ELNK

EarthLink Holdings Corp. (ELNK)

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EarthLink, Inc. (ELNK)

Morgan Stanley Technology, Media & Telecom Conference

February 27, 2013 4:20 pm ET

Executives

Bradley A. Ferguson - Chief Financial Officer, Principal Accounting Officer and Executive Vice President

Presentation

Unknown Analyst

All right. Good afternoon, everybody. It's my great pleasure to introduce Brad Ferguson. Brad's Chief Financial Officer for EarthLink. Before we get started, please note that all important disclosures, including personal holding disclosures and Morgan Stanley disclosures, appear on the Morgan Stanley public website at www.morgan stanley.com/researchdisclosures or at the registration desk.

Brad, welcome. Thank you for coming to San Francisco. Perhaps you could just start. You just reported earnings, put out your guidance for 2013, perhaps you can start by sort of summarizing where you are in the transition period and what your priorities are for the coming year.

Bradley A. Ferguson

Yes, great and it's great to be out here. Yes, EarthLink is certainly going through a pretty large transition right now, going back 3 years or so. We are in a top line decline of about over 20%, have done a series of acquisitions, moving from the consumer business to the business side. So really very business focused now and have really stemmed those declines and do see a path to growth, which we're real excited about.

The -- within our business services, we've got a growth business that's about $140 million of run rate revenue now growing at about 20% and the products in there are MPLS networks, hosted VoIP and IT services and we really think that that's an opportunity and the growth of those products will allow us to grow the total top line for the company. So that's, again, to be able to talk about growth, given where we've come from, we're really excited about that.

Certainly, at the core, there's a lot of cash flow, so we've got a consumer business that's still generating a lot of cash and a legacy business services business that is also generating a lot of cash. And we've really organized to kind of capture that. So we've got a group that is going to be focused on the growth products and we're funding the growth on that side. But then we'll also have a group that's focused on the lower end business services, so a lot of the customers that we got through the acquisitions were lower end CLEC customers and we're going to be organized more running that like the consumer business. So, really, just focused on retention of the base that we have and then maximizing the cash flow from that business to really fund the growth on the other side.

The balance sheet still remains strong. So we have $200 million worth of cash, a low debt profile of $600 million, a lot of tax assets. So $500 million of NOLs, a large fiber network that, certainly, we utilize for our services, but it's really a very unique asset in addition to a nationwide network that allows us to provide our services. So, excited about those pieces.

So the quarter were -- we've done some things, I talked about reorganizing. So we have restructured some of our sales force. We've gotten out of some smaller markets that we really inherited through the acquisition. So probably about 25 smaller markets, things like Akron, Ohio and some places in Maine. I mean just some markets that we didn't really see the growth opportunity. So we've really taken down our direct sales force and again, are investing that back in to the growth products. And we're actually beefing up the sales force in other markets. I mean it's a net reduction on our total direct force, but we're staffing up in markets like Chicago, San Jose, Dallas. So some other markets we hadn't been in, we're going to, again, go to larger markets, because that's really where we think the opportunities are.

Question-and-Answer Session

Unknown Analyst

Great. So help us talk through the guidance and when we really start to see the top line. You obviously talked about reducing the rate of decline, but actually getting the growth assets growing fast enough and being large enough to offset the...

Bradley A. Ferguson

Yes. So certainly -- I mean, really it's the growth part of the business that I talked about, which -- I mean, where a matter of quarters on the business services side of seeing the growth for the business services segment, which makes up 75% of our revenues. I mean we haven't pinpointed the exact time, but it's either later in '13 or '14 and so we're getting the traction with the growth products and really that the growth there will compensate the declines that we're seeing. And really, the declines that we're seeing in other parts of the business are improving all the time. Our total top line were down at a mid-single digit decline rate, so as the decline -- the parts of the business that are in secular decline improve, it just makes the hurdle that much lower for us to grow. So as a total company, we'll be getting close in 2015 to really getting to a flat point and then the inflection point.

Unknown Analyst

So the telecom business typically has some pretty high operating leverage. How does the profitability shift around with the business mix that you're going through now?

Bradley A. Ferguson

So I talked about how we're kind of segmenting it out with the growth products and the lower end -- I'll talk about how we're thinking about it for each of those. But on the growth products, I mean certainly we're investing there now. I mean the incremental margins are good and we do expect the margins on that business, I mean the IT services we're providing. So we're doing some cloud hosting, application hosting, so those types of products over time will have much better margins that we're seeing now. So EBITDA margins, right now, are around, in the high teens, and really in the mid-teens for the business segment until we'd expect to be able to get some improvements as we get that operating leverage for the growth products. On the lower end business services segment, so really, we'll be managing that for cost and being able to take out cost and looking at where we have fixed cost infrastructure and trying to variablize that over time and certainly, we'll be losing some scale there, but we're doing a lot on the cost side to kind of fight that over time.

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