversely affect our results of operations and financial position; (36) that we may have exposure to greater than anticipated tax liabilities and the use of our net operating losses and certain other tax attributes could be limited in the future; (37) that our indebtedness could adversely affect our financial health and limit our ability to react to changes in our industry; (38) that we may require substantial capital to support business growth or refinance existing indebtedness, and this capital may not be available to us on acceptable terms, or at all; (39) that our debt agreements include restrictive covenants, and failure to comply with these covenants could trigger acceleration of payment of outstanding indebtedness; (40) that we may reduce, or cease payment of, quarterly cash dividends; (41) that our stock price may be volatile; and (42) that provisions of our third restated certificate of incorporation, amended and restated bylaws and other elements of our capital structure could limit our share price and delay a change of control of the company. 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, 2011.

                                                                                                                                            EARTHLINK, INC.
                                                                                                                     Unaudited Condensed Consolidated Statements Of Operations (1)
                                                                                                                                 (in thousands, except per share data)

                                                                                                                                                                  Twelve
                                                                                                                                                                                                 Months
                                                                                                                                                                                                 Ended
                                                                                                                                                                                                December
                                                                                                                                                                                                                                             Three Months Ended December 31,                                  31,
                                                                                                                                                       -------------------------------             ---
                                                                                                             2011                                2012                  2011                                2012
                                                                                                             ----                                 ---                   ---                                 ---

    Revenues                                                                                                       $350,237                                                  $331,637                                                  $1,314,104                                                     $1,348,977
    Operating costs and expenses:
    Cost of revenues (exclusive of depreciation and                                                       161,079                                                  156,148                                                  590,486                                                       641,621
       amortization shown separately below)
    Selling,
     general
     and
     administrative
     (exclusive
     of                                                                                                   110,572                                                                            111,270                                                                            406,358                                                                                    437,803
       depreciation and amortization shown separately below)
     Depreciation
     and
     amortization                                                                                          46,747                                                    46,405                                                   160,083                                                        183,304
     Restructuring,
     acquisition
     and
     integration-
     related
     costs
     (2)                                                                                                    7,551                                                                              4,508                                                                             32,068                                                                                     18,244
                                                                                                            -----                                                      ---                                                      ---                                                           ---
    Total
     operating
     costs
     and
     expenses                                                                                             325,949                                                                            318,331                                                                          1,188,995                                                                                  1,280,972
    Income
     from
     operations                                                                                            24,288                                                    13,306                                                   125,109                                                         68,005
    Interest
     expense
     and
     other,
     net                                                                                                  (16,443)                                                                           (15,157)                                                                           (70,640)                                                                                   (63,416)
                                                                                                          -------                                                      ---                                                      ---                                                           ---
    Income
     (loss)
     before
     income
     taxes                                                                                                  7,845                                                                             (1,851)                                                                            54,469                                                                                      4,589
    Income
     tax
     (provision)
     benefit                                                                                               (3,694)                                                    1,842                                                   (19,902)                                                         2,931
                                                                                                           ------                                                      ---                                                      ---                                                           ---
    Net
     income
     (loss)                                                                                                          $4,151                                                       $(9)                                                    $34,567                                                         $7,520
                                                                                                                       ====                                                       ===                                                        ====                                                           ====
    Net income (loss) per share
    Basic                                                                                                             $0.04                                               $         -                                                       $0.32                                                          $0.07
                                                                                                                      =====                                             ===       ===                                                       =====                                                          =====
    Diluted                                                                                                           $0.04                                               $         -                                                       $0.32                                                          $0.07
                                                                                                                      =====                                             ===       ===                                                       =====                                                          =====
    Weighted average common shares outstanding
    Basic                                                                                                 106,650                                                  103,393                                                  108,098                                                       105,221
                                                                                                          =======                                                      ===                                                      ===                                                           ===
    Diluted                                                                                               107,202                                                  103,393                                                  108,949                                                       105,983
                                                                                                          =======                                                      ===                                                      ===                                                           ===

    Dividends declared per share                                                                                      $0.05                                                     $0.05                                                       $0.20                                                          $0.20
                                                                                                                      =====                                                     =====                                                       =====                                                          =====

                                                                                                   EARTHLINK, INC.
                                                                                   Unaudited Condensed Consolidated Balance Sheets
                                                                                        (in thousands, except per share data)

                                                                                                                                   December 31,   December 31,
                                                                                                                                            2011        2012
                                                                                                                                            ----        ----

                                                                                                        ASSETS
    Current assets:
    Cash and cash equivalents                                                                                                           $211,783                 $157,621
    Marketable securities                                                                                                                 28,606                   42,073
    Restricted cash                                                                                                                        1,781                    1,013
    Accounts receivable, net of allowance of $7,323 and $7,872 as of December 31,                                                        114,757                  112,765
       2011 and 2012, respectively
    Prepaid expenses                                                                                                                      13,163                   17,171
    Deferred income taxes, net                                                                                                            38,437                   15,954
    Other current assets                                                                                                                  23,530                   20,303
                                                                                                                                          ------                   ------
    Total current assets                                                                                                                 432,057                  366,900
    Long-term marketable securities                                                                                                        1,001                    4,778
    Property and equipment, net                                                                                                          389,549                  418,966
    Long-term deferred income taxes, net                                                                                                 172,376                  195,012
    Goodwill                                                                                                                             378,235                  379,415
    Other intangible assets, net                                                                                                         285,361                  214,685
    Other long-term assets                                                                                                                21,872                   19,654
                                                                                                                                          ------                   ------
    Total assets                                                                                                                      $1,680,451               $1,599,410
                                                                                                                                      ==========               ==========
                                                                                     LIABILITIES AND STOCKHOLDERS' EQUITY
    Current liabilities:
    Accounts payable                                                                                                                     $16,023                  $18,792
    Accrued payroll and related expenses                                                                                                  29,090                   31,003
    Other accrued liabilities                                                                                                            126,841                  129,572
    Deferred revenue                                                                                                                      61,440                   51,690
    Current portion of long-term debt and capital lease obligations                                                                        1,655                    1,375
                                                                                                                                           -----                    -----
    Total current liabilities                                                                                                            235,049                  232,432
    Long-term debt and capital lease obligations                                                                                         653,765                  614,890
    Other long-term liabilities                                                                                                           38,493                   33,284
                                                                                                                                          ------                   ------
    Total liabilities                                                                                                                    927,307                  880,606
    Stockholders' equity:
    Convertible preferred stock, $0.01 par value, 100,000 shares authorized, 0                                                                -                       -
       shares issued and outstanding as of December 31, 2011 and 2012
    Common stock, $0.01 par value, 300,000 shares authorized, 196,202 and                                                                  1,962                    1,969
       196,919 shares issued  as of December 31, 2011 and 2012, respectively, and
       106,193 and 102,739 shares outstanding  as of December 31, 2011 and 2012,
       respectively
    Additional paid-in capital                                                                                                         2,071,298                2,057,974
    Accumulated deficit                                                                                                                 (613,668)                (606,148)
    Treasury stock, at cost, 90,009 and 94,180 shares  as of December 31, 2011 and                                                      (706,434)                (735,003)
       2012, respectively
    Accumulated other comprehensive income (loss)                                                                                            (14)                      12
                                                                                                                                             ---                      ---
    Total stockholders' equity                                                                                                           753,144                  718,804
                                                                                                                                         -------                  -------
    Total liabilities and stockholders' equity                                                                                        $1,680,451               $1,599,410
                                                                                                                                      ==========               ==========

                                                         EARTHLINK, INC.
                                   Reconciliation of Net Income (Loss) to Adjusted EBITDA (3)
                                                         (in thousands)

                                                                                  Twelve
                                                                                                                                 Months
                                                                                                                                  Ended
                                                                                                                                December
                                                                                                                                                                  Three Months Ended December 31, 31,
                                                                                              -------------------------------   ---
                      2011               2012                   2011                                 2012
                      ----               ----                    ---                                 ----

    Net income
     (loss)                 $4,151                                        $(9)                                                   $34,567                   $7,520
    Interest
     expense
     and
     other,
     net            16,443                                                               15,157                                          70,640                                                   63,416
    Income tax
     provision
     (benefit)       3,694                                    (1,842)                                                    19,902                  (2,931)
     Depreciation
     and
     amortization   46,747                                    46,405                                                    160,083                 183,304
    Stock-
     based
     compensation
     expense         3,012                                     2,259                                                     13,466                  10,462
     Restructuring,
     acquisition
     and
     integration-
     related
     costs (2)       7,551                                                                4,508                                          32,068                                                   18,244
                     -----                                    -----                                                       ---                   ----
    Adjusted
     EBITDA
     (3)                   $81,598                                    $66,478                                                   $330,726                 $280,015
                              ====                                       ====                                                       ====                     ====
                                                               EARTHLINK, INC.
                                     Reconciliation of Net Income (Loss) to Unlevered Free Cash Flow (3)
                                                                (in thousands)

                                                                                           Twelve
                                                                                                                                                     Months
                                                                                                                                                     Ended
                                                                                                                                                     December
                                                                                                                                                                                        Three Months Ended December 31,           31,
                                                                                                                -------------------------------  ---
                       2011                       2012                     2011                            2012
                       ----                       ----                      ---                             ---

    Net
     income
     (loss)                   $4,151                                                $(9)                                                   $34,567                               $7,520
    Interest
     expense
     and
     other,
     net             16,443                                                                           15,157                                                    70,640                                                    63,416
    Income
     tax
     provision
     (benefit)        3,694                                              (1,842)                                                  19,902                               (2,931)
     Depreciation
     and
     amortization    46,747                                              46,405                                                  160,083                              183,304
    Stock-
     based
     compensation
     expense          3,012                                               2,259                                                   13,466                               10,462
     Restructuring,
     acquisition
     and
     integration-
     related
     costs
     (2)              7,551                                                                            4,508                                                    32,068                                                    18,244
    Purchases
     of
     property
     and
     equipment      (31,000)                                                                         (66,631)                                                 (101,967)                                                 (147,360)
                    -------                                               ----                                                     ---                                 ---
    Unlevered
     Free Cash
     Flow (3)                $50,598                                              $(153)                                                  $228,759                             $132,655
                                ====                                               ====                                                       ====                                 ====

                                                                                                                                         EARTHLINK, INC.
                                                                                                   Reconciliation of Net Cash Flows from Operating Activities to Unlevered Free Cash Flow (3)
                                                                                                                                         (in thousands)

                                                                                                                     Twelve
                                                                                                                                                                      Months
                                                                                                                                                                      Ended
                                                                                                                                                                      December
                                                                                                                                                                                         Three Months Ended December 31,                                31,
                                                                                                                                  -------------------------------  ---
                                                                                                 2011                                    2012                  2011                                2012
                                                                                                 ----                                     ---                   ---                                 ---

    Net cash provided by operating activities                                                             $29,754                                                      $12,527                                                    $146,234                                                       $191,055
    Income
     tax
     provision
     (benefit)                                                                                  3,694                                                        (1,842)                                                    19,902                                                         (2,931)
    Non-cash
     income
     taxes                                                                                     (4,274)                                                         (878)                                                   (16,125)                                                         1,707
    Interest
     expense
     and
     other,
     net                                                                                       16,443                                                                                   15,157                                                                             70,640                                                                                    63,416
     Amortization
     of debt
     discount,
     premium
     and
     issuance
     costs                                                                                     (1,446)                                                                                     475                                                                            (11,136)                                                                                    1,945
     Restructuring,
     acquisition
     and
     integration-
     related
     costs
     (2)                                                                                        7,551                                                                                    4,508                                                                             32,068                                                                                    18,244
    Changes
     in
     operating
     assets
     and
     liabilities                                                                               27,355                                                                                   36,070                                                                             89,562                                                                                     6,469
    Purchases
     of
     property
     and
     equipment                                                                                (31,000)                                                                                 (66,631)                                                                          (101,967)                                                                                 (147,360)
    Other,
     net                                                                                        2,521                                                           461                                                       (419)                                                           110
                                                                                                -----                                                          ---                                                       ---                                                           ---
    Unlevered
     Free Cash
     Flow (3)                                                                                             $50,598                                                        $(153)                                                   $228,759                                                       $132,655
                                                                                                             ====                                                         ====                                                        ====                                                           ====

    Net cash provided by (used in) investing
     activities                                                                                          $(63,795)                                                    $(65,110)                                                   $141,594                                                      $(163,836)
                                                                                                             ====                                                         ====                                                        ====                                                           ====
    Net cash
     used in
     financing
     activities                                                                                         $(269,486)                                                    $(51,589)                                                  $(318,997)                                                      $(81,381)
                                                                                                             ====                                                         ====                                                        ====                                                           ====

                                   EARTHLINK, INC.
             Reconciliation of Guidance Provided in Non-GAAP Measure (3)
                                    (in millions)

                                                      Year Ending
                                                   December 31, 2013
                                                   -----------------

    Net loss                                                     $(45) - $(40)
    Interest expense and other, net                                         58
    Income tax benefit                                (27) - (21)
    Depreciation and amortization                      189 - 193
    Stock-based compensation expense                                        17
    Restructuring, acquisition and
     integration-related costs (2)                                          18
    Adjusted EBITDA (3)                                            $210 - $225
                                                                   ===========

                                                                                                                                       EARTHLINK, INC.
                                                                                                                      Supplemental Schedule of Segment Information (4)
                                                                                                                                       (in thousands)

                                                                                                                                                            Twelve
                                                                                                                                                                                          Months
                                                                                                                                                                                          Ended
                                                                                                                                                                                         December
                                                                                                                                                                                                                                          Three Months Ended December 31,                                  31,
                                                                                                                                               -------------------------------               ---
                                                                                                 2011                                                                2012                                                                                    2011                                                    2012
                                                                                                 ----                                                                ----                                                                                     ---                                                     ---

    Business Services
    Revenues                                                                                           $262,530                                                     $256,460                                                       $938,259                                                $1,031,267
    Cost of
     revenues
     (excluding
     depreciation
     and
     amortization)                                                                            133,679                                                                                   131,000                                                                                   473,004                                                                              536,519
                                                                                              -------                                                        ----                                                         ---                                                      ---
    Gross
     margin                                                                                   128,851                                                      125,460                                                      465,255                                                   494,748
    Direct
     segment
     operating
     expenses                                                                                  85,374                                                       86,757                                                      301,995                                                   341,258
                                                                                               ------                                                        ----                                                         ---                                                      ---
    Segment
     operating
     income                                                                                             $43,477                                                      $38,703                                                       $163,260                                                  $153,490
                                                                                                            ===                                                          ===                                                            ===                                                       ===
    Consumer Services
    Revenues                                                                                            $87,707                                                      $75,177                                                       $375,845                                                  $317,710
    Cost of
     revenues
     (excluding
     depreciation
     and
     amortization)                                                                             27,400                                                                                    25,148                                                                                   117,482                                                                              105,102
                                                                                               ------                                                        ----                                                         ---                                                      ---
    Gross
     margin                                                                                    60,307                                                       50,029                                                      258,363                                                   212,608
    Direct
     segment
     operating
     expenses                                                                                  18,036                                                       17,799                                                       73,293                                                    67,526
                                                                                               ------                                                        ----                                                         ---                                                      ---
    Segment
     operating
     income                                                                                             $42,271                                                      $32,230                                                       $185,070                                                  $145,082
                                                                                                            ===                                                          ===                                                            ===                                                       ===
    Consolidated
    Revenues                                                                                           $350,237                                                     $331,637                                                     $1,314,104                                                $1,348,977
    Cost of
     revenues                                                                                 161,079                                                      156,148                                                      590,486                                                   641,621
                                                                                              -------                                                        ----                                                         ---                                                      ---
    Gross
     margin                                                                                   189,158                                                      175,489                                                      723,618                                                   707,356
    Direct
     segment
     operating
     expenses                                                                                 103,410                                                      104,556                                                      375,288                                                   408,784
                                                                                              -------                                                        ----                                                         ---                                                      ---
    Segment
     operating
     income                                                                                    85,748                                                       70,933                                                      348,330                                                   298,572
     Depreciation
     and
     amortization                                                                              46,747                                                       46,405                                                      160,083                                                   183,304
     Restructuring,
     acquisition
     and
     integration-
     related
     costs                                                                                      7,551                                                                                     4,508                                                                                    32,068                                                                               18,244
     Corporate
     operating
     expenses                                                                                   7,162                                                        6,714                                                       31,070                                                    29,019
                                                                                                -----                                                       -----                                                         ---                                                      ---
    Income
     from
     operations                                                                                         $24,288                                                      $13,306                                                       $125,109                                                   $68,005
                                                                                                            ===                                                          ===                                                            ===                                                       ===

                                                                                                                         EARTHLINK, INC.
                                                                                                             Supplemental Schedule of Revenue Detail
                                                                                                                         (in thousands)

                                                              Twelve
                                                                                               Months
                                                                                               Ended
                                                                                              December
                                                 Three Months Ended December 31,                         31,
                                                 -------------------------------               ---
                                                                   2011                                    2012                 2011                                    2012
                                                                   ----                                    ----                  ---                                     ---

    Business Services
    Retail services                                                      $214,083                                                     $209,824                                                       $760,158                                                    $845,664
     Wholesale
     services                                                    37,309                                                       38,987                                                      136,224                                                     151,910
    Other
     services                                                    11,138                                                        7,649                                                       41,877                                                      33,693
                                                                 ------                                                       -----                                                         ---                                                        ---
    Total
     revenues                                                   262,530                                                      256,460                                                      938,259                                                   1,031,267
    Consumer Services
    Access services                                              74,618                                                      63,091                                                     323,998                                                    269,533
    Value-
     added
     services                                                    13,089                                                       12,086                                                       51,847                                                      48,177
                                                                 ------                                                        ----                                                         ---                                                        ---
    Total
     revenues                                                    87,707                                                       75,177                                                      375,845                                                     317,710
    Total
     Revenues                                                            $350,237                                                     $331,637                                                     $1,314,104                                                  $1,348,977
                                                                              ===                                                          ===                                                            ===                                                         ===

                                                                                                                                     EARTHLINK, INC.
                                                                                                                               Supplemental Financial Data

                                                                                                                                                                                                                                                                                        December 31,              June 30,           September 30,           December 31,
                                                                                                                                                                                                                                                                                                 2011                 2012                    2012                   2012
                                                                                                                                                                                                                                                                                                 ----                 ----                    ----                   ----
    Balance Sheet Data                                                                                                                                                                                                                                                                 (in thousands)
    Cash and marketable securities                                                                                                                                                                                                                                                                     $241,390                           $257,964                         $310,165                  $204,472
    Debt (5)                                                                                                                                                                                                                                                                                            624,800                            624,800                          624,800                   592,300
    Stockholders' equity                                                                                                                                                                                                                                                                                753,144                            745,023                          734,721                   718,804

    Employee Data
    Number of employees at end of period (6)                                                                                                                                                                                                                                                              3,241                              3,120                            3,264                     3,205

                                                                   EARTHLINK, INC.
                                                         Consumer Services Operating Metrics

                                  December 31,                                 June 30,          September 30,           December 31,
                                                    2011                                    2012                    2012                   2012
                                                    ----                                    ----                    ----                   ----
    Consumer Subscriber Detail
    Narrowband access subscribers                741,000                                 676,000                 650,000                626,000
    Broadband access subscribers                 609,000                                 568,000                 547,000                526,000
                                                 -------                                 -------                 -------                -------
       Total consumer subscribers              1,350,000                               1,244,000               1,197,000              1,152,000
                                               =========                               =========               =========              =========

                                            Three Months Ended
                                            ------------------
                                       December 31, June 30,   September 30,    December 31,
                                                 2011   2012            2012      2012
                                                 ----   ----            ----      ----
    Consumer Subscriber Activity
    Subscribers at beginning of period      1,410,000        1,295,000       1,244,000       1,197,000
    Gross organic subscriber additions         48,000           37,000          44,000          34,000
    Churn                                    (108,000)         (88,000)        (91,000)        (79,000)
                                             --------          -------         -------         -------
    Subscribers at end of period            1,350,000        1,244,000       1,197,000       1,152,000
                                            =========        =========       =========       =========

    Consumer Metrics
    Average consumer subscribers (7)        1,379,000        1,270,000       1,218,000       1,175,000
    ARPU (8)                                   $21.20           $21.17          $21.27          $21.32
    Churn rate (9)                                2.6%             2.3%            2.5%            2.3%

                          EARTHLINK, INC.
           Footnotes to Consolidated Financial Highlights

            1.   On April 1, 2011, EarthLink completed its
                 acquisition of One Communications, a
                 privately-held, multi-regional integrated
                 telecommunications solutions provider
                 serving customers in the northeast, mid-
                 Atlantic and upper midwest sections of the
                 United States. The results of operations of
                 One Communications have been included in
                 EarthLink's consolidated financial
                 statements since the acquisition date.

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

                                                                                                                    Twelve
                                                                                                                                                                   Months
                                                                                                                                                                    Ended
                                                                                                                                                                  December
                                                                                                                                                                                   Three Months Ended December 31,                                   31,
                                                                                                                                 -------------------------------     ---
                                                                                                   2011                               2012                 2011                                  2012
                                                                                                   ----                               ----                  ---                                  ----

    Severance and retention costs                                                                        $2,852                                                       $956                                                   $16,460                                                     $6,067
     Transaction-
     related
     costs                                                                                          889                                                      33                                                       5,756                                                      1,399
     Integration-
     related
     costs                                                                                        3,210                                                   3,508                                                       4,044                                                     10,452
    Facility-
     related
     costs                                                                                          842                                                     (12)                                                      5,530                                                        479
                                                                                                    ---                                                    ---                                                        ---                                                       ---
    Acquisition
     and
     integration-
     related
     costs                                                                                        7,793                                                                             4,485                                                                                31,790                                                                                 18,397
    Facility
     exit and
     restructuring
     costs                                                                                         (242)                                                     23                                                         278                                                       (153)
     Restructuring,
     acquisition
     and
     integration-
     related
     costs                                                                                               $7,551                                                     $4,508                                                   $32,068                                                    $18,244
                                                                                                           ====                                                       ====                                                      ====                                                       ====

                 Acquisition and integration-related costs
                 consist of costs related to EarthLink's
                 acquisitions. Such costs include: 1)
                 severance and retention costs;  2)
                 transaction-related costs, which are direct
                 costs incurred to effect a business
                 combination, such as advisory, legal,
                 accounting, valuation and other professional
                 fees; 3) costs to settle postcombination
                 stock awards; 4) integration-related costs,
                 such as system conversion, rebranding costs
                 and integration-related consulting and
                 employee costs; and 5) facility-related
                 costs, such as lease termination and asset
                 impairments. We expect to incur
                 restructuring charges of approximately $10
                 million in the first quarter of 2013 driven
                 by timing of severance around sales and
                 marketing actions.

                 Facility exit and restructuring costs consist
                 of costs incurred for EarthLink's
                 restructuring plans. In August 2007,
                 EarthLink adopted a restructuring plan (the
                 "2007 Plan") to reduce costs and improve the
                 efficiency of the Company's operations. The
                 2007 Plan was the result of a comprehensive
                 review of operations within and across the
                 Company's functions and businesses. Under
                 the 2007 Plan, the Company reduced its
                 workforce by approximately 900 employees,
                 closed office facilities in Orlando,
                 Florida; Knoxville, Tennessee; Harrisburg,
                 Pennsylvania and San Francisco, California
                 and consolidated its office facilities in
                 Atlanta, Georgia and Pasadena, California.
                 The 2007 Plan was primarily implemented
                 during the latter half of 2007 and during
                 the year ended December 31, 2008. However,
                 there have been and may continue to be
                 changes in estimates to amounts previously
                 recorded.

    3.           Adjusted EBITDA is defined as net income
                 (loss) before interest expense and other,
                 net, income taxes, depreciation and
                 amortization, stock-based compensation,
                 impairment of goodwill and intangible
                 assets, and restructuring, acquisition and
                 integration-related costs.  Unlevered Free
                 Cash Flow is defined as net income (loss)
                 before interest expense and other, net,
                 income taxes, depreciation and amortization,
                 stock-based compensation, impairment of
                 goodwill and intangible assets, and
                 restructuring, acquisition and integration-
                 related costs, less purchases cash used for
                 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 period's 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.

    4.           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 comprehensive
                 suite of communications and technology
                 services, including voice, data, managed
                 network services, cloud hosting and
                 equipment services, to business customers.
                 The Company's Consumer Services segment
                 provides nationwide Internet access and
                 related value-added services to residential
                 customers.

                 The Company presents its Business Services
                 revenue in the following three categories:
                 (1) retail services, which includes data,
                 voice and managed IT services; (2) wholesale
                 services, which includes the sale of
                 transmission capacity to other
                 telecommunications carriers; and (3) other
                 services, which includes the sale of
                 customer premises equipment and web hosting.
                 The Company presents its Consumer Services
                 revenue in the following two categories: (1)
                 access services, which includes include
                 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, email storage and Internet
                 call waiting; search revenues; and
                 advertising revenues.

                 EarthLink evaluates performance of its
                 operating segments based on segment income
                 from operations. Segment income from
                 operations includes revenues from external
                 customers, related cost of revenues and
                 operating expenses directly attributable to
                 the segment, which include expenses over
                 which segment managers have direct
                 discretionary control, such as advertising
                 and marketing programs, customer support
                 expenses, site operations expenses, product
                 development expenses, certain technology and
                 facilities expenses, billing operation and
                 provisions for doubtful accounts. Segment
                 income from operations excludes other income
                 and expense items and certain expenses that
                 segment managers do not have discretionary
                 control over. Costs excluded from segment
                 income from operations include various
                 corporate expenses (consisting of certain
                 costs such as corporate management, human
                 resources, finance and legal), depreciation
                 and amortization, stock-based compensation
                 expense, impairment of goodwill and
                 intangible assets and restructuring,
                 acquisition and integration-related costs,
                 as they are not evaluated in the measurement
                 of segment performance.

    5.           Debt represents the principal amount of
                 EarthLink's Senior Notes, EarthLink's
                 Convertible Senior Notes and ITC^DeltaCom's
                 Senior Secured Notes. Below is a summary of
                 the carrying amount of EarthLink's debt (in
                 thousands):

                                                  December 31, June 30, September 30, December 31,
                                                          2011     2012          2012     2012
                                                          ----     ----          ----     ----
    EarthLink Senior Notes - Principal                $300,000         $300,000       $300,000      $300,000
    EarthLink Senior Notes - Discount                   (9,779)          (9,310)        (9,067)       (8,818)
    ITC^DeltaCom Senior Secured Notes - Principal      324,800           324,800       324,800       292,300
    ITC^DeltaCom Senior Secured Notes - Premium         22,056            19,780        18,622        15,694
                                                                                                   ------
    Carrying amount of debt                           $637,077          $635,270      $634,355      $599,176
                                                      ========          ========      ========      ========

    6.           Represents full-time
                 equivalents.

    7.           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.

    8.           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.

    9.           Churn rate is used to measure
                 the rate at which subscribers
                 discontinue service on a
                 voluntary or involuntary basis.
                  Churn rate is computed by
                  dividing the average monthly
                 number of subscribers that
                 discontinued service during the
                 period by the average
                 subscribers for the period.

SOURCE EarthLink, Inc.


Source: PR Newswire