ELNK

EarthLink Holdings Corp. (ELNK)

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EarthLink (ELNK)

Q1 2013 Earnings Call

May 02, 2013 8:30 am ET

Executives

Louis Alterman

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

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

Analysts

Michael Crawford - B. Riley Caris, Research Division

Donna Jaegers - D.A. Davidson & Co., Research Division

Barry M. Sine - Drexel Hamilton, LLC, Research Division

Mark Kelleher - Dougherty & Company LLC, Research Division

Anthony Klarman - Deutsche Bank AG, Research Division

Kunal Madhukar

Barry McCarver - Stephens Inc., Research Division

Presentation

Operator

Good morning. My name is Janica, and I will be your conference operator today. At this time, I would like to welcome everyone to EarthLink's First Quarter 2013 Earnings Call. [Operator Instructions] I will now turn the conference over to Mr. Louis Alterman, Senior Vice President of Finance for EarthLink. Please go ahead, sir.

Louis Alterman

Thanks, and welcome to our call. During today's call, we will refer to earnings slides that are available for you to view in the Investor Relations section of our website at earthlink.net. 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 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 principal 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 a reconciliation 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 earthlink.net.

After Rolla's opening comments, Brad Ferguson, our Chief Financial Officer, will discuss the quarter's financial results. Now I'd like to hand things over to Rolla Huff, our Chairman and CEO.

Rolla P. Huff

Thanks, Louis, and good morning to everyone joining us on the call. Well, we're off to a terrific start so far in 2013. New customer bookings are up considerably and we're raising our revenue and adjusted EBITDA guidance. Before I get to the part of the call where we talk about the Q1 operating results and higher full year outlook, I'd like to take a couple of minutes upfront to address our recent refinancing effort and the goodwill impairment charge we booked in Q1.

As you recall, our bookings in the second half of 2012 were soft as we saw extended customer decision cycles despite a growing sales pipeline that we've talked to everybody about. This caused the 2013 entry point and resulting financial guidance for this year to be lower than many of us had hoped it would be. Shortly following the issuance of that guidance, we had, what I described as an unforced error in our attempt to opportunistically refinance some debt. We believe the financing was poorly executed by our bankers, which ultimately caused us to terminate the financing instead of completing a financing with unattractive terms.

Now I don't say this to deflect accountability for our role in the process. We're responsible for everything that happens in this company. But I do say it to point out that the termination of the refinancing was due to tactical reasons, not because fixed income markets have an issue funding our strategy, as evidenced by the fact that we have $300 million of unsecured notes trading at a 7.5% yield today.

The combination of this event, plus the impact that 2012 sales had on our 2013 guidance, caused our stock to trade down by 16% in the first quarter. The change in the stock price then triggered a formulaic accounting process, which caused us to record a noncash goodwill impairment. I want to stress we recorded the impairment because we followed GAAP rules related to the trading value of our equity relative to the book value of the assets and not due to any sort of change in our future prospects. Our sales team knocked it out apart during the first quarter. And if anything, our view on our prospect has only improved.

And I think that's a good segue, so now let's talk about our first quarter results. I'll start on Page 2 with new customer bookings, which are the lifeblood of our recurring subscription model like ours. Throughout last year, I shared with you that we were seeing our pipeline build, the prospects were interested and wanted to talk to us about our new product offerings but that we were seeing decision cycles extend and deal closings were happening slower than we had liked. I'm very excited to report that our team materially reversed that trend in Q1, the first quarter under Mike Toplisek's leadership. We booked $3.4 million of new gross monthly recurring revenue, which was our highest quarter since we had over double the sales reps in 2011, and it equates to $84 million of total contract value. Our MRR bookings were up by 14% and was a $2.9 million improvement from Q4 2012.

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