Earthlink (NASDAQ:ELNK) is a public provider of Internet Protocol(IP) infrastructure and services to medium-sized and large business, enterprise customers, and over 1.5 million residential customers in the United States. Earthlink main business is in providing Internet access and communication services. The company is composed of several business divisions that provide a full complement of voice, data, mobile and equipment services over a Synchronous Optical Network Transmission (SONET) fiber optic network in the Southeast, and Multiprotocol Label Switching (MPLS) based services nationwide. Earthlink provides a consumer segment that uses an Internet Service Provider connecting people to the power and possibilities of the Internet.
EarthLink Inc. provides a different types of communications services to individual and business customers. In their Customers Services segment they provide nationwide internet access and related services to individuals customers. These services include dial-up and high-speed internet access, add-on features to our internet access services, search and advertising. Their business segment provides integrated communications and related value-added services to business and communications carriers. They include data services, managed IP-based network services and broadband internet access. In addition they offer voice services via local exchanges, over long-distance as well as conference calling; also mobile data and voice services and web hosting. They provide consumers services mainly through third-party providers of telecommunications services and they provide business services primarily through a nationwide fiber optic based network utilizing MLPS (Multi-Protocol Label Switching) and they have a 14-state fiber optic network.csdf
Earthlink primary business strategy is to transition their business to a leading IP infrastructure and managed service provider. They also continue to focus on optimizing our Customer Services segment operations, maintaining their operational efficiency and pursuing potential strategic acquisitions. As of today the company has four main strategies:
EarthLink subsidiaries NEW EDGE NETWORKS, DELTACOM, STS TELECOM AND ONE COMMMUNICATIONS are working together to ensure that company has a state of the art IP infrastructure to compete for years to come. 
To the left we can see the capabilities of EarthLink prior to the acquisition of DeltaCom and One Communications, which have added a huge value to Earthlink capabilities and potential future growth in the industry.
The company operates two main segments:
This segment provides Internet access to customers nationwide and some other related services. EarthLink derives 74% of their revenue during the year from this part of the business. They expect this percentage to decrease as their Business Services Segment comprises a large part of their overall business and the market for consumer Internet access continues to mature.
This segment provides integrated communications services and other services to businesses, organizations and carriers. Most of these services include data services, managed IP-based network solutions, and broadband Internet access, voice services, mobile data and web hosting. Before the company's acquisition of ITC^DeltaCom, this segment consisted primarily of their New Edge Networks subsidiary to provide IP-based network solutions to business nationwide. Earthlink also provides internet access and web hosting services to small and mid-size business. After they completed the acquisition of ITC^DeltaCom their services have expanded to include voice services and be able to offer it over a broader part of the country. The company currrently owns a fiber network that can be used to provide new services to business. In 2010, approximately 26% of the revenue came from the Business Segment and they expect this percentage to grow after their ITC^DeltaCom acquisition as well as the pending acquisition of One Communications, and other potential future acquisitions.
The Company operates a fiber optic network that is located in the Southeast of the United States with 35 metro fiber rings, and over 16,000 route miles. Their core products include in the connectivity part include:
MPLS enables business to prioritize voice, video and data on a private network with up to six different types of services. MPLS trafic optimizes bandwith usage and provides better support for all business aplications, including latency in VOIP ad video. Since MPLS is more capable and less complex than previous systems used, business overall tend to gain more flexibility and reduce their network cost.. To the right we have a map displaying the MPLS structure of Earthlink.
Asynchronous Transfer Mode (ATM) is a switching technique for telecommunication networks.
Frame Relay is an efficient, wide are network (WAN) technology which combines high bandwidth service with reliability. This service offers EarthLink customers an scale circuit performance to meet individuals needs in a cost effective manner. This service is an efficient, dependable option for connecting a LAN or WAN to the net, building a corporate intranet or for customers that require high speed internet acces.
Is a 3G high speed wireless broadband standard. A significant advantage of this technology is that it uses the same broadcasting frequencies as CDMA networks; therefore decreasing significantly the cost of building and using a new network.
3G or 3rd generation mobile telecommunications, used by mobile phones and mobile telecommunications services.
In the business services segment they offer Data, Voice and Video services. In addition they have add value services, among them Security, Data and Voice CPE, Cloud Computing, ASP Web Hosting, Managed Services and Customer Interface Portal. They also offer Residential services like Broadband and Narrowbank Internet Access. On the Wholesale segment they offer Fiber Capacity and Services.
EarthLink had 1870 employees as of December 31, 2010, including 1069 operations and customer support personnel, 614 of them are part of the sales and marketing departments, and 187 are in the administrative department. None of the employees from the company is currently represented by a labor union and have on collective bargaining agreements. Human resources is an important part of Earthlink because the company future success depends in an effective transfer of knowledge and transitions between key employees, an if this is not accomplished successfully then this could derail the business strategy of the company as well as future and financial well-being. Therefore having such an efficient human resource department is a big part of Earthlink business success and it will part of any future success as well. Below there is a table with details about their key employees:
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To the right we have a comparables tables of EarthLink and its main competitors. EarthLink is the smaller company with a Market Cap of about 891.33M, compare to the giant AT&T with 182.89B. EarthLink has a cheap P/E ratio of 9.01 compare to 13.57 for T and 39.76 for VZ, and just a little bit than AOL ratio of 6.76.Regarding the PEG ratio Earthlink seems to be extremely expensive against all the competition, with a 7.85 ratio than is more than double that one of AT&T and almost six times the ratio of VZ; based on this ratio the ELNK seems to be very overvalued.
In the P/S ratio we see a similar pattern than in the PEG ratio, where ELNK has a much higher ratio than T, VZ and AOL making it look expesinve against the competition. The price to book ratio is in the low end of the ratio with 1.29 compare to 1.61 for AT&T and 2.8 for VZ. ELNK has a hight P/CF ratio of 4.96 only barely lower than the 5.03 from AT&T and much bigger than the 3.07 of VZ and 2.94 of AOL, making the company stock in theory not valued very well.
EarthLink EBITDA is 209.16M, much lower than the 38.95B from AT&T and even lower than the 705.30M of AOL. But considering that they are the smaller player by size this is not a surprise. ELNK has the highest gross margin among its peers and this is ideal because ELNK is managing its capital than the competition. The company's current ratio of 1.74 is fairly higher than that of AT&T(0.59) and Verizon(0.91), and a lower than AOL(2.20); which translate that ELNK should not have any problem meeting its current obligations.
EarthLink also has a fairly high quick ratio compare to AT&T and VZ, making the company in investors eyes very liquid, only a bit less liquid than AOL. The total asset turnover for ELNK is in-line with AT&T and VZ, but lower than AOL ratio making them less efficient. EarthLink has  an ROA of 8.53% almost as high as AT&T(8.68%) and much bigger than VZ(2.51%) and AOL(-23.74%). ELNK has also a good ROE of 10.67%, better than VZ(6.36%) and lower than AT&T(17.82%).The ROIC is pretty much in the same position than the ROE vs. the competitors.
The table to the left shows the history of EPS for ELNK since 2003, where we can noticed that they only 2 negative years, performing fairly well the rest of the time. Unfortunately ELNK seems to be decreasing its earning significantly since 2009 which was a great year for them, putting in doubt whether they will continue to improve.
The table below to the right is showing two things. The first row is showing internet market share, as of 2008, for EarthLink and these three other internet service providers. As seen in the table, Earthlink is at the lower end of the spectrum with only 3% of the market share, whereas AT&T, Verizon and AOL all hold solid market shares. EarthLink is a much smaller company than these other competitors, but the ISP industry is also Earthlink's niche market. AOL is in the same boat as Earthlink, as they rely heavily on the ISP business.
The other part of the table shows AT&T and Verizon's market share in the Wireless Carriers industry. Verizon is dominant in this market, with over 31% market share compared to 25% for AT&T. The main reason why AT&T and Verizon are such successful companies is because of their product differentiation. They do not rely on only one industry as they have many different segments to bring in revenue and pick up other segments slack if certain areas are struggling. By offering internet service, coupled with a wireless network as dominant as theirs is, they are able to remain a dominant force as a company.
Earthlink faces an extremely competitive industry in the Internet services access market. They compete with big online companies like AOL and Microsoft; also with communications companies and local exchange carrier that include AT&T and Verizon; cable companies like Comcast and Time Warner Cable, in addition to local and ISPs (Internet Service Providers). And they are also facing internet giants like Google as well as satellite and fixed wireless providers. The company is without doubt in an extremely competitive environment, which could pose a threat to the survival of the company. The company also faces strong competition in the VoIP services that they offer. These competitors include telecommunications and cable companies, ISPs, leading Internet companies and VoIP providers like Vonage. They see several main competitive factors that are key to their operations and future of the company as well. These are price, speed, features, coverage area and quality of service. Overtime EarthLink expects that companies like AT&T will continue to reduce their price for internet access and that will force them to reduce their pricing thus reducing significantly their profit margins.
EarthLink has two business segments. In the Consumer services, the company provides their services by narrowband and broadband access, VoIP and value-added services. In EarthLink Business and web hosting segments, the company provide data service that including managed IP-based network services and broadband Internet access services; voice services, including local exchange, long-distance and conference calling; mobile data and voice services; and web hosting.
EarthLink offers competitively priced local telephone services to its customers. One of the pricing strategy is reducing their price for contract renewals. Since the company is the provider of the services, they have the ability to offer a discount for their products or offer a free trail to their new potential customers.
The company is only located in the United States. EarthLink is a regional and local narrowband provider. The company has varies markets in the southern part of the U.S. The company operates IP-based networks in most of the southeast of the united east. They have office in Anniston and Huntsville, Alabama and in Raleigh, North Carolina.
The company offers sale incentives to its new customers, and potential new subscribers. These promotions include free moderns and other hardware and free internet access on a trial basis. The company also offers trail periods to their products as way to attract new customers. In 2008, EarthLink decrease their revenues and as a result the company increases their promotions and retention incentives trying to retain existing subscribers.
EarthLink focuses on combining their sales forces and service offerings. They also have expanded their services offering to make their products and services more attractive to business customers regardless of the location, promoting awareness of the new brand and integrating their acquisitions to achieve cost savings, operating synergies, and increasing of their revenue. This strength helped the company to sustain their competitive position in the market, expanding their customer numbers, offer their employees with a better working environment and also maximizing stockholder’s value. EarthLink is the third largest internet provider in the country, and as the result they have a very extensive network of IP services.
EarthLink has lot of competitors among the Internet services companies either directly or indirectly. These companies are AT&T, Verizon and AOL and some other cable companies. The competition over internet access services will continue to increase in the marketplace, and this will force a decrease in futures prices that EarthLink’s can charge for current services, possible resulting in a loss of customers base, and increasing operating costs for ELNK; thus these factors may limit the number of subscribers the company might be able to add. EarthLink has been experiencing some pricing pressure in their consumer broadband services segment, mainly from the the internet service provider AT&T. As its largest competitor, AT&T has continue reducing prices for retail internet access services to target the overall market, trying to increase their total market share. On the other hand, this reduction could prevent EarthLink from raising their service price and shrink the profit margin of the company. Both AT&T and Verizon have a lot more financial and technological resources than Earthlink and that makes it extremely difficult for EarthLink to compete with them. Their biggest competitor, AT&T obtained authority to create affiliates that would operate on a much less regulated basis and, therefore, could provide significant competition in addition to the local services historically offered by a much more regulated AT&T.
The states regulate the retail prices of internet carriers helps EarthLink to be a more competitive player in the industry, which is a good opportunity for EarthLink. The states regulations help subsidizes services which makes it possible for EarthLink to offer competitive services at lower prices than most of their competitors. EarthLink owns switch sites in Birmingham and Montgomery, Alabama and in Nashville, Tennessee. They leased spaces for their voice switch sites in cities in Florida, Georgia, Mississippi, North Carolina and South Carolina. EarthLink has their network mostly through southeastern United States, and if they were to expand their services to northeast and as well as west coast of the United states, this could result in an explosive growth possibility for the company. Also we think that EarthLink can not only expand nationally, but they should expand their business overseas in places like Canada, China and some other countries where they currently don't have operations .
If AT&T and Verizon continue to expand their market share, it will be a big threat for EarthLink. Also if internet providers start to have price wars that could end badly for EarthLink, given that they don't have the financial resources that AT&T an VZ can deploy, therefore affect their bottom-line and decrease their revenue to the point that it could put them out of business. A failure of EarthLink to continue innovating and trying to provide better services than its bigger competitors could impair significantly their future in the industry, since they don't have a big market share in the industry.
There are two main revenue segments for EarthLink, one the Consumer Services and the other Business Services. Consumers Services provides internet access services for nationwide and individual customers. Revenue are also earned from value-added services such as security products, email storage and internet call waiting. Business Services provides local or long-distance calling and data services. Revenues from services are recurring monthly charges like usage fees, services and installation fees.
In the column chart to the right we can see how the revenue of EarthLink Inc has been decreasing for a few years. In 2006 revenue was about $1,301,072(in thousands) and in 2010 the company revenue was only $622,212(in thousands). It had shrinked about half from 2006 levels. The company's revenues are expected to increase significantly from 2010 levels. Revenues sales are expected to increase over 1 billion for 2011 and 2012.
The company had operating cost and expenses for 2008, 2009, and 2010, which include restructuring and acquisition costs of $9.1 million, $5.6 million and $22.4 million. The decrease of revenue is due to a decrease in the consumer subscribers base. For 2009, there were approximately 2 million paying subscribers but it decreased to 1.6 million in 2010. The company is trying to reduce their sales and marketing efforts(cost reduction) and ELNK believes this will produce an acceptable rate of return for the company.
In the pie charts to the left we can see a break down of EarthLink revenues where almost 74% comes from the Consumers Services Segment, the main part of this segment is the Access and Service part that makes up almost 70% of the total revenue of the company and the rest 4% is obtain by Value Added services the company produces. The other 26% comes from the Business Services segment, which has become an important part of the future growth. From this segment most of the earnings come via the Access and Services part of the Business Segment and less than 0.50% comes from the value added services part. Earthlink expect that this business segment will continue to expand and relace some of the lost income over the last few years in the Customers Services segment, which might continue to increase given the strong competition in the industry.
Starting in 2010, Earthlink launched a new position strategy with hopes of improving their market position and taking their company to the next level. However, with implementing new business strategies, Earthlink is taking some big risks because they are going to enter into new markets they might not have prior experience in. Currently, their market position is not what they desire it to be, so their recent acquisitions of Deltacom and their pending acquisition of One Communications are hopefully going to benefit their company and their market position. Entering into new markets, combining sales forces and entering into areas where they have little to no existing market share poses many problems, and they may have difficulty implementing their new plan as a result. Recently, the revenues of Earthlink and their recent acquisitions have been declining, and their is no evidence suggesting this is going to change. With that said, if their new business strategy does not counteract these declining revenues, this could have a huge impact on their financial conditions, business, cash flows and market position.
Threat of New Entrants- Moderate to low. Internet service providers are in a capital intensive and high technology industry. There are numerous things start up companies would have to overcome in order to break through in this industry. With the high amount of competition, and the relatively few number of large corporations involved, there is a small chance that any new companies would be able to enter this market unless they merge with an already existing company.
Threat of Substitutes- High. Whenever you are in an industry that faces high competition through a small number of corporations, there is always gonna be a big threat of substitutes. If a customer doesn't like the service they are receiving with one company, they can easily switch to another provider without facing high switching costs. Granted, there are contracts involved with these ISPs, but that will not stop people from switching companies when there are better substitutes available.
Buyer Power- Moderate to high. Buyers have moderate to high bargaining power in the ISP industry. There are a few large corporations, as long as a handful of smaller companies all competing for your services. For this reason, buyers have the ability to pick and choose which company they want to buy from.
Supplier Power- Low. Suppliers in this industry do not have as much power as they do in others. They are not able to set the prices where they'd like to have them because of the numerous other options the buyers have. Whatever service the supplier is providing, buyers are likely to be able to find it elsewhere. For this reason, supplier power is low.
Competitive Rivalry- High. The internet does not belong to one person, it belongs to everyone who has access to it from all over the world. These large corporations who provide internet access to people must compete with each other on a daily basis in order to gain as much market share as possible. If competitive rivalry was not high, we wouldn't see the large amounts of advertising involved with this industry.
If economic conditions remain unfavorable this would have a negative impact in company’s operating results. It would also create disruptions in the financial markets and this in turn will increase our operating cost, as well as decrease consumer demand. Under negative economic conditions the company might not have access to credit and be able to meet its obligations. Therefore, a stable economic would certainly be great for the company and ensure future growth in the industry. The company manages to survive in 2008 financial crisis and Earth Link believes they will be able to go through a double dip recession if were to occur.
The internet tax non-discrimination act is actually delay taxes on Internet access and multiple, discriminatory taxes on electronic commerce. Different states will collect certain taxes on electronic commerce. If any state tax laws are not successfully contested, the company’s cost of internet service would be increased. The company had approximately $515.9 million of tax net operating losses for federal income tax purposes and approximately $776.6 million of tax net operating losses for the states. The future income taxes could affect by changes in the valuation of deferred tax assets and liabilities or by changes in tax laws. The determination of provision for income taxes and other tax liabilities requires significant judgment and also there are many ultimate tax determinations of transactions are uncertain.
Currently interest rate is very low this makes financing operations cheaper for the company. Since interest rate can only rise from now, the company is exposed to interest rate risk. It will increase their financing cost operations. In 2009, they had auction of marketable securities of $42.9 million at average interest rate of 1.42%. The company has convertible notes due in the year 2026, if interest rate increases; it would negatively affect the senior notes. As part of our recent ITC^DeltaCom, the company has $325 million aggregate outstand debts with 10.5% yield. Also the company has a risk-free interest rate of 3%.
To the left we have a graph line of the Weigthed Average Cost of Capital, which has decline significantly since 2002 to the advantage of EarthLink. The company’s WACC has been decreasing from 11.2% to 5.7% currently, making it a plus for the company since it is cheaper for EarthLink to finance their operations.
The company has a distribution of its cost of capital between equity and debt. The percentage of weight in Equity is around 61.06%, and the weight in Debt is about 38.94%. The cost financing in Equity is 8.17%, and in Debt is 0.84%.The total amount the company financing in Equity is 4.99% and in Debt is 0.72%.
The Market Capitalization of the company is roughly 932.09 Millions, the short term debt is 243.07 Millions, long term debt is around 351.25 Millions, and the total Capital Structure for ELNK is 1526.41 Millions. EarthLink Economic Value Added is 24.89 Millions for 2010, and the return on invested capital (ROIC) is close to 8.37%.
For the full year of 2010, Earthlink reported total revenues of $622.2 million, which was down 14% from 2009. Their company aggressively manages expenses to keep their costs in line with revenue trends. For 2010, Earthlink was able reduces their total operating expenses by a very impressive 20%. Along with reducing their operating expenses, Earthlink showed a net operating income of $81.5 million, or $.74 per share, and issued over $17 million in dividend payments to their shareholders. When compared to the full year of 2009 ($287.1 million), these numbers do not look too impressive, but Earthlink has a long-term thought process, and they are not discouraged by these short term results. They believe their business discipline will allow them to create value for shareholders and position themselves to continue to invest in the future of the company with a path for growth. Their acquisition of Deltacom complete and the One Communications will enable earthlink to have a dense fiber network which offers a uniqueness in terms of the value proposition they can offer multi-location enterprise customers.
Government regulations have the ability to greatly impact the way Earthlink does their business, ultimately forcing them to change their business practices. Earthlinks goods and services are subject to federal, state and local regulation. Even though they have had recent growth in their Businesses services segment through recent and pending acquisition, they will be more affected by regulation than in the past. Federal, state and local regulations over their services are subject of ongoing judicial proceedings, rulemakings and legislative initiatives. All of these could change the manner in which the industry operates and ultimately have a big affect on the business as a whole. Consumer services segment regulation include narrowband internet access, internet taxation and universal service. Narrowband internet access is currently classified as "information service", and this means it is not subject to traditional telecommunications services regulation. These regulations include licensing and pricing. If these things change, Earthlink could be subject to per minute access charges that would greatly affect the overall costs of the service. Internet taxation currently falls under the Internet Tax Non-Discrimination act, which goes through November of 2014. If these tax laws change, the cost of providing internet access services would be increased, greatly affected their business as a whole. Currently, under Universal Service, Earthlink's policy exempts broadband access services from the Universal Service Fund. However this may be expanded in the near future to include broadband services. If this happens, end users will face a surcharge which will effectively raise the cost of services to the customers, negatively affecting the company.
EarthLink is trying to take a proactive role to bring awareness to the public about environmental issues while trying to do everything it can to be a part of the solution. The new idea is a Sustainable EarthLink. The company policy is to transform the itself into a green company, a sustainable workplace that uses less energy, creates less waste and a culture where employees know that they can a difference every day. In January 2008, EarthLink receivedd gold certification from the Leadership in Energy and Environmental Design(LEED) rating system for its green initiatives in the 2nd floor build out of the Bradley building in Pasadena. Their data center has tried to mitigate the enviromental impact of EarthLink. This sustainability program will have a great influence in EarthLink's green efforts and given every employee a chance to make a mark for environmental sustainability. EarthLink Green Initiative has several objective that is committed to achieve: 1. Reducing the company use of electricity 2. Purchase Renewable Energy Credits. These funds will support alternative energy solutions like wind powet, solar power and geothermal power. By doing this they can offset some of their carbon footprint. 3. Purchase of materials such as copy paper, paper plates and other supplies that have a higher recycled content and trying to recycle a high percentage of the waste created by EarthLink.
The company framework is focus in maintaining their efficiency. The company also intends to increase their operational efficiency to reduce their cost structure without impacting the quality of the product the firms offers. EarthLink believes that being efficient is important in order to create a synergy between EarthLink and any future acquisition. They have also plans to continue outsourcing certain functions in order to reduce cost. In 2007 Earthlink implemented a Restructuring Plan to reduce cost and improve efficiency, where they did a comprehensive review trying to consolidate all their offices Nationwide.
Earthlink's solvency ratio, which is measured by (after tax income + depreciation) / Long and Short term liabilities comes out to be 40.53%. Generally speaking, any company with a solvency ratio of greater than 20% is said to be in solid financial condition. Eartlink's solvency ratio of over 40% shows the company is at relatively no risk of defaulting on their debt obligations. In the fiscal year of 2010, Earthlink reported total liabilities of $766,050(in thousands) and total equity of $757,868(in thousands) . Their leverage ratio, or debt/equity, comes out to be 1.0108. Typically, companies want to have a lower leverage ratio to ensure they have enough equity to pay off their total debts. In this case, Earthlink has more debt than they do equity to cover it. A high leverage ratio does not always mean the company is more at risk of default.