EarthLink Holdings Corp. (ELNK)

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EarthLink Holdings (ELNK)

Q2 2014 Earnings Call

August 05, 2014 8:30 am ET


Louis Alterman -

Joseph F. Eazor - Chief Executive Officer, President and Director

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


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

Michael Crawford - B. Riley Caris, Research Division

Anthony Francis Klarman - Deutsche Bank AG, Research Division

Arun Seshadri - Crédit Suisse AG, Research Division

Lance W. Vitanza - CRT Capital Group LLC, Research Division



Good morning. My name is Charisse, and I will be your conference operator today. At this time, I would like to welcome everyone to the EarthLink's Second Quarter 2014 Earnings Call. [Operator Instructions] I will now turn the conference over to Louis Alterman, EarthLink's Senior Vice President of Finance, Investor Relations and Treasurer. 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 protection 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 in the Form 8-K that has been furnished to the SEC, both of which are available on our website at earthlink.net. After Joe'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 Joe Eazor, our President and CEO.

Joseph F. Eazor

Thank you, Louis, and good morning, everyone. I felt like I just started here, but I'm now over 6 months into the job. On my first 2 earnings calls, I communicated that we at EarthLink would do a few things: That we would materially improve our cash flow, that we would execute a structured operations transformation plan, that we would narrow our growth focus around managed network services and network-related cloud services, and that we would optimize our product and business portfolio. And today, I'm glad to say that we are making progress in all fronts. First, I'm pleased with our Q2 financial results. Let me start with our revenue. We all know there are declining revenue segments to this business, but we are taking actions to shore up revenue in the short term as well as steps to drive better long-term performance. For the quarter, our revenue was flat versus Q1 and it met our expectations. Additionally, we made solid progress in our bookings. And because of this, we remain committed to delivering full-year revenue within our guidance. From a profitability perspective, we made good progress. With improvements in both cost of revenue and operating expenses. As a result, we are narrowing and increasing our adjusted EBITDA guidance for the full year. Our strong focus on cash flows resulted in significant improvement. From the adjusted EBITDA increase I just mentioned, to our CapEx, where we are aggressively improving our capital productivity. Based on these drivers, we have increased our free cash flow expectations by almost $30 million from the beginning of this year. Brad will walk you through all the details of our Q2 performance and our guidance for the year in just a few minutes. But before I turn it over to Brad, I wanted to spend a few minutes on specific areas of progress. I would like to highlight progress in 3 areas: Success in our managed network services; our efforts to simplify and improve our operations and our portfolio optimization work. First as I said last quarter, we must improve our focus on our growth activities. Spending more of our effort in managed network services where we have strong capabilities that align very well with market demand. Some recent key wins this last quarter highlight this that the value of this focus and these are shown on Page 2.

Michael Kors needed a reliable way to connect its distribution plants and warehouses. We would leverage our network partner relationships to design primary and secondary MPLS layer that gave them a cost-effective and secure solution. BD Brands was unhappy with their existing provider, to provide better service in their 58 locations, EarthLink designed a blended access MPLS network and layered in Hosted Voice, Hosted Network Security, Wi-Fi and PCI compliance solutions. We won this business because we have a proven track record of success for retail customers. Genesco, a retailer with approximately 3,000 locations, has long been an EarthLink customer. We worked with Genesco to enable better connection with shoppers via mobile, to gather better data on in-store activity and to ship one to many advertising to one-to-one targeted offers. This has extended our services partnership with Genesco for another 4 years. As a result of these and other wins, our new customer bookings during the second quarter were at the highest level in 3 quarters and our contract renewals continued at a very fast clip, nearly double the pace we were in '13. Additionally, we are enhancing our capabilities in VPN, or IP site tunneling as well as other managed network services products around the areas of security, customer network operation centers, network and other data analytics and so on. Our network related IT services products also saw success last quarter, including Hosted Voice over IP, disaster recovery and hosted industry relevant applications. Bookings of these products increased more than 50% from the first quarter. The second area I would like to discuss on Page 3 is the progress we are making to simplify and improve our operations in the customer experience, access management, product rationalization and our go-to-market focus. Our service delivery team has been streamlining processes like service installation and customer support. As we've seen market improvement in our service delivery intervals and customer satisfaction performance as a result. We believe these improvements and others like them will continue to lead to a better customer experience, which should lead to improve revenue, reduced operating costs and better customer retention. We've talked before about our efforts to manage our cost of revenue through focus access management activities. These efforts have continued to yield additional benefits in the second quarter. We believe that there is still more opportunity to reduce the cost of our network and we will continue to pursue these gross margin improvements aggressively, while improving our network performance. The focus on operational excellence is not limited to service delivery and network. We are simplifying our product catalog and better aligning the organization to support our strategy. For example, we continue to rationalize thousands of products SKUs out of our catalog and workflows. And have a more focused and standard product set that will be represented in our new automated coating system that is rolling out now. And finally, we are carefully segmenting the market and prioritizing our go-to market activities. As an example, we are shifting demand generation activities from the markets with the very smallest customers, where our products are less competitive in favor of managed network services in the mid-market enterprise segments, with a particular focus on multi-location businesses, such as retail. This product in market simplification should yield significant improvements throughout the organization. From sales and marketing, to order management, to service delivery, to customer care, to improve our support functions.

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