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EarthLink Holdings (NASDAQ:ELNK)

Q4 2013 Earnings Call

February 20, 2014 8:30 am ET

Executives

Louis Alterman

Joseph F. Eazor - Chief Executive Officer, President and Director

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

Analysts

Michael Crawford - B. Riley Caris, Research Division

Donna Jaegers - D.A. Davidson & Co., Research Division

Michael McCormack - Jefferies LLC, Research Division

Anthony Klarman - Deutsche Bank AG, Research Division

Operator

Good morning. My name is Theresa, and I will be your conference operator today. At this time, I would like to welcome everyone to EarthLink's Fourth Quarter and Year End 2013 Earnings Call. [Operator Instructions]

I will now turn the conference over to Louis Alterman, Senior 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 review 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. They 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 Joe'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 Joe Eazor, our President and CEO.

Joseph F. Eazor

Thank you, Louis. Good morning, everyone, and thank you for joining us on the call today. I'm truly excited to be part of EarthLink. I believe we can create significant value but to be clear, we have a lot of work to do. I've been at the company for about a month now. And since I moved to Atlanta in January, I have embarked on a process to thoroughly examine our business, our market and our priorities. All of this is part of developing our detailed go-forward plan. So far, this has included detailed reviews of our business, meetings with hundreds of employees, discussions with our largest customers, introductory meetings with a number of shareholders and securities analysts, and reviews with selected partners and other third parties.

My goal is to complete initial planning effort and time to share the details on our next call in May. And in the meantime, here's what I've learned so far. I'm pleased with the number of things and want to give Rolla and the team a lot of credit for the aspects of the company they've built.

First, the company is put together to attract a set of capabilities that are both relevant and appealing to our target customers. Second, the company has an extensive customer base that can be leveraged, a brand that resonates with customers and the strong emerging products -- a set of emerging products in key growth areas. As a result of all this, the company has momentum in key market segments, particularly, in segments in the mid-market. Lastly, and importantly, the company has a committed set of employees with a desire to succeed and a passion for customer service. This has been evident, as I've talked to both our employees and our customers.

So while I'm impressed with these aspects of the company, we have a great deal of work to do. I don't need to tell this audience that revenue is declining, even if the decline is decelerated and margins have compressed as the company's loss scale. In my first month, I've seen that the company has a tremendous amount of complexity in its systems and its processes. Our determined employees go to great lengths to compensate for this, and to take care of our customers. That in my view, that's just not good enough and it's harder for them than it has to be to do their jobs. We need to do a number of things to ride the ship and get our performance accelerator -- performance improvement accelerated.

First, we have to deliver better and more consistent operational and financial performance. Second, drive operational excellence, a sense of urgency and world-class practices throughout this organization. Third, better align our organization, our operations to the market and deliver functional excellence. Fourth, accelerate our IT systems implementation plan and reengineer our service delivery and customer experience processes. Fifth, refine our product strategies and offerings by market segment. Sixth, continue and expand our sales and marketing transformation efforts. And seven, we have to put all this together in a clarified and focused corporate strategy that maximizes the value of all of our assets and has the right capital structure to match.

I won't belabor each one of these points now in my prepared remarks, but be happy to discuss in our Q&A session.

I want to stress the point that we can be a lot better operationally. And I believe there should be real benefits to the company's revenue, margin profile and cash flow over time.

Before I hand it over to Brad to take you through our results and our outlook, I want to talk about cash. I'm a cash guy. I'm keenly aware of our cash balance, and I don't like to see it declining. While EBITDA is an important metric, we're going to have a culture and a set of compensation drivers in our company that also values every dollar of cash. Whether this is derived from EBITDA, CapEx or integration-related activities. This is the only way I know how to think and it's the way true long-term value will be created at EarthLink.

So in summary, we have built the company through acquisition, which has yielded strong capabilities, but much of the blocking and tackling related to building EarthLink into a world-class operating company is yet to be done.

I'm not here to keep the company on its current trajectory and run rate. I'm here to drive better operational performance and growth, and we aren't going to tolerate anything less. As we go through this process, I commit to be transparent with you and regularly communicate with investors, recognizing that, obviously, we work for the equity holders.

Now I'll turn it over to Brad to dive into our financial results and guidance, and then we'll open it up for Q&A. Brad?

Bradley A. Ferguson

Thanks, Joe. I'll begin with the discussion on the operating and financial results for the quarter on Page 3.

For the fourth quarter 2013, we reported revenue of $302 million, which reflects the first full quarter impact of the elevated churn levels we experienced earlier in 2013. Since then, churn levels have decreased, which I'll discuss more in a minute.

For the quarter, our total cost of revenue was $150 million. Normalizing for settlements, the gross margin run rate is around 50%.

Total selling, general and administrative expenses were $106 million for the fourth quarter. Normalizing for the CenterBeam acquisition, Q4 SG&A expenses were down approximately 6% year-over-year.

We reported adjusted EBITDA of $50 million for the quarter, which includes $4 million in favorable dispute and legal settlements.

In the fourth quarter, the company reported a net loss of $279 million or $2.75 per share. This included a one-time charge of $266 million to record a valuation allowance on our deferred tax assets. We continue to expect to realize substantial value from our tax assets, which include over $0.5 billion in federal NOLs, but the accounting guidance dictated that we put out this allowance. Excluding the valuation allowance, we reported a net loss of $13 million or $0.13 per share.

I'll now dive a little deeper into the operational results. Beginning with our bookings on Page 4. We had a solid [ph] bookings quarter. We booked $2.7 million in new monthly recurring revenue in the fourth quarter, down from $3.2 million in the third quarter. Some of the decline can be attributed to seasonal factors that result from selling to retail business customers, who tend to slowdown IT and telecom purchasing during the holiday season.

Also, as we've discussed previously, as our business continues to evolve towards selling more complex managed services and technology solutions, our sales will be lumpy. Still, the quarter was light and we would've liked to have closed more of the larger deals.

However, we continue to see strong demand for our portfolio growth products and our funnel grew by 13% quarter-over-quarter as a result.

For the full year, we increased gross new MRR bookings from $12.5 million to $12.7 million, which was close to half the number of sales reps. We also continued to shift our mix in sales toward our emerging products. These products comprised 60% of new bookings in 2013, up significantly from 46% of the bookings in 2012. We'll continue to book revenue from traditional CLEC services, but expect the emerging products to continue to comprise an increasing portion of our new business over time.

Turning now to a discussion of churn on Page 5. We saw improvement in churn in both the business and consumer segments. As I mentioned earlier, Business Services churn continue to abate from the elevated levels we experienced during the summer of 2013. We expected this improvement and have begun to see the churn levels decreasing during the third quarter. Business churn for the quarter was 1.6%, down from 1.8% to 1.9% range in the middle of the year.

Customer retention will continue to be a management focus as we work to deliver better customer service and offer targeted product bundles that we believe can make our customers stickier. We can still be a lot better at this and expect to improve customer retention at the ground level over the coming quarters.

Also, as we expected, churn in the consumer segment declined further, reaching a record low of 2.0% in the fourth quarter.

Turning now to our revenue trajectory on Page 6. Normalizing for dispute settlements that can cause noise in the numbers in any given quarter, our revenue trajectory improved as we closed out 2013. We're on a path towards the company's top line becoming flat and then growing, but to be clear, revenue was lower for the year than we had planned, and we want to reduce churn further and increase new bookings and installs to accelerate our progress.

Page 7 shows the components of our revenue. Revenue on our portfolio growth product continued to expand in the fourth quarter. Our retail emerging services including MPLS, Hosted Voice and cloud products comprised 15% of our company revenues, up from 14% in the third quarter, and up from 11% in the prior year period.

Revenues from these products grew 29% from the fourth quarter of 2012, and around 20% organically. We expect these products to continue to grow in the 20% or more level.

Our wholesale business grew modestly on a quarterly sequential basis from $36 million to $37 million, after declining in Q3 due to the Nextel grooming we discussed last quarter.

Our overall growth product portfolio expanded to a $328 million run rate business at the end of 2013.

Turning to our traditional CLEC offerings. We generated $154 million in revenue from these products during the fourth quarter, down from $160 million in the prior quarter. Much of this decline was a result of experience of full quarter impact of the elevated churn rates we had in the middle of Q3 -- that went through the middle of Q3. This portion of our business contributed 51% of our total revenue, down from 54% in the fourth quarter of 2012.

The consumer business continues to perform as expected. Revenue declines continued to attenuate, decreasing 12% in 2013 after declining 15% the year earlier.

Net subscriber losses in the consumer segment were 38,000 compared to 42,000 last quarter and 46,000 in the fourth quarter of 2012.

Approximately 70% of our consumer subscribers have now been with us for over 5 years and these customers churn rates are down in the 1s. We expect this business to continue to flatten overtime.

Now turning to cash flow. As shown in the summary, cash block on Page 8. As I mentioned, we generated $50 million in adjusted EBITDA during the quarter. We invested $34 million in capital expenditures during the quarter and $144 million for the full year. As we said previously, we expect to reduce our run rate of capital spending in 2014. We also paid a dividend of a little over $5 million in the quarter.

For the full year 2013, we returned $27 million to shareholders through dividends and share repurchases. In the fourth quarter, we also drove $24 million in favorable net working capital changes.

Looking at the balance sheet on Page 9. We ended the year with $117 million in cash and we have $600 million in gross debt outstanding, with maturity dates in 2019 and 2020.

We still have access to $135 million on a revolving credit facility, which remains undrawn.

Now for the financial outlook for 2014 on Page 10. As we exited 2013, Q4 annualized revenue was at a $1.2 billion run rate. For the full year 2014, we expect revenue to be in the range of $1.16 billion to $1.18 billion or 2% to 4% decline from the year end 2013 run rate. This projection is consistent with the detailed product growth rates we covered in the revenue components discussion on Page 7, and reflects an expectation of improved customer installs and a gradual flattening of customer churn as we get deeper into the year. We'll be able to see and measure the progress of these metrics in 2014. While the improvement in these metrics can only modestly impact this year's revenue, they'll be important to set ourselves up a for a better 2015 entry point.

We exited 2013 with an annualized adjusted EBITDA run rate of $200 million or approximately $185 million when normalizing for the timing of nonrecurring settlements.

For the full year 2014, we expect to generate adjusted EBITDA of $180 million to $195 million, which translates to a flat to single-digit decline versus our current run rate.

For the full year 2014, we're projecting a net loss of $85 million to $95 million. A reconciliation of our adjusted EBITDA guidance to our net loss guidance is provided on Page 14. This reconciliation includes the expectation that will incur approximately 2/3 of our full year integration and restructuring charges in the first half of 2014.

After which, we expect these costs to begin to taper off.

Turning to capital expenditures. We expect to invest $125 million to $135 million in CapEx in 2014, down approximately $10 million to $20 million for the full year 2013. As Joe mentioned, we'll have a heavy focus on cash flow.

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

Question-and-Answer Session

Operator

[Operator Instructions] And your first question is from the line of Mike Crawford of B. Riley.

Michael Crawford - B. Riley Caris, Research Division

First, to get to the tax situation. With the $500 million plus of federal NOLs at year end, to what extent are these subject to Section 382 restrictions? Not only from what you inherited with your Deltacom and OneComm purchases, but also in the event a larger company were to acquire you first, something closer to $1.5 billion or $10 to share?

Bradley A. Ferguson

Yes. So certainly, if we got acquired, I mean, that the 382 limitation would come into play, but really, there is a calculation that you do, a built-in gain calculation, which really, I think, for the NOLs which we have, which is actually close to $600 million at this point, there's a large portion of those that would be available in the first 5 years, call it 60% or so. And again, it depends on the purchase price that you'd have for that, but that calculation would get to where a lot of those would be front end loaded.

Michael Crawford - B. Riley Caris, Research Division

Okay. And then switching gears to the business. So we know one sweet spot for EarthLink is the small-box retailers. And what other market segments, Joe, are you finding is most attractive for EarthLink today?

Joseph F. Eazor

Yes, sure. We've seen good traction in, I would call at the mid-market and multi-location, actually multi-state retailers. So as you point out, whether that be in the jewelry or apparel or other kinds of retailers, we have made good traction in the market there. And, by the way, we're selling a strong set of emerging services, whether it be MPLS and IT services into those customers, as well as some of our traditional CLEC-type services. And additionally, we have strong presence in the health care space. We have regional banks and there is room for us, I think, to improve our focus and our level of commitment to those industry verticals and a few others that have similar characteristics. So the only formal vertical we have from a go-to-market perspective is retail. And we've seen how that's really driven us some good market momentum. And I think if we take some more approaches into these other verticals like health care and regional banks, just as examples, we should start to see momentum in more verticals.

Michael Crawford - B. Riley Caris, Research Division

And last question, just on the cash flow, I'm glad you're a cash guy. I think you completed the fiber build out in Texas in Q4, and I was a little surprised to see still a relatively high level of CapEx planned for 2014. To what extent do you balance those investments with ROI goals?

Joseph F. Eazor

Yes. So still, by and large, or large proportion of our CapEx for '14 is attached to winning deals. So it's gauged on our market success. And so when you see the projections, they're driven significant amount by our anticipated sales and bookings for the year. Now having said that, I think we have room to improve. I think there's room to improve both on our effectiveness and how we deploy capital on new deals. How we scope it and sell it and then look at our ROIC on each deal in a more effective way. And secondly, there's some decisions we can make on how much do we lease versus how much we buy and other things, so that's part of the review process, Mike, that I don't have full answers for you on, but certainly, in the next earnings call, we'll have a better point of view on not just our strategy, but how that then rolls out into CapEx, and what I think the optimum CapEx levels will be.

Operator

And your next question is from Donna Jaegers of D.A. Davidson.

Donna Jaegers - D.A. Davidson & Co., Research Division

Two questions. Joe, first for you. Can you talk a little about, and we all know you're from EMC, but can you talk about your experience with turnarounds in the past? And any experience you've had with M&A?

Joseph F. Eazor

Yes, sure. I'm sorry, keep going, Donna.

Donna Jaegers - D.A. Davidson & Co., Research Division

No, go ahead. I'll ask the second question as a follow-up.

Joseph F. Eazor

Yes, so I ran M&A for EDS on 2 different occasions, so I've been part of a leading strategy in M&A and transactions, and integrations on multiple different occasions, had that responsibility at EDS, reporting to the Chairman and CEO. Again, 2 different occasions in my history. I actually led the disposition of EDS to HP, and the subsequent integration at HP. So I've had a fair bit of experience on M&A. Secondly, my experience in -- related to -- I forgot the first part of your question again? Oh, the turnaround. Yes, so EDS was a turnaround story. My first look back to EDS, it was near what I would call, I wouldn't say bankruptcy, but it was in deep trouble after some deals were done in the early 2000s, so we spent a few years in cutting $1 billion of costs out of the place, turning around and cleaning up the balance sheet, as well as turning it back into growth. So I've had good experience, both on the turnaround side. I was also, for a brief period of time, for about 2 years a partner at AlixPartners, a turnaround management consulting firm. So I've got some background in turnarounds too, Donna.

Donna Jaegers - D.A. Davidson & Co., Research Division

Great. So then the key question going forward is how do you improve customer service and cut cost? Because usually those go in opposite directions?

Joseph F. Eazor

Yes, great question. A lot of our customer service issues have to do with defining consistent processes for how we serve a customer, how we install, implement, and then on the other side of it, repair and take in -- and do customer service. And so a lot of inefficiencies come through buying -- building a company through acquisition and not while the integration work to get to one set of common processes across the board has been done yet. So that's planned. It's reflected in our plan. A lot of that has to do with IT systems. It enabled our customer care reps not have to swivel chairs as much as they do today and allow them to better serve our customers. And so the restructuring or the costs associated with that is reflected in our plan and the benefits, obviously, or the efficiencies that come from the back end of that -- that again, are cost reduction benefits, et cetera. So that's first part of it. I mean, so basically, we got the anticipated expenditures in the plan. I think the benefits, don't accrue as quickly, but come over time. And I think there's room to add on to that in terms of just how we operate the business. So just good old-fashioned blocking and tackling, and how we execute our sales plans and how we align our sales force to the market, how we leverage our partners, how we process orders and then how we manage our inventory, backlog, et cetera. So there are tried and trued methods for delivering operational improvement, cost efficiencies without having to spend more than we have planned. If we do need to spend more, I'll be the first to tell you -- let you know before we do.

Donna Jaegers - D.A. Davidson & Co., Research Division

Okay. And then one other question on, since you're a cash guy and that's always good to hear, obviously, you guys push working capital pretty hard this quarter, there's limits to that. What are your priorities as far as sustaining the dividend?

Joseph F. Eazor

That's a question that's come up a number of times. As you know, the -- first -- let me just take it in sequence. The first thing we're doing is laying on a plan for the company that allows us to achieve the best operating performance we can and addressing the strategic gaps we might have. And part of that will be what's the optimum capital structure that goes with that plan. And so it's hard to answer a dividend question without understanding overall strategy at the next level of detail than we have today and how that plays out over the next several years, how we would like to -- where we would like to invest and how to best use our capital. And then in the back end of that, what's the right capital structure to maximize value, including dividend and other items. So the short answer to all that is, "I don't know yet." Every quarter, we'll -- that's a decision we made this quarter. Next quarter, we'll roll out our strategy and I'll give you more details on what the plan is going forward and be able to give you a much better picture about that.

Operator

Your next question comes from the line of Michael McCormack of Jefferies.

Michael McCormack - Jefferies LLC, Research Division

Let me just a comment, Joe, what you're seeing out there from a competitive standpoint on any sort of pricing and maybe in particular from the cable operators?

Joseph F. Eazor

Yes, so I'll make a comment and again, I probably should remind everyone, I'm 1 month on the job. So my comments are still being formed and my points of view are still being informed of facts. But obviously, there's -- the cable operators in terms of just Internet access and [Technical Difficulty] We see that, obviously, they're very successful in delivering broadband Internet access to the consumer's business and the small business customers. And so, there's clearly pricing pressure and technology pressure to our traditional telco businesses there. However, we have good partnerships we've built with the cable companies. We have a higher level of managed services and value added services that ride on top of those capabilities, and we're seeing good traction in the market, in particular, and slightly more complex solutions into that mid-market. So I think it's certainly competition. It's also collaboration and I think our emerging services and products are really differentiated in many ways and so it's not a pure price competition for us.

Michael McCormack - Jefferies LLC, Research Division

And Joe, the first cut, have you thought about the opportunities out there from a sort of transactional issue and anything that could really sort of move the needle for you guys that makes sense strategically?

Joseph F. Eazor

Yes. So as part of this review and as part of our strategic planning activity, we have going -- we'll lay out the strategy for the company, where we want to focus our attention in the market and identify gaps, and that will be part of this, where we look and say, "hey, you know if we have gaps, what we want in our portfolio -- our product portfolio, make decisions on whether -- what's the best way to fill the gaps" even organic investment or acquisition. So just not ready to give much more details on that yet.

Operator

And your next question comes from the line of Anthony Klarman of Deutsche Bank.

Anthony Klarman - Deutsche Bank AG, Research Division

Two questions. First on the EBITDA guidance. There's a -- it's a fairly wide range. And, I guess, it's sort of an 8% range from low to high, which I would imagine implies that there are lots of variables that could go into anywhere between the low and the high. Could you give us some sense as to what the drivers are there that you identified that you sort of if they come through, put you at the higher end versus where the consensus had been, which was around sort of towards the lower end of guidance?

Bradley A. Ferguson

Yes. I mean the $15 million range, and it's -- there's a lot of things that can happen. Certainly, in sales, installs, churn levels, cost savings initiatives, which we have, if you kind of really focus on the exit rate that we had for Q4 and what that implies, I mean, certainly, there's cost reduction activities that we need to execute on for both the cost of revenue and throughout our operating cost. So I mean, it's really not that wide of a range. I mean, it's pretty tight, but certainly, revenue is probably the biggest thing and just like some of the churn increases that we saw last year and the impact that has. So there's several variables that can change. And certainly, as the year goes on, we'll have more visibility into that and can tighten that up, but those are the factors that went into the range we came up with. And that's what we did last year as we started with a $15 million range and tightened it down. I think if it is a little over 1% of revenue and so it's, I guess, broad when compared to itself, but when compared to the revenue base, it's reasonably narrow.

Joseph F. Eazor

As the new guy here, it's -- revenue is a major driver, right? I mean, so that incremental $20 million from the low end to high end on revenue on a similar fixed cost base contributes a significant portion of EBITDA. So we got a lot of attention to pay on revenue in addition to costs here, but I think the revenue range is the biggest driver of the EBITDA range.

Anthony Klarman - Deutsche Bank AG, Research Division

I guess, I was wondering maybe if it implied anything about potential turn in the Business Services side because that was viewed historically as one of the real levers that -- if that sort of abated, it really took the pressure off of the growth products, which had been growing, but were being dwarfed by the decline in business.

Joseph F. Eazor

We feel good about the growth of our emerging services in the Business Services area. I think it reflects more of the risk in the traditional services business.

Anthony Klarman - Deutsche Bank AG, Research Division

Okay. And then a question on just sort of cash and cash flow. If I use your midpoint for EBITDA and CapEx, and assume that you keep the dividend where it is, your guidance implies that you'd burn cash this year and you ended 2013 with about $116 million or $117 million in cash. I guess, how do you prioritize -- you mentioned that you're sort of a cash first guy. How do you prioritize sort of the cash generation of the business? And what's the minimum liquidity level that you guys are comfortable with having in the business?

Joseph F. Eazor

So, first of all, you're right. The math does work that way. Secondly, I don't like it, so I'm going to go to work on that, and the team will spend a lot more effort on our cash flow as I mentioned earlier. And unfortunately, thirdly, that still worked in the plan to develop what the details of that looked like. So you go into things and what's the right capital ratio, CapEx ratio for new deals. I think we have some room to optimize that and look at that more carefully and how to better -- there are things that make the lease-buy decision on equipment. We buy most of our equipment today, so it's a cash flow, CapEx expenditure. There may be some opportunities to lease certain items and there's always a trade-off in those conversations, but I guess, the short answer is it's part of the planning activities, not optimize our CapEx.

Bradley A. Ferguson

Yes, we also and we have our revolver. And so, liquidity is not a big issue, but it's certainly sensitive to the declining cash balance in terms of how low we'll be comfortable at going. I mean, we've talked about $50 million number somewhere in that range.

Joseph F. Eazor

My goal is to not let it get that low, personally.

Operator

[Operator Instructions] And your next question is from [indiscernible] of Crédit Suisse.

Unknown Analyst

Just wanted to understand in terms of the, sort of slightly lower MRR bookings in this quarter, if you could talk qualitatively about the factors there? And do you feel comfortable, sort of getting back to the $3 million plus quarterly bookings level that you've shown in the prior quarters?

Joseph F. Eazor

Yes. So I'm looking at this in the rearview mirror, obviously, I wasn't here for the last quarter, but I look back at it and say we had a weaker Q4 than we wanted, for sure on bookings, in particular, in 1 month. So we have some work to do to catch up. I'll just give you, what I do know about the business is; our sales are a little bit lumpy, especially as we do larger deals. It takes longer time to get deals closed and the timing of when they close is certainly a factor, and that's the nature of our business. I think, secondly, that also spills over to the install world into revenue -- actually revenue realization because it's a little longer to install in some of the larger deals. So we've changed the nature of the mix of what we're selling, and some of these larger deals, perhaps, are slipping and then we also have a little bit slower time to revenue realization on those. We do need to do a much better job of closing what we have in our pipeline, I call it, basically conversion of our pipeline. Our pipeline or our funnel has gone up steadily, double-digit increases over, what I've seen for over last year, and even double-digit improvement over the last several months. And so, we've got real need to start converting that better into revenue and again, I'm just digging in here, but there's a series of operational things that we need to do to get that realized more effectively.

Unknown Analyst

And then as far as your guidance for 2014 on EBITDA, I think on the prepared comments, you talked about some gradual moderation in churn. What are your churn expectations, especially on the business side? Where should you be exiting 2014 relative to the 1.6% level currently, for you to hit your guidance?

Bradley A. Ferguson

Yes. So I mean, really, we talked about just some improvement from those levels. We need to see that still down in the mid 1s. So it doesn't have to be improvement from where it is, but it needs to improve. And so, that's really the expectation. I mean, it's just a little lower and then we expect to see that happen through the back half of the year and are doing things to influence that, but certainly, it's something that we're going to have to fight and work towards.

Joseph F. Eazor

Yes, I think Brad's right on. And we're doing a lot of work on churn. If you think about our revenue drivers and you think about what we have is kind of our base or backlog, if you will, you think about what we have in new bookings and revenue from new bookings, what we have in process and installations and then the negative effect of churn. We were building attack plans in each one of those drivers of revenue and churn is obviously, the top of the list because that's kind of where most of the mobility is in my opinion. And I think, Brad's right on, and we're doing a lot of things to attack that more aggressively. It's hard to predict, exactly how that materializes. And so, we need to dig into it even more before I can give you a lot of confidence and a firmer projection of how much improvement we can make there, but I feel like we can make improvements.

Unknown Analyst

I appreciate that as well. And as far as within the business section -- within the Business Services side, any qualitative color you can talk about in terms of the components of that churn? I know in prior quarters, you've given us details within Business Services churn, but even qualitatively we could talk about the drivers, that would be great.

Bradley A. Ferguson

I think the thing we really highlighted is just the customers at the lower end, and that's where we've seen a lot of the cable company order abilities. It's more of our single location, which was a lot of the business that we got through the acquisitions. And so, pricing the churn rates for the customers on that lower end in the high 2s, high 2% range, certainly, are our growth products in the multi-location networks where, I mean, you have a much stickier product and as Joe mentioned earlier, it's really not up, as much about price, it's about the quality of the service that you're offering and some more meaningful stickier service. Those churn rates are down 1%, sub-1% in a lot of cases, so it really is at that low end and -- so our challenge is to, how to go about attacking that low end and making sure we keep everything we have.

Joseph F. Eazor

And one other point I'll make on that is one of the things we haven't rolled out as effectively as we should and we're going to spend a fair bit of effort on is, what are some plug-and-play offerings that leveraged our capabilities into that lower end of the market, where it helps us re-term customers and sell these more emerging services into that churning customer base. So we can keep the customer even if we're churning the old revenue for the new revenue. And so, there's the number of activities that we've launched in that regard as well. I think we can do a better job of coming up and delivering plug-and-play offerings to that smaller part of that mid-market, SMB space.

Unknown Analyst

One last question from me and that is, I just wanted to understand what your expectations are for restructuring cash flow in 2014, as well as what your expectations are for working capital, so as the use of cash.

Bradley A. Ferguson

Yes. So we had, in the reconciliation tables, you'll see a $17 million number for that and talked about it really being more front loaded as we wrap up some of the in-process integration projects. Certainly, that will trail out through the back half of the year, but it should be tapering off towards the back half.

Unknown Analyst

And then on working capital, any color, what your expectations are?

Bradley A. Ferguson

Maybe a small use, but not significant. I mean, I think if you go through all the components, yes, mid single digits or so usage, working capital.

Operator

And our last question comes from the line of Donna Jaegers of D. A. Davidson.

Donna Jaegers - D.A. Davidson & Co., Research Division

On the IT conversion, obviously, this -- if it was easy, it would have been done already. So can you discuss a little of the progress so far? And obviously, you're hoping to make big strides in the first half of the year.

Joseph F. Eazor

You said in IT?

Donna Jaegers - D.A. Davidson & Co., Research Division

Yes, in IT, the systems conversion, yes.

Joseph F. Eazor

I'm sorry, I just missed that. I don't know if you said IP or IT. But on the IT side, I think -- and again, I'll reflect on what I've learned coming in. There's was I think a plan that was originally in place, may have not been as executable as it was laid out originally. And I think there's may be a little too much of, I think even the words Big Bang were used for that plan. Somewhere in the last half of last year, we changed approaches as a company and took a much more logical and less risky and more effective approach to how we're going to roll out our systems improvement plan or IT systems, and we're on track for that and releases are being happening all the time. We've consolidated a new CRM system for all of our sales folks. We've got anew consistent repair and ticketing system for all that part of the work for the company. And so every quarter and every month, actually, new parts of that system are being launched and going live and so, it's an ongoing process that I think we're making good progress on. Now having said that, there's still a lot of complexity and it is hard work to do, Donna, as you pointed out. But I think the team is driving it, Brian Fink and his team are driving it, and I think we're making good progress based on what I've seen.

Donna Jaegers - D.A. Davidson & Co., Research Division

Great. And then, on the bookings, you mentioned that there was 1 month of slippage. Can you talk a little about the linearity of bookings and about whether you guys are losing deals out of the pipeline? Or whether they're just -- the decision time is just being stalled?

Joseph F. Eazor

It's a great question, and we're digging into more details all the time. It doesn't appear that we've just all of a sudden become less competitive in the market. It seems like some of these are timing-related issues that we expect to claw back in different months of this year. I think there's nothing materially affecting us from a macro side or from a competitive side. I think it's just some -- it's some timing of decisions, as well as some execution effectiveness on our side.

Donna Jaegers - D.A. Davidson & Co., Research Division

And the 1 month slippage, that was the last month of the quarter?

Joseph F. Eazor

November.

Operator

And there are no further questions at this time. I'll now turn the call back to management.

Joseph F. Eazor

Okay. Let me say a couple of things. I know it's -- sometimes it's easy to reflect on what we need to improve and to talk about the things that will help us improve our performance over the long term, actually in the near term and long term. And you probably can tell by now, I'm committed to making sure that happens for us at EarthLink. But at the same time, I still remain very bullish and very positive about the company. We have great assets. We have strong progress and momentum and key parts of the market that are very important to our future. We have employee base. I can't tell you how pleased I am when I came here and how the warm reception, as well as the commitment to customer service that our employees have. And I just think we have to do some work on the execution side and we have some strategy refinement work to do as well. And I promise that we'll keep you posted in all of these fronts when we get back together on phone in May, you'll hear more details about it. But I'm very pleased to be here. There are things to do, a lot of work to do, a lot of operational excellence that we can deploy and execute better. But again, I'm bullish about our future. And so, thank you guys for joining today, and I look forward to catching up again in a few months. And in between now and then, one on one wherever possible. Thank you.

Operator

Thank you. And this concludes today's conference call. You may now disconnect.

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Source: EarthLink Holdings Management Discusses Q4 2013 Results - Earnings Call Transcript

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