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EarthLink (NASDAQ:ELNK)

Q4 2012 Earnings Call

February 19, 2013 8:30 am ET

Executives

Louis Alterman

Rolla P. Huff - Chairman, Chief Executive Officer and President

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

Analysts

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

Mark Kelleher - Dougherty & Company LLC, Research Division

Scott H. Kessler - S&P Equity Research

Operator

Good morning. My name is Jenisha, and I will be your conference operator today. At this time, I would like to welcome everyone to Earthlink's Fourth Quarter and Full Year 2012 Earnings Call. [Operator Instructions] I would now turn the conference over to Louis Alterman, Senior Vice President of Finance of Earthlink. Please go ahead.

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 at 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 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 described in the forward-looking statements, but 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 to the SEC, both of which are available on our website at earthlink.net.

After Rolla's opening comments, 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 good morning to everyone joining us on the call today.

Before we get into the quarterly results, I wanted to take a step back and talk about EarthLink's progression since we began our evolution to a Business Services company 2 years ago. As you all are well aware, we're now nearly 2/3 of the way through a 3-year transformative integration that began at the end of 2010 when we purchased ITC^DeltaCom, followed shortly thereafter by One Communications.

We went into these deals with eyes wide open, discussing with our investors that there were substantial portions of the revenue bases that were declining and would continue to do so, and of course, the multiples we paid reflected the fact that these were declining businesses. We understood that the CLEC business model and the legacy products in that model wouldn't be the products that drive our growth over the long-term, but the acquisitions came with long-lived valuable fiber assets, as well as a customer base and cash flow, and our view of the best path forward was to use these assets and customers to build a new sustainable business.

Over the past 24 months, we put these assets together with additional IT services capabilities, some that were bought and others that we developed ourselves. We began to go to market in 2012 to address what, we are confident, is the substantial emerging opportunity to sell IT services to mid-market business customers. We're at the midst of the integration. We're still early in the new sales motion and nothing is easy, but our growth products are getting substantial traction. More specifics on this in a minute. And I'm more convinced than ever that we're positioning Earthlink to fully participate in a massive wave that is just beginning to form.

That wave is being driven by the need for all but the very smallest business customers to move more and more of their business model to the web without compromising the security of their data and the personal information that their customers send them. These businesses are recognizing that their top lines are not keeping up with the ever-increasing cost of IT, IT infrastructure, data security and regulatory compliance requirements. It is precisely because of that reality that Earthlink has been developing an integrated set of capabilities for customers to choose from. These capabilities will allow customers to variabilize their IT cost structure, while operating their enterprise-class operating platforms and expertise.

Our differentiated blend of secured, near-ubiquitous IP connectivity, state-of-the-art cloud platforms and emerging control point technology, as well as our history of outstanding customer service, is now starting to be recognized by industry groups and analysts that cover this substantial technology shift. We are increasingly being included in the list of companies that are leaders in the space. Just this week, Earthlink Business was ranked, not just on the list, but as the top managed services company by MSPmentor, who ranks the Top 100 Managed Services Providers. That's an important recognition for Earthlink, and we'll be sending out a press release in the coming days announcing this. There is much work still to do, but our long-term opportunity and potential has substantially improved over the past 24 months. Over these past 2 years, we've made significant strides on our top line trajectory.

As you can see on Page 2, while our revenue profile has been lumpy with quarterly noise from things like carrier dispute settlements which, as you know, are a way of life in telecom and data-related companies, as well as the impact of seasonal patterns and even weather events, it continues to be abundantly clear that our revenue trajectory is improving. There will continue to be volatility from quarter-to-quarter, the lumps are the nature of our business, but we're getting more and more visibility and confidence in our ability to predict our business performance. We recognize that with all our moving parts, our transformation, our new products and the complexity of running the business while integrating information systems, we've been a difficult business to model and even understand. But we believe we've got enough visibility to begin providing annual revenue guidance, which is something we've not done since my arrival on -- at the company in 2007. Brad will take you through this guidance in a few minutes.

On Page 3, churn in both our Business and Consumer segments continues to improve as Earthlink people demonstrate the high-quality customer service that our company is known for. We believe there's still room for more improvement going forward as we provide our customers with a broader and more relevant mix of products.

Now on Page 4, I'd like to talk a little bit more about the components of Earthlink, what's working and what we need to improve on. Within our Business segment, our wholesale and retail business, and there are multiple components you should understand within each business. First, as you know, we have a wholesale revenue stream which comprises approximately 11% of our total company revenue. Wholesale revenues in the fourth quarter continue to perform well, nearly 75% of this business is recurring in nature and we should be able to continue to grow this business in the low single digit as we capitalize on unique fiber routes within our footprint.

And as we've shared with you in the past, our retail business has -- does have some products in secular decline, but others that are growing rapidly. I'll start first with the suite of products and services that we call our retail growth business. In the fourth quarter, those products comprised 11% of our total revenue and nearly 14% of our business segment revenue. This revenue stream, which includes MPLS, Hosted Voice and IT services, has grown over 20% in the past year on an organic basis. This is now an approximate $140 million run rate business within Earthlink. These products are in high demand in the markets which we are clearly seeing in our revenue growth and continuing growth in our sales funnel.

Now make no mistake, we still have room for improvement on the sales side. We can up-sell more to our existing customers, we can acquire more new logos, but the IT services opportunity is still forming in the marketplace and we're just now preparing to launch the Gen 2 nationwide cloud platform that we discussed last quarter. Within the 20% growth business are some IT services that are small but already growing within EarthLink at well over 100%, every sign that we see tells us that we're well-positioned to participate in the early growth of these products in the marketplace and that we can accelerate our growth as our new platform comes online.

We have $140 million retail growth business. Combined with wholesale, we have a $280 million run rate growth business to build on from here. We're convinced this business has substantial value that will increase as it scales. While sales of our new growth products have been on track and churn continues to improve across all of our products. The rate of new bookings on some of our legacy CLEC products like usage, single T1s in small accounts, as well as simple low-end business Internet access, showed softness in the second half of 2012.

Clearly, cable competition is fierce at the lower end of the markets segment, where CLEC have traditionally sold products like POTS. There's also no doubt that the macro environment for small business has been very challenging. We don't pretend to be economic forecasters, but based on our conversations with customers, we don't see overall economic conditions for small businesses improving in the near-term, particularly in certain small markets, where our legacy products sales have been the weakest. Because of these factors, we continue to see further softness in our non-growth product bookings in the fourth quarter. This has had an impact on our revenue run rate as we enter 2013, as Brad will review with you in a few minutes.

While we can't predict that the macro -- what the macro environment will look like, we can choose to manage our cost structure to scale down investment in legacy products and allow us to continue to invest in our growth products, sales and marketing motion.

I want to share with you the actions we've been taking over the past few months, beginning on Page 5.

We've been taking steps to further accelerate our evolution to an IT services-focused sales model and to lower the cost structure associated with our legacy CLEC business model. This evolution is consistent with the overall plan we've talked about during our last few quarterly and earnings calls. We found that the bulk of our new bookings come from larger markets. These markets have a richer density of customers who have multiple location business models and higher propensity to buy IT services.

As a result, we're exiting approximately 220 people, most of it from whom have already left, cutting across most functional areas but primarily in approximately 2 dozens of small markets in our footprint. The smaller markets that are being impacted represent a disproportionate amount of cost structure for the sales results they delivered, which is -- been less than 10% of our total production.

It's important to emphasize that we're not completely exiting these smaller markets. We'll retain support organizations to continue to service our existing customers in these markets, and we'll continue to sell in these smaller markets to our various channel partners, but we will have variabilized much of that cost structure. And as anyone who's followed our company for the past several years knows, we have continually generated cash flow on our consumer business, for example, by demonstrating that we're willing to variabilize the cost structure for a flat to declining business.

The remaining reps that we have in the company are the highest performers in the company. They deliver over 90% of our current productivity and are generally located in geographic markets with the highest propensity to buy IT services. Going forward, we expect to maintain a base of 140 to 170 direct sales reps. This includes the remaining reps, which are already highly productive, and the new reps we'll be adding in 4 new markets that are at the core of our data center and cloud growth products.

In addition to reducing our direct selling presence in these smaller markets, we're consolidating our sales and marketing groups under our Executive Vice President of Sales and Marketing, Mike Toplisek. As you recall, Mike came to EarthLink in May of 2012. Mike has been leading our marketing efforts, and over the last 12 months, has made considerable progress standardizing our IT services product sets and getting it ready for scale distribution. Beyond the marketing experience, the bulk of Mike's background is in sales and sales management. Mike brings a forward-looking vision that stems from his experience in the IT services world, which requires a different approach than a more transactional CLEC motion. With Mike's leadership, we'll be focused on providing professional services approach to identify opportunities, and we'll have more technical expertise in the field to design solutions for our customers.

In connection with this consolidation of sales and marketing, Mae Squier-Dow has left the company at the beginning of the month. She's been fully involved in the planning of these actions. And I want to personally thank her for her service and the contribution she made to this effort.

Lastly, after the first half of 2013, we will no longer add new customers in our systems equipment business, which was essentially a PBX business that we acquired with ITC^DeltaCom. This is a low-margin, nonrecurring revenue stream that has been a transactional business primarily focused on selling, as I say, legacy PBX-type equipment. While this action will cause us not to record new revenue, we otherwise would have in the second, third and fourth quarters of 2013, an impact of approximately $1 million a month of revenue, it will be EBITDA margin neutral to the company and will allow us to focus on our growing recurring revenue products.

We value the relationships we have with our existing systems customers, and we'll continue to maintain the same level of care and commitment to servicing them in the future. Aggressively managing the cost structure in the legacy CLEC side of our business is the right thing to do, and it funds the investments we can make that have a higher return. We'll continue to aggressively invest in our IT services business in several ways as I've outlined on Page 6.

First, we're adding additional technical talent in the field to support our IT services sales efforts. These individuals have backgrounds in the IT services industry. We recognize this kind of talent is more expensive than what is traditionally been required in the traditional telecom space. However, having the expertise in the field ultimately allows us to design better solutions for new prospects and better serve existing customers. Some of this new talent will be located in markets like Denver and other markets where we're adding network and data centers, including Chicago, San Jose, Miami and Dallas. In the last 6 months, we've hired more than 100 people in our IT services product, sales and operations group. And given the strength and promise we're seeing in the revenue stream, we expect these investments to continue.

Second, we will continue to ramp up our efforts in search engine marketing and search engine optimization to drive leads to our inside sales force. The most successful IT services company have demonstrated that this channel can cost-effectively bring in good business, and our early results have proven to us that there's more we can be doing with SEM, SEO and inside sales.

And third, we'll market around our already strong brand to increase awareness in the IT services space. Clearly, the decision to exit employees from the business is never easy, but it's necessary for us to continue to evolve away from the legacy CLEC model and align our next-generation products with the next generation sales motion. We believe we can continue to improve the revenue trajectory of our company and begin to spend our acquisition dollars more efficiently as well.

As we've done with our Consumer business since day 1, we're controlling our cost structure for the proportion of the business that's declining. This funds the investment in the parts of our business that have the biggest opportunity and are still forming out in the marketplace. We recognize that electing to make this investment has an impact on our near-term results, but it is the right thing to do.

I'd like to briefly touch on our integration on Page 7. Our OSS integration project continues to progress. A substantial portion of the co-development work has now been completed and we've entered the QE stage. We'll move into the user acceptance testing soon, and are hoping to make the step to the new platform in the second quarter. Of course, this is a big deal for us and we must be very careful that we do this correctly, so we won't cut over until we are sure that the platform is ready to go.

We've differentiated capabilities within the breadth of our portfolio, our data center presence, fiber assets and myLink Control Point, just to name a few. I know there are a lot of moving parts within the Earthlink umbrella and it can be difficult to see through all the noise that there is in a rapidly building growth business, but we're living it every day. We can see and feel the progress. We had a strong sales month in January that was better than our expectations as you would typically expect to see production dip during a period where employees' jobs are being impacted.

So with that, I'll turn it over to Brad.

Bradley A. Ferguson

Thanks, Rolla. I'll begin on Page 8. Through the fourth quarter of 2012, we reported revenue of $332 million and adjusted EBITDA of $66 million. As we've said before, the majority of our business is recurring in nature, but there is some element of lumpiness. We've had ongoing disputes and settlements within revenue, cost of revenue or operating expense that, as a result, result in a favorable or unfavorable outcome in the P&L. We recognize that this causes noise in the quarterly comparisons, and you should expect that we will continue to have these types of items in the future.

To that point, this quarter, we successfully resolved the customer dispute resulting in an increase to revenue of approximately $8 million. Additionally, we benefited from approximately $2 million in net favorable items within operating expense. While our slide presentation shows the numbers as reported, to provide meaningful information about the run rate of the business, my remarks for the remainder of this morning will be focused on the recurring results after normalizing for these settlements, which was approximately $324 million of revenue and $56 million in adjusted EBITDA.

Earthlink reported flat net income during the fourth quarter of 2012. Normalizing for the benefits I've just described, we had a net loss of approximately $0.06 per share. The key sources and uses of cash during the fourth quarter are outlined on Page 9. During the quarter, we utilized $67 million for capital expenditures, of which approximately $27 million is related to the data center and network expansion that we discussed last quarter. The remaining portion of just under $20 million will fall in the first half of 2013.

We used approximately $34 million of cash to redeem $33 million of the outstanding Deltacom notes in the fourth quarter at a price of 103%. We also returned $18 million to shareholders through dividend and share repurchases. During the quarter, we repurchased approximately 1.9 million shares at an average price of $6.60 per share. And we have $74 million of share repurchases -- authorization, excuse me, remaining. Throughout 2012, we returned nearly $47 million to shareholders. We used networking capital during the quarter related to the timing of our interest payments, as well as normal differences in the timing of payments and receipts to and from vendors and large customers.

Moving to the balance sheet on Page 10. We ended the quarter with $204 million of cash and marketable securities, and we have approximately $593 million of gross debt outstanding, after executing the 10% call on the Deltacom notes back in December. These notes have a 10.5% coupon. And as we discussed with you last quarter, we have an April 1 call option on the remaining balance of the notes. We're considering our options with would allow us to lower our ongoing interest expense and simplify our capital structure.

Now I'll discuss some of the operating results and metrics in more detail. Moving on to Page 11. Total normalized revenue for the fourth quarter 2012 was $324 million, which consisted of $248 million of Business Services revenue or 77% of total revenues, and $75 million of Consumer revenue. As Rolla mentioned, our revenue declines have significantly improved from the 10%-plus decline levels pre-acquisition.

In the Consumer segment, revenue decreased $2.5 million from the third quarter of 2012, an improvement from the $3 million sequential decline a year ago and a $3.8 million sequential decline a year earlier -- excuse me, a quarter ago, $3 million. The Consumer business has been flattening for 5 years now and we expect this trend to continue.

In the fourth quarter of 2012, revenue churn on the business segment as a whole was 1.5%, which is down from 1.6% in the third quarter. In the Consumer segment, net subscriber losses were 45,000 in the fourth quarter of 2012, down from 47,000 in the third quarter of 2012, and 60,000 in the fourth quarter of 2011. Total consumer churn improved sequentially to an all-time low of 2.3% in the fourth quarter of 2012, which was down from 2.5% in the third quarter and below the 2.6% from the year-ago quarter. We expect seasonality to impact some of the quarterly trends, but generally expect consumer decline -- consumer churn to continue to decrease over time.

Our total cost of revenue was $156 million in the fourth quarter of 2012, yielding a normalized gross margin rate of 52%, which was better than the 50% normal -- normalized rate in the third quarter of 2012. Total normalized selling, general and administrative expenses were $113 million for the fourth quarter, up approximately $2 million, sequentially, driven by the timing of certain expenses, including our consumer cable marketing expense.

Turning to Page 12. Sales on our retail growth products improved from 37% in the third quarter to 39% in the fourth quarter. When combined with the recurring sales from our wholesale business, 50% of our total new bookings in the fourth quarter came from products that are growing, which is consistent with our mix from last quarter and well above the 40% level earlier in the year.

Now for the financial outlook for 2013, which begins on Page 13. For the full year of 2013, we're expecting revenue in the range of $1.25 billion to $1.265 billion. This is consistent with the market growth rates Rolla covered on Page 4. We expect adjusted EBITDA of $210 million to $225 million. The corresponding EBITDA margins are in line with our comments from last quarter as we expect total company margins to contract in the near-term due to the scale loss from the declining revenues, the overall shift in the mix of Business Services and the fact we are making investments in IT services capabilities in advance of scaling the revenue. However, as we gain traction on our higher-margin IT service products like virtualization and security, we believe this can be favorably impacted over time.

A walk through our adjusted EBITDA guidance is provided on Page 14. As you can see, our starting point adjusted EBITDA run rate, plus the ongoing declines in consumer and intercarrier compensation gross margins, would have us begin the year at an approximately $200 million run rate. From there, we'll have declines in certain legacy telecom products, but will more than offset these declines with growth on our $280 million run rate growth business, as well as the improved cost structure that Rolla referenced a few minutes ago.

For the full year 2013, we're projecting a net loss of $40 million to $45 million. A reconciliation of our adjusted EBITDA guidance to our net loss guidance is provided on Page 19. Included in this reconciliation, is an expectation that we'll incur just over 1/2 of the full year integration and restructuring-related charges in the first quarter, driven largely by the timing of severance around the sales and marketing action.

Moving onto CapEx on Page 15. Our 5-quarter CapEx guidance last quarter was between $215 million and $225 million. In the fourth quarter of 2012, we spent $67 million, which as I mentioned earlier, included approximately $27 million of the $45 million network and data center investment. In 2013, we anticipate spending between $140 million to $155 million, which consists of approximately $120 million to $135 million per typical run rate CapEx and just under $20 million for the remaining portion of our data centers and fiber investments.

With that, operator, let's open up the line for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Mike Crawford of B. Riley & Company.

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

Mike Crawford from B. Riley. Can you talk -- just going with the last points, Brad, can you just talk a little bit about the return on investment expectations for the various expenditures you're making in the business?

Bradley A. Ferguson

Yes. So I mean, we haven't given out specific hurdles. But certainly, we think that for the data center investment and we think that's well above 20% return and we've do -- been a lot of internal modeling and look at that and feel like that's our best approach to growing the business. I mean, we looked that -- we talked about doing that -- inorganically looked at data of other companies in this space and see the valuations they're getting and really felt that going, doing it organically play was the best option for us.

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

Okay. On the data center? And what about the fiber investments? Is that similar expected return? Or is that slightly lower?

Bradley A. Ferguson

No, that's in the same boat and actually probably higher.

Rolla P. Huff

Mike, it's probably important to remember that when you think of our data center strategy, it's a little bit different than the typical one, because we're really investing in cloud platforms. We are not building new data centers. We're not building a product that is meant to be sold as space and power. So we're, in fact, we're a much more capital-like model than typical data center-type model.

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

Okay. And then what -- are there any particular services or sets of services that are -- you're getting the best traction with and the most response to? Are there any other applications on the flip side of that, that are just not resonating so well yet?

Rolla P. Huff

Clearly, there's a lot of interest in our managed hosting and our virtual machine -- our virtual infrastructure products, I think especially these mid-market customers don't want to go through technology refresh cycles. They're looking for partners that can help them virtualize more of their applications. And so I think that's where the biggest interest. I will say that we're also seeing a lot of interest in our virtual desktops, as well as our virtual TechCare.

Operator

Your next question comes from the line of Mark Kelleher from Dougherty & Company.

Mark Kelleher - Dougherty & Company LLC, Research Division

I wanted to focus a little bit on the SG&A. First, the 220 people let go, were those all direct sales people in smaller markets?

Rolla P. Huff

No. No, they were a mix of salespeople, that's supporting sales engineering that goes with them, order coordinators, so on and so forth. So it was really everything that supported the direct sales motion in those 2 dozen markets. So think of it as sort of like 150, 160 salespeople with the balance being the support organization that goes with them.

Mark Kelleher - Dougherty & Company LLC, Research Division

Okay. And I know you said you wanted to have 140 to 170 direct sales reps. So is it roughly half of the direct sales force?

Rolla P. Huff

Well, we also have people that carry quota to sell into the partner channel that's not included there. We've got people that are in account management that carry quotas that are not included in that. So we probably, at the beginning of the year -- keep me honest here, Brad, but we probably have 450 or 500 people that were carrying a quota. They weren't all direct sales, but they were carrying a quota in some capacity or another, selling to agents versus directly to customers.

Mark Kelleher - Dougherty & Company LLC, Research Division

And where in the quarter did that happen?

Rolla P. Huff

We took those actions, we announced them internally in the fourth quarter. There was no one market that there was a...

Bradley A. Ferguson

Mid-January.

Rolla P. Huff

Or, sorry, mid-January, and they exited the business, like, within 1 week or 2 after that, the salespeople. So -- and then there's some people that are -- were stringing out a little bit longer. We'd notify them, but they're not going to exit immediately.

Mark Kelleher - Dougherty & Company LLC, Research Division

So they were all there in the fourth quarter? They're all selling in the fourth quarter?

Rolla P. Huff

Right.

Bradley A. Ferguson

Correct..

Mark Kelleher - Dougherty & Company LLC, Research Division

Okay. And how about the new data centers that you're constructing, can you just give us an update on how those are going? How that build-out is going?

Rolla P. Huff

Sure. Again, we're not constructing any data centers. I mean, really, that's an important point. We are going -- we've worked the deal with 2 very large space and power companies that you would recognize, I think their start-of-the-art facilities. We put our cloud platform in those facilities, and we have come to an agreement that allows us to sell collo as part of a solution that we're selling to customers, and we can buy that collo space on a -- I call it a purse-dip basis. We've had not go out and commit to x numbers of square feet. So where we're putting up those cloud platforms are San Jose, Dallas, Chicago, South Florida and Rochester, New York. Rochester is up and running. Dallas is within a couple of days of being up and running, networks already there, but I can't say that we've got our alpha customers on that cloud stack in Dallas. And then, Chicago will be sort of summer. Miami will be this summer. And San Jose will be this spring.

Mark Kelleher - Dougherty & Company LLC, Research Division

Okay. And last question, just a quick numbers question. The favorable customer settlements, was there some of that in Q3?

Louis Alterman

Yes, Mark, this is Louis. There's about a $1.5 million half in Q3, not all in revenue, but mostly in core favorable settlements.

Operator

Your next question comes from the line of Dan Olsen [ph] of D.A. Davidson.

Unknown Analyst

I just had a quick question. You gave a little tease here about your debt. You said you're considering options about the 10.5% note? Or could you tell me a little bit more about your options?

Rolla P. Huff

Yes. So we have the early call in April. So that's a call at 105. And so really just looking at market conditions, what we could do just kind of the math of what you can refinance that at possibly versus taking that out. So certainly, we've talked about all our options around that. Did the 10% back in December. So we continue to evaluate that and we'll make a move based on market conditions and what makes the most sense for us.

Operator

Your next question comes from the line of Scott Kessler of S&P Capital IQ.

Scott H. Kessler - S&P Equity Research

So Brad mentioned that 60% of the spend has been made on the data center and fiber network investments, and I'm wondering if you could talk about whether the announcement and investments you've already made have yet to have an impact on bookings or sales? And I have a follow-up.

Rolla P. Huff

No, they've had no impact whatsoever. Effectively, all of our IT services today are being delivered out of our prior -- older data centers in Rochester and Marlborough and Columbia. And we're just now bringing online our Gen 2 cloud stacks that really drove these investments and getting them all hooked up on the fiber. So now we think -- and that's why we feel pretty good of our growth prospects in the growth products because we're really now getting our nationwide platform deployed just now.

Scott H. Kessler - S&P Equity Research

Right. Okay. And my second question is around the number of employees you guys have. So you talked about some people affected by essentially a streamlining or a reconstituting of the sales force that you guys, frankly, have been signaling for the last number of quarters...

Rolla P. Huff

In fact, we've actually been doing it for the last 2 years. I mean, if you think about where -- what we were talking about in terms of sales headcount 6 quarters ago and where we've come from, we've been shrinking the size of the sales force. This was probably a -- just a bigger move in the smaller markets than we've done, but we've just sort of been managing it down through attrition. Because as we've said, the CLEC sales motion is just much different than the motion that we're moving some business to.

Scott H. Kessler - S&P Equity Research

Right, sure. And I guess I'm wondering, so you guys had about 3,200 employees at the end of the year. And I'm wondering where you expect to be, say, at end of this year? Obviously, there are a lot of puts and takes. But I mean, you talked about reducing the number in the smaller markets committed to CLEC area, for example, but then you talked about adding some folks in some of the major markets presumably with respect to some of the investments that you guys are making. So can you give us a sense of where you might be at the end of the year?

Rolla P. Huff

I think net-net we'll probably be down from 200 to 300 people from where we ended the year.

Bradley A. Ferguson

Yes. And so what's happening there is we'll be taking out -- taking down the sales force as we've discussed, hiring up in the IT services. But then as we integrate and get the benefits of integration, really, across all the areas of the company, we'll start to see the benefits or further benefits of the headcount there.

Operator

[Operator Instructions]

Rolla P. Huff

Well, if there are no more questions, I want to thank everybody for listening today. And just close by saying, we're very confident that the products and services we're putting together are the right ones to capitalize on the opportunity in the markets, and we're committed to growing -- to create long-term value for our shareholders. In the meantime -- and I think it's important to point out that over the past 2 years our business has generated nearly $400 million in unlevered free cash flow, which has given us the ability to invest in our growth business while also buying back shares, paying dividends and paying off debt.

So thanks, everybody, for joining us and we'll talk to you soon. Take care.

Operator

This concludes today's call. You may now disconnect.

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