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EarthLink's Heat

By Alyce Lomax
April 20, 2004

EarthLink (Nasdaq: ELNK) shares shot heavenward after it announced its first-quarter results today, at one point rising 21%. Not only is the company still coaxing customers to its broadband fold, it narrowed its losses and gave a sunnier outlook for 2004. In a climate where narrowband and broadband services represent global cooling and warming, respectively, EarthLink is managing to shed its premium dial-up image, whereas rival Time Warner's (NYSE: TWX) America Online is still struggling with subscriber losses.

EarthLink says it now expects to bring in 300,000 to 550,000 new subscribers this year. It predicts net income of $54 million to $80 million, compared with the January forecast of $13 million to $39 million. Revenue is expected to remain about the same, at $1.41 billion to $1.44 billion.

Although EarthLink still offers both premium and value dial-up, it's been positioning itself to benefit from the switch to broadband. EarthLink added 98,000 subscribers this quarter for a total of 5.3 million. Broadband customers are now at 1.2 million, a 30% increase. Narrowband (dial-up) revenues decreased 11%, while broadband gained 26%.

Earlier this week, the Pew Internet & American Life project said broadband has infiltrated 55% of us Netheads, either at home or at work. That study said that broadband use at home has increased 60% over the past year -- a much faster rate than many of us supposed.

Of course, a large part of that surge is due to the aggressive efforts of cable Internet providers, like Comcast (Nasdaq: CMCSA), and DSL providers, like Verizon (NYSE: VZ) and SBC Communications (NYSE: SBC), to woo users to their high-speed services with fees that hovered only slightly above those of premium dial-up packages.

A co-branded broadband deal inked with Sprint (NYSE: FON) could be another growth driver for EarthLink -- like the competitors above, they know the lure of a single, existing bill is a strong one. EarthLink's recent link-ups with telecom companies are a shrewd play to increase its DSL footprint and compete with Internet providers across the board.

Overall, EarthLink's first-quarter loss narrowed to $11.8 million, compared to a loss of $61.9 million in the same quarter last year. While EarthLink's revenues crept down by less than 1% to $351.6 million, it shaved its operating costs 13% to $417.7 million.

With broadband's torrid adoption rates and steep competition, you could argue that these are the best of the times and the worst of times for traditional ISPs struggling to rethink themselves for a more sophisticated Internet user. So far, though, EarthLink seems to be hitting the hot spots.

Do you think EarthLink can continue to grow subscribers in such a tough competitive climate? Talk to other Fools on the EarthLink discussion board.

Alyce Lomax does not own shares of any of the companies mentioned. She's one of the former EarthLink users who defected to Verizon.

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I am surprised by the fact that Earthlink has been able to add subscribers. There are roughly half a million People PC subscribers that have been added to offset losses by the premium priced dial-up service, while broadband numbers continue to increase. Although revenues are flat they have done a good job of cutting costs and total employee headcount has been slashed from 4,169 a year ago to 2,089 at the end of Q1 2004. The amortization costs from previous acquisitions have dropped sharply from $26.83 million a year ago to $7.84 in Q1 2004.

Excluding the facility exit costs of $30 million in Q1 Earthlink chalked up a profit of $18.4 million (0.11 EPS) and is projecting a profit of $21 - $27 million (0.15 EPS) in the second quarter. In Q4 of 2003 ELNK reported net income of $10.7 million (0.07 EPS). A pattern of increasing net income has been established after years of losses. It sure looks like ELNK is on the path to increasing profits although I'm not sure how much further costs can be cut...

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Our Atlanta paper had an article today. I'm about to go out of town, so I only scanned it. If you want to see it you can go to then click on the print news and the business section for Wed. You will have to register.

One thing that was a little unsettling in the article was that the churn rate was a little higher than it had been previously.

There was also mention both in that article and in an item a day earlier that Garry Betty got a big bonus while more than 1,000 employees were let go.

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There was also mention both in that article and in an item a day earlier that Garry Betty got a big bonus while more than 1,000 employees were let go.

I think that Earthlink was faced with a situation where revenues were no longer growing and United Online (UNTD - NASDAQ) was attracting hundreds of thousands of customers with its cut-rate service. I think UNTD has around 3 million subscribers and only has 500 employees. So ELNK took over People PC and had to slash costs in order to be able to compete sucessfully in the lower cost tier of the market. The trend these days is for companies to "outsource" as much as possible in order to lower costs.

I think the management team deserves a lot of credit for the turnaround they have produced in the last 12 - 18 months. It is too bad that all those people had to lose their jobs but I think the long-term financial health of Earthlink was on the line and now the future looks bright indeed...

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