ELNK

EarthLink Holdings Corp. (ELNK)

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EarthLink, Inc. (ELNK)

Q1 2010 Earnings Call

April 27, 2010 8:30 am ET

Executives

Brad Ferguson - CFO

Rolla Huff - Chairman & CEO

Joe Wetzel - COO

Michele Sadwick - VP, Corporate Communications

Louis Alterman - VP, IR

Analysts

Youssef Squali - Jefferies & Co.

Ingrid Chung - Goldman Sachs

Mike Crawford - B. Riley & Company

James Cakmak - Sidoti & Co.

Sri Anantha - Oppenheimer

Scott Kessler - Standard & Poor’s

Ed Einboden - Wm Smith & Company

Rick D'Auteuil - Columbia Management

Presentation

Operator

Good morning, everyone, and welcome to EarthLink's first quarter 2010 earnings conference call. Today's call is being recorded. At this time, I would like to turn the conference over to Mr. Brad Ferguson, Chief Financial Officer, for opening remarks and introductions. Please go ahead, sir.

Brad Ferguson

Thanks and welcome to our call. This morning I'm joined by EarthLink's Chairman and CEO, Rolla Huff; our Chief Operating Officer, Joe Wetzel; our Vice President of Corporate Communications, Michele Sadwick, and our Vice President of Investor Relations, Louis Alterman, to discuss our first quarter 2010 results and updated 2010 guidance. 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’ll turn things over to Rolla.

Rolla Huff

Thanks, Brad, and good morning, everyone. I’d like to make a few opening summary comments about the quarter then spend a bit more time on a few specific areas. Clearly, our Q1 financial results were ahead of our expectations. Over the past several months, we experienced a number of positive changes in key underlying business drivers that resulted in better results in our historical trend lines would have predicted.

As a result of our Q1 performance and the trends we continue to see into April, we have increased our full-year 2010 guidance. I’ll talk more about what we saw in Q1 versus in key trend lines in a few minutes.

As we’ve noted on several occasions, we run our core Internet access business as a cash generation vehicle. We use historical trend lines to predict future business performance, we continue to believe that strategy will optimize long-term shareholder value, while our top line revenue in that business continues to decline, the rate of decline continues to attenuate.

As a result, we believe continuing to run this business with that strategy can and will continue to generate meaningful amounts of cash for sometime to come. We're continuing to be vigilant stewards of our balance sheet, while we look for investment opportunities to apply the skill sets we have in our company, our management philosophy and our business discipline in a way that can create more long-term shareholder value.

As in the past we’re keeping everything on the table including acquisitions, dividend increases, large special one-time dividends and equity buybacks as we consider strategic alternatives for our cash.

Today's announcement that we are increasing our regular quarterly dividend by 14% is consistent with other desire to create value for our shareholders and should not be interpreted as an unwillingness to consider any of the other alternatives we have on the table over the coming months and/or quarters.

So with those introductory comments, let me spend a bit more time on some of the trends we saw in the first quarter that impacted our results and our expectation. As I mentioned, this quarter we benefited from a number of positive changes to key drivers within our business including network and product performance, customer churn, customer contract rates and bad debt.

These changes are all interrelated and work together to create a positive operating performance loop. A more reliable product, more tenured customers and more effective customer support drive satisfy customers. And satisfied customers call us less, they churn less, they pay us more and they demand fewer refunds and discounts. All of these items cumulatively built on each other and resulted in a meaningful positive impact to the P&L.

The main catalyst of these drivers is the continuously increasing tenure of our customer base, and the resulting positive impact on customer churn across all product categories. Let me give you some examples to put this in context, within premium narrow band more then 90% of our customers now fall within the two plus year tenured cohort and nearly 75% in the five plus year cohort.

Now historically our data base tells us that these cohorts typically experience seasonality and churn increases by approximately 30 basis points from Q4 to Q1. While our premium narrow band churn did increase this quarter over last quarter in mini cohorts as we would have expected, the increase was closer to only 10 basis points. And year-over-year premium dial churn actually decreased in the two plus year and five plus year tenured cohorts by 39 basis points and 34 basis points respectively.

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