EarthLink Inc, (ELNK)
Earnings Conference Call
July 27, 2010 08:30 am ET
Brad Ferguson – Chief Financial Officer
Rolla Huff - Chairman & CEO
Joe Wetzel – Chief Operating Officer
Michele Sadwick – Vice President, Corporate Communications
Louis Alterman – Vice President, Investor Relations
Youssef Squali - Jefferies & Co.
Ingrid Chung - Goldman Sachs
Mike Crawford - B. Riley & Company
James Cakmak - Sidoti & Co.
Sri Anantha - Oppenheimer
Scott Kessler - Standard & Poor’s Equity
Rick D'Auteuil - Columbia Management
Good morning everyone and welcome to the EarthLink second quarter 2010 earnings conference call. Today’s call is being recorded. At this time I would like to turn the conference call over to Mr. Brad Ferguson Chief Financial Officer for opening remarks and introductions. Please go ahead sir.
Bradley A. Ferguson
Thanks and welcome to our call. This morning I’m joined by EarthLink’s Chairman and CEO Rolla Huff, our President and Chief Operating Officer Joe Wetzel, our Vice President of corporate Communications Michele Sadwick and our Vice President of Investor Relations Louis Alterman to discuss our second quarter 2010 results and updated 2010 guidance. Following our comments there will be an opportunity for questions.
Before we continue I’d like to point out that certain statements contained in our earnings release and on this conference call are forward looking statements rather than historical facts that are subject to risk and uncertainties that could cause actual results to differ materially from those described.
With respect to such forward looking statements the company seeks the protections afforded by the Private Securities Litigation Reform Act of 1995. These risks include a variety of factors including competitive developments and risk factors listed in the company’s SEC reports and public releases.
Those lists are intended to identify certain principal factors that could cause actual results to differ materially from those describes in the forward looking statements that are not intended to represent a complete list of all the risks and uncertainties impairment to the company’s business.
In an effort to provide useful information to investors our comments today also include non-GAAP financial matters. For details on these measures including why we use them and reconciliations to the most comparable GAAP measures please refer to our earnings release in the form 8-K that has been furnished to the SEC. both of which are available on our website at
Now I’ll turn things over to Rolla.
Rolla P. Huff
Thanks, Brad and good morning everyone. I’m pleased to report that our second quarter financial and operating results were once again ahead of our internal expectations.
During the quarter we continued to build on the positive momentum we discussed with you on our last call in April. At that time we highlighted 3 key themes in our business and today those same themes are equally relevant.
I’d like to review those 3 key topics and I’ll provide you with a quick update on each. First when we reported our first quarter results that were ahead of expectations we discussed how that steamed from a number of positive changes in key underlying business drivers that created what we described at the time as a positive feedback loop driving better results than our historical trend lines had predicted.
In April we raised our guidance to reflect the new trend lines.
In the second quarter we experienced even further net improvement which is also extended into July I might add. Across many of the same areas including customer churn, network performance, customer contact rates, bad debt as well as a new area or two including our search and advertising revenues.
Essentially we outperform the revised trend lines as a result we reported second quarter adjusted EDITDA of $57 million and today further increased our 2010 guidance.
The second theme we talked about last quarter was the fact that we run our core internet access business as a cash generation vehicle and will not pursue growth at any cost.
While the top line is declining it continues to do so at an attenuating rate. We maintain our belief that continuing to execute on our cash generation strategy will maximize shareholder value. And I think clearly we believe that today’s result and higher guidance continue to validate that strategy.
The third major theme reinforces that we continue to be vigilant stewards of our balance sheet while we seek investment opportunities that allow us to apply our skill sets, company assets and business discipline in value creating way.
We continue to believe that the strategic leverage of our balance sheet will even flow with the strength of the debt and equity markets. As the equity markets weaken the relative strategic leverage of our balance sheet strengthens. We believe our balance sheet currently represents a relative strength.
So with those key things in mind let me spend a bit more time on some of the trends we saw in the second quarter and the actions our team has taken to maximize cash generation in this business.
As I mentioned so far this year we’ve worked to implement and we’ve benefited from a number of key changes in the underlying drives of our business. These improvements worked together to create that positive feedback loop that I mentioned. Better network performance and customer support drive lower churn which results in a more tenure base of customers who call us last, demand fewer refunds and discounts.
As a result today we increased our adjusted EBITDA guidance by about $10 million. $2 million comes from our consumer cost structure and another $2 million is driven by sales traction and improved churn in our business segment at New Edge. The majority of the change $6 million relates to consumer revenue from better churn performance in the increasing tenure of our customer base.