EarthLink posts loss, shows improvement

Number two Internet service provider EarthLink reported a net loss Thursday, but showed improvement as it narrowed its EBITDA losses while continuing to drive up revenues en route to cash flow positive status by the fourth quarter, the company said.

The Atlanta-based company said excluding acquisition and merger-related costs and including a $4.1 million write-down, net loss was $35.1 million, or 27 cents per share.

The results mirrored analyst expectations of a 27-cent per share loss for the quarter, according to Thomson Financial/First Call.

EBITDA loss narrowed from an $18.6 million loss in the first quarter 2001 to an $8.2 million loss in the second quarter. This compares to an EBITDA loss for the second quarter 2000 of $32.7 million.

“We have an investment thesis that EarthLink is a very strong cash flow story and the quarter’s results reinforces our thesis,” said Anthony Noto, an analyst at Goldman Sachs & Company. “They significantly beat our EBITDA estimate and are on track to be EBITDA positive by the fourth quarter.”

Revenues increased just 3 percent to $303.8 million compared to the first quarter, but compared to the same three-month period last year, increased 32 percent from $230.9 million.

EarthLink ended the second quarter with 4.9 million total subscribers, 4.4 million of which were narrowband. The company expects to end 2001 with 5 million paying subscribers with the most growth coming from the broadband side, which it said would hit 500,000.

Broadband subscribers climbed 20 percent from the first to second quarters, increasing from 288,000 to 346,000. The company claimed just 80,000 broadband subscribers at the end of the second quarter last year.

EarthLink said overall subscriber growth rates were down slightly compared to the first quarter due to industry-wide price increases—including its own 9 percent rate increase from $21.95 to $23.90 per month announced last month—and seasonal effects.

“Due to the recent price increase, we expect only modest growth for the remainder of the year,” said CEO Garry Betty in a conference call to investors.

Broadband revenues increased 25 percent to $40.6 million quarter to quarter, representing 13 percent of the company’s total revenue compared to 11 percent of total revenue last quarter and 4 percent at the end of the second quarter 2000. Chief Financial Officer Lee Andrean said the company expects broadband to account for 14 percent to 15 percent of total revenue by year-end.

Narrowband continued to represent the bulk of EarthLink’s revenues, totaling $244.1 million, or 80 percent, for the second quarter.

The company anticipates narrowband subscriptions to decrease slightly year over year due to the price increase and continued migration to broadband service. EarthLink said total subscribers could fall to the 4.75 million to 4.9 million range by the end of the third quarter.

But what the company loses in customers it said it would make up in revenues generated from the price increase and broadband growth, bringing in an expected $315 million to $320 million in third quarter 2001 revenues.

EBITDA loss for next quarter is expected to be between $5 million and breakeven. For the year, EarthLink said it anticipates revenues of between $1.2 billion and $1.3 billion. Wall Street expects the company to hit $1.24 billion. The company also expects EBITDA losses of $17 million to $27 million for all of 2001.

Net loss for the year, excluding merger-related costs and write-offs, is expected to be between $105 million and $120 million, or an 80-cent to 95-cent loss per share. Analysts project an 81-cent to $1.03 loss per share, according to Thomson Financial/First Call.