Earthlink's Amazingly Bad Churn Rate (ELNK)

| About: EarthLink, Inc. (ELNK)

The WSJ reports (sub. req.) on EarthLink's Q1 2006 numbers, and they are atrocious, but at least they have plus signs.

Net income of $16.4M on revenue of $310M, for a margin of 5%. Those were both down 51% - $16.9M absolute ($16.4M/$33.3M) and 7% - $25M absolute ($310M/$335M) Y/Y, respectively. A 7% top line decrease leading to a 51% bottom line decrease shows the top line is operating at just about break even, and they desperately need about $300M quarterly revenue to stay positive. They offer some gobblygook about their new services being delayed, in an attempt to keep hope alive.

But the truly stunning figure is that they have a monthly churn rate of 4.6%. That is an annual churn rate of 55.2%. For every 100 people they sign up in December, 55 of them will have decided that the service sucks enough to cancel before the next December. That's amazingly bad customer retention, and shows how desperately they need new compelling services. When 55% of old customers leave, why would anyone new sign up with them? Customer acquisition is expensive, and 55% of that expense is being thrown away.

We previously thought their story was worth a look, and the story is compelling, but the facts don't seem to be. Annualizing their current EPS ($0.12x4) gives them a forward P/E of 20 at a current ELNK share price of about $9.75. That's not crazy, but this is one very slowly turning ship, and the torpedoes are coming fast.

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