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EarthLink Reports First Quarter 2016 Results

  • Revenue of $254.3 million
  • Net income of $7.9 million and net income per share of $0.07
  • Adjusted EBITDA of $61.7 million
  • Net cash provided by operating activities of $10.6 million
  • Unlevered Free Cash Flow of $43.2 million
  • Repurchased $7 million of outstanding 8.875% senior notes and repaid $35 million balance on outstanding revolving credit facility
  • Ending cash balance of $60.7 million

EarthLink (EarthLink Holdings Corp.), (NASDAQ:ELNK), a leading network services provider dedicated to delivering great customer experiences, today announced financial results for its first quarter of 2016.

"2016 is a transformational year for EarthLink as we work to become the industry leader in network services in the cloud world," said EarthLink Chief Executive Officer and President Joe Eazor. "In the first quarter, we made progress on our journey and delivered solid financial results, including strong cash flow and further debt reduction."

First Quarter 2016 Financial Summary

Figures in US $ millions, Fourth First
except per share First Quarter Quarter Quarter
2015 2016 Change 2015 2016 Change
Revenues
Enterprise/Mid-Market $ 114.4 $ 104.7 (8.5 )% $ 106.2 $ 104.7 (1.4 )%
Small Business 79.0 62.1 (21.5 )% 66.5 62.1 (6.6 )%
Carrier/Transport 32.9 36.1 9.7 % 34.3 36.1 5.2 %
Consumer 56.1 51.4 (8.4 )% 53.3 51.4 (3.6 )%
Total Revenue 282.4 254.3 (10.0 )% 260.2 254.3 (2.3 )%
Gross Margin 153.0 139.1 (9.1 )% 138.5 139.1 0.4 %
Operating Expenses 95.3 81.4 (14.6 )% 88.4 81.4 (7.9 )%
Net Income (Loss) (10.5 ) 7.9 NM (12.3 ) 7.9 NM
Net Income (Loss) per share (0.10 ) 0.07 NM (0.12 ) 0.07 NM
Adjusted EBITDA [(1)] 61.1 61.7 1.0 % 53.9 61.7 14.5 %
Capital Expenditures 17.5 18.6 6.3 % 27.1 18.6 (31.4 )%
Cash 108.1 60.7 (43.8 )% 91.3 60.7 (33.5 )%
Gross Debt Outstanding [(2)] 578.9 466.9 (19.3 )% 508.9 466.9 (8.3 )%
Net Cash Provided by Operating Activities 18.9 10.6 (43.9 )% 41.4 10.6 (74.4 )%
Unlevered Free Cash Flow [(1)] 43.6 43.2 (0.9 )% 26.8 43.2 61.2 %
[(1)] Adjusted EBITDA and Unlevered Cash Flow are non-GAAP measures, see definitions in "Non-GAAP Measures" below.
[(2)] Gross debt outstanding excludes unamortized debt issuance costs, unamortized debt discount and capital leases.
NM - Percentage is not meaningful

Revenue and Gross Margin

  • Total revenue was $254.3 million during the first quarter of 2016, a decline of 10.0% from the prior year quarter and 2.3% from the fourth quarter of 2015.

    • On February 1, 2016, the Company sold certain assets related to its IT services product offerings. Total revenue during the first quarter of 2016 included $3.4 million of IT services revenue, compared to $11.8 million during the first quarter of 2015 and $10.2 million during the fourth quarter of 2015.

    • Total revenue during the first quarter of 2016 included $0.9 million of favorable settlements, compared to $2.1 million during the first quarter of 2015 and $0.9 million during the fourth quarter of 2015. In addition, total revenue during the first quarter of 2016 included $2.2 million of other favorable one-time revenue items.

  • Gross margin during the first quarter of 2016 was $139.1 million, compared to $153.0 million in the first quarter of 2015 and $138.5 million in the fourth quarter of 2015. Cost of revenue in the first quarter of 2016 included $3.9 million of favorable settlements, compared to $3.6 million in the first quarter of 2015 and $2.2 million in the fourth quarter of 2015.

Net Income (Loss) and Adjusted EBITDA

  • Net income was $7.9 million during the first quarter of 2016. This compares to a net loss of $(10.5) million in the first quarter of 2015 and $(12.3) million in the fourth quarter of 2015. Net income during the first quarter of 2016 includes a $5.7 million pretax gain on the sale of the Company's IT services assets. Net income during the first quarter of 2016 also reflects a decrease in depreciation and amortization expense primarily due to certain assets becoming fully amortized and a decrease in interest expense due to lower outstanding debt as compared to the prior year periods.

  • Adjusted EBITDA (a non-GAAP measure, see definition in "Non-GAAP Measures" below) was $61.7 million in the first quarter of 2016. This compares to $61.1 million in the first quarter of 2015 and $53.9 million during the fourth quarter of 2015. Adjusted EBITDA in the first quarter of 2016 includes the aforementioned revenue and cost of revenue settlements and one-time items, which totaled $7.0 million.

Balance Sheet and Cash Flow

  • Net cash provided by operating activities was $10.6 million during the first quarter of 2016. This compares to net cash provided by operating activities of $18.9 million in the first quarter of 2015 and $41.4 million in the fourth quarter of 2015. Net cash provided by operating activities was unfavorably impacted in the first quarter by seasonal changes to net working capital.

  • Unlevered Free Cash Flow (a non-GAAP measure, see definition in "Non-GAAP Measures" below) was $43.2 million during the first quarter of 2016. This compares to Unlevered Free Cash Flow of $43.6 million in the first quarter of 2015 and $26.8 million in the fourth quarter of 2015.

  • EarthLink ended the first quarter of 2016 with $60.7 million in cash. EarthLink received $26.0 million of cash from the sale of its IT services assets. EarthLink repurchased $7.0 million of outstanding 8.875% senior notes at an average price of $100.35 per $100 face value of notes and repaid all of the $35.0 million outstanding under its revolving credit facility during the first quarter of 2016.

Non-GAAP Measures
Adjusted EBITDA is defined as net income (loss) before interest expense and other, net, income taxes, depreciation and amortization, stock-based compensation expense, impairment of goodwill and long-lived assets, restructuring, acquisition and integration-related costs, gain on sale of business and loss on extinguishment of debt. Unlevered Free Cash Flow is defined as net income (loss) before interest expense and other, net, income taxes, depreciation and amortization, stock-based compensation expense, impairment of goodwill and long-lived assets, restructuring, acquisition and integration-related costs, gain on sale of business and loss on extinguishment of debt, less cash used for purchases of property and equipment.

Adjusted EBITDA and Unlevered Free Cash Flow are non-GAAP financial measures. They should not be considered in isolation or as an alternative to measures determined in accordance with U.S. generally accepted accounting principles. Please refer to the Consolidated Financial Highlights for a reconciliation of these non-GAAP financial measures to the most comparable measures reported in accordance with U.S. generally accepted accounting principles and Footnote 4 of the Consolidated Financial Highlights for a discussion of the presentation, comparability and use of such financial measures.

Conference Call for Analysts and Investors
EarthLink's First Quarter 2016 Conference Call will be held on Tuesday, May 3, 2016, at 8:30 a.m. ET and hosted by EarthLink's Chief Executive Officer and President Joseph F. Eazor and Executive Vice President and Chief Financial Officer Louis M. Alterman.

The dial-in number is: (866) 887-3882.
Participants should reference the conference ID number 91321780 or "EarthLink First Quarter 2016 Earnings Call" and dial in 10 minutes prior to the scheduled start time.

Webcast
A live webcast of the conference call will be available at: http://ir.earthlink.net/.

Presentation
An investor presentation to accompany the conference call and webcast will be available at: http://ir.earthlink.net/

Replay
A webcast replay will be available from 11:30 a.m. ET on May 3, 2016 through midnight on June 3, 2016. Dial toll-free: (855) 859-2056. The replay confirmation code is 91321780. The webcast will be archived on the company's website at: http://ir.earthlink.net/events.cfm.

About EarthLink
EarthLink (EarthLink Holdings Corp.), ELNK, +1.20% is a leading network services provider dedicated to delivering great customer experiences in a cloud connected world. We help thousands of multi-location businesses securely establish critical connections in the cloud. Our solutions for cloud and hybrid networking, security and compliance, and unified communications provide the cost-effective performance and agility to serve customers anytime, anywhere, via any channel, or any device. We operate a nationwide network spanning 29,000+ fiber route miles, with 90 metro fiber rings and secure data centers that provide ubiquitous data and voice IP coverage. To learn why thousands of specialty retailers, restaurants, franchisors, financial institutions, healthcare providers, professional service firms, local governments, residential consumers and other carriers choose to connect with us, visit us at www.earthlink.com, @earthlink, on LinkedIn and Google+.

Cautionary Information Regarding Forward-Looking Statements
This press release includes "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. Although we believe that the expectations expressed in these forward-looking statements are reasonable, we cannot promise that our expectations will turn out to be correct. Our actual results could be materially different from and worse than our expectations. With respect to such forward-looking statements, we seek the protections afforded by the Private Securities Litigation Reform Act of 1995. These risks include, without limitation: (1) that we...


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