EarthLink Near-Term Future Revolves Around Broadband Access

Undaunted by third-quarter net losses and forecasting sluggish new subscriber growth through year-end, EarthLink seeks to build future profits by migrating subscribers to broadband services.

by ISP-Planet Staff [October 24, 2001]

Top-notch national Internet service provider EarthLink Inc. reported its net loss widened during the third-quarter due to merger-related costs and forecast slightly slower subscriber growth in the near-term. But all in all, the company seems to think it performing pretty well.

EarthLink reported its third-quarter and year-to-date financial results for the three and nine month periods ending September 30, 2001. Earnings before interest, taxes, depreciation and amortization (EBITDA) were $1.5 million, an improvement of $9.8 million from an EBITDA loss in the previous quarter and of nearly $40 million over the third quarter last year.

EarthLink's net loss for the period, excluding acquisition and merger-related costs, narrowed by 35 percent to $22.7 million in the red, compared to a negative $35.1 million for the previous quarter. Revenues grew to $319.0 million in the third-quarter, up 5 percent from the second quarter and up 28 percent from the same period last year.

Garry Betty, EarthLink chief executive officer, said the company passed an important milestone in its path toward profitability.

"Continuing to achieve greater operating efficiencies and benefiting from our first ever monthly price increase for basic dialup service, EarthLink became EBITDA positive for the quarter," Betty said, "demonstrating the company's strength in a difficult economy.

Behind the numbers
Like chief rivals MSN and American Online, EarthLink executed a price hike of its unlimited monthly dialup service at the beginning of August. It raised monthly fees for all new and existing subscribers from $19.95 to $21.95 between July and August.

Narrowband revenues were $254.3 million for EarthLink, which ended the third-quarter with approximately 4.8 million paying subscribers. It had approximately 4.9 million in June 2001 and 4.6 million one year ago. Executives said they expected the decline in narrowband customers, blaming the four percent downturn on the price increase and continuing customer migration to high-speed services. There was no explanation as to why EarthLink's dialup subscriber base grew only 4.2 percent over its performance in 2000.

It's far more likely that most of the 100,000 missing dialup users fled EarthLink as a direct result of the price hike. After all, EarthLink's high-speed access subscriber base grew to only 406,000 users, up from 346,000 for the previous quarter. This means that 60,000 of the 100,000-narrowband users didn't disappear from EarthLink's dialup subscriber base -- they upgraded.

However, it is entirely accurate to say that increasing broadband users is a priority for EarthLink. High-speed access revenues totaled $45.1 million in the third-quarter, up 11 percent over the second and up 192 percent over the same time last year.

High-speed services currently account for 14 percent of EarthLink's total revenues and with the addition of cable modem access to its broadband portfolio, Betty has reason to believe the future looks bright for the Atlanta-based ISP. "We continue to look to high speed access to drive further growth," Betty said. "Particularly through our roll out over AOL Time Warner's cable network and from additional revenues generated from such services as our home gateway and telecommuting products."

Additionally, EarthLink reported Web hosting revenues of $14.6 million, comparable to the second quarter revenues. The number of Web hosting customers remained relatively constant at 172,000 quarter over quarter. Advertising, content and commerce revenue increased slightly over the prior quarter to $4.9 million.

Outlook and highlights
In September, EarthLink began rolling out its high-speed Internet service over AOL Time Warner's cable network in Columbus, OH and Syracuse, NY. EarthLink is now offering cable modem services in 10 markets, passing an estimated 6.0 million U.S. households.

During the quarter, EarthLink initiated an integrated marketing plan, including broadcast TV, radio, outdoor and direct mail, targeted at Time Warner Cable markets to accelerate acceptance of the company's retail cable access offering. The company also launched a follow-up to its initial branding campaign with television spots that focused on Internet privacy, spam and the security of personal information.

The company's principal operating objectives are to continue growing its high-speed access business rapidly while significantly improving profitability and demonstrating the ability to generate cash from operations.

Based on current market conditions and its operating plans, EarthLink expects to end 2001 with approximately 4.8 million paying customers, excluding the acquisition of Cidco users just acquired this month. In light of softer economic conditions and expectations for weak holiday season PC sales, EarthLink does not expect the normal seasonal strength in new Internet access sign-ups.

"While we are forecasting only slight growth overall, we continue to see good growth prospects for the high-speed access product line," Betty said. "EarthLink will continue to capitalize on its national footprint, and its ability to deploy DSL, cable, fixed wireless and satellite high-speed access solutions, to grow its high-speed access base by 60,000 to 70,000 subscribers in the fourth quarter."

And 2002 is looking pretty bright for EarthLink. Chances are good that by the end of the year it will be able to offer its high-speed Internet access to half of the homes passed by Time Warner Cable's network.

—End