EarthLink reports mixed results

The Internet service provider continues to add new broadband subscribers, but it faces trouble in its dial-up business as more premium customers defect to other ISPs.

Marguerite Reardon Former senior reporter
Marguerite Reardon started as a CNET News reporter in 2004, covering cellphone services, broadband, citywide Wi-Fi, the Net neutrality debate and the consolidation of the phone companies.
Marguerite Reardon
3 min read
Internet service provider Earthlink on Tuesday reported a mixed bag of results for the fourth quarter of 2003.

The Atlanta-based ISP once again grew its broadband division and added customers to its PeoplePC budget dial-up business, but it continued to struggle with its premium dial-up service.

Earthlink earned $10.7 million, or 7 cents a share, in the fourth quarter, compared with a loss of $36.9 million, or 24 cents a share, in the same quarter a year ago. Excluding one-time charges mostly related to the closing of facilities, EarthLink earned $19.4 million, or 12 cents a share.

Analysts surveyed by Thomson expected earnings of 9 cents a share.

Revenue was up slightly to $348.6 million from $347.9 million a year ago.

Garry Betty, EarthLink's chief executive officer, was upbeat about the company's progress. "The fourth quarter capped a highly successful 2003," he said in a statement. "In addition to passing the 1 million broadband customer milestone, EarthLink experienced another record quarter for PeoplePC Online, our value-priced access service, and posted subscriber gains in our premium narrowband access services."

Over the past few quarters, EarthLink's broadband subscriptions have increased, while its narrowband subscriptions have fallen, particularly in the company's premium dial-up business. This is a problem for EarthLink, considering that it still makes the bulk of its revenue from selling high-margin, premium dial-up services.

During the fourth quarter, EarthLink added 108,000 broadband subscriptions, bringing the total to 1.1 million, a 36.2 percent increase from a year ago. During a conference call with investors and analysts, Betty acknowledged regional Bell operators, namely SBC Communications and Verizon Communications, are aggressively competing on DSL (digital subscriber line). Cable companies also are putting up a good fight as they continue to compete on low introductory pricing.

But where EarthLink is fighting the hardest battle is in its narrowband business. Overall, it added about 143,000 narrowband customers in the quarter, but roughly 129,000 of those were from PeoplePC, the company's low-priced narrowband service. Only a small number were from the company's premium narrowband business.

"Losing fewer subscribers is a good thing," said Youssef Squali, an analyst at First Albany. "But it's hard to know if this is a sustainable pattern going forward."

Mark May, an equities analyst at Kaufman Brothers, said that looking at the subscriber figures, EarthLink has not actually improved its premium dial-up business.

"About 65 percent of their revenue comes from premium dial-up customers," he said. "If you exclude subscriber gains from acquisitions, that business continued to lose subscribers on an organic basis."

Other ISPs, such as Microsoft and America Online, also have seen sharp declines in dial-up subscribers over the past several quarters.

Where are these customers going? EarthLink executives said that premium customers are leaving for broadband services. Unfortunately for EarthLink, they are not upgrading to its broadband service. Instead, the company said, they are migrating to other providers' broadband access services.

EarthLink executives were optimistic about the future. They said the company plans to increase its subscriber base by approximately 250,000 to 550,000 in 2004, mostly through the addition of more budget narrowband subscribers and high-speed access subscribers. EarthLink also will try to slow down the churn on its premium narrowband business and convert those customer to broadband customers.

The company expects its revenue for the year to be approximately $1.41 billion to $1.44 billion.