Tuesday, February 21, 2006

EarthLink Plans Strategic Transformation in 2006, Updates Revenue Guidance

EarthLink believes its municipal Wi-Fi broadband, voice and HELIO initiatives represent significant growth opportunities, but they may require significant investment over several years. The company is issuing new financial guidance to reflect its current expectations on the investments needed for initial product development and infrastructure, as well as additional sales and marketing expenditures needed to generate subscribers and recurring revenues.

EarthLink expects its future operating models for these new initiatives to be similar to the ISP operating model on which the company has based its current operations.

In the early stages of these products' life cycles, investments in sales and marketing expenditures are expected to exceed the operating profits derived from the service offerings. Once the company adds a sufficient number of new subscribers, operating profits are expected to exceed the incremental sales and marketing expenditures needed to acquire additional customers. At that point, EarthLink expects these new services to generate operating profits.

"We expect 2006 to be a transformational year for EarthLink," said Garry Betty, EarthLink's chief executive officer. "The cash generated from our traditional Internet access business is helping fund our expanding product portfolio of voice, data and wireless services for residential and business customers.

"Over the next three years, we plan to generate meaningful growth as we become a total communications company. We believe our current and proposed investments in municipal Wi-Fi broadband, voice and our wireless joint- venture, HELIO, will give us a unique advantage in the marketplace."

During 2006, EarthLink expects to begin marketing its DSL and Home Phone Service bundles and municipal Wi-Fi services over a larger coverage area, but it expects these products will have a limited impact on subscriber levels until the fourth quarter of 2006. As in prior years, EarthLink expects subscriber decreases in the seasonally weaker second and third quarters and subscriber growth again in the fourth quarter of 2006. For the full year 2006, EarthLink expects its paying subscribers to be approximately level with the 5.3 million subscribers it reported at the end of 2005.

EarthLink expects HELIO to launch its wireless service offering in the first half of 2006. HELIO's spending is expected to increase significantly once it begins to market these services. While HELIO'S loss for the first quarter of 2006 is not expected to increase significantly compared to the fourth quarter of 2005, if HELIO is successful in generating subscriber growth for the full year 2006, HELIO's sales and marketing spending could increase which would result in significant net losses for HELIO.

Updated financial guidance is available on the EarthLink website.


  • HELIO is a $440 million joint venture between EarthLink and SK Telecom. HELIO plans to leverage R&D from SK Telecom to create a constant pipeline of new, proven service platforms, systems and applications. HELIO will use existing U.S. EVDO networks under its own brand to deliver data-rich content, such as music, video and multi-player gaming. HELIO will also feature cutting-edge mobile devices built for 3G.

  • Earlier this month, EarthLink announced separate partnerships with EchoStar Communications and DIRECTV to offer satellite TV service.

  • In January 2006, EarthLink and BellSouth reached a commercial agreement through the end of 2008 under which EarthLink service is available via DSL to customers in BellSouth's coverage area.

  • Also in January 2006, EarthLink named Motorola as its key partner to provide wireless equipment, design, installation and system integration for the initial five major cities where EarthLink will deploy municipal Wi-Fi Internet access networks. Motorola will provide its MOTOwi4 portfolio of products, including its Canopy high-speed backhaul and Wi-Fi mesh network equipment supplied to Motorola by Tropos Networks.

  • In December 2005, EarthLink agreed to acquire New Edge Networks, a privately-held single-source national provider of private Virtual Private Networks (VPNs) and secure multi-site managed data networks and dedicated access for businesses and communications carriers. New Edge Networks integrates a wide variety of last-mile broadband access services available through multiple carriers, technologies, and geographic region. It owns a nationwide multi-services network with more than 850 carrier-class switches and Internet routers. New Edge Networks' core and extended DSL coverage spans about 12,800 telephone company central office locations that are equipped for DSL service across the U.S.

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