Editor's Corner

EarthLink filed on Friday its 10-K annual report that indicates its MVNO joint venture with SK Telecom, Helio, is burning through the money and will need significantly more than the $440 million its parent companies pledged to the MVNO.

Not surprisingly, Helio has been operating at negative gross margins. It recorded a net loss of $191.75 million in 2006 on revenues of $46.6 million and expects over the next year to continue to incur substantial losses from its operating and investing activities. Helio is looking to secure more cash financing from its parent companies and outside investors.

Both SK Telecom and EarthLink committed $440 million to Helio, beginning March 2005 through August 2007. The parent companies will hand over the last $12 million of that funding by August. In addition, Helio has received $8 million from outside investors.

How much more will EarthLink and SK Telecom be willing to contribute to the MVNO? During its fourth-quarter conference call with analysts, EarthLink acknowledged that the Helio will require additional investment in 2007 but that it hasn't made any decisions to give the company any more money. However, it did say it might contribute between $50 million and $100 million this year.

EarthLink said it's bullish on Helio, which ended 2006 with about 70,000 subscribers. Helio expects to pass 100,000 customers early in the second quarter and reach about 250,000 subscribers by the end of the year--all the while keeping ARPU in the $100 range. But first, Helio has to incur significant costs associated with acquiring customers. EarthLink expects Helio will generate net losses of $330 million to $360 million in 2007, and reach positive cash flow in 2009. EarthLink's proportionate share of Helio's loss in 2007 is expected to be $160 million to $180 million, compared with $85 million in 2006.

Helio's auditor, Ernst & Young, noted the MVNO may not have sufficient working capital or financing available to meet its operating goals over the next year. "These conditions raise substantial doubt about [Helio's] ability to continue as a going concern," the firm said in its report.

I suspect Helio's ownership will be forced to significantly diversify in 2007. Both partners have pressures in their core businesses. EarthLink is working to push its broadband subscriber adoption as dial-up customers shrink and ramping up several municipal WiFi initiatives. SK Telecom also has pressures in its highly competitive home market of South Korea. When a public company's non-core business generates substantial losses, investors begin to ask questions. You can bet that Helio is hitting the road looking for investors willing to pony up some substantial cash. -Lynnette


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