ELNK

EarthLink Holdings Corp. (ELNK)

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EarthLink, Inc. (ELNK)

Deutsche Bank's DbAccess 21st Annual Media and Telecom Conference

March 04, 2013 2:20 pm ET

Executives

Rolla P. Huff - Chairman, Chief Executive Officer and President

Presentation

Unknown Analyst

We're going to go ahead and start now. All right. If everybody will just find a seat, we're going to go ahead and start with the next session here this afternoon. This is not Brad Ferguson, the CFO of EarthLink. This is Rolla Huff, the CEO of EarthLink, so apologies for the misprint there in the conference guide. Rolla, we're actually thrilled to have you back at the conference again for another year.

Rolla P. Huff

Glad to be here.

Unknown Analyst

I think that the way we'll get things started here is just for the benefit of people who are getting up to speed on the story. A quick recap on what you've done at EarthLink, to get people away from the legacy mindset of what the company is, in particular, the meaningful and interesting investments you're making in the IT space and then I'll have a series of follow-up questions after that.

Rolla P. Huff

Sure. Yes. EarthLink is well underway in a pretty substantial transformation from being a consumer business to now being a leading-edge IT services business that leverages both emerging -- an emerging cloud business with the -- with an underlying MPLS network and putting them together, focused on the midmarkets.

Unknown Analyst

Great. Just reported your quarter, you gave a little bit of -- actually, you gave a lot of guidance for 2013, more so than you've given, I think, since you've been with the company. Maybe just recap for us a little bit what you're hoping to accomplish this year, and then why do you feel confident enough to give that level of specificity around what you think the company can achieve, when in the last couple of years maybe you were a little more reluctant. What are you seeing?

Rolla P. Huff

Sure. Well, first of all, as the business are coming together, we're getting a lot more visibility into the business. As you know, EarthLink, we bought 2 fairly large companies, and 1 of them had -- was really a compilation of companies that had not been integrated. We bought these companies at 4.5x, so we knew we had a lot of elbow grease that we were going to have to put into these companies. But as we've brought the companies together, and we're still working through the integration, but we're well on our way. The further we get through, the more visibility we feel like we have in the business. And any kind of transformation story, like EarthLink is, we think the best thing that we can do is tell people everything we know about the business as best we can. So 12 months ago, when we were giving guidance, we were still in the early -- earlier stages of the integration. And while we had reasonable visibility, we didn't feel like we had good visibility. As we start to have product line reporting and better geographic reporting, it's just a lot easier to reach into the business and get a view of what to expect.

Unknown Analyst

And just give us a recap on where you are in the integration of that because you had a nice series of timelines in your earnings presentation. It's sort of like you have lined of sight here on being through the last real phase of integrating these 2 assets. What are the -- I think you have 2 key hurdles you have to get over and then you're pretty much done.

Rolla P. Huff

Yes. Well, we think that some time this summer and hopefully, it's early summer, we will have about 70% to 80% of the core foundation of the new platform put in place. We'll still have 1 or 2 network inventory systems that we'll integrate in, but we will have collapsed probably 5 to 6 of the OSS platforms. That will really allow us to change how -- what our workflow looks like and a lot of cost structure that we'll be able to address after that. And then I think by the end of 2013, we should be through the bulk of it.

Unknown Analyst

I guess what I wanted to spend a little more time on is understanding -- because your revenue mix is shifting in a very interesting way. You have -- the majority of it is still your older businesses, whether it's consumer or on the enterprise side. And there is ongoing secular pressures there. The portion of your business that's growing is growing incredibly quickly, over 20%.

Rolla P. Huff

Correct.

Unknown Analyst

And so I guess what I want to kind of spend some time on is, let's think about the 2 buckets of stuff that's legacy, whether it's your old consumer business, which is you'll people sort of remember from the old days and then your sort of the legacy component of your CLEC business, and how you're able to leverage what those businesses create for you, whether it's cash or customers, in order to continue the acceleration of the IT business.

Rolla P. Huff

Sure.

Unknown Analyst

Do you understand the concept of the question there?

Rolla P. Huff

Sure, absolutely. So we have the consumer segment that we'll continue to manage just the way we we've been managing it. We manage it to optimize cash flow, it's generated a lot of cash in the past and it'll continue to generate a lot of cash flow. We've taken the business services segment to your point and separated those business customers that are more likely to require technical IT solution. And we've separated those out and the remaining part of the business, which is the legacy CLEC type of stuff usage in single T1 types of businesses. We'll run that in a way that's very similar to the consumer business. In fact, the same guy that's been running the consumer business will now run that segment of the business. Well, the objective is we want to keep every customer we have, we want to give them a reason to stay with us, but we don't want to spend a lot of money to get more of those kinds of businesses. I mean, when we've seen softness in the business, that's the sector we've seen it in because clearly, that part of the business is under attack by the cable companies. The part of the business that's growing, we -- actually, there's 2 components of business services that are growing. One is our IT Solutions, MPLS and Hosted Voice. That part of the business is about $140 million today, and it's growing at about 20% a year, a little over 20%. Then we have a wholesale business that's also about $140 million-ish roughly, and that business is growing in the single digits. So we've got a core piece of business that's over a quarter of a billion dollars that has a decent growth profile on it. We've got the other pieces of the business that we think we can manage for cash, and that's important because we're using the cash to go out and really create our cloud platform, our underlying IP infrastructure that supports those growth products.

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