EarthLink Holdings Corp. (ELNK)

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EarthLink (ELNK)

Q3 2013 Earnings Call

November 05, 2013 8:30 am ET


Louis Alterman

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

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


Michael Crawford - B. Riley Caris, Research Division

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



Good morning. My name is Vanessa, and I will be your conference operator today. At this time, I would like to welcome everyone to EarthLink's Third Quarter 2013 Earnings Call. [Operator Instructions]

I will now turn the conference 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 free 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'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 principal factors that could cause actual result 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. We were encouraged by our continued overall progress in the third quarter. Sales bookings were well above historical levels and rep productivity continues to be high.

As we expected, business churn peaked in July, then began to decline in August and approached more normal levels in September.

As we passed several important milestones in our integration efforts this quarter, we will now leverage some of our new capabilities to begin a substantial project to reduce the cost structure of our access network and drive greater provisioning efficiency in 2014 and beyond.

And finally, we were able to drive several favorable settlements, including a more positive outcome in the USAC audit than we had originally anticipated last year.

I'll go more into depth in each of these items I just mentioned, and then I'll hand it over to Brad to dive deeper into the quarterly results and full year guidance.

I'll begin on Page 2 with new customer bookings, where we had a strong third quarter. The sequential comparisons will of course continue to be lumpy as we move upmarket as we've described in the past. But I think the important thing is that we continue to maintain booking levels significantly above 2012 production.

In Q3, we booked over $88 million in total contract value. Year-to-date, through September, we've booked $265 million in total contract value, or over $10 million in monthly recurring revenue. This is more than 5% above where we were last year at this time on approximately half the number of sales reps.

As you can see from the mix information on the bottom half of the page, 64% of our bookings in Q3 came from our growth products in carrier business.

Legacy CLEC sales are now down to 36% of the total, whereas 1.5 years ago, they comprised the vast majority of our new bookings.

We see substantial customer demand for the new platform we've invested in, and expect our reps will continue to sell proportionately more of our next-generation products and services.

Now, all of this translates into rep productivity that continues to be meaningfully higher relative to prior periods, as shown on Page 3.

Including our carrier business, our sales reps produced at a rate of $4,600 of new MRR per rep per month on average in Q3, which is above level seen in Q2 and nearly double the levels we saw throughout 2012.

As we've talked about before, it's not just the makeup of our product set that changed, but the makeup of our salesforce as well. EarthLink reps today are more proficient and solution selling, are used to carrying higher quotas and have the technical know-how to educate our customers on the benefits of moving to the cloud or transitioning to cloud-based IP voice technology.

The ability to offer and sell technology-based solutions at the enterprise level has been at the core of the EarthLink transformation.

We continue to invest some of the savings from our reduced salesforce into online demand creation. In the third quarter, digital advertising resulted in $31 million impressions, and we posted improvements north of 50% over last quarter's click-through rate.

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