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8-K - 8-K - EarthLink Holdings, LLCa16-4768_18k.htm
EX-99.2 - EX-99.2 - EarthLink Holdings, LLCa16-4768_1ex99d2.htm

Exhibit 99.1

 

Investors

Trey Huffman

404-748-6219

huffmanal@elnk.com

 

 

 

Media

 

Bert Kelly

 

678-891-0317

 

bert.kelly@elnk.com

 

EARTHLINK REPORTS STRONG FOURTH QUARTER AND FULL YEAR 2015 RESULTS

 

·                  Revenue of $260.2 million for the fourth quarter of 2015 and $1,097.3 million for the full year 2015

·                  Net loss of $(12.3) million, or $(0.12) per share, for the fourth quarter of 2015 and $(43.2) million, or $(0.42) per share, for the full year 2015

·                  Adjusted EBITDA of $53.9 million for the fourth quarter of 2015 and $242.5 million for the full year 2015

·                  Net cash provided by operating activities of $41.4 million for the fourth quarter of 2015 and $167.4 million for the full year 2015

·                  Unlevered Free Cash Flow of $26.8 million for the fourth quarter of 2015 and $155.0 million for the full year 2015

·                  Ending cash balance of $91.3 million

 

ATLANTA - Feb. 17, 2016 - EarthLink (EarthLink Holdings Corp., NASDAQ: ELNK), a leading network services provider dedicated to delivering great customer experiences, today announced financial results for its fourth quarter and full year 2015.

 

“2015 was a year of significant progress for EarthLink,” said EarthLink Chief Executive Officer and President Joseph F. Eazor. “We executed on our business unit strategy and delivered strong financial performance as a result. Going into 2016 we are focusing on activities that pave the way to growth.”  Eazor also announced changes to EarthLink’s Board of Directors. “Today we’re also announcing that long-time EarthLink Directors David Koretz and Wayne Wisehart will be retiring from our Board of Directors prior to our annual stockholders meeting in April. We are grateful for their dedication and many contributions to EarthLink since 2008.”

 



 

Fourth Quarter 2015 Financial Summary

 

 

 

 

 

 

 

 

 

Third

 

Fourth

 

 

 

Full

 

Full

 

 

 

Figures in US $ millions,

 

Fourth Quarter

 

 

 

Quarter

 

Quarter

 

 

 

Year

 

Year

 

 

 

except per share

 

2014

 

2015

 

Change

 

2015

 

2015

 

Change

 

2014

 

2015

 

Change

 

Revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Enterprise/Mid-Market

 

 

*

$

106.2

 

 

*

$

110.0

 

$

106.2

 

(3.5

)%

 

*

$

445.0

 

 

*

Small Business

 

 

*

66.5

 

 

*

72.9

 

66.5

 

(8.8

)%

 

*

297.0

 

 

*

Carrier/Transport

 

 

*

34.3

 

 

*

34.2

 

34.3

 

0.3

%

 

*

135.9

 

 

*

Business Services

 

225.7

 

206.9

 

(8.3

)%

217.1

 

206.9

 

(4.7

)%

930.9

 

877.9

 

(5.7

)%

Consumer Services

 

58.8

 

53.3

 

(9.4

)%

53.8

 

53.3

 

(0.9

)%

246.0

 

219.3

 

(10.9

)%

Total Revenue

 

284.5

 

260.2

 

(8.5

)%

270.9

 

260.2

 

(3.9

)%

1,176.9

 

1,097.3

 

(6.8

)%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross Margin

 

152.8

 

138.5

 

(9.4

)%

148.5

 

138.5

 

(6.7

)%

619.5

 

596.6

 

(3.7

)%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating Expenses

 

102.0

 

88.4

 

(13.3

)%

90.8

 

88.4

 

(2.6

)%

419.0

 

368.8

 

(12.0

)%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Loss

 

(22.5

)

(12.3

)

(45.3

)%

(10.5

)

(12.3

)

17.1

%

(72.8

)

(43.2

)

(40.7

)%

Net Loss per share

 

(0.22

)

(0.12

)

(45.5

)%

(0.10

)

(0.12

)

20.0

%

(0.71

)

(0.42

)

(40.8

)%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Adjusted EBITDA (1)

 

53.2

 

53.9

 

1.3

%

61.4

 

53.9

 

(12.2

)%

213.0

 

242.5

 

13.8

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Capital Expenditures

 

28.6

 

27.1

 

(5.2

)%

22.0

 

27.1

 

23.2

%

102.9

 

87.5

 

(15.0

)%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash

 

134.1

 

91.3

 

(31.9

)%

87.6

 

91.3

 

4.2

%

134.1

 

91.3

 

(31.9

)%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross Debt (2)

 

600.0

 

508.9

 

(15.2

)%

513.9

 

508.9

 

(1.0

)%

600.0

 

508.9

 

(15.2

)%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Cash Provided by Operating Activities

 

38.7

 

41.4

 

7.0

%

74.0

 

41.4

 

(44.1

)%

140.0

 

167.4

 

19.6

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unlevered Free Cash Flow (1)

 

24.6

 

26.8

 

8.9

%

39.4

 

26.8

 

(32.0

)%

110.2

 

155.0

 

40.7

%

 


(1) Adjusted EBITDA and Unlevered Free Cash Flow are non-GAAP measures, see definitions in “Non-GAAP Measures” below.

 

(2) Gross debt excludes unamortized debt issuance costs, unamortized debt discount and capital leases.

 

* During the third quarter of 2015, the Company implemented certain organizational, operational and reporting changes that resulted in the disaggregation of its Business Services segment into three separate reportable segments: enterprise/mid-market, small business and carrier/transport. Management determined it is impracticable to restate financial information prior to 2015 to conform to the new segment structure. See Consolidated Financial Highlights and Footnote 7 to the Consolidated Financial Highlights for more detail.

 

Revenue and Cost of Revenue

 

·                  Total revenue was $260.2 million during the fourth quarter of 2015, a decline of 8.5% from the fourth quarter of 2014. Total revenue was $1,097.3 million during the full year 2015, a decline of 6.8% from the full year 2014.

 



 

·                  Total Business Services revenue was $206.9 million during the fourth quarter of 2015, a decline of 8.3% from the fourth quarter of 2014. Total Business Services revenue was $877.9 million during the full year 2015, a decline of 5.7% from the full year 2014.

 

·                  Total Business Services and company revenue during the fourth quarter of 2015 included $0.9 million of favorable settlements and adjustments compared to $3.9 million during the fourth quarter of 2014 and $1.2 million during the third quarter of 2015. Total company revenue during the full year 2015 included $5.9 million of favorable settlements and adjustments ($5.2 million in Business Services and $0.7 million in Consumer Services) compared to $10.7 million during the full year 2014 (all within Business Services).

 

·                  Total company cost of revenue during the fourth quarter of 2015 included $2.2 million of favorable settlements and adjustments compared to $4.4 million of favorable settlements during the fourth quarter of 2014 and $3.9 million during the third quarter of 2015. Total company cost of revenue during the full year 2015 included $12.3 million of favorable settlements and adjustments ($13.0 million favorable in Business Services, offset by $0.7 million unfavorable in Consumer Services) compared to $14.8 million during the full year 2014 (all within Business Services).

 

Net Loss and Adjusted EBITDA

 

·                  Net loss was $(12.3) million during the fourth quarter of 2015. This compares to a net loss of $(22.5) million in the fourth quarter of 2014 and $(10.5) million in the third quarter of 2015. Net loss was $(43.2) million for the full year 2015 compared to a net loss of $(72.8) million for the full year 2014.

 

·                  Adjusted EBITDA (a non-GAAP measure, see definition in “Non-GAAP Measures” below) was $53.9 million in the fourth quarter of 2015, a 1.3% increase from the fourth quarter of 2014 and a 12.2% decrease from the third quarter of 2015. Adjusted EBITDA was $242.5 million for the full year 2015 compared to $213.0 million for the full year 2014.

 

Balance Sheet and Cash Flow

 

·                  Net cash provided by operating activities was $41.4 million during the fourth quarter of 2015. This compared to net cash provided by operating activities of $38.7 million in the fourth quarter of 2014 and $74.0 million in the third quarter of 2015. Net cash provided by operating activities was $167.4 million for the full year 2015 compared to $140.0 million for the full year 2014.

 

·                  Unlevered Free Cash Flow (a non-GAAP measure, see definition in “Non-GAAP Measures” below) was $26.8 million during the fourth quarter of 2015. This compared to Unlevered Free Cash Flow of $24.6 million in the fourth quarter of 2014 and $39.4 million in the third quarter of

 



 

2015. Unlevered Free Cash Flow was $155.0 million for the full year 2015 compared to $110.2 million for the full year 2014.

 

·                  EarthLink ended the fourth quarter of 2015 with $91.3 million in cash. During the fourth quarter of 2015, EarthLink made net repayments on gross outstanding debt of $5.0 million and dividend payments of $5.2 million. During the full year 2015, EarthLink made net repayments on gross outstanding debt of $91.1 million and dividend payments of $26.4 million.

 

Non-GAAP Measures

 

Adjusted EBITDA is defined as net income (loss) before interest expense and other, net, income taxes, depreciation and amortization, stock-based compensation expense, impairment of goodwill and long-lived assets, restructuring, acquisition and integration-related costs, loss on extinguishment of debt, and gain (loss) from discontinued operations, net of tax. Unlevered Free Cash Flow is defined as net income (loss) before interest expense and other, net, income taxes, depreciation and amortization, stock-based compensation expense, impairment of goodwill and long-lived assets, restructuring, acquisition and integration-related costs, loss on extinguishment of debt, and gain (loss) from discontinued operations, net of tax, less cash used for purchases of property and equipment.

 

Adjusted EBITDA and Unlevered Free Cash Flow are non-GAAP financial measures.  They should not be considered in isolation or as an alternative to measures determined in accordance with U.S. generally accepted accounting principles. Please refer to the Consolidated Financial Highlights for a reconciliation of these non-GAAP financial measures to the most comparable measures reported in accordance with U.S. generally accepted accounting principles and Footnote 6 of the Consolidated Financial Highlights for a discussion of the presentation, comparability and use of such financial measures.

 

Conference Call for Analysts and Investors

 

EarthLink’s Fourth Quarter 2015 Conference Call will be held on Thursday, February 18, 2016, at 8:30 a.m. ET and hosted by EarthLink’s Chief Executive Officer and President Joseph F. Eazor and Executive Vice President and Chief Financial Officer Louis M. Alterman.

 

The dial-in number is:  (866) 887-3882.

 

Participants should reference the conference ID number 27956447 or “EarthLink Fourth Quarter 2015 Earnings Call” and dial in 10 minutes prior to the scheduled start time.

 

Webcast

 

A live Webcast of the conference call will be available at: http://ir.earthlink.net/.

 

Presentation

 

An investor presentation to accompany the conference call and webcast will be available at: http://ir.earthlink.net/.

 



 

Replay

 

A webcast replay will be available from 11:30 a.m. ET on February 18, 2016 through midnight on March 17, 2016. Dial toll-free:  (855) 859-2056. The replay confirmation code is 27956447. The Webcast will be archived on the company’s website at: http://ir.earthlink.net/events.cfm.

 

About EarthLink

 

EarthLink (EarthLink Holdings Corp., NASDAQ: ELNK) is a leading network services provider dedicated to delivering great customer experiences in a cloud connected world. We help thousands of multi-location businesses securely establish critical connections in the cloud. Our solutions for cloud and hybrid networking, security and compliance, and unified communications provide the cost-effective performance and agility to serve customers anytime, anywhere, via any channel, or any device. We operate a nationwide network spanning 29,000+ fiber route miles, with 90 metro fiber rings and secure data centers that provide ubiquitous data and voice IP coverage. To learn why thousands of specialty retailers, restaurants, franchisors, financial institutions, healthcare providers, professional service firms, local governments, residential consumers and other carriers choose to connect with us, visit us at www.earthlink.com, @earthlink, on LinkedIn and Google+.

 

Cautionary Information Regarding Forward-Looking Statements

 

This press release includes “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. Although we believe that the expectations expressed in these forward-looking statements are reasonable, we cannot promise that our expectations will turn out to be correct. Our actual results could be materially different from and worse than our expectations. With respect to such forward-looking statements, we seek the protections afforded by the Private Securities Litigation Reform Act of 1995. These risks include, without limitation: (1) that we may not be able to execute our strategy to successfully transition to a leading managed network, security and cloud services provider, which could adversely affect our results of operations and cash flows; (2) that we may not be able to increase revenues from our growth products and services to offset declining revenues from our traditional products and services, which could adversely affect our results of operations and cash flows; (3) that if we are unable to adapt to changes in technology and customer demands, we may not remain competitive, and our revenues and operating results could suffer; (4) that failure to achieve operating efficiencies and otherwise reduce costs would adversely affect our results of operations and cash flows; (5) that we may have to undertake further restructuring plans that would require additional charges; (6) that we may be unable to successfully divest non-strategic products, which could adversely affect our results of operations; (7) that acquisitions we complete could result in operating difficulties, dilution, increased liabilities, diversion of management attention and other adverse consequences, which could adversely affect our results of operations; (8) that we face significant competition in our business markets, which could adversely affect our results of operations; (9) that failure to retain existing customers could adversely affect our results of operations and cash flows; (10) that decisions by legislative or regulatory authorities, including the Federal Communications Commission, relieving incumbent carriers of certain regulatory requirements, and possible further deregulation in the future, may restrict our ability to provide services and may increase the costs we incur to provide these services; (11) that if we are unable to interconnect with AT&T, Verizon and other incumbent carriers on acceptable terms, our ability to offer competitively priced local telephone services will be adversely affected; (12) that the continued decline in switched access and reciprocal compensation revenue will adversely affect our results of operations; (13) that failure to obtain and maintain necessary permits and rights-of-way could interfere with our network infrastructure and operations; (14) that if our larger carrier customers terminate the service they receive from us, our wholesale revenue and results of operations could be adversely affected; (15) that we obtain a majority of our network equipment and software from a limited number of third-party suppliers; (16) that our commercial and alliance arrangements may not be renewed or may not generate expected benefits, which could adversely affect our results of operations; (17) that our consumer business is dependent on the availability of third-party network service providers; (18) that we face significant competition in the Internet access industry that could reduce our profitability; (19) that the continued decline of our consumer access subscribers will adversely affect our results of operations; (20) that lack of regulation governing wholesale Internet service providers could adversely affect our operations; (21) that cyber security breaches could harm our business; (22) that privacy concerns relating to our business could damage our reputation and deter current and potential users from using our services; (23) that interruption or failure of our network,

 



 

information systems or other technologies could impair our ability to provide our services, which could damage our reputation and harm our operating results; (24) that our business depends on effective business support systems and processes; (25) that if we, or other industry participants, are unable to successfully defend against disputes or legal actions, we could face substantial liabilities or suffer harm to our financial and operational prospects; (26) that we may be accused of infringing upon the intellectual property rights of third parties, which is costly to defend and could limit our ability to use certain technologies in the future; (27) that we may not be able to protect our intellectual property; (28) that we may be unable to hire and retain sufficient qualified personnel, and the loss of any of our key executive officers could adversely affect us; (29) that unfavorable general economic conditions could harm our business; (30) that government regulations could adversely affect our business or force us to change our business practices; (31) that our business may suffer if third parties are unable to provide services or terminate their relationships with us; (32) that we may be required to recognize impairment charges on our goodwill and other intangible assets, which would adversely affect our results of operations and financial position; (33) that we may have exposure to greater than anticipated tax liabilities and we may be limited in the use of our net operating losses and certain other tax attributes in the future; (34) that our indebtedness could adversely affect our financial health and limit our ability to react to changes in our business and industry; (35) that we may require substantial capital to support business growth, and this capital may not be available to us on acceptable terms, or at all; (36) that our debt agreements include restrictive covenants, and failure to comply with these covenants could trigger acceleration of payment of outstanding indebtedness; (37) that we may reduce, or cease payment of, quarterly cash dividends; (38) that our stock price may be volatile; (39) that provisions of our certificate of incorporation, bylaws and other elements of our capital structure could limit our share price and delay a change of control of the company; and (40) that our bylaws designate the Court of Chancery of the State of Delaware as the sole and exclusive forum for certain types of actions and proceedings that may be initiated by our stockholders, which could limit our stockholders’ flexibility in obtaining a judicial forum for disputes with us or our directors, officers or employees. These risks and uncertainties, as well as other risks and uncertainties that could cause our actual results to differ significantly from management’s expectations, are not intended to represent a complete list of all risks and uncertainties inherent in our business, and should be read in conjunction with the more detailed cautionary statements and risk factors included in our Annual Report on Form 10-K.

 

#                                         #                                         #

 



 

EARTHLINK HOLDINGS CORP.

Unaudited Condensed Consolidated Statements Of Operations

(in thousands, except per share data)

 

 

 

Three Months Ended

 

Twelve Months Ended

 

 

 

December 31,

 

December 31,

 

 

 

2014

 

2015

 

2014

 

2015

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

$

284,472

 

$

260,237

 

$

1,176,895

 

$

1,097,252

 

Operating costs and expenses:

 

 

 

 

 

 

 

 

 

Cost of revenues (exclusive of depreciation and amortization shown separately below)

 

131,677

 

121,727

 

557,436

 

500,628

 

Selling, general and administrative (exclusive of depreciation and amortization shown separately below)

 

101,989

 

88,381

 

419,019

 

368,763

 

Depreciation and amortization (1)

 

47,686

 

46,826

 

186,872

 

188,315

 

Impairment of long-lived assets (2)

 

2,974

 

 

14,334

 

 

Restructuring, acquisition and integration-related costs (3)

 

9,095

 

4,484

 

20,088

 

19,320

 

Total operating costs and expenses

 

293,421

 

261,418

 

1,197,749

 

1,077,026

 

Income (loss) from operations

 

(8,949

)

(1,181

)

(20,854

)

20,226

 

Interest expense and other, net

 

(14,253

)

(11,192

)

(56,261

)

(50,972

)

Loss on extinguishment of debt (4)

 

 

 

 

(9,734

)

Loss from continuing operations before income taxes

 

(23,202

)

(12,373

)

(77,115

)

(40,480

)

Income tax (provision) benefit

 

1,152

 

91

 

4,744

 

(2,730

)

Loss from continuing operations

 

(22,050

)

(12,282

)

(72,371

)

(43,210

)

Loss from discontinued operations, net of tax (5)

 

(442

)

 

(381

)

 

Net loss

 

$

(22,492

)

$

(12,282

)

$

(72,752

)

$

(43,210

)

 

 

 

 

 

 

 

 

 

 

Basic and diluted net loss per share

 

 

 

 

 

 

 

 

 

Continuing operations

 

$

(0.22

)

$

(0.12

)

$

(0.71

)

$

(0.42

)

Discontinued operations

 

 

 

 

 

Basic and diluted net loss per share

 

$

(0.22

)

$

(0.12

)

$

(0.71

)

$

(0.42

)

Basic and diluted weighted average common shares outstanding

 

102,315

 

103,862

 

102,313

 

103,388

 

 

 

 

 

 

 

 

 

 

 

Dividends declared per share

 

$

0.05

 

$

0.05

 

$

0.20

 

$

0.20

 

 



 

EARTHLINK HOLDINGS CORP.

Unaudited Condensed Consolidated Balance Sheets

(in thousands, except per share data)

 

 

 

December 31,
2014

 

December 31,
2015

 

ASSETS

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

134,133

 

$

91,296

 

Accounts receivable, net of allowance of $6,211 and $3,537 as of December 31, 2014 and 2015, respectively

 

92,616

 

74,724

 

Prepaid expenses

 

13,761

 

14,187

 

Other current assets

 

13,671

 

9,724

 

Total current assets

 

254,181

 

189,931

 

Property and equipment, net

 

404,713

 

372,504

 

Goodwill

 

137,751

 

137,751

 

Other intangible assets, net

 

91,490

 

25,325

 

Other long-term assets

 

11,061

 

9,141

 

Total assets

 

$

899,196

 

$

734,652

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

 

$

23,726

 

$

18,442

 

Accrued payroll and related expenses

 

50,197

 

50,532

 

Other accrued liabilities

 

85,181

 

64,305

 

Deferred revenue

 

43,940

 

40,229

 

Current portion of long-term debt and capital lease obligations

 

1,537

 

6,787

 

Total current liabilities

 

204,581

 

180,295

 

Long-term debt and capital lease obligations

 

595,319

 

505,613

 

Long-term deferred income taxes, net

 

3,199

 

3,876

 

Other long-term liabilities

 

21,313

 

22,022

 

Total liabilities

 

824,412

 

711,806

 

Stockholders’ equity:

 

 

 

 

 

Preferred stock, $0.01 par value, 100,000 shares authorized, 0 shares issued and outstanding as of December 31, 2014 and 2015

 

 

 

Common stock, $0.01 par value, 300,000 shares authorized, 198,623 and 200,207 shares issued as of December 31, 2014 and 2015, respectively, and 102,296 and 103,880 shares outstanding as of December 31, 2014 and 2015, respectively

 

1,986

 

2,002

 

Additional paid-in capital

 

2,035,382

 

2,026,638

 

Accumulated deficit

 

(1,217,727

)

(1,260,937

)

Treasury stock, at cost, 96,327 shares as of December 31, 2014 and 2015

 

(744,857

)

(744,857

)

Total stockholders’ equity

 

74,784

 

22,846

 

Total liabilities and stockholders’ equity

 

$

899,196

 

$

734,652

 

 


 


 

EARTHLINK HOLDINGS CORP.

Reconciliation of Net Loss to Adjusted EBITDA (6)

(in thousands)

 

 

 

Three Months Ended

 

Twelve Months Ended

 

 

 

December 31,

 

September 30,

 

December 31,

 

December 31,

 

December 31,

 

 

 

2014

 

2015

 

2015

 

2014

 

2015

 

Net loss

 

$

(22,492

)

$

(10,523

)

$

(12,282

)

$

(72,752

)

$

(43,210

)

Interest expense and other, net

 

14,253

 

11,731

 

11,192

 

56,261

 

50,972

 

Income tax provision (benefit)

 

(1,152

)

2,060

 

(91

)

(4,744

)

2,730

 

Depreciation and amortization (1)

 

47,686

 

46,502

 

46,826

 

186,872

 

188,315

 

Stock-based compensation expense

 

2,392

 

3,635

 

3,730

 

12,600

 

14,594

 

Impairment of long-lived assets (2)

 

2,974

 

 

 

14,334

 

 

Restructuring, acquisition and integration-related costs (3)

 

9,095

 

5,486

 

4,484

 

20,088

 

19,320

 

Loss on extinguishment of debt (4)

 

 

2,482

 

 

 

9,734

 

Loss from discontinued operations, net of tax (5)

 

442

 

 

 

381

 

 

Adjusted EBITDA (6)

 

$

53,198

 

$

61,373

 

$

53,859

 

$

213,040

 

$

242,455

 

 

EARTHLINK HOLDINGS CORP.

Reconciliation of Net Loss to Unlevered Free Cash Flow (6)

(in thousands)

 

 

 

Three Months Ended

 

Twelve Months Ended

 

 

 

December 31,

 

September 30,

 

December 31,

 

December 31,

 

December 31,

 

 

 

2014

 

2015

 

2015

 

2014

 

2015

 

Net loss

 

$

(22,492

)

$

(10,523

)

$

(12,282

)

$

(72,752

)

$

(43,210

)

Interest expense and other, net

 

14,253

 

11,731

 

11,192

 

56,261

 

50,972

 

Income tax provision (benefit)

 

(1,152

)

2,060

 

(91

)

(4,744

)

2,730

 

Depreciation and amortization (1)

 

47,686

 

46,502

 

46,826

 

186,872

 

188,315

 

Stock-based compensation expense

 

2,392

 

3,635

 

3,730

 

12,600

 

14,594

 

Impairment of long-lived assets (2)

 

2,974

 

 

 

14,334

 

 

Restructuring, acquisition and integration-related costs (3)

 

9,095

 

5,486

 

4,484

 

20,088

 

19,320

 

Loss on extinguishment of debt (4)

 

 

2,482

 

 

 

9,734

 

Loss from discontinued operations, net of tax (5)

 

442

 

 

 

381

 

 

Purchases of property and equipment

 

(28,624

)

(22,011

)

(27,055

)

(102,863

)

(87,468

)

Unlevered Free Cash Flow (6)

 

$

24,574

 

$

39,362

 

$

26,804

 

$

110,177

 

$

154,987

 

 



 

EARTHLINK HOLDINGS CORP.

Reconciliation of Net Cash Provided by Operating Activities to Unlevered Free Cash Flow (6)

(in thousands)

 

 

 

Three Months Ended

 

Twelve Months Ended

 

 

 

December 31,

 

September 30,

 

December 31,

 

December 31,

 

December 31,

 

 

 

2014

 

2015

 

2015

 

2014

 

2015

 

Net cash provided by operating activities

 

$

38,657

 

$

73,962

 

$

41,359

 

$

139,995

 

$

167,448

 

Income tax provision (benefit)

 

(1,152

)

2,060

 

(91

)

(4,744

)

2,730

 

Non-cash income taxes

 

(4,530

)

(151

)

(145

)

(591

)

(677

)

Interest expense and other, net

 

14,253

 

11,731

 

11,192

 

56,261

 

50,972

 

Amortization of debt discount, premium and issuance costs

 

(1,037

)

(849

)

(831

)

(4,104

)

(3,703

)

Restructuring, acquisition and integration-related costs (3)

 

9,095

 

5,486

 

4,484

 

20,088

 

19,320

 

Changes in operating assets and liabilities

 

(2,578

)

(30,951

)

(2,324

)

5,673

 

6,721

 

Purchases of property and equipment

 

(28,624

)

(22,011

)

(27,055

)

(102,863

)

(87,468

)

Other, net

 

490

 

85

 

215

 

462

 

(356

)

Unlevered Free Cash Flow (6)

 

$

24,574

 

$

39,362

 

$

26,804

 

$

110,177

 

$

154,987

 

 

 

 

 

 

 

 

 

 

 

 

 

Net cash used in investing activities

 

$

(28,624

)

$

(22,011

)

$

(27,055

)

$

(102,777

)

$

(87,468

)

Net cash used in financing activities

 

$

(5,512

)

$

(51,690

)

$

(10,631

)

$

(19,721

)

$

(122,817

)

 



 

EARTHLINK HOLDINGS CORP.

Supplemental Schedule of New Segment Information (7)

(in thousands)

 

 

 

Three Months

 

Twelve Months

 

 

 

Ended

 

Ended

 

 

 

December 31, 2015

 

December 31, 2015

 

Enterprise/Mid-Market

 

 

 

 

 

Revenues

 

$

106,159

 

$

444,968

 

Cost of revenues (excluding depreciation and amortization)

 

54,285

 

221,347

 

Gross margin

 

51,874

 

223,621

 

Small Business

 

 

 

 

 

Revenues

 

66,462

 

297,039

 

Cost of revenues (excluding depreciation and amortization)

 

32,863

 

139,440

 

Gross margin

 

33,599

 

157,599

 

Carrier/Transport

 

 

 

 

 

Revenues

 

34,299

 

135,905

 

Cost of revenues (excluding depreciation and amortization)

 

15,855

 

61,979

 

Gross margin

 

18,444

 

73,926

 

Consumer Services

 

 

 

 

 

Revenues

 

53,317

 

219,340

 

Cost of revenues (excluding depreciation and amortization)

 

18,724

 

77,862

 

Gross margin

 

34,593

 

141,478

 

Consolidated

 

 

 

 

 

Revenues

 

260,237

 

1,097,252

 

Cost of revenues (excluding depreciation and amortization)

 

121,727

 

500,628

 

Gross margin

 

138,510

 

596,624

 

Selling, general and administrative expenses

 

88,381

 

368,763

 

Depreciation and amortization (1)

 

46,826

 

188,315

 

Restructuring, acquisition and integration-related costs (3)

 

4,484

 

19,320

 

Interest expense and other, net

 

11,192

 

50,972

 

Loss on extinguishment of debt (4)

 

 

9,734

 

Loss from continuing operations before income taxes

 

$

(12,373

)

$

(40,480

)

 


 


 

EARTHLINK HOLDINGS CORP.

Supplemental Schedule of Segment Information (7)

(in thousands)

 

 

 

Three Months Ended

 

Twelve Months Ended

 

 

 

December 31,

 

December 31,

 

 

 

2014

 

2015

 

2014

 

2015

 

Business Services

 

 

 

 

 

 

 

 

 

Revenues

 

$

225,658

 

$

206,920

 

$

930,931

 

$

877,912

 

Cost of revenues (excluding depreciation and amortization)

 

110,919

 

103,003

 

469,523

 

422,766

 

Gross margin

 

114,739

 

103,917

 

461,408

 

455,146

 

Direct segment operating expenses

 

85,459

 

75,726

 

345,982

 

316,220

 

Segment operating income

 

$

29,280

 

$

28,191

 

$

115,426

 

$

138,926

 

Consumer Services

 

 

 

 

 

 

 

 

 

Revenues

 

$

58,814

 

$

53,317

 

$

245,964

 

$

219,340

 

Cost of revenues (excluding depreciation and amortization)

 

20,758

 

18,724

 

87,913

 

77,862

 

Gross margin

 

38,056

 

34,593

 

158,051

 

141,478

 

Direct segment operating expenses

 

10,081

 

7,455

 

43,615

 

30,731

 

Segment operating income

 

$

27,975

 

$

27,138

 

$

114,436

 

$

110,747

 

Consolidated

 

 

 

 

 

 

 

 

 

Revenues

 

$

284,472

 

$

260,237

 

$

1,176,895

 

$

1,097,252

 

Cost of revenues (excluding depreciation and amortization)

 

131,677

 

121,727

 

557,436

 

500,628

 

Gross margin

 

152,795

 

138,510

 

619,459

 

596,624

 

Direct segment operating expenses

 

95,540

 

83,181

 

389,597

 

346,951

 

Segment operating income

 

57,255

 

55,329

 

229,862

 

249,673

 

Depreciation and amortization (1)

 

47,686

 

46,826

 

186,872

 

188,315

 

Impairment of long-lived assets (2)

 

2,974

 

 

14,334

 

 

Restructuring, acquisition and integration-related costs (3)

 

9,095

 

4,484

 

20,088

 

19,320

 

Corporate operating expenses

 

6,449

 

5,200

 

29,422

 

21,812

 

Interest expense and other, net

 

14,253

 

11,192

 

56,261

 

50,972

 

Loss on extinguishment of debt (4)

 

 

 

 

9,734

 

Loss from continuing operations before income taxes

 

$

(23,202

)

$

(12,373

)

$

(77,115

)

$

(40,480

)

 

EARTHLINK HOLDINGS CORP.

Supplemental Schedule of Revenue Detail

(in thousands)

 

 

 

Three Months Ended

 

Twelve Months Ended

 

 

 

December 31,

 

December 31,

 

 

 

2014

 

2015

 

2014

 

2015

 

Business Services

 

 

 

 

 

 

 

 

 

Retail services

 

$

183,719

 

$

167,900

 

$

756,747

 

$

722,895

 

Wholesale services

 

36,909

 

34,299

 

154,109

 

135,905

 

Other services

 

5,030

 

4,721

 

20,075

 

19,112

 

Total revenues

 

225,658

 

206,920

 

930,931

 

877,912

 

Consumer Services

 

 

 

 

 

 

 

 

 

Access services

 

47,343

 

41,079

 

202,008

 

173,389

 

Value-added services

 

11,471

 

12,238

 

43,956

 

45,951

 

Total revenues

 

58,814

 

53,317

 

245,964

 

219,340

 

Total Revenues

 

$

284,472

 

$

260,237

 

$

1,176,895

 

$

1,097,252

 

 



 

EARTHLINK HOLDINGS CORP.

Supplemental Financial Data

 

 

 

December 31,

 

September 30,

 

December 31,

 

 

 

2014

 

2015

 

2015

 

Employee Data

 

 

 

 

 

 

 

Number of employees at end of period (8)

 

2,659

 

2,144

 

2,138

 

 

EARTHLINK HOLDINGS CORP.

Consumer Services Operating Metrics

 

 

 

Three Months Ended

 

 

 

December 31,

 

September 30,

 

December 31,

 

 

 

2014

 

2015

 

2015

 

 

 

 

 

 

 

 

 

Average narrowband subscribers (9)

 

487,000

 

466,000

 

454,000

 

Average broadband subscribers (9)

 

350,000

 

298,000

 

286,000

 

Average consumer subscribers (9)

 

837,000

 

764,000

 

740,000

 

 

 

 

 

 

 

 

 

ARPU (10)

 

$

23.42

 

$

23.48

 

$

24.01

 

Churn rate (11)

 

1.9

%

1.7

%

1.8

%

 



 

EARTHLINK HOLDINGS CORP.

Footnotes to Consolidated Financial Highlights

 


(1)              Based on the current amount of definite-lived intangible assets, the Company expects to record amortization expense of approximately $23.6 million, $1.3 million and $0.4 million during the years ending December 31, 2016, 2017 and 2018, respectively. Within 2016, the Company expects to record amortization expense of approximately $12 million during the first quarter, $7 million during the second quarter, $4 million during the third quarter and $1 million during the fourth quarter. Actual amortization expense to be reported in future periods could differ materially from these estimates as a result of acquisitions, changes in useful lives and other relevant factors.

 

(2)              During the three and twelve months ended December 31, 2014, the Company recorded $3.0 million and $14.3 million, respectively, for impairment of property and equipment, which consisted of impairment of work in progress for information technology projects not expected to be used.

 

(3)              Restructuring, acquisition and integration-related costs consisted of the following for the periods presented (in thousands):

 

 

 

Three Months Ended December 31,

 

Twelve Months Ended December 31,

 

 

 

2014

 

2015

 

2014

 

2015

 

 

 

 

 

 

 

 

 

 

 

Integration-related costs

 

1,058

 

$

1,423

 

$

9,043

 

$

5,924

 

Severance, retention and other employee costs

 

7,292

 

2,863

 

9,297

 

9,798

 

Facility-related costs

 

745

 

198

 

1,744

 

3,598

 

Transaction-related costs

 

 

 

4

 

 

Restructuring, acquisition and integration-related costs

 

$

9,095

 

$

4,484

 

$

20,088

 

$

19,320

 

 

Restructuring, acquisition and integration-related costs consist of costs related to the Company’s restructuring, acquisition and integration-related activities. Such costs include:1) integration-related costs, such as system conversions, rebranding costs and integration-related consulting and employee costs; 2) severance, retention and other employee termination costs associated with restructuring, acquisition and integration activities and with certain voluntary employee separations; 3) facility-related costs, such as lease termination and asset impairments; and 4) transaction-related costs, which are direct costs incurred to effect a business combination, such as advisory, legal, accounting, valuation and other professional fees.

 

(4)              During the twelve months ended December 31, 2015, the Company recorded $9.7 million for losses on extinguishment of debt. The losses consisted of premiums paid on the Company’s debt repurchases and redemptions, the write-off of unamortized discount on debt and the write-off of unamortized debt issuance costs. In March 2015, the Company repurchased $21.1 million outstanding principal amount of its 8.875% Senior Notes due 2019 (the “Senior Notes”) in the open market. In April 2015, the Company repurchased $5.0 million outstanding principal amount of its Senior Notes in the open market. In June 2015, the Company redeemed $70.0 million aggregate principal amount of its Senior Notes pursuant to terms under the indenture. In August 2015, the Company repurchased $30.0 million aggregate principal amount of its Senior Notes in the open market.

 

(5)              The operating results of the Company’s telecom systems business acquired as part of ITC^DeltaCom have been separately presented as discontinued operations for all periods presented. On August 2, 2013, the Company sold its telecom systems business. The Company has no significant continuing involvement in the operations or significant continuing direct cash flows.

 

(6)              Adjusted EBITDA is defined as net income (loss) before interest expense and other, net, income taxes, depreciation and amortization, stock-based compensation expense, impairment of goodwill and long-lived assets, restructuring, acquisition and integration-related costs, loss on extinguishment of debt, and gain (loss) from discontinued operations, net of tax. Unlevered Free Cash Flow is defined as net income (loss) before interest expense and other, net, income taxes, depreciation and amortization, stock-based compensation expense, impairment of goodwill and long-lived assets, restructuring, acquisition and integration-related costs, loss on extinguishment of debt, and gain (loss) from discontinued operations, net of tax, less cash used for purchases of property and equipment.

 

Adjusted EBITDA and Unlevered Free Cash Flow are non-GAAP measures and are not determined in accordance with U.S. generally accepted accounting principles. These non-GAAP financial measures are commonly used in the industry

 



 

and are presented because management believes they provide relevant and useful information to investors. Management uses these non-GAAP financial measures to evaluate the performance of its business and determine bonuses. Management believes that excluding the effects of certain non-cash and non-operating items enables investors to better understand and analyze the current period’s results and provides a better measure of comparability. There are limitations to using these non-GAAP financial measures. Adjusted EBITDA and Unlevered Free Cash Flow are not indicative of cash provided or used by operating activities and may differ from comparable information provided by other companies.  Adjusted EBITDA and Unlevered Free Cash Flow should not be considered in isolation, as an alternative to, or more meaningful than measures of financial performance determined in accordance with U.S. GAAP.

 

(7)              The Company reports segment information along the same lines that its Chief Operating Decision Maker reviews its operating results in assessing performance and allocating resources. The Company has historically operated two reportable segments, Business Services and Consumer Services. The Company’s Business Services segment provided a broad range of data, voice and managed services to retail and wholesale business customers. The Company’s Consumer Services segment provided nationwide Internet access and related value-added services to residential customers.

 

During the three months ended September 30, 2015, the Company implemented certain organizational, operational and reporting changes that resulted in the disaggregation of its Business Services segment into three separate reportable segments: Enterprise/Mid-Market, Small Business and Carrier/Transport. The Consumer Services segment was not impacted. The Company’s new reportable segments are strategic business units that are aligned around distinct customer categories. The Company reorganized its business around these business units to optimize operations. The Company began reporting the disaggregated information to its Chief Operating Decision Maker during the three months ended September 30, 2015. As a result, the Company now operates the following four reportable segments:

 

·                                          Enterprise/Mid-Market. The Company’s Enterprise/Mid-Market segment provides a broad range of data, voice and managed network services to distributed multi-site business customers.

·                                          Small Business. The Company’s Small Business segment provides a broad range of data, voice and managed network services to small, often single-site business customers.

·                                          Carrier/Transport. The Company’s Carrier/Transport segment provides transmission capacity and other data, voice and managed network services to telecommunications carriers and large enterprises.

·                                          Consumer Services. The Company’s Consumer Services segment provides nationwide Internet access and related value-added services to residential customers.

 

Segment information for the three and twelve months ended December 31, 2014 has not been restated to reflect the Company’s new reportable segment structure. The Company began recording revenue and expense transactions at the new segment level in 2015. Management has determined that it is impracticable to restate financial information prior to 2015 to conform to the new reportable segment structure due to the level of effort required to segment customers that terminated service prior to 2015 and identify the related cost of revenue associated with those customers, as this information is not currently available. For comparability purposes, the Company presented segment results under the Company’s previous reportable segment structure for the three and twelve months ended December 31, 2014 and 2015.

 

The Company evaluates performance of its new segment structure based on segment gross margin. Segment gross margin includes revenues from external customers and related cost of revenues. Costs excluded from segment gross margin include selling, general and administrative expenses, depreciation and amortization, impairment of goodwill and intangible assets, restructuring, acquisition and integration-related costs, and interest expense and other, net, as they are not considered in the measurement of segment performance.

 

The Company evaluated performance of its previous segment structure based on segment operating income. Segment operating income includes revenues from external customers, related cost of revenues and operating expenses directly attributable to the segment, which included costs over which segment managers have direct discretionary control, such as advertising and marketing programs, customer support expenses, product development expenses, certain technology and facilities expenses, billing operations and provisions for doubtful accounts. Segment operating income excluded other income and expense items and certain expenses over which segment managers do not have discretionary control. Costs excluded from segment operating income include various corporate expenses (consisting of certain costs such as corporate management, human resources, finance and legal), depreciation and amortization, impairment of goodwill and intangible assets, restructuring, acquisition and integration-related costs, stock-based compensation expense, and interest expense and other, net, as they were not considered in the measurement of segment performance.

 

(8)              Represents full-time equivalents.

 



 

(9)              Average subscribers for the three month periods is calculated by averaging the ending monthly subscribers or accounts for the four months preceding and including the end of the quarterly period.

 

(10)       ARPU represents the average monthly revenue per user (subscriber). ARPU is computed by dividing average monthly revenue for the period by the average number of subscribers for the period. Average monthly revenue used to calculate ARPU includes recurring service revenue as well as nonrecurring revenues associated with equipment and other one-time charges associated with initiating or discontinuing services.

 

(11)       Churn rate is used to measure the rate at which subscribers discontinue service on a voluntary or involuntary basis.  Churn rate is computed by dividing the average monthly number of subscribers that discontinued service during the period by the average subscribers for the period.