EarthLink Holdings Corp. (ELNK)

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EarthLink (ELNK)

Q2 2013 Earnings Call

August 01, 2013 8:30 am ET


Louis Alterman

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

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


Michael Crawford - B. Riley Caris, Research Division

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

Mark Kelleher - Dougherty & Company LLC, Research Division

Barry McCarver - Stephens Inc., Research Division

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

Scott H. Kessler - S&P Capital IQ Equity Research

Ankit Sharma - Jefferies LLC, Research Division

Anthony Klarman - Deutsche Bank AG, Research Division



Good morning. My name is Nicole, and I will be your conference operator today. At this time, I would like to welcome everyone to the EarthLink Second Quarter 2013 Earnings Call. [Operator Instructions] I will now turn the call over to 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.

Prior to handing the call over to Rolla, I'd like to point out that we are in the process of running a sale process for our systems business, which was previously part of our legacy CLEC business. The business is approximately EBITDA neutral, and we expect the sale proceeds to be immaterial. Given the progress we've made in the sale process, in the second quarter, we accounted for our systems business within discontinued operations. This accounting treatment applies to all historical numbers, reducing our first half 2013 revenues by just over $5 million, and we will continue this accounting treatment perspectively for a full year revenue impact of approximately $10 million.

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. I'd like to start by sharing some of our operating metrics in the second quarter, along with my assessment of our progress, and then hand it over to Brad to dive deeper into the quarterly results and full year guidance. I'll come back at the end for some closing remarks around our capital allocation.

I'll start on Page 2 with new customer bookings. As you recall from 3 months ago, our Q1 sales bookings were $3.4 million of monthly recurring revenue, which was up considerably over our 2012 production. This morning, we announced that we had a strong second quarter of bookings as well, maintaining and in some cases, accelerating our positive sales momentum. As you can see on the bottom half of the page, not only did the total MRR bookings hold to Q1's high levels, but for our growth products, bookings grew sequentially from 40% to 47% of the total. This is important because these are the products that are the future of EarthLink and are in the early stages of adoption in the marketplace. Total contract value grew from $84 million in the first quarter to $93 million in the second quarter. So not only are we selling more and selling proportionately better products but customers are signing up for longer contract lengths. These bookings don't eliminate the fact that we still have a portion of our base made up of legacy CLEC products -- and I'll get to churn in a second -- but they continue to validate the substantial demand that's out there for the new platform we put in place.

Turning to Page 3. I want to remind everyone that we increased our total sales in the first half of this year with 200 less people than we had at the end of 2012. As we described, we exited sales force headcount in small markets, but retained and invested in the most productive reps in key markets. The sales force that we have today is only getting stronger, and as a result, we averaged $4,300 in MRR bookings per rep per month or $4,500 if you include our wholesale channel. Retail productivity grew 32% sequentially from Q1. And Q1, I'll remind you, was a record quarter that was already 45% above historical levels. This is a key foundational element of our transformation. Also, as we told you we would do, we took some of the savings from our more efficient sales force and invested it in demand creation initiatives. Since mid-March, we've delivered over 96 million impressions on targeted online sites. In the second quarter, our search engine marketing efforts resulted in $190,000 in MRR bookings or $2.3 million in new annualized revenue. This is more than double the $1.1 million from search in Q1. And looking ahead at the pipeline, through a combination of search engine marketing and digital advertising, we've increased the number of IT leads by 72% over the -- over Q1. So not only are we selling more and doing so with less sales reps, but we're moving up market and at a very fast clip. The dollar amount of large deals that we sold, defined as $10,000 or more of MRR per transaction, has doubled over the past 2 quarters. And across all sales, our average deal size grew by over 35%. And as we look at our sales funnels, we expect this trend to continue.

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