EarthLink Announces Third Quarter Earnings

ATLANTA, Oct. 25 /PRNewswire-FirstCall/ -- EarthLink, Inc. (Nasdaq: ELNK) today announced financial results for its third quarter ended September 30, 2007. Highlights include:

 -- Revenue of $298.8 million -- Loss from operations of $(35.9) million -- Net loss of $(79.4) million, or $(0.65) per share, which includes a $(41.9) million, or $(0.34) per share, Helio equity loss and a $(54.8) million, or $(0.45) per share, facility exit and restructuring charge -- Adjusted EBITDA (a non-GAAP measure) of $37.9 million

"The third quarter was transformational for EarthLink as the company began implementing its restructuring efforts. These changes will significantly reduce the cost structure for both our existing services as well as our various growth initiatives," said Rolla P. Huff, EarthLink's president and chief executive officer. "A key component of our restructuring was our decision to reduce sales and marketing spending as we reduce activity costs aimed at attracting potentially unprofitable new subscribers. "One thing remained constant -- EarthLink's recognized leadership providing quality service to the ISP market. In September, we were ranked highest in two J.D. Power and Associates customer satisfaction segments; proving once again that consumers see quality and value in the products and services we provide," Huff added.

"EarthLink also announced that SK Telecom had preliminarily agreed to an additional investment of up to $270 million in Helio. This incremental investment would allow Helio to continue to grow and permit EarthLink to retain a meaningful ownership interest in a fast-growing and innovative wireless service, while not requiring the company to provide additional capital," said Huff.

"Combined, the restructuring and Helio announcements materially alter the risk profile and potential returns to EarthLink shareholders. While EarthLink is participating in some potentially attractive growth opportunities, the company is no longer investing significant amounts of current operating cash," added Kevin Dotts, EarthLink's chief financial officer. "However, due to the timing of the restructuring, only limited benefits of the restructuring are reflected in our third quarter results.

"Prospectively, we expect EarthLink to generate positive net income before facility exit and restructuring charges in the 4th quarter, and believe our future free cash flow and returns to shareholders will be significantly improved as a result of this restructuring effort," Dotts stated.

Financial and Operating Results

In August 2007, the Board of Directors of EarthLink approved a restructuring plan to reduce operating costs and improve the efficiency of the organization. Under the plan, the company is reducing its workforce by approximately 900 employees, consolidating its office facility in Atlanta and closing certain office facilities, including Orlando, Knoxville, Harrisburg and San Francisco. The plan is being implemented during the third and fourth quarters of 2007. While these actions will negatively impact revenue in the near-term, they result in more free cash flow and improved operating margins.

Revenue During the third quarter, EarthLink continued to see growth in its consumer value added services revenue which increased to $31.9 million, or 6.8 percent. Driving this increase was growth in advertising, search and incremental services compared to the third quarter of 2006. This increase was offset by a decline in consumer access services revenue to $219.4 million, or 13.1 percent, driven by declines in narrowband subscribers. Additionally, business services revenues decreased to $46.8 million, or 2.9 percent. This was due to decreases in legacy business services like web-hosting and business narrowband, partially offset by increases in small and medium enterprise access services. Overall revenues decreased to $298.8 million, or 9.8 percent, compared to the third quarter of 2006.

Profitability and Other Financial Measures

EarthLink's core access services continued to generate significant cash. During the quarter, adjusted EBITDA from core access services (a non-GAAP measure, see definition in "Non-GAAP Measures" below) reached $61.4 million, compared to $60.4 million in the third quarter of 2006. In addition to reducing core support service expense, EarthLink reduced the cost structures related to its various growth initiatives. Consequently, for the third quarter of 2007, adjusted EBITDA (a non-GAAP measure, see definition in "Non-GAAP Measures" below) was $37.9 million, an 8.2 percent increase compared to the third quarter of 2006. The decrease in spending related to the growth initiatives noted above was offset by a $15.7 million increase in the Helio equity loss and a $5.8 million net loss on other investments, and resulted in a net loss before facility exit and restructuring costs (a non-GAAP measure, see definition in "Non-GAAP Measures" below) of $(24.6) million compared to $(3.2) million in the third quarter of 2006.

The net loss for the quarter was $(79.4) million, or $(0.65) per share, compared to $(3.2) million, or $(0.02) per share, in the prior year quarter. The net loss included $54.8 million of facility exit and restructuring costs including $33.9 million for people-related costs; $0.7 million for facilities-related costs; $10.5 million for asset impairments; and $9.7 million for other associated costs.

Helio Operating Performance and Profitability

In the third quarter, EarthLink provided Helio with a $30 million loan to cover day-to-day operations. Additionally, EarthLink announced that SK Telecom will potentially invest up to $270 million in Helio. EarthLink will not be required to participate in future funding rounds, and will retain a meaningful ownership stake. The definitive amended joint venture agreements are expected to be finalized in the near future. During the quarter, Helio continued to grow its business and expand its service and device offerings. Helio launched additional unique mobile services such as a new MySpace mobile application that rivals the speed and functionality of the Web, and YouTube optimized for mobile with exclusive video instant upload capabilities with only two-clicks.

Continuing to expand their offering to business users, Mail for Microsoft Exchange was introduced for Ocean, allowing users to wirelessly sync this device with email, calendar and contacts from their companies' Exchange Server. Helio also continued to expand its portfolio to the most popular form factor in the U.S., launching Fin, the thinnest folder handset available in the market. In the third quarter Helio generated $51.7 million in revenue, while its net loss was $(92.3) million, as it continued to make investments in infrastructure, products and marketing to support future growth.

Balance Sheet and Cash Flow Free cash flow (a non-GAAP measure, see definition in "Non-GAAP Measures" below) was $18.9 million during the third quarter of 2007 compared to $23.7 million in the third quarter of 2006. The decrease was the result of an increase in capital expenditures and subscriber base acquisitions, offset by the decrease in activity related to EarthLink's growth initiatives. During the quarter, the company had capital expenditures, including subscriber base acquisitions, of $19.0 million. Additionally, EarthLink's board approved an additional $200 million for share repurchases. The company repurchased 3.9 million shares of its outstanding common stock for $25.0 million and has $270.3 million remaining under the authorized share repurchase program.

EarthLink ended the third quarter with $333.8 million in cash and marketable securities, an increase of $175.7 million from the prior year quarter. Non-GAAP Measures Adjusted EBITDA is defined as earnings before interest income and other, net, income taxes, depreciation and amortization, stock-based compensation expense under SFAS No. 123(R), net losses of equity affiliate, gain (loss) on investments in other companies, net, and facility exit and restructuring costs. Adjusted EBITDA from core access services is defined as earnings before interest income and other, net, income taxes, depreciation and amortization, stock-based compensation expense under SFAS No. 123(R), net losses of equity affiliate, gain (loss) on investments in other companies, net, facility exit and restructuring costs, and net investments in growth initiatives. Net income (loss) before facility exit and restructuring costs is defined as GAAP net income (loss) before facility exit and restructuring costs. Free cash flow is defined as income (loss) from operations before facility exit and restructuring costs, stock-based compensation expense under SFAS No. 123(R) and depreciation and amortization, less cash used for purchases of property and equipment and purchases of subscriber bases. Adjusted EBITDA, adjusted EBITDA from core access services, net income (loss) before facility exit and restructuring charges, and free cash flow are non-GAAP financial performance 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 performance measures to the most comparable measures reported in accordance with U.S. generally accepted accounting principles and Footnote 1 of the Consolidated Financial Highlights for a discussion of the presentation, comparability and use of such financial performance measures.

Business Outlook These statements are forward-looking, and actual results may differ materially. See comments under "Cautionary Information Regarding Forward- Looking Statements" below. EarthLink undertakes no obligation to update these statements. Management is reiterating its previously issued 2007 guidance and continues to expect revenues to be $1.190 billion to $1.210 billion and adjusted EBITDA is expected to be between $135 million to $145 million. However, under GAAP equity method accounting, EarthLink will no longer record a net loss for our equity interest in Helio as its investment balance was reduced to zero during the third quarter of 2007. As a result, in the fourth quarter, the company now expects a significant increase in net income before facility exit and restructuring costs. For the fourth quarter of 2007, EarthLink expects net income before facility exit and restructuring costs to be $30 million to $40 million. For the full year, management expects a net loss before facility exit and restructuring costs of $(30) million to $(40) million. For 2008, EarthLink is reiterating that the company continues to expect to generate cash from operations in the $200 to $240 million range.

Additionally, as EarthLink will not be required to record any Helio losses in 2008, the company expects a significant portion of its cash flow from operations will be reflected in net income. Consequently, EarthLink expects to generate positive net income for 2008. The company does not expect to be a significant cash tax payer due to the significant net operating loss tax benefit EarthLink presently maintains. Management expects to further refine these preliminary financial estimates when the company provides its customary yearly guidance with the release of full year 2007 results.

Conference Call for Analysts and Investors Investors in the U.S. and Canada interested in participating in the conference call on October 25, 2007 at 8:30 a.m. Eastern Daylight Time (EDT) may dial 1-800-706-0730 and reference the EarthLink call. Other international investors may dial 1-706-634-5173 and also reference the EarthLink call. EarthLink recommends dialing into the call approximately 10 minutes prior to the scheduled start time. Investors also will have the opportunity to listen to a live Webcast of the conference call via the Internet at the following site: http://ir.earthlink.net/ A taped replay will be available beginning at 10:30 a.m. EDT on October 25, 2007 through midnight on November 1, 2007 by dialing 1-800-642-1687. International callers should dial 1-706-645-9291. The replay confirmation code is 19311942.