Earthlink tops estimates, sets 2001 targets

4 min read

EarthLink Inc. (Nasdaq: ELNK) reported fourth quarter earnings that topped estimates Tuesday and outlined its expectations for revenue and earnings in 2001.

The company sees 2001 revenue of between $1.2 billion and $1.3 billion, slightly less than expectations, and earnings before interest, taxes, depreciation and amortization (EBITDA) in the range of negative $35 million to $60 million.

Shares gained $0.94, or 11 percent, to $9.44 Monday, but are still well below its 52-week high of $31.88. The company continues to struggle against AOL (NYSE: AOL), which recently merged with Time Warner.

Fourth quarter revenue of $286.8 million, up 15 percent over the third quarter, reflects strong growth in broadband access services and the acquisition of OneMain.com in September. On a conference call with analysts, the company said it would continue to grow its narrowband business through acquisitions. "We'll stay agressive and optimistic," said CEO Gary Betty.

Net loss for the quarter, excluding acquisition and merger-related costs, was $52.2 million, or 40 cents a share, much narrower than the 51 cents a share expected by First Call. Losses widened from 33 cents a share in the previous quarter and a year-earlier loss of 22 cents a share. The company reported a one-time gain of $2.4 million, or 2 cents a share, from the recognition of an income tax benefit during the quarter.

Earnings before interest, taxes, depreciation and amortization (EBITDA) were negative $40.7 million in the quarter. This was an increase of only $3.1 million from the EBITDA loss in the third quarter of $37.6 million despite a national brand advertising campaign. During the quarter, EarthLink initiated a major ad campaign to raise brand awareness.

The improvement in profitability reflects a reduction in spending on less effective marketing channels and tight control over operating expenses, which included the loss of 255 jobs during the quarter.

EarthLink ended the year with around 4.7 million paying subscribers, up from 4.6 million at the end of the prior quarter and 3.1 million one year ago. Of these, 4,306,000 were narrowband subscribers, down 2 percent from the third quarter as subscribers migrated to broadband.

For the quarter broadband revenues rose to $22.9 million, a 48 percent increase over the third quarter and a 214 percent increase over the fourth quarter of 1999. The company added 76,000 broadband subscribers to end the year with a total installed broadband subscriber base of 215,000 -- up 760 percent from a year ago and up 55 percent from the third quarter.

Broadband growth was across each of EarthLink's DSL, cable and fixed wireless platforms, but Betty said on the conference call that technologies other than DSL may come to the fore this year. Betty reiterated the company remains agnostic on technology.

The company also completed an open access broadband agreement with AOL Time Warner cable operations, which will enable it to be the first new ISP, following the expiration of AOL Time Warner's exclusive arrangement with RoadRunner, to offer high-speed Internet access on AOL Time Warner's broadband cable networks. EarthLink expects to start these services in the second half of 2001, and is seeking access to other cable companies' systems.

Earthlink said continuing softness in the advertising environment is expected to dent its advertising, content and commerce revenue in the first quarter of 2001. In the fourth quarter, advertising, content and commerce revenue was $5.8 million in the fourth quarter, down $900,000 from the preceding quarter, reflecting the deteriorating Internet advertising environment. Earthlink also predicted it will start growing this revenue stream again in mid-2001 by focusing on a stable set of advertising, content and commerce partners.

On the topic of profitability, Earthlink said it has identified opportunities to improve profitability and expects to be EBITDA-positive operations by the end of 2001.

Other projections include revenue for the year of between $1.2 billion and $1.3 billion. According to First Call, analysts expect revenue of $1.36 billion.

EBITDA is expected to improve sequentially in each quarter of 2001 and to go positive in the fourth quarter. For the year, EBITDA is expected to be in the range of negative $35 million to $60 million. Net loss before merger and acquisition-related costs is expected to be in the range of $110 million to $135 million, and net loss per share is expected to be in the range of 85 cents a share to $1.05 a share.

In the first quarter of 2001, total subscribers are expected to grow to approximately 4.8 million. Revenues should increase to approximately $295 million to $300 million, and EBITDA loss before merger and acquisition related costs should narrow to a negative $31 million to $36 million. Net loss, before merger and acquisition related costs, is expected to be in the range of 37 to 41 cents a share.

The company also expects to improve operating margins in 2001 by consolidating the former OneMain ISPs onto a single operating platform, reducing broadband installation costs by self-installation; and growing all other operational expenses more slowly than revenues.

Sales and marketing expenses are expected to grow slightly year over year as investment in broadband growth and brand advertising continues.

As of Dec. 31, the company held cash and cash equivalents of $675 million. It expects its cash balance to be more than sufficient to fund the company's operations until they are free cash flow positive.