ELNK

EarthLink Holdings Corp. (ELNK)

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EarthLink, Inc. (ELNK)

Q4 2008 Earnings Call.

February 05, 2009, 08:30 AM ET

Executives

Kevin Dotts - CFO

Rolla Huff - Chairman and CEO

Analysts

Youssef Squali - Jefferies & Company

Jennifer Watson - Goldman Sachs

Michael Crawford - Raytheon

Scott Kessler - Standard & Poor's

Presentation

Operator

Good morning everyone and welcome to EarthLink's Fourth Quarter and Year End '08 Earnings Call. Today's call is being recorded. At this time I would like to turn the conference over to Mr. Kevin Dotts Chief Financial Officer for opening remarks and introductions. Please go ahead, sir.

Kevin Dotts

Thanks and welcome everyone to our call. This morning I'm joined by EarthLink's Chairman and CEO Rolla Huff and our Vice President of Corporation Communications Michelle Sadwick and our Vice President of Investor Relations [Lewis Alterman] to discuss our fourth quarter and year end results. Following our comments there will be an opportunity for questions.

Before we continue I would like to point out that certain statements contained in our earnings release and on this conference call are forward-looking statements rather than historical facts that are subject to risk and uncertainties that could cause actual results to differ materially from those described. With respect to such forward-looking statements the company seeks the protection supported by the Private Securities Litigation Reform Act of 1995.

These risks include a variety of factors including competitive developments and risk factors listed in the company's SEC reports and public releases. Those lists are intended to identify certain principle factors that could cause actual results to differ materially from those described in the forward-looking statements but are not intended to represent a complete list of all risks and uncertainties inherent to the company's business.

In an effort to provide useful information to our investors our comments today also include non-GAAP financial measures. For details on these measures including why we use them and reconciliations to the most comparable GAAP measures please refer to our earnings release and the Form 8-K that has been furnished with the SEC both of which are available on our website at www.earthlink.net.

Now, I would like to turn things over to, Rolla.

Rolla Huff

Thanks, Kevin and good morning everyone. Well I hope you agree that the fourth quarter and full year 2008 results we announced today demonstrate that we are continuing to execute on the strategy we announced in August of 2007.

Today we reported $309 million in adjusted EBITDA and $302 million in free cash flow for full year 2008, up 66% and a 141% respectively over 2007.

While we continue to keep a close eye on the deepening economic crisis we feel comfortable reaffirming our prior adjusted EBITDA guidance for 2009 and raising our 2009 free cash flow guidance, and Kevin will take you through that a little bit later.

For the fourth quarter average monthly subscriber churn across all products was 3.9% down from 4.2% in the third quarter of 2008 and down from 5.2% we recorded at year end 2007.

We've been closely monitoring any impact that current economic environment might have on our business, its still too early to come to any real conclusions but let me spend a few minutes on what we are seeing.

At a high level, there is an argument to be made during these tough economic times financially constrained consumers might give up the luxury of the triple play or high data speeds and instead migrate to the lowest price point alternative that allows them to retain basic Internet access. We are seeing some increase in call volumes and growth subscriber additions on our EarthLink branded dial up product.

One competitor of ours actually is making a meaningful national advertising push around the message that dial up access can save consumers billions of dollars which it can by the way.

Average monthly churn for premium dial improved to 3.2% a 50 basis point improvement over the third quarter and a 110 basis point improvement over the prior year quarter. Probably more notable is that we saw our Q4 average monthly churn come down from the third quarter and the prior year fourth quarter in seven of the eight tenure cohorts we track.

The strength of EarthLink brand combined with the save money message that is being continuously broadcast nationwide, could be providing some positive momentum for us in premium dial. Obviously we hope this becomes a trend, but truly I think it's too early to tell.

Unlike our premium dial business, we saw an increase in average monthly churn across most tenure cohorts in our value oriented PeoplePC product towards the end of the fourth quarter and that's continued into January.

I should note that most of these customers were generally credit challenged which may have contributed to an up tick in customers disconnected for non-payment. This increase in value dial churn in most tenure cohort was offset by the continued aging of overall value dial base.

So, in total PeoplePC average monthly churn remained flat quarter-over-quarter at 6.5%, and it actually improved from the 8.3% we reported in the fourth quarter of '07. We continue to see our lower priced value dial service account for a disproportionately large part of our churn.

These subs represented 55% or over half of our overall subscriber decline and now represent 27% of our consumer access subscriber base. But I think more importantly just 16% of our consumer access revenue base.

Total average monthly broadband churn in the quarter was 2.6%, a 20 basis point improvement over both third quarter of 2008 and the fourth quarter of 2007.

Read the rest of this transcript for free on seekingalpha.com