ELNK

EarthLink Holdings Corp. (ELNK)

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EarthLink Inc, (ELNK)

Q3 2010 Earnings Call

October 26, 2010 8:30 am ET

Executives

Brad Ferguson - CFO

Rolla Huff - Chairman & CEO

Joe Wetzel - COO

Michele Sadwick - VP, Corporate Communications

Louis Alterman - VP of IR

Analysts

Ingrid Chung - Goldman Sachs

Youssef Squali - Jefferies & Co

Sri Anantha - Oppenheimer

James Cakmak - Sidoti & Co:

Mike Crawford - B. Riley & Company

Donna Jaegers - DA Davidson

Scott Kessler - Standard & Poor’s Equity

Presentation

Operator

Good morning everyone and welcome to the EarthLink Third Quarter 2010 Earnings Conference Call. Today’s call is being recorded. At this time I would like to turn the conference call 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 President and Chief Operating Officer Joe Wetzel, our Vice President of Communications Michele Sadwick and our Vice President of Investor Relations Louis Alterman to discuss our third quarter 2010 results and 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 risk 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 the 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 matters. For details on these measures including why we use them and reconciliations to the most comparable GAAP measures please refer to our earnings release in 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 and thanks for joining us today to discuss our third quarter results.

We certainly had an exciting quarter and today I will share three important updates with you. First we will talk about the ongoing stability and cash generation from our consumer business. Second, I will give and update on continued traction we have seen out of New Edge Networks, that enabled the top-line in our business segment to grow sequentially this quarter and third we will end with a discussion of the recent announcement of our Deltacom acquisition and EarthLink’s transition to a leading IP infrastructure and services company.

First, lets start with our consumer business. We had another solid quarter. We reported $51 million in adjusted EBITDA and three years after we restructured the business the consumer business remained healthy, generating $48 million in free cash flow in the quarter.

First, adds this quarter were strong as we added 77,000 new customers. While that is down from a 108,000 a year earlier, its up over 10,000 from Q2 of this year. Cable adds were particularly robust and over 70% of our customer added were on the broadband product platform.

Our average monthly churn rate was 3% in the third quarter. That’s down nearly 20% from the 3.6% we reported a year earlier and up about 5 basis points over Q2, partly due to seasonality and partly due to the early impact of our strong gross add performance.

Next subscriber losses for the quarter was 95,000, down from 109,000 in the second quarter this year and 35% less from the 146,000 loss year earlier. I said many times on this calls absent to material change and historical customer behavior, we believe that our consumer customer churn will continue to improve as the weighted average tenure of our customer base increases. We believe the cash flow that these customers generate in the future would be meaningful for years to come.

We recorded $145million dollars in revenue in the third quarter, which was down $6 million from the prior quarter excluding the second quarter impact of a one-time partner settlement we discussed with you last quarter. As we discussed in the past we expect that as our churn continues to come down our revenue attrition will continue to flatten out as well. That’s exactly what has happened as the quarterly sequentially declines, I just mentioned were about half of $12 million sequential revenue decline we reported in the year ago quarter.

While we are pleased that revenue declines continues to attenuate as we expect, we also clearly recognize that we must stay focused in taking actions, keep our consumer cost structure in line with revenue. On this front Joe Wetzel his team had lots of success again and is evident as adjusted EBITDA margins remain robust at 35% of revenue.

Now, to put this in perspective, while revenue this quarter was $30 million dollars lower than it was a year ago and gross margin percentages were 100 basis point lower due to the ongoing shift of our customers to broadband adjusted, EBITDA margins were flat to Q3 2009. Now what that means, is that we took out a lot of fixed cost over the past year.

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