EarthLink earnings on target; shares rise

Growth in its high-speed services helps the Internet service provider meet predictions for the second quarter, with slightly better-than-expected sales. Shares gain 11 percent on the news.

Margaret Kane Former Staff writer, CNET News
Margaret is a former news editor for CNET News, based in the Boston bureau.
Margaret Kane
3 min read
Growth in high-speed services helped Internet service provider EarthLink come in on target for its second quarter, with slightly better-than-expected sales, the company said Thursday.

Revenue was up 3 percent from the first quarter to $303.8 million. Excluding merger and acquisition costs, the company posted a net loss of $35.1 million, or 27 cents per share. Analysts had been looking for it to record a loss of 27 cent per share on sales of $300.9 million, according to First Call.

EarthLink was also forced to write off $4.1 million worth of investments in other companies during the quarter. That's something several tech companies have had to do in recent weeks as the value of tech stocks has plunged.

Shares were up $2.33, or more than 15 percent, to $17.28 by market close. EarthLink has more than tripled from a price of $5.31 on the first trading day of 2001. Shares have rallied based on improving performance of the company, broadband growth and takeover chatter.

EarthLink is the third-largest ISP in the United States. While most concede it won't catch up with competitor AOL Time Warner in its number of subscribers, it's been successfully driving up broadband access. EarthLink recently signed a deal to offer its service over AOL Time Warner's cable service, and it has deals in place with Comcast, Cox Communications and AT&T Broadband to test its high-speed services over each company's cable infrastructure.

But investors had expressed some concerns over whether price increases would hurt subscription rates. And news that AOL had missed revenue expectations for its second quarter also concerned some analysts.

EarthLink said Thursday that its subscriber base grew by 97,000 during the quarter to 4.9 million, while monthly subscriber churn was 3.9 percent.

But subscribers could slip as low as 4.75 million in the next quarter, as a result of a new, more expensive pricing program, the company warned.

Stock price from July 2000 to present.  

Source: Prophet Finance
Broadband access, which makes up 13 percent of total revenue, saw the most growth during the quarter. The broadband subscriber base grew to 346,000 from 288,000 in the previous quarter, while revenue rose 25 percent from the first quarter to $40.6 million.

But EarthLink said subscriber growth was somewhat slowed by seasonality and rising prices. EarthLink raised prices on its digital subscriber line (DSL) service in March. That figure is lower than at least one analyst's expectations; Jeffries & Company analyst Frederick Moran had pegged the figure at 353,000.

Dial-up access revenue inched up 1 percent from the first quarter to $244.1 million, primarily because of an increase of 39,000 subscribers. The company now has 4.4 million narrowband subscribers, compared to 3.5 million in the year-ago quarter.

Web hosting accounted for $14.5 million in sales during the quarter, down 13 percent from the first quarter. While the customer base remained stable, revenue was hurt by lower domain-name fees and a new, lower pricing base, which the company claims will help it compete in the small-business market. Earthlink said it expects to see hosting revenue stabilize at current levels.

Cash-flow positive
CEO Garry Betty said the company should post earnings before interest, taxes, depreciation and amortization (EBITDA) by the fourth quarter of the year. On that basis, the company posted a loss of $8.2 million for the second quarter, compared to an EBITDA loss of $18.6 million in the first quarter.

But despite the anticipated drop in overall subscriber rates in the third quarter, increased broadband business and higher prices should boost revenues, which are expected to be between $315 million and $320 million, compared to the $312.8 million analysts were looking for. The company expects to post a net loss for the third quarter of between 17 cents and 20 cents per share, slightly less than the 22 cents per share analysts were looking for.

Revenue for the year should be between $1.2 billion and $1.3 billion, in line with current analyst expectations of $1.25 billion. The company said it expects to post a net loss before acquisition-related charges of $105 million to $120 million, or around 80 cents to 85 cents per share. That's also in line with expectations; First Call consensus was for a 91 cent per-share loss.