Earthlink forecasts lower revs and EBITDA, stock heads to Earth (4Q04 earnings)

| About: EarthLink, Inc. (ELNK)

Earthlink's Q4 earnings report and guidance were a downer: the stock fell 9% in trading today. Key points, and then a comment:

Q4 results

  • EPS of $0.23 beat the consensus estimate by a penny.
  • Revenue of $338.1 million was down 3% year over year.
  • EBITDA (excluding "facilities exit fees") of $53.8 million was up 47.4% year over year.
  • Operating income of $37.2 million rose from $10.7 million a year earlier.
  • Free cash flow was $44.9 million compared to $26.0 million a year earlier.
  • Customer base declined by 14,000, with positive net additions of 84,000 broadband subs and 118,000 PeoplePC subs but a net decline of 211,000 dial-up subs and 5,000 web hosting accounts.
  • Total subs of 5.4 million were up 3.5% year over year.
  • Average monthly churn was 4.7%, level with Q3 but higher than the 4.1% rate a year earlier.

Q1 Guidance

  • Net subscriber additions of 20,000 to 50,000, driven by broadband and cheap dial-up (AKA "value narrowband").
  • Revenue of $330 to $335 million
  • Gross margin percentage same as 2004 Q4.
  • Adjusted EBITDA down slightly compared to $45 to $50 million due to legal expenses.
  • Net income of $28 to $33 million.

Full Year Guidance

  • Revenue of $1.3 to $1.34 billion, versus $1.383 billion in 2004.
  • EBITDA of $180-200 million versus $218.4 million in 2004.

Quick comment:
Earthlink is getting pummeled on its full-price dial-up business. And here's the funny thing: everyone knew that the days of full-price dial-up were over. But somehow longer term trends just don't seem to get priced into stocks.

Congrats to Earthlink on an outstanding press release: it's clear, intelligable and thorough. With press releases like that, there's no need for sell-side interpretation.

ELNK chart below.