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EarthLink Reports Second Quarter 2014 Results

Companies mentioned in this article: EarthLink Holdings Corp.

ATLANTA, Aug. 4, 2014 /PRNewswire/ -- EarthLink Holdings Corp. (NASDAQ: ELNK) today announced financial results for its second quarter of 2014.

"I'm proud of our strong financial results we delivered this quarter," said EarthLink Chief Executive Officer and President Joseph F. Eazor. "We are intensely focused on improving our operations and cash flow generation. Our results this quarter reflect the team's good progress so far. We are still early in this process and we expect to continue to make additional run rate improvements."



    Second Quarter 2014 Financial Summary


                                  Figures in US $ millions,                                                                                                                    First            Second

                                      except per share                                 Second Quarter                                                      Quarter            Quarter
                                                                                       --------------

                                                                                    2013                               2014                        Change      2014                 2014           Change
                                                                                    ----                               ----                        ------      ----                 ----           ------

                 Revenues

                 Business Services                                                          $243.3                                          $234.2           (3.7)%                               $234.0                $234.2           0.1%

                 Consumer Services                                                  70.1                               63.1                        (10.0)%              63.3                         63.1       (0.3)%

                 Total Revenue                                                     313.4                              297.4                         (5.1)%             297.3                        297.4                   -  %


                 Gross Margin                                                      160.5                              153.2                         (4.5)%             151.4                        153.2         1.2%


                 Operating Expenses                                                105.0                              104.6                         (0.4)%             106.5                        104.6       (1.8)%


                 Net Loss                                                         (11.2)                            (21.8)                         94.6%            (26.5)                      (21.8)     (17.7)%

                 Net Loss per share                                                         (0.11)                                         (0.21)           90.9%                        (0.26)             (0.21)               (19.2)%


                 Adjusted Net Loss (1) (2)                                        (11.2)                            (16.4)                         46.4%            (21.1)                      (16.4)     (22.3)%

                 Adjusted Net Loss per share (1) (2)                                        (0.11)                                         (0.16)           45.5%                        (0.21)             (0.16)               (23.8)%


                 Adjusted EBITDA (2)                                                59.5                               50.9                        (14.5)%              49.9                         50.9         2.0%


                 Capital Expenditures                                               34.4                               26.0                        (24.4)%              23.4                         26.0        11.1%


                 Cash and Marketable Securities                                    141.9                               98.5                        (30.6)%             108.5                         98.5       (9.2)%


                 Net Cash Provided by Operating Activities                          11.7                               18.0                          53.8%              21.3                         18.0      (15.5)%


                 Unlevered Free Cash Flow (2)                                       25.1                               24.9                         (0.8)%              26.5                         24.9       (6.0)%
                 ---------------------------                                        ----                               ----                          -----               ----                         ----        -----


                  (1) Q1 2014 Adjusted Net Loss excludes a one-time fixed asset impairment of $5.3 million and Q2 2014 Adjusted Net Loss excludes
                  a one-time fixed asset impairment of $5.4 million.

                  (2) Adjusted Net Loss, Adjusted Net Loss per Share, Adjusted EBITDA and Unlevered Cash Flow are non-GAAP measures, see
                  definitions in "Non-GAAP Measures" below.

Revenue

    --  EarthLink's total revenue for the second quarter of 2014 was $297.4
        million, a decline of 5.1% from the prior year quarter. The revenue
        trajectory continued to show improvement versus the 6.1% year-over-year
        decline the company reported in the first quarter of 2014.
    --  Business Services revenue declined 3.7% from the second quarter of 2013,
        an improvement versus the 4.3% year-over-year decline reported in the
        first quarter of 2014. The company's sales teams continued to make
        progress extending the terms of contracts with existing customers.
    --  The Consumer Services revenue profile was aided by targeted price
        actions during the quarter. Consumer Services churn in the second
        quarter is commensurate with an increase in ARPU. We expect consumer
        churn to continue to moderate in future periods.

Net Loss and Adjusted EBITDA

    --  Net loss was $(21.8) million in the second quarter. This amount includes
        one-time non-cash charges of $5.4 million to record impairment of
        certain fixed assets. This compares to a net loss of $(11.2) million in
        the second quarter of 2013 and $(26.5) million in the first quarter of
        2014.
    --  Adjusted EBITDA (a non-GAAP measure, see definition in "Non-GAAP
        Measures" below) was $50.9 million in the second quarter, a 2% increase
        from the first quarter of 2014, and a 15% decrease from the second
        quarter of 2013.

Balance Sheet and Cash Flow

    --  Net cash provided by operating activities was $18.0 million. EarthLink
        ended the second quarter with $98.5 million in cash. This compared to
        net cash provided by operating activities of $11.7 million in the second
        quarter of 2013 and $21.3 million in the first quarter of 2014.
        EarthLink made interest payments of $24.5 million during the second
        quarter and repurchased 0.7 million shares of common stock for $2.2
        million.
    --  EarthLink generated Unlevered Free Cash Flow (a non-GAAP measure, see
        definition in "Non-GAAP Measures" below) of $24.9 million during the
        second quarter of 2014.  This compared to Unlevered Free Cash Flow of
        $25.1 million in the second quarter of 2013 and $26.5 million in the
        first quarter of 2014.

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, and gain (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 long-lived assets, restructuring, acquisition and integration-related costs, and gain (loss) from discontinued operations, net of tax, less cash used for purchases of property and equipment. Adjusted Net Loss is defined as net loss excluding the non-cash charge to record valuation allowance against deferred tax assets, the non-cash impairment of goodwill and estimated tax impact and the non-cash impairment of long-lived assets.

Adjusted EBITDA, Unlevered Free Cash Flow and Adjusted Net Loss 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 Second Quarter 2014 Conference Call will be held on Tuesday, August 5, 2014 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 Bradley A. Ferguson.

The dial-in number is: (866) 887-3882.
Participants should reference the conference ID number 72905401 or "EarthLink Second Quarter 2014 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 August 5 through midnight on September 5, 2014. Dial toll-free: (855) 859-2056. The replay confirmation code is 72905401. The Webcast will be archived on the company's website at: http://ir.earthlink.net/events.cfm.

About EarthLink
Founded in 1994, EarthLink Holdings Corp. (NASDAQ: ELNK) is a leading managed network and cloud services 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 @EarthLink.

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) we may not be able to execute our strategy to be a leading managed network services provider, which could adversely affect our results of operations and cash flows; (2) 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) our failure to achieve operating efficiencies will adversely affect our results of operations; (4) as a result of our continuing review of our business, we may determine to undertake further restructuring plans that would require additional charges, including incurring facility exit and restructuring charges; (5) we may be unsuccessful integrating acquisitions into our business, which could result in operating difficulties, losses and other adverse consequences; (6) 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) unfavorable general economic conditions could harm our business; (8) we may be unable to successfully identify, manage and assimilate future acquisitions, which could adversely affect our results of operations; (9) we face significant competition in the communications and IT services industry that could reduce our profitability; (10) failure to retain existing customers could adversely affect our results of operations and cash flows; (11) 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) 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) 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) 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) 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) we obtain a majority of our network equipment and software from a limited number of third-party suppliers; (18) 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) 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) we face significant competition in the Internet access industry that could reduce our profitability; (22) the continued decline of our consumer access subscribers will adversely affect our results of operations; (23) potential regulation of Internet service providers could adversely affect our operations; (24) cyber security breaches could harm our business; (25) privacy concerns relating to our business could damage our reputation and deter current and potential users from using our services; (26) 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) our business depends on effective business support systems and processes; (28) 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) 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) we may not be able to protect our intellectual property; (31) 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) government regulations could adversely affect our business or force us to change our business practices; (33) our business may suffer if third parties are unable to provide services or terminate their relationships with us; (34) 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) 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) our indebtedness could adversely affect our financial health and limit our ability to react to changes in our industry; (37) 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) our debt agreements include restrictive covenants, and failure to comply with these covenants could trigger acceleration of payment of outstanding indebtedness or limit our ability to draw on our revolving credit facility; (39) we may reduce, or cease payment of, quarterly cash dividends; (40) our stock price may be volatile; (41) 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) 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, 2013.


                                                                                 
    EARTHLINK HOLDINGS CORP.
                                                                 Unaudited Condensed Consolidated Statements Of Operations
                                                                           (in thousands, except per share data)


                                                   Three Months Ended                                            Six Months Ended

                                                        June 30,                                                     June 30,
                                                        --------                                                     --------

                                             2013                   2014                      2013                     2014
                                             ----                   ----                      ----                     ----


    Revenues                                       $313,401                                          $297,358                         $630,189      $594,678

    Operating costs and expenses:

    Cost of revenues
     (exclusive of
     depreciation and
     amortization shown
     separately below)                    152,938                            144,188                               305,804              290,064

    Selling, general and
     administrative
     (exclusive of
     depreciation and
     amortization shown
     separately below)                    104,980                            104,598                               211,558              211,082

    Depreciation and
     amortization                          44,270                             45,615                                87,625               92,470

    Impairment of goodwill
     and long-lived assets
     (1)                                       -                             5,437                               255,599               10,771

    Restructuring,
     acquisition and
     integration-related
     costs (2)                              7,278                              4,908                                18,540                9,885
                                            -----                              -----                                ------                -----

    Total operating costs and
     expenses                             309,466                            304,746                               879,126              614,272

    Income (loss) from
     operations                             3,935                            (7,388)                            (248,937)             (19,594)

    Interest expense and
     other, net                          (18,173)                          (14,082)                             (32,729)            (28,038)
                                          -------                            -------                               -------              -------

    Loss from continuing
     operations before income
     taxes                               (14,238)                          (21,470)                            (281,666)             (47,632)

    Income tax benefit
     (provision)                            3,329                              (374)                               35,447                (737)
                                            -----                               ----                                ------                 ----

    Loss from continuing
     operations                          (10,909)                          (21,844)                            (246,219)             (48,369)

    Gain (loss) from
     discontinued operations,
     net of tax (3)                         (292)                                 6                               (1,397)                  61
                                             ----                                ---                                ------                  ---

    Net loss                                      $(11,201)                                        $(21,838)                      $(247,616)    $(48,308)
                                                   ========                                          ========                        =========      ========


    Basic and diluted net loss per share

    Continuing operations                           $(0.11)                                          $(0.21)                         $(2.39)      $(0.47)

    Discontinued operations                     -                                 -                               (0.01)                   -

    Basic and diluted net
     loss per share                                 $(0.11)                                          $(0.21)                         $(2.40)      $(0.47)
                                                     ======                                            ======                           ======        ======

    Basic and diluted
     weighted average common
     shares outstanding                   103,011                            102,354                               102,963              102,335
                                          =======                            =======                               =======              =======


    Dividends declared per
     share                                            $0.05                                             $0.05                            $0.10         $0.10
                                                      =====                                             =====                            =====         =====


                                                
    EARTHLINK HOLDINGS CORP.
                                     Unaudited Condensed Consolidated Balance Sheets
                                          (in thousands, except per share data)


                                                    December 31,                 June 30,
                                                            2013                       2014
                                                            ----                       ----

                                                          ASSETS

    Current assets:

    Cash and cash equivalents                                         $116,636                            $98,452

    Accounts receivable, net of
     allowance of $8,615 and $7,746
     as of December 31, 2013 and
     June 30, 2014, respectively                         100,792                                 104,947

    Prepaid expenses                                      15,945                                  17,345

    Deferred income taxes, net                               549                                     402

    Other current assets                                  13,930                                  15,315
                                                          ------                                  ------

    Total current assets                                 247,852                                 236,461

    Property and equipment, net                          438,321                                 415,707

    Goodwill                                             139,215                                 137,725

    Other intangible assets, net                         155,428                                 123,500

    Other long-term assets                                26,502                                  24,448
                                                          ------                                  ------

    Total assets                                                    $1,007,318                           $937,841
                                                                    ==========                           ========

                                         LIABILITIES AND STOCKHOLDERS' EQUITY

    Current liabilities:

    Accounts payable                                                   $33,440                            $26,872

    Accrued payroll and related
     expenses                                             35,041                                  28,488

    Other accrued liabilities                             88,225                                  94,996

    Deferred revenue                                      49,689                                  46,275

    Current portion of long-term
     debt and capital lease
     obligations                                           1,489                                   1,473
                                                           -----                                   -----

    Total current liabilities                            207,884                                 198,104

    Long-term debt and capital
     lease obligations                                   606,442                                 606,536

    Long-term deferred income
     taxes, net                                            2,221                                   3,298

    Other long-term liabilities                           28,553                                  24,959
                                                          ------                                  ------

    Total liabilities                                    845,100                                 832,897


    Stockholders' equity:

    Preferred stock, $0.01 par
     value, 100,000 shares
     authorized, 0 shares issued and
     outstanding as of December 31,
     2013 and June 30, 2014                                    -                                      -

    Common stock, $0.01 par value,
     300,000 shares authorized,
     197,491 and 198,527 shares
     issued as of December 31, 2013
     and June 30, 2014,
     respectively, and 101,876 and
     102,248 shares outstanding as
     of December 31, 2013 and June
     30, 2014, respectively                                1,975                                   1,985

    Additional paid-in capital                         2,047,607                               2,040,880

    Accumulated deficit                              (1,144,975)                            (1,193,283)

    Treasury stock, at cost, 95,615
     shares and 96,279 shares as of
     December 31, 2013 and June 30,
     2014, respectively                                (742,389)                              (744,638)
                                                        --------

    Total stockholders' equity                           162,218                                 104,944
                                                         -------                                 -------

    Total liabilities and
     stockholders' equity                                           $1,007,318                           $937,841
                                                                    ==========                           ========


                                               
    EARTHLINK HOLDINGS CORP.
                                   Reconciliation of Net Loss to Adjusted EBITDA (4)
                                                    (in thousands)


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

                         June 30,               March 31,                June 30,

                              2013                    2014                      2014
                              ----                    ----                      ----


    Net loss                        $(11,201)                                        $(26,470)         $(21,838)

    Interest expense and
     other, net             18,173                              13,956                          14,082

    Income tax provision
     (benefit)             (3,329)                                363                             374

    Depreciation and
     amortization           44,270                              46,855                          45,615

    Stock-based
     compensation
     expense                 4,010                               4,943                           2,335

    Impairment of
     goodwill and long-
     lived assets (1)            -                              5,334                           5,437

    Restructuring,
     acquisition and
     integration-
     related costs (2)       7,278                               4,977                           4,908

    (Gain) loss from
     discontinued
     operations, net of
     tax (3)                   292                                (55)                            (6)
                               ---                                 ---                             ---

    Adjusted EBITDA (4)               $59,493                                           $49,903            $50,907
                                      =======                                           =======            =======


                                             
    EARTHLINK HOLDINGS CORP.
                                Reconciliation of Net Loss to Adjusted Net Loss (4)
                                       (in thousands, except per share data)


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

                      June 30,               March 31,                June 30,

                           2013                    2014                      2014
                           ----                    ----                      ----


    Net loss                     $(11,201)                                        $(26,470)           $(21,838)

    Impairment of
     goodwill and
     long-lived
     assets (1)               -                              5,334                            5,437

    Adjusted Net Loss
     (4)                        $(11,201)                                        $(21,136)           $(16,401)
                                  ========                                          ========             ========


    Basic and diluted
     weighted average
     common shares
     outstanding        103,011                             102,312                          102,354

    Adjusted Net Loss
     per Share                     $(0.11)                                          $(0.21)             $(0.16)


                                                
    EARTHLINK HOLDINGS CORP.
                               Reconciliation of Net Loss to Unlevered Free Cash Flow (4)
                                                     (in thousands)


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

                         June 30,                March 31,                June 30,

                              2013                     2014                      2014
                              ----                     ----                      ----


    Net loss                         $(11,201)                                        $(26,470)             $(21,838)

    Interest expense and
     other, net             18,173                               13,956                              14,082

    Income tax provision
     (benefit)             (3,329)                                 363                                 374

    Depreciation and
     amortization           44,270                               46,855                              45,615

    Stock-based
     compensation
     expense                 4,010                                4,943                               2,335

    Impairment of
     goodwill and long-
     lived assets (1)            -                               5,334                               5,437

    Restructuring,
     acquisition and
     integration-
     related costs (2)       7,278                                4,977                               4,908

    (Gain) loss from
     discontinued
     operations, net of
     tax (3)                   292                                 (55)                                (6)

    Purchases of
     property and
     equipment            (34,401)                            (23,384)                           (25,965)
                           -------                              -------                             -------

    Unlevered Free Cash
     Flow (4)                          $25,092                                           $26,519                $24,942
                                       =======                                           =======                =======


                                                                                
    EARTHLINK HOLDINGS CORP.
                                                Reconciliation of Net Cash Flows from Operating Activities to Unlevered Free Cash Flow (4)
                                                                                      (in thousands)


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

                                                                        June 30,                March 31,                June 30,

                                                                             2013                     2014                      2014
                                                                             ----                     ----                      ----


    Net cash provided by operating activities                                         $11,696                                           $21,306                $17,969

    Income tax provision (benefit)                                        (3,329)                                 363                                 374

    Non-cash income taxes                                                   3,356                                (210)                              (242)

    Interest expense and other, net                                        18,173                               13,956                              14,082

    Amortization of debt discount, premium and
     issuance costs                                                         (462)                             (1,016)                            (1,022)

    Restructuring, acquisition and integration-
     related costs (2)                                                      7,278                                4,977                               4,908

    Changes in operating assets and liabilities                            24,566                               10,437                              14,732

    Purchases of property and equipment                                  (34,401)                            (23,384)                           (25,965)

    Other, net                                                            (1,785)                                  90                                 106
                                                                           ------                                  ---                                 ---

    Unlevered Free Cash Flow (4)                                                      $25,092                                           $26,519                $24,942
                                                                                      =======                                           =======                =======


    Net cash used in investing activities                                           $(15,471)                                        $(23,384)             $(25,379)
                                                                                     ========                                          ========               ========

    Net cash used in financing activities                                           $(28,473)                                         $(6,045)              $(2,651)
                                                                                     ========                                           =======                =======


                                                                   
    EARTHLINK HOLDINGS CORP.
                                                        Supplemental Schedule of Segment Information (5)
                                                                         (in thousands)


                                     Three Months Ended                                            Six Months Ended

                                          June 30,                                                     June 30,
                                          --------                                                     --------

                                2013                  2014                      2013                     2014
                                ----                  ----                      ----                     ----


    Business Services

    Revenues                         $243,308                                          $234,216                        $487,871     $468,219

    Cost of revenues
     (excluding depreciation
     and amortization)       129,598                           121,555                               257,517             244,819
                             -------                           -------                               -------             -------

    Gross margin             113,710                           112,661                               230,354             223,400

    Direct segment operating
     expenses                 83,282                            86,834                               167,794             172,445
                              ------                            ------                               -------             -------

    Segment operating income          $30,428                                           $25,827                         $62,560      $50,955
                                      =======                                           =======                         =======      =======

    Consumer Services

    Revenues                          $70,093                                           $63,142                        $142,318     $126,459

    Cost of revenues
     (excluding depreciation
     and amortization)        23,340                            22,633                                48,287              45,245
                              ------                            ------                                ------              ------

    Gross margin              46,753                            40,509                                94,031              81,214

    Direct segment operating
     expenses                 13,380                            11,401                                25,879              22,961
                              ------                            ------                                ------              ------

    Segment operating income          $33,373                                           $29,108                         $68,152      $58,253
                                      =======                                           =======                         =======      =======

    Consolidated

    Revenues                         $313,401                                          $297,358                        $630,189     $594,678

    Cost of revenues         152,938                           144,188                               305,804             290,064
                             -------                           -------                               -------             -------

    Gross margin             160,463                           153,170                               324,385             304,614

    Direct segment operating
     expenses                 96,662                            98,235                               193,673             195,406
                              ------                            ------                               -------             -------

    Segment operating income  63,801                            54,935                               130,712             109,208

    Depreciation and
     amortization             44,270                            45,615                                87,625              92,470

    Impairment of goodwill
     and long-lived assets
     (1)                          -                            5,437                               255,599              10,771

    Restructuring,
     acquisition and
     integration-related
     costs (2)                 7,278                             4,908                                18,540               9,885

    Corporate operating
     expenses                  8,318                             6,363                                17,885              15,676
                               -----                             -----                                ------              ------

    Income (loss) from
     operations                        $3,935                                          $(7,388)                     $(248,937)   $(19,594)
                                       ======                                           =======                       =========     ========


                                                            EARTHLINK HOLDINGS CORP
                                                    Supplemental Schedule of Revenue Detail
                                                                 (in thousands)


                                 Three Months Ended                                      Six Months Ended

                                      June 30,                                               June 30,
                                      --------                                               --------

                            2013                          2014                     2013                 2014
                            ----                          ----                     ----                 ----


    Business Services

    Retail services                $199,431                                     $191,386                     $400,512  $383,906

    Wholesale services    39,084                          37,970                             77,942             74,412

    Other services         4,793                           4,860                              9,417              9,901
                           -----                           -----                              -----              -----

    Total revenues       243,308                         234,216                            487,871            468,219

    Consumer Services

    Access services       58,996                          52,514                            119,736            105,149

    Value-added services  11,097                          10,628                             22,582             21,310
                          ------                          ------                             ------             ------

    Total revenues        70,093                          63,142                            142,318            126,459
                          ------                          ------                            -------            -------

    Total Revenues                 $313,401                                     $297,358                     $630,189  $594,678
                                   ========                                     ========                     ========  ========


                                          
    EARTHLINK HOLDINGS CORP.
                                         Supplemental Financial Data


                     June 30,               March 31,              June 30,

                          2013                     2014                   2014
                          ----                     ----                   ----

    Employee Data

    Number of
     employees at
     end of period
     (6)                2,999                              2,994                       2,981




                                     EARTHLINK HOLDINGS CORP.
                               Consumer Services Operating Metrics


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

                     June 30,               March 31,              June 30,

                          2013                     2014                   2014
                          ----                     ----                   ----


    Average
     narrowband
     subscribers (7)   591,000                            536,000                     518,000

    Average
     broadband
     subscribers (7)   484,000                            421,000                     397,000


    Average consumer
     subscribers (7) 1,075,000                            957,000                     915,000
                     =========                            =======                     =======


    ARPU (8)                      $21.74                                       $22.06         $22.99

    Churn rate (9)        2.1%                              2.1%                       2.3%


                 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.


                  During the six months ended June 30,
                   2014, the Company recorded $10.8
                   million for impairment of property
                   and equipment, which included $5.3
                   million recorded during the three
                   months ended March 31, 2014 for
                   impairment of work in progress for
                   an information technology project
                   not expected to be used and $5.4
                   million recorded during the three
                   months ended June 30, 2014 for
                   impairment of work in progress and
                   software licenses not expected to
                   be used.


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


                              Three Months Ended June 30,         Six Months Ended June 30,
                              ---------------------------         -------------------------

                                  2013                 2014       2013                 2014
                                  ----                 ----       ----                 ----


    Integration-related costs    5,485                      2,762                   10,486     6,715

    Severance, retention and
     other employee costs        1,101                        958                    5,689     1,966

    Facility-related costs         267                      1,186                    1,835     1,202

    Transaction-related costs      210                          2                      315         2

    Legacy plan restructuring
     costs                         215                          -                     215         -
                                   ---                        ---                     ---       ---

    Restructuring,
     acquisition and
     integration-related
     costs                                $7,278                         $4,908             $18,540  $9,885
                                          ======                         ======             =======  ======

                  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) facility-related costs, such as lease
                   termination and asset impairments; and 4)
                   transaction-related costs, which are direct
                   costs incurred to effect a business
                   combination, such as advisory, legal,
                   accounting, valuation and other professional
                   fees.


    3.             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 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.


    4.             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, and gain (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 long-
                   lived assets, restructuring, acquisition and
                   integration-related costs, and gain (loss)
                   from discontinued operations, net of tax,
                   less cash used for purchases of property and
                   equipment. Adjusted Net Loss is defined as
                   net loss excluding the non-cash charge to
                   record a valuation allowance against
                   deferred tax assets, the non-cash
                   impairment of goodwill and estimated tax
                   impact and the non-cash impairment of long-
                   lived assets.


                  Adjusted EBITDA, Unlevered Free Cash Flow and
                   Adjusted Net Loss 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 Adjusted Net Loss 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 Adjusted Net Loss 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.


    5.             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.


    6.            Represents full-time equivalents.


    7.             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.


    8.             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.


    9.             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 Holdings Corp.