swung to a third-quarter profit on the strength of cost-cutting, despite losing customers in its core dial-up business.
The company reported earnings of $3.5 million, or 2 cents a share, on revenue of $347 million. While the company has added paying subscribers in the last year, it has also lost about 230,000 customers of its flagship and most profitable $21.95-a-month dial-up service since the end of the 2002 third quarter. Some of those customers migrated either to its $10.95-a-month discount service or to the broadband service that it sells on top of offerings from various cable and telephone companies.
The discount service is by far EarthLink's fastest-growing segment, growing its customer base over 400% from the year-ago period. The company actually lost 40,000 broadband customers vs. the year-ago period because of the restructuring of a relationship with one of its broadband partners. Broadband revenue now accounts for $93 million, or about 27% of total revenue for the quarter, helping to offset some of the revenue lost in the narrowband business.
The company was most successful in cutting costs. It was able to generate substantial reductions on telecommunications and customer service expenses vs. the year-ago period, helping save the company about $12 million in these areas to offset cost increases in its broadband business.
The company said it will report full year revenue in line with analyst expectations, but its earnings outlook is unclear. Analysts surveyed by First Call expect the company to report full-year earnings of 20 cents per share, and the company says it will report a GAAP loss of about $70 million, or 40 cents per share, and a pro forma result it calls "adjusted EBITDA" of about $130 million, or 74 cents a share. The company expects to add over 100,000 new subscribers in the fourth quarter, entirely in its broadband and discount offerings, to offset the continuing loss of full-price narrowband customers.
EarthLink's stock is up almost $2 for the year and trades at a price-to-earnings ratio of 23 times analysts 2004 earnings estimate of 33 cents per share.