Having spent the year integrating the assets of Deltacom and One Communications as well as other smaller purchases, Earthlink (NASDAQ:ELNK, news, filings) closed out 2011 with its fourth quarter earnings this morning. Revenues of $350.2M were slightly above expectations, while earnings per share of $0.04 was inline with estimates. Here is a quick table of the company’s results alongside the prior quarter’s numbers:
| $ in millions | Q3/11 | Q4/11 | 2012 (guidance) |
|---|---|---|---|
| – Business | 265.7 | 262.5 | |
| – Consumer | 91.5 | 87.7 | |
| Revenue | 357.3 | 350.2 | |
| COS | 161.3 | 161.1 | |
| SG&A | 108.8 | 110.6 | |
| EBITDA | 90.5 | 81.6 | 285-295 |
| EPS | 0.07 | 0.04 | 0.03-0.09 |
| Operating Cash Flow | 60.0 | 50.6 | 150-180 |
| Capex | 30.5 | 31.0 | 115-135 |
Revenues: Earthlink’s business revenues, which are now 75% of the business nowadays, declined sequentially again but roughly as expected. Churn fell to 1.5%, and the company says its efforts to move into IT cloud services should put it in position to return this segment to growth around the end of 2012. Consumer revenues followed their usual trajectory as the company manages this segment for cash flow, but with churn moderating as dialup becomes a smaller and smaller portion of their consumer segment.
EBITDA and Earnings: I’m still coming up to speed on Earthlink’s reporting structure. However, it does appear that while Q4 met expectations for EPS and the top of guidance for EBITDA, the market was expecting something rather better than guidance of $3-10M net income in 2012. Part of this seems to be related to the FCC changes to intercarrier compensation, revenues of which Earthlink expects to head toward zero this year. Another part appears to be higher anticipated spending on further IT Cloud services development as they spend in advance of anticipated growth.
Integration: Earthlink exceeded $30M in synergies achieved in 2011, expects to reach the target of $40M earlier than expected by the end of the year, and has identified an additional $5-7M that it will act on next year. I have mentioned several times that I expect Earthlink to participate in further consolidation this year, as their Business segment’s assets don’t seem like a completed puzzle just yet. While they have more to do, it does seem like they are probably going to be ready to make a move in a quarter or two – assuming there is a suitable target at the time.
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Categories: CLEC · Financials
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I think the street reacted unfavorably to the performance by indicating why the synergy cost achievement was important the underlying business has challenges. Earthlink needs to do something fundamentally to transform its network reach and until it does its not going to be able to create compelling returns. Fundamentally i believe they are making the right investments in cloud services which is the future but i also believe they need to do something inorganically to solve to the underlying optics of having a network that isn’t able to compete on the same level as Level 3, XO, Windstream, etc.