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EarthLink Announces Fourth Quarter And Full Year 2013 Results

Companies mentioned in this article: EarthLink, Inc.

ATLANTA, Feb. 19, 2014 /PRNewswire/ -- EarthLink Holdings Corp. (NASDAQ: ELNK) today announced financial results for its fourth quarter and full year ended December 31, 2013. Highlights for the fourth quarter include:

    --  Revenues of $301.8 million
    --  Net loss of $(279.9) million or $(2.75) per share (which includes a
        $266.3 million non-cash charge to establish a valuation allowance
        against deferred tax assets)
    --  Net loss per share, excluding valuation allowance (a non-GAAP measure),
        of $(0.13) per share.
    --  Adjusted EBITDA (a non-GAAP measure) of $50.1 million
    --  Net cash provided by operating activities of $40.7 million
    --  Unlevered Free Cash Flow (a non-GAAP measure) of $16.2 million
    --  Ending cash balance of $116.6 million

"I am excited to be a part of EarthLink. The company has many things going for it, including a fantastic customer base, a strong set of capabilities across information communications and technology, momentum penetrating the mid-market with technology solutions and managed services, and the best employees in the industry," said EarthLink Chief Executive Officer and President Joseph F. Eazor. "However, we have a lot of work to do. With a disciplined operational focus, I'm confident we will improve our business performance."

Financial and Operating Results
EarthLink reported revenue of $301.8 million for the fourth quarter of 2013 and $1.24 billion for the full year 2013. Business services segment revenue comprised 78% of EarthLink's revenue in the fourth quarter of 2013. EarthLink's retail emerging services reached an approximate $328 million annualized revenue run rate in the fourth quarter of 2013. EarthLink's consumer segment churn was a record low of 2.0% for the fourth quarter of 2013, compared to 2.2% in the third quarter of 2013 and 2.2% in the fourth quarter of 2012. Broadband services comprised 70% of consumer access revenue in the fourth quarter of 2013.

EarthLink's selling, general and administrative expenses were $105.6 million, or 35% of revenue, for the fourth quarter of 2013, and $426.1 million, or 34% of revenue, for the full year 2013. This compares to expenses of $109.1 million, or 33% of revenue, for the fourth quarter of 2012 and $429.1 million, or 32% of revenue, for the full year 2012.

Profitability and Other Financial Measures
EarthLink reported a net loss of $(279.9) million, or $(2.75) per share, in the fourth quarter of 2013 and a net loss of $(538.8) million, or $(5.25) per share, for the full year 2013. These compared to net income of $0.0 million, or $0.00 per share, in the fourth quarter of 2012 and $7.5 million, or $0.07 per share, for the full year 2012. The net loss for the fourth quarter and full year 2013 includes a $266.3 million non-cash charge to establish a valuation allowance against deferred tax assets. The net loss for the full year 2013 includes a $256.7 million pre-tax non-cash impairment charge to goodwill.

EarthLink generated Adjusted EBITDA (a non-GAAP measure, see definition in "Non-GAAP Measures" below) of $50.1 million in the fourth quarter of 2013 and $227.1 million for the full year 2013. Included in the company's fourth quarter 2013 results was approximately $4 million of favorable dispute and legal settlements, primarily within general and administrative expenses. The company reported Adjusted EBITDA of $67.2 million in the fourth quarter of 2012 and $283.9 million for the full year 2012. Included in the company's fourth quarter 2012 results was approximately $10 million of favorable dispute settlements.

Balance Sheet and Cash Flow
Net cash provided by operating activities was $40.7 million in the fourth quarter of 2013 and $124.2 million for the full year 2013. This compared to net cash provided by operating activities of $12.5 million in the fourth quarter of 2012 and $191.1 million for the full year 2012.

EarthLink generated Unlevered Free Cash Flow (a non-GAAP measure, see definition in "Non-GAAP Measures" below) of $16.2 million during the fourth quarter of 2013 and $83.5 million for the full year 2013. This compared to Unlevered Free Cash Flow of $0.1 million during the fourth quarter of 2012 and $136.5 million for the full year 2012. EarthLink's capital expenditures were $34.0 million for the fourth quarter of 2013 and $143.6 million for the full year 2013. The company made $5.1 million of dividend payments to shareholders in the fourth quarter of 2013 for a total of $20.8 million of dividend payments to shareholders during the full year 2013. EarthLink repurchased 1.2 million shares of common stock at an average price of $5.02 per share for the full year 2013.

As of December 31, 2013, the company had cash of $116.6 million.

Business Outlook
The following statements are forward-looking, and actual results may differ materially. See comments under "Cautionary Information Regarding Forward-Looking Statements" below. EarthLink undertakes no obligation to update these statements.

Today EarthLink announced financial guidance for the full year 2014. Management expects revenue of $1.160 to $1.180 billion; Adjusted EBITDA of $180 million to $195 million; capital expenditures of $125 million to $135 million; and net loss of $(85) million to $(95) million for the full year 2014.

Other Matters
Today, EarthLink also announced that Rolla P. Huff will retire from the Board of Directors effective on February 21, 2014. The Board has appointed current director Dr. Julie A. Shimer to succeed Huff as interim Chairman of the Board. Additionally, Marce Fuller announced her retirement from the Board of Directors effective upon the election of directors at the 2014 Annual Meeting of Stockholders. Fuller has served on the EarthLink Board since October 2001. EarthLink has scheduled its 2014 Annual Meeting of Stockholders for Tuesday, April 29, 2014 at its Atlanta, GA headquarters.

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 intangible assets, restructuring, acquisition and integration-related costs, and loss from discontinued operations, net of tax. 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 intangible assets, restructuring, acquisition and integration-related costs, and loss from discontinued operations, net of tax, less cash used for purchases of property and equipment. Net Loss Excluding Valuation Allowance is defined as net loss excluding the non-cash charge to record valuation allowance against deferred tax assets.

Adjusted EBITDA, Unlevered Free Cash Flow and Net Loss Excluding Valuation Allowance 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 5 of the Consolidated Financial Highlights for a discussion of the presentation, comparability and use of such financial measures.

Conference Call for Analysts and Investors
Conference Call Details
Thursday, February 20, 2014, at 8:30 a.m. ET hosted by EarthLink's Chief Executive Officer and President Joseph F. Eazor and Chief Financial Officer Bradley A. Ferguson.
Dial-in Number: 855-590-8814
Participants should reference the conference ID number 46365767 or "EarthLink's 4(th) Quarter 2013 Conference Call" and dial in 10 minutes prior to 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 February 20 through midnight on February 27, 2014. Dial toll-free 855-859-2056. The replay confirmation code is 46365767. The Webcast will be archived on the company's website at: http://ir.earthlink.net/events.cfm.

About EarthLink
Founded in 1994, EarthLink (NASDAQ: ELNK) is a leading IT services and communications provider, empowering businesses with a fully-managed, end-to-end communications, IT and virtualization portfolio including cloud computing, IT security, colocation, enterprise-class hosted applications and IT support services. EarthLink operates an over 28,000 fiber route mile network, with 90 metro fiber rings and 8 secure data centers providing ubiquitous nationwide data and voice IP service coverage. EarthLink's service and product innovation enables the company to design scalable solutions specific to each client's IT needs, supported by an experienced customer care team. The company also offers award-winning high-speed, wireless and dial-up Internet services to residential customers across the U.S. For more information, visit www.earthlinkbusiness.com or follow @EarthLinkBiz.

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 may not be able to execute our strategy to be a leading IT services and communications provider, which could adversely affect our results of operations and cash flows; (2) that we may not be able to grow revenues from our growth products and services to offset declining revenues from our traditional products and services, which could adversely affect our results of operations and cash flows; (3) that our failure to achieve operating efficiencies will adversely affect our results of operations; (4) that as a result of our continuing review of our business, we may have to undertake further restructuring plans that would require additional charges, including incurring facility exit and restructuring charges; (5) that we may be unsuccessful integrating acquisitions into our business, which could result in operating difficulties, losses and other adverse consequences; (6) that if we are unable to adapt to changes in technology and customer demands, we may not remain competitive, and our revenues and operating results could suffer; (7) that unfavorable general economic conditions could harm our business; (8) that we may be unable to successfully identify, manage and assimilate future acquisitions, which could adversely affect our results of operations; (9) that we face significant competition in the communications and IT services industry that could reduce our profitability; (10) that failure to retain existing customers could adversely affect our results of operations and cash flows; (11) that decisions by legislative or regulatory authorities, including the Federal Communications Commission relieving incumbent carriers of certain regulatory requirements, and possible further deregulation in the future, may restrict our ability to provide services and may increase the costs we incur to provide these services; (12) that if we are unable to interconnect with AT&T, Verizon and other incumbent carriers on acceptable terms, our ability to offer competitively priced local telephone services will be adversely affected; (13) that our operating performance will suffer if we are not offered competitive rates for the access services we need to provide our long distance services; (14) that we may experience reductions in switched access and reciprocal compensation revenue; (15) that failure to obtain and maintain necessary permits and rights-of-way could interfere with our network infrastructure and operations; (16) that we have substantial business relationships with several large telecommunications carriers, and some of our customer agreements may not continue due to financial difficulty, acquisitions, non-renewal or other factors, which could adversely affect our wholesale revenue and results of operations; (17) that we obtain a majority of our network equipment and software from a limited number of third-party suppliers; (18) that work stoppages experienced by other communications companies on whom we rely for service could adversely impact our ability to provision and service our customers; (19) that our commercial and alliance arrangements may not be renewed or may not generate expected benefits, which could adversely affect our results of operations; (20) our consumer business is dependent on the availability of third-party network service providers; (21) that we face significant competition in the Internet access industry that could reduce our profitability; (22) that the continued decline of our consumer access subscribers will adversely affect our results of operations; (23) that potential regulation of Internet service providers could adversely affect our operations; (24) that cyber security breaches could harm our business; (25) that privacy concerns relating to our business could damage our reputation and deter current and potential users from using our services; (26) that interruption or failure of our network, information systems or other technologies could impair our ability to provide our services, which could damage our reputation and harm our operating results; (27) that our business depends on effective business support systems and processes; (28) that if we, or other industry participants, are unable to successfully defend against disputes or legal actions, we could face substantial liabilities or suffer harm to our financial and operational prospects; (29) that we may be accused of infringing upon the intellectual property rights of third parties, which is costly to defend and could limit our ability to use certain technologies in the future; (30) that we may not be able to protect our intellectual property; (31) that we may be unable to hire and retain sufficient qualified personnel, and the loss of any of our key executive officers could adversely affect us; (32) that government regulations could adversely affect our business or force us to change our business practices; (33) that our business may suffer if third parties are unable to provide services or terminate their relationships with us; (34) that we may be required to recognize impairment charges on our goodwill and intangible assets, which would adversely affect our results of operations and financial position; (35) that we may not realize our deferred tax assets, we may have exposure to greater than anticipated tax liabilities and we may be limited in the use of our net operating losses and certain other tax attributes in the future; (36) that our indebtedness could adversely affect our financial health and limit our ability to react to changes in our industry; (37) that we may require substantial capital to support business growth, and this capital may not be available to us on acceptable terms, or at all; (38) that our debt agreements include restrictive covenants, and failure to comply with these covenants could trigger acceleration of payment of outstanding indebtedness; (39) that we may reduce, or cease payment of, quarterly cash dividends; (40) that our stock price may be volatile; (41) that provisions of our certificate of incorporation, bylaws and other elements of our capital structure could limit our share price and delay a change of control of the company; and (42) that our bylaws designate the Court of Chancery of the State of Delaware as the sole and exclusive forum for certain types of actions and proceedings that may be initiated by our stockholders, which could limit our stockholders' flexibility in obtaining a judicial forum for disputes with us or our directors, officers or employees. These risks and uncertainties, as well as other risks and uncertainties that could cause our actual results to differ significantly from management's expectations, are not intended to represent a complete list of all risks and uncertainties inherent in our business, and should be read in conjunction with the more detailed cautionary statements and risk factors included in our Annual Report on Form 10-K for the year ended December 31, 2012.



                                                                                        EARTHLINK HOLDINGS CORP.

                                                                       Unaudited Condensed Consolidated Statements Of Operations

                                                                                 (in thousands, except per share data)


                                                                                                                                       Three Months                     Twelve Months
                                                                                                                                          Ended                             Ended

                                                                                                                                      December 31,                     December 31,
                                                                                                                                      ------------                     ------------

                                                                                                                                    2012             2013                2012                2013
                                                                                                                                    ----             ----                ----                ----


    Revenues                                                                                                                              $328,726           $301,839          $1,335,135          $1,240,606

    Operating costs and expenses:

    Cost of revenues (exclusive of depreciation and amortization                                                                 154,672            150,178               632,616               600,742

       shown separately below)

    Selling, general and administrative (exclusive of depreciation and                                                           109,126            105,601               429,087               426,070

       amortization shown separately below)

    Depreciation and amortization                                                                                                 46,362            48,800               183,165               183,114

    Impairment of goodwill (1)                                                                                                         -               -                  -               255,599

    Restructuring, acquisition and integration-related costs (2)                                                                   4,508            11,562               18,244               40,030
                                                                                                                                   -----            ------               ------               ------

    Total operating costs and expenses                                                                                           314,668            316,141               1,263,112               1,505,555

    Income (loss) from operations                                                                                                 14,058            (14,302)               72,023               (264,949)

    Interest expense and other, net                                                                                              (15,157)           (13,972)               (63,416)               (60,686)
                                                                                                                                 -------            -------               -------               -------

    Income (loss) from continuing operations before income taxes                                                                  (1,099)           (28,274)               8,607               (325,635)

    Income tax benefit (provision) (3)                                                                                             1,809            (251,260)               1,331               (211,231)
                                                                                                                                   -----            --------               -----               --------

    Income (loss) from continuing operations                                                                                         710            (279,534)               9,938               (536,866)

    Loss from discontinued operations, net of tax (4)                                                                               (719)           (339)               (2,418)               (1,961)
                                                                                                                                    ----             ----               ------               ------

    Net income (loss)                                                                                                                          $(9)         $(279,873)             $7,520           $(538,827)
                                                                                                                                               ===           ========              ======            ========


    Basic net income (loss) per share

    Continuing operations                                                                                                                    $0.01             $(2.74)              $0.09              $(5.23)

    Discontinued operations                                                                                                        (0.01)              -               (0.02)               (0.02)

    Basic net income (loss) per share                                                                                                  $         -             $(2.75)              $0.07              $(5.25)
                                                                                                                                      ==       ===             ======               =====              ======

    Basic weighted average common shares outstanding                                                                             103,393            101,901               105,221               102,599
                                                                                                                                 =======            =======               =======               =======


    Diluted net income (loss) per share

    Continuing operations                                                                                                                    $0.01             $(2.74)              $0.09              $(5.23)

    Discontinued operations                                                                                                        (0.01)              -               (0.02)               (0.02)
                                                                                                                                   -----             ---               -----               -----

    Diluted net income (loss) per share                                                                                                $         -             $(2.75)              $0.07              $(5.25)
                                                                                                                                      ==       ===             ======               =====              ======

    Diluted weighted average common shares outstanding                                                                           103,393            101,901               105,983               102,599
                                                                                                                                 =======            =======               =======               =======


    Dividends declared per share                                                                                                             $0.05              $0.05               $0.20               $0.20
                                                                                                                                             =====              =====               =====               =====



                                                                                                    EARTHLINK HOLDINGS CORP.

                                                                                        Unaudited Condensed Consolidated Balance Sheets

                                                                                             (in thousands, except per share data)


                                                                                                                                         December            December
                                                                                                                                            31,                 31,
                                                                                                                                             2012               2013
                                                                                                                                             ----               ----

                                                                                                             ASSETS

    Current assets:

    Cash and cash equivalents                                                                                                                       $157,621            $116,636

    Marketable securities                                                                                                                  42,073                 -

    Restricted cash                                                                                                                         1,013                 -

    Accounts receivable, net of allowance of $7,872 and $8,615 as of December 31, 2012                                                    112,765              100,792

       and 2013, respectively

    Prepaid expenses                                                                                                                       17,171              15,945

    Deferred income taxes, net                                                                                                             15,954                549

    Other current assets                                                                                                                   20,303              13,930
                                                                                                                                           ------              ------

    Total current assets                                                                                                                  366,900              247,852

    Long-term marketable securities                                                                                                         4,778                 -

    Property and equipment, net                                                                                                           418,966              438,321

    Long-term deferred income taxes, net                                                                                                  195,012                 -

    Goodwill                                                                                                                              379,415              139,215

    Other intangible assets, net                                                                                                          214,685              155,428

    Other long-term assets                                                                                                                 19,654              26,502
                                                                                                                                           ------              ------

    Total assets                                                                                                                                  $1,599,410          $1,007,318
                                                                                                                                                    ========            ========

                                                                                              LIABILITIES AND STOCKHOLDERS' EQUITY

    Current liabilities:

    Accounts payable                                                                                                                                 $18,792             $33,440

    Accrued payroll and related expenses                                                                                                   31,003              35,041

    Other accrued liabilities                                                                                                             129,572              88,225

    Deferred revenue                                                                                                                       51,690              49,689

    Current portion of long-term debt and capital lease obligations                                                                         1,375              1,489
                                                                                                                                            -----              -----

    Total current liabilities                                                                                                             232,432              207,884

    Long-term debt and capital lease obligations                                                                                          614,890              606,442

    Long-term deferred income taxes, net                                                                                                        -              2,221

    Other long-term liabilities                                                                                                            33,284              28,553
                                                                                                                                           ------              ------

    Total liabilities                                                                                                                     880,606              845,100

    Stockholders' equity:

    Preferred stock, $0.01 par value, 100,000 shares authorized, 0 shares issued and                                                            -                 -

       outstanding as of December 31, 2012 and 2013

    Common stock, $0.01 par value, 300,000 shares authorized, 196,919 and 197,491                                                           1,969              1,975

       shares issued as of December 31, 2012 and 2013, respectively, and 102,739 and

       101,876 shares outstanding as of December 31, 2012 and 2013, respectively

    Additional paid-in capital                                                                                                          2,057,974              2,047,607

    Accumulated deficit                                                                                                                 (606,148)               (1,144,975)

    Treasury stock, at cost, 94,180 and 95,615 shares as of December 31, 2012 and 2013,                                                 (735,003)              (742,389)

       respectively

    Accumulated other comprehensive income                                                                                                     12                 -
                                                                                                                                              ---               ---

    Total stockholders' equity                                                                                                            718,804              162,218
                                                                                                                                          -------              -------

    Total liabilities and stockholders' equity                                                                                                    $1,599,410          $1,007,318
                                                                                                                                                    ========            ========


                                                                                  EARTHLINK HOLDINGS CORP.

                                                                 Reconciliation of Net Income (Loss) to Adjusted EBITDA (5)

                                                                                       (in thousands)


                                                                                                                    Three Months Ended                                   Twelve Months Ended
                                                                                                                    ------------------                                   -------------------

                                                                                                  December 31,               September 30,           December 31,               December 31,              December 31,

                                                                                                          2012                     2013                2013                     2012                   2013
                                                                                                          ----                     ----                ----                     ----                   ----


    Net income (loss)                                                                                                   $(9)               $(11,338)           $(279,873)                  $7,520              $(538,827)

    Interest expense and other, net                                                                     15,157                   13,985              13,972                   63,416                 60,686

    Income tax provision (benefit) (3)                                                                  (1,809)                 (4,582)              251,260                  (1,331)                 211,231

    Depreciation and amortization                                                                       46,362                   46,689              48,800                  183,165                 183,114

    Stock-based compensation expense                                                                     2,259                    1,238               4,057                   10,462                 13,275

    Impairment of goodwill (1)                                                                               -                       -                  -                       -                 255,599

    Restructuring, acquisition and integration-related costs (2)                                         4,508                    9,928              11,562                   18,244                 40,030

    Loss from discontinued operations, net of tax (4)                                                      719                      225                 339                    2,418                  1,961
                                                                                                           ---                      ---                 ---

    Adjusted EBITDA (5)                                                                                             $67,187                 $56,145              $50,117                 $283,894               $227,069
                                                                                                                    =======                 =======              =======                 ========               ========


                    EARTHLINK HOLDINGS CORP.

         Reconciliation of Guidance Provided in Non-GAAP
                           Measure (5)

                          (in millions)


                                         Year Ending

                                      December 31, 2014
                                      -----------------


    Net loss                            ($95) - ($85)

    Interest expense and other,
     net                                                57

    Income tax benefit                    (2) - (1)

    Depreciation and
     amortization                         188 - 192

    Stock-based compensation
     expense                                            15

    Restructuring, acquisition
     and integration-related
     costs                                              17

    Adjusted EBITDA (5)                        $180 - $195
                                               ===========


                    EARTHLINK HOLDINGS CORP.

    Reconciliation of Net Loss to Net Loss Excluding Valuation
                          Allowance (5)

              (in thousands, except per share data)


                             Three                  Per
                            Months                 Share
                             Ended

                           December
                           31, 2013              Amount
                          ---------              ------


    Net loss                          $(279,873)            $(2.75)

    Valuation allowance     266,339                  2.61

    Net Loss Excluding
     Valuation Allowance
     (5)                               $(13,534)            $(0.13)
                                       ========             ======


                                                                                      EARTHLINK HOLDINGS CORP.

                                                                 Reconciliation of Net Income (Loss) to Unlevered Free Cash Flow (5)

                                                                                           (in thousands)


                                                                                                                        Three Months Ended                                  Twelve Months Ended
                                                                                                                        ------------------                                  -------------------

                                                                                                      December 31,             September 30,           December 31,               December 31,              December 31,

                                                                                                              2012                   2013                2013                     2012                   2013
                                                                                                              ----                   ----                ----                     ----                   ----


    Net income (loss)                                                                                                     $(9)               $(11,338)           $(279,873)                  $7,520              $(538,827)

    Interest expense and other, net                                                                         15,157                 13,985              13,972                   63,416                 60,686

    Income tax provision (benefit) (3)                                                                      (1,809)               (4,582)              251,260                  (1,331)                 211,231

    Depreciation and amortization                                                                           46,362                 46,689              48,800                  183,165                 183,114

    Stock-based compensation expense                                                                         2,259                  1,238               4,057                   10,462                 13,275

    Impairment of goodwill (1)                                                                                   -                     -                  -                       -                 255,599

    Restructuring, acquisition and integration-related costs (2)                                             4,508                  9,928              11,562                   18,244                 40,030

    Loss from discontinued operations, net of tax (4)                                                          719                    225                 339                    2,418                  1,961

    Purchases of property and equipment                                                                    (66,631)               (32,792)              (33,967)                  (147,360)                 (143,614)


    Unlevered Free Cash Flow (5)                                                                                         $556                 $23,353              $16,150                 $136,534                $83,455
                                                                                                                         ====                 =======              =======                 ========                =======



                                                                                                  EARTHLINK HOLDINGS CORP.

                                                                 Reconciliation of Net Cash Flows from Operating Activities to Unlevered Free Cash Flow (5)

                                                                                                       (in thousands)


                                                                                                                                     Three Months Ended                                   Twelve Months Ended
                                                                                                                                     ------------------                                   -------------------

                                                                                                                  December 31,               September 30,            December 31,               December 31,            December 31,

                                                                                                                          2012                     2013                  2013                    2012                 2013
                                                                                                                          ----                     ----                  ----                    ----                 ----


    Net cash provided by operating activities                                                                                       $12,527                  $39,890               $40,726                $191,055             $124,156

    Income tax provision (benefit) (3)                                                                                  (1,809)                 (4,582)               251,260                  (1,331)               211,231

    Non-cash income taxes                                                                                                 (911)                   4,603               (253,076)                     107               (212,870)

    Interest expense and other, net                                                                                     15,157                   13,985                13,972                  63,416               60,686

    Amortization of debt discount, premium and issuance costs                                                              475                     (996)              (1,017)                   1,945               (2,061)

    Restructuring, acquisition and integration-related costs (2)                                                         4,508                    9,928                11,562                  18,244               40,030

    Changes in operating assets and liabilities                                                                         36,060                  (6,910)               (13,612)                   7,930                5,662

    Purchases of property and equipment                                                                                (66,631)                 (32,792)               (33,967)                  (147,360)               (143,614)

    Other, net                                                                                                           1,180                      227                   302                   2,528                  235
                                                                                                                         -----                      ---                   ---                   -----                  ---

    Unlevered Free Cash Flow (5)                                                                                                       $556                  $23,353               $16,150                $136,534              $83,455
                                                                                                                                       ====                  =======               =======                ========              =======


    Net cash used in investing activities                                                                                          $(65,110)                $(20,311)             $(33,967)              $(163,836)           $(112,500)
                                                                                                                                   ========                 ========              ========               =========            =========

    Net cash used in financing activities                                                                                          $(51,589)                $(17,576)              $(6,026)               $(81,381)            $(52,641)
                                                                                                                                   ========                 ========               =======                ========             ========


                                                                           EARTHLINK HOLDINGS CORP.

                                                               Supplemental Schedule of Segment Information (6)

                                                                                (in thousands)


                                                                                                                       Three Months                    Twelve Months
                                                                                                                          Ended                            Ended

                                                                                                                      December 31,                    December 31,
                                                                                                                      ------------                    ------------

                                                                                                                   2012              2013               2012                2013
                                                                                                                   ----              ----               ----                ----


    Business Services

    Revenues                                                                                                             $253,549           $235,730          $1,017,425            $964,227

    Cost of revenues (excluding depreciation and amortization)                                                  129,524             127,299              527,514               506,245
                                                                                                                -------             -------              -------               -------

    Gross margin                                                                                                124,025             108,431              489,911               457,982

    Direct segment operating expenses                                                                            84,612             87,980              332,542               342,630
                                                                                                                 ------             ------              -------               -------

    Segment operating income                                                                                              $39,413            $20,451            $157,369            $115,352
                                                                                                                          =======            =======            ========            ========

    Consumer Services

    Revenues                                                                                                              $75,177            $66,109            $317,710            $276,379

    Cost of revenues (excluding depreciation and amortization)                                                   25,148             22,879              105,102               94,497
                                                                                                                 ------             ------              -------               ------

    Gross margin                                                                                                 50,029             43,230              212,608               181,882

    Direct segment operating expenses                                                                            17,177             12,005              67,526               50,623
                                                                                                                 ------             ------              ------               ------

    Segment operating income                                                                                              $32,852            $31,225            $145,082            $131,259
                                                                                                                          =======            =======            ========            ========

    Consolidated

    Revenues                                                                                                             $328,726           $301,839          $1,335,135          $1,240,606

    Cost of revenues                                                                                            154,672             150,178              632,616               600,742
                                                                                                                -------             -------              -------               -------

    Gross margin                                                                                                174,054             151,661              702,519               639,864

    Direct segment operating expenses                                                                           101,789             99,985              400,068               393,253
                                                                                                                -------             ------              -------               -------

    Segment operating income                                                                                     72,265             51,676              302,451               246,611

    Depreciation and amortization                                                                                46,362             48,800              183,165               183,114

    Impairment of goodwill                                                                                            -                -                 -               255,599

    Restructuring, acquisition and integration-related costs                                                      4,508             11,562              18,244               40,030

    Corporate operating expenses                                                                                  7,337             5,616              29,019               32,817
                                                                                                                  -----             -----              ------               ------

    Income (loss) from operations                                                                                         $14,058           $(14,302)            $72,023           $(264,949)
                                                                                                                          =======            =======             =======            ========



                             EARTHLINK HOLDINGS CORP.

                      Supplemental Schedule of Revenue Detail

                                  (in thousands)


                                    Three Months                    Twelve Months
                                       Ended                            Ended

                                   December 31,                    December 31,
                                   ------------                    ------------

                                2012                2013             2012             2013
                                ----                ----             ----             ----


    Business Services

    Retail
     services                         $209,824            $194,039           $845,664         $793,940

    Wholesale
     services                 38,987               36,791            151,910            151,071

    Other
     services                  4,738               4,900            19,851            19,216
                               -----               -----            ------            ------

    Total
     revenues                253,549               235,730            1,017,425            964,227

    Consumer Services

    Access
     services                 63,091               54,713            269,533            231,448

    Value-
     added
     services                 12,086               11,396            48,177            44,931
                              ------               ------            ------            ------

    Total
     revenues                 75,177               66,109            317,710            276,379
                              ------               ------            -------            -------

    Total
     Revenues                         $328,726            $301,839         $1,335,135       $1,240,606
                                        ======              ======           ========         ========


                                               EARTHLINK HOLDINGS CORP.

                                             Supplemental Financial Data


                                                                   December           June            September           December
                                                                      31,              30,                30,                31,

                                                                       2012            2013               2013               2013
                                                                       ----            ----               ----               ----

    Balance Sheet Data                                                               (in thousands)

    Cash and marketable securities                                          $204,472         $141,936            $115,903          $116,636

    Debt (7)                                                        592,300           600,000             600,000             600,000

    Stockholders' equity                                            718,804           465,338             444,074             162,218


    Employee Data

    Number of employees at end of period (8)                          3,203           2,999              3,053              3,035


                                            EARTHLINK HOLDINGS CORP.

                                       Consumer Services Operating Metrics


                                           December 31,                    June 30,       September 30,            December 31,

                                                   2012                      2013            2013                2013
                                                   ----                      ----            ----                ----

    Consumer Subscriber Detail

    Narrowband access subscribers               626,000                    580,000         561,000             544,000

    Broadband access subscribers                513,000                    475,000         452,000             432,000
                                                -------                    -------         -------             -------

    Total consumer subscribers                1,139,000                    1,055,000       1,013,000             976,000
                                              =========                     =========       =========             =======



                                                                    Three Months Ended
                                                                    ------------------

                                           December 31,                    June 30,       September 30,            December 31,

                                                   2012                      2013            2013                2013
                                                   ----                      ----            ----                ----

    Consumer Subscriber Activity

    Subscribers at beginning of period        1,185,000                    1,095,000       1,055,000            1,013,000

    Gross organic subscriber additions           32,000                    27,000          27,000              21,000

    Churn                                       (78,000)                   (67,000)        (69,000)            (58,000)


    Subscribers at end of period              1,139,000                    1,055,000       1,013,000             976,000
                                              =========                     =========       =========             =======


    Consumer Metrics

    Average consumer subscribers (9)          1,161,000                    1,075,000       1,034,000             994,000

    ARPU (10)                                                $21.57                $21.74               $21.91             $22.15

    Churn rate (11)                                 2.2%                      2.1%            2.2%                2.0%


            EARTHLINK HOLDINGS CORP.

      Footnotes to Consolidated Financial
                   Highlights


    1.      During the first quarter of
            2013, the Company recognized
            a $256.7 million non-cash
            impairment charge to goodwill
            related to its Business
            Services reporting unit, of
            which $255.6 million is
            included in continuing
            operations and $1.1 million
            is reflected in discontinued
            operations. The impairment
            was based on an analysis of a
            number of factors after a
            decline in the Company's
            market capitalization
            following the announcement of
            its fourth quarter 2012
            earnings and 2013 financial
            guidance. The primary factor
            contributing to the
            impairment was a change in
            the discount rate and market
            multiples as a result of the
            change in these market
            conditions, both key
            assumptions used in the
            determination of fair value.


    2.      Restructuring, acquisition and
            integration-related costs
            consisted of the following
            for the periods presented (in
            thousands):


                                                       Three Months Ended December 31,          Twelve Months Ended December 31,
                                                       -------------------------------          --------------------------------

                                                       2012                        2013             2012                          2013
                                                       ----                        ----             ----                          ----


    Integration-related costs                                      $3,508                $5,944                  $10,452               $21,622

    Severance, retention and other employee costs       956                       5,126            6,067                        14,844

    Transaction-related costs                            33                          36            1,399                         1,021

    Facility-related costs                              (12)                        456              479                         2,328

    Legacy plan restructuring costs                      23                          -             (153)                          215
                                                                                                   ----                           ---

    Restructuring, acquisition and integration-related             $4,508               $11,562                  $18,244               $40,030

       costs


            Restructuring, acquisition and
            integration-related costs consist of
            costs related to restructuring,
            acquisition and integration-related
            activities. Such costs include: 1)
            integration-related costs, such as
            system conversion, rebranding costs
            and integration-related consulting
            and employee costs; 2) severance,
            retention and other employee
            termination costs associated with
            acquisition and integration activities
            and with certain voluntary employee
            separations; 3) transaction-related
            costs, which are direct costs incurred
            to effect a business combination, such
            as advisory, legal, accounting,
            valuation and other professional fees;
            and 4) facility-related costs, such
            as lease termination and asset
            impairments. The Company expects to
            incur restructuring, acquisition and
            integration-related costs of
            approximately $7 million in the first
            quarter of 2014 and $17 million for
            the full year 2014. The Company
            expects these costs to generally
            decline throughout the year.


    3.      The income tax provision for the three
            and twelve months ended December 31,
            2013, includes a $266.3 million non-
            cash charge to record a valuation
            allowance against the Company's
            deferred tax assets. During the fourth
            quarter of 2013, the Company
            determined it will not be able to
            fully realize its deferred tax assets
            in the future.


    4.      The operating results of the Company's
            telecom systems business acquired as
            part of ITC^DeltaCom have been
            separately presented as discontinued
            operations for all periods presented.
            On August 2, 2013, the Company sold
            its ITC^DeltaCom telecom systems
            business. The Company has no
            significant continuing involvement in
            the operations or significant
            continuing direct cash flows. The
            telecom systems results of operations
            were previously included in the
            Company's Business Services segment.


    5.      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 intangible assets,
            restructuring, acquisition and
            integration-related costs, and loss
            from discontinued operations, net of
            tax.  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 intangible assets,
            restructuring, acquisition and
            integration-related costs, and loss
            from discontinued operations, net of
            tax, less cash used for purchases of
            property and equipment. Net Loss
            Excluding Valuation Allowance is
            defined as net loss excluding the non-
            cash charge to record a valuation
            allowance against deferred tax assets.


            Adjusted EBITDA, Unlevered Free Cash
            Flow and Net Loss Excluding Valuation
            Allowance are non-GAAP measures and
            are not determined in accordance with
            U.S. generally accepted accounting
            principles. These non-GAAP financial
            measures are commonly used in the
            industry and are presented because
            management believes they provide
            relevant and useful information to
            investors. Management uses these non-
            GAAP financial measures to evaluate
            the performance of its business and
            determine bonuses. Management believes
            that excluding the effects of certain
            non-cash and non-operating items
            enables investors to better understand
            and analyze the current period's
            results and provides a better measure
            of comparability. There are
            limitations to using these non-GAAP
            financial measures. Adjusted EBITDA,
            Unlevered Free Cash Flow and Net Loss
            Excluding Valuation Allowance are not
            indicative of cash provided or used by
            operating activities and may differ
            from comparable information provided
            by other companies.  Adjusted EBITDA,
            Unlevered Free Cash Flow and Net Loss
            Excluding Valuation Allowance should
            not be considered in isolation, as an
            alternative to, or more meaningful
            than measures of financial performance
            determined in accordance with U.S.
            GAAP.


    6.      The Company reports segment information
            along the same lines that its chief
            executive officer reviews its
            operating results in assessing
            performance and allocating resources.
            The Company operates two reportable
            segments, Business Services and
            Consumer Services. The Company's
            Business Services segment provides a
            broad range of data, voice and IT
            services to retail and wholesale
            business customers. The Company's
            Consumer Services segment provides
            nationwide Internet access and related
            value-added services to residential
            customers.


            The Company presents its Business
            Services revenue in the following
            three categories: (1) retail services,
            which includes data, voice and IT
            services provided to business
            customers; (2) wholesale services,
            which includes the sale of
            transmission capacity to other
            telecommunications carriers and
            businesses; and (3) other services,
            which primarily consists of web
            hosting. The Company's IT services,
            which are included within its retail
            services, include data centers,
            virtualization, security,
            applications, premises-based
            solutions, managed solutions and
            support services. The Company presents
            its Consumer Services revenue in the
            following two categories: (1) access
            services, which includes narrowband
            and broadband Internet access
            services; and (2) value-added
            services, which includes revenues from
            ancillary services sold as add-on
            features to EarthLink's Internet
            access services, such as security
            products, premium email only, home
            networking and email storage; search
            revenues; and advertising revenues.


            EarthLink evaluates performance of its
            operating segments based on segment
            income from operations. Segment income
            from operations includes revenues from
            external customers, related cost of
            revenues and operating expenses
            directly attributable to the segment,
            which include expenses over which
            segment managers have direct
            discretionary control, such as
            advertising and marketing programs,
            customer support expenses, site
            operations expenses, product
            development expenses, certain
            technology and facilities expenses,
            billing operation and provisions for
            doubtful accounts. Segment income from
            operations excludes other income and
            expense items and certain expenses
            that segment managers do not have
            discretionary control over. Costs
            excluded from segment income from
            operations include various corporate
            expenses (consisting of certain costs
            such as corporate management, human
            resources, finance and legal),
            depreciation and amortization, stock-
            based compensation expense, impairment
            of goodwill and intangible assets and
            restructuring, acquisition and
            integration-related costs, as they
            are not evaluated in the measurement
            of segment performance.


    7.      Debt represents the principal amount of
            EarthLink's Senior Notes, EarthLink's
            Senior Secured Notes and
            ITC^DeltaCom's Senior Secured Notes.
            Below is a summary of the carrying
            amount of EarthLink's debt (in
            thousands):


                                                   December 31,           June
                                                                           30,             September 30,          December 31,

                                                           2012            2013                  2013                2013

     ITC^DeltaCom Senior Secured Notes - Principal               $292,300     $          -          $           -       $             -

     ITC^DeltaCom Senior Secured Notes - Premium         15,694                -                      -                    -

     EarthLink Senior Notes - Principal                 300,000           300,000               300,000             300,000

     EarthLink Senior Notes - Discount                   (8,818)          (8,302)               (8,035)             (7,762)

     EarthLink Senior Secured Notes                           -           300,000               300,000             300,000
                                                            ---           -------               -------             -------

     Carrying amount of debt                                     $599,176         $591,698               $591,965              $592,238
                                                                 ========           ======               ========              ========


    8.        Represents full-time
              equivalents.


    9.        Average subscribers for
              the three month periods
              is calculated by
              averaging the ending
              monthly subscribers or
              accounts for the four
              months preceding and
              including the end of the
              quarterly period.


    10.       ARPU represents the
              average monthly revenue
              per user (subscriber).
              ARPU is computed by
              dividing average monthly
              revenue for the period by
              the average number of
              subscribers for the
              period. Average monthly
              revenue used to calculate
              ARPU includes recurring
              service revenue as well
              as nonrecurring revenues
              associated with equipment
              and other one-time
              charges associated with
              initiating or
              discontinuing services.


    11.       Churn rate is used to
              measure the rate at which
              subscribers discontinue
              service on a voluntary or
              involuntary basis.  Churn
              rate is computed by
              dividing the average
              monthly number of
              subscribers that
              discontinued service
              during the period by the
              average subscribers for
              the period.

SOURCE EarthLink, Inc.