EarthLink Management Discusses Q2 2012 Results - Earnings Call Transcript

EarthLink (ELNK)

Q2 2012 Earnings Call

August 02, 2012 8:30 am ET

Executives

Louis Alterman

Rolla P. Huff - Chairman of the Board and Chief Executive Officer

Joseph M. Wetzel - President and Chief Operating Officer

Bradley A. Ferguson - Chief Financial Officer, Principal Accounting Officer and Executive Vice President

Analysts

Barry McCarver - Stephens Inc., Research Division

Michael Crawford - B. Riley & Co., LLC, Research Division

Nick Yu - D.A. Davidson & Co., Research Division

Mark Kelleher - Dougherty & Company LLC, Research Division

Scott H. Kessler - S&P Equity Research

Presentation

Operator

Good morning. My name is Tracy, and I will be your conference operator today. At this time, I would like to welcome everyone to the EarthLink Second Quarter 2012 Earnings Conference Call. [Operator Instructions] I will now turn the conference over to Louis Alterman, Vice President of Finance for EarthLink. Please go ahead, sir.

Louis Alterman

Thanks, and welcome to our call. During today's call, we will refer to earnings slides that are available for you to view in the Investor Relations section of our website, earthlink.net. Following our comments, there will be an opportunity for questions.

Before we continue, I would 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 risks 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, the 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 described in the forward-looking statements. They are not intended to represent a complete list of all risks and uncertainties inherent to the company's business.

In an effort to provide useful information to investors, our comments today also include non-GAAP financial measures. For details on these measures, including why we use them, and a reconciliation to the most comparable GAAP measures, please refer to our earnings release and the Form 8-K that has been furnished with SEC, both of which are available on our website at earthlink.net.

After Rolla's opening comments, Joe Wetzel, our President and Chief Operating Officer, will provide an integration update; and Brad Ferguson, our Chief Financial Officer, will discuss the quarter's financial results.

Now I'd like to hand things over to Rolla Huff, our Chairman and CEO.

Rolla P. Huff

Thanks, Louis, and thanks to everyone who is joining us this morning. Second quarter was another quarter of progress in our transformation to a growing Business Services company, despite the substantial weight integration activities we're having on every part of the business. We're approaching the home stretch of a big portion of our integration work and we can feel it.

I'll talk more about that in a few minutes. As you saw in this morning's announcements, in the second quarter, we accrued just over $8 million to increase our reserves for certain regulatory audits, primarily being a routine audit currently being conducted by the Universal Service Administration Company or USAC on Deltacom Universal Service Fund contributions dating back 2010. Those familiar with the industry understand that USAC rules can be somewhat subjective and open to different interpretations. While USAC has not yet finished its final audit report, we believe there's a meaningful probability they will determine that Deltacom should have collected and remitted more USF fees from customers on certain legacy products and bundles. We'll continue to work with USAC to help them understand the judgments that Deltacom made when determining how much USF is needed to be collected on certain products. But from an accounting standpoint, we believe taking this charge and disclosing it is the proper course. Accordingly, we're also lowering our guidance to reflect the impact of this change. Overall, we were pleased to see that market interest in our IT services and nationwide connectivity products continues to be very strong. There's no doubt in our minds that our underlying strategy is the right one.

Our Business Services revenue decline continue to attenuate in the second quarter. We were also extremely pleased to see our consumer churn beat our own model forecast. We'll talk more about churn in a few minutes.

As I mentioned at the start of the call, almost every aspect of our business is being impacted by our OSS integration activities. While Joe will walk you through more detail, we are seeing important integration milestones occurring. We're now operating on an integrated sales funnel management platform and integrated cost management platform and integrated financial reporting platform. And all of that working in conjunction with our integrated network. By the end of this year, we'll have a meaningful part of the new OSS platform in production. While we still have an enormous amount of work left to do, we do believe there is light at the end of this integration tunnel we're in and we have begun to plan for that time. And on that note, today, we announced that Joe Wetzel will be leaving at the end of the year commensurate with the expected delivery of major components of Earthlink's new integrated OSS platform. For the balance of the year, he'll provide focused oversight on the integration to make sure it stays on track. We believe that as our new platform is close to production, now is the time to streamline our management structure and create a stronger sales and marketing-focused organization. Accordingly, we're now consolidating product and marketing functions under Mike Toplisek, sales functions under Mae Squier-Dow, all provisioning and care functions under Kevin Brand and all infrastructure and network management under Jim O'Brien.

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