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EarthLink, Inc. (ELNK)
Q1 2009 Earnings Call
April 28, 2009 8:30 am ET
Kevin Dotts - CFO
Rolla Huff - Chairman and CEO
Unidentified Company Representative
Youssef Squali - Jefferies & Co.
Jennifer Watson - Goldman Sachs
Edward Einboden - WM Smith Securities
Mike Crawford - B. Riley & Company, Inc.
James Cakmak – Sidoti & Co.
Good morning, everyone, and welcome to EarthLink's first quarter 2009 earnings conference call. Today's call is being recorded.
Previous Statements by ELNK
» EarthLink, Inc. Q4 2008 Earnings Call Transcript
» Earthlink, Inc. F3Q08 (Quarter End 9/27/08) Earnings Call Transcript
» EarthLink, Inc. Q2 2008 Earnings Call Transcript
Thanks and welcome, everyone, to our call. This morning I'm joined by EarthLink's Chairman and CEO, Rolla Huff, our Vice President of Corporate Communications, Michele Sadwick, and our Vice President, Investor Relations, Louis Alterman, to discuss our first quarter results. Following our comments there will be an opportunity for questions.
Before we continue I'd 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 risks and uncertainties that could cause actual results to differ materially from those described. With respect to such forward-looking statements the company seeks the protections afforded 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 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 to the SEC, both of which are available on our website at www.EarthLink.net.
Now I would like to turn things over to Rolla.
Thanks, Kevin, and good morning, everyone.
This morning EarthLink released its operating results for the first quarter. While the downturn in the U.S. economy is impacting us in certain customer areas, our business I would say for the most part is performing at or above our expectations.
Just to summarize our results for the quarter, we reported $69 million in adjusted EBITDA and $66 million in free cash flow, exceeding our own estimates on these metrics. We continue to run a profitable albeit attenuating subscription business while maintaining solid EBITDA margins.
I feel pretty good about where our Consumer Access business is today. When we restructured the business at the end of 2007 we knew we would face - and I think we told you that we would face - significant revenue churn as we stopped unprofitable marketing motions while the customers we had acquired over the prior 18 months followed their historical cohort churn profiles. Our ability to quickly increase operating margins then hold these higher margins during the height of that revenue churn has actually been above the expectations I had for the business when we announced the restructuring, again, at the end of the third quarter.
I can tell you that it is and will continue to be an every single day effort by the people and leadership in the company to constantly optimize processes and cost structure. We understand that it'll be required that we optimize every part of the business so that we can continue to generate good value in the future. My hat is off to the former and current people of EarthLink who stuck with our customers, with me and our shareholders even though it has often been anything but fun.
Based on the performance of the business in the first quarter and the trend lines we currently see, we're raising our prior guidance for adjusted EBITDA and free cash flow for the full year 2009. Kevin will take you through the details of that in just a few minutes.
While there have been some interesting nuances in our business this quarter, I think it's fair to say that we've not seen any material impact on our business from the economy, positive or negative. It's interesting to note that gross adds in both our value and our premium narrowband products, as well as our broadband products, actually increased over the prior quarter. Total gross adds across all products grew to 116,000 customers versus 114,000 in the fourth quarter. While we're talking about a relatively small number, it's noteworthy given that we continue to limit our marketing investment to only those distribution channels that will present a positive lifetime return on an acquired customer.
From our standpoint, it further demonstrates our belief that narrowband continues to be a relevant product for a portion of the consumer base and there is a significant valuable tail on this business if it's run properly. I should also note that we did a recent study on the credit scores of our gross adds and in spite of the economic downturn, their credit quality has been virtually unchanged in the past year.
Our customer churn during this most pessimistic economic time was flat quarter-over-quarter and is down significantly from the year ago quarter. This is in contrast to many other U.S. businesses, which are losing customers at a much faster clip in this kind of environment.
As we turn the corner into Q2, we've seen early signs that our churn may be decreasing from the levels we have reported over the past two quarters, particularly in the involuntary or non-pay churn category, which is good news given this economy. Clearly, it's impossible to predict whether this trend will continue. In any case, we intend to remain vigilant in our efforts to keep churn as low as possible by providing good customer service and loyalty programs that enhance our customer relationships, extend our customers' tenure with us and deepen their web engagement.