You've gotta love a stock that goes up when profits are down. That was the case Thursday for EarthLink (Nasdaq: ELNK). A 51% drop in its first-quarter profit? No problem, apparently -- last time I checked, investors had bid up shares by nearly 6%.
EarthLink, which has long struggled with the transition from a dial-up Internet service provider to an ISP that provides broadband and communications solutions, reported first-quarter net income of $16.4 million, or $0.12 per share, with sales down 7.5% to $309.7 million. Margins took a hit because of the decrease in revenue as well as continued customer defection to lower-margin broadband services. Furthermore, EarthLink's free cash flow for the quarter dropped 38% to $21.5 million.
Although EarthLink's low-cost dial-up PeoplePC service increased its customer base by 39%, its premium narrowband base continued negative trends, dipping 25% on a year-over-year basis. Average revenue per user also declined, as the company seeks to woo subscribers through price promotions and lower retail DSL pricing. Meanwhile, although EarthLink has lots of plans for bolstering its business over the long term, it said that the launch of its bundled voice product in additional markets will be delayed by about a quarter. However, if investors seemed to like EarthLink's outlook, it is likely because it sees second-quarter and yearly results beating what analysts had thus far anticipated.
In the past, EarthLink was best known for its dial-up services -- back when dial-up was cool. It always had pretty serious competition from the likes of Time Warner's (NYSE: TWX) AOL, Microsoft's (Nasdaq: MSFT) MSN, and United Online (Nasdaq: UNTD); now, it also contends with telecom providers like Verizon (NYSE: VZ) and cable operators like Comcast (Nasdaq: CMCSA), which offer competitively priced high-speed Internet access. Dial-up is synonymous with dinosaur these days, and Internet access and newer propositions like voice over Internet protocol, or VoIP, are rife with competition.
Granted, EarthLink has been trying to re-create itself as a high-speed provider, as well as an all-around communications solution, including voice packages. One of its most high-profile deals involves providing Wi-Fi access in San Francisco, in conjunction with Google (Nasdaq: GOOG). However, I can't even see that as a great boon for EarthLink, considering that Google will be offering the service free with advertising, while EarthLink will provide an ad-free version for $20 per month. I'd imagine that many people would opt for the free version. Furthermore, many people are of the opinion that the Wi-Fi network poses privacy concerns.
EarthLink shares may have increased today, but its stock has definitely borne the brunt of negative sentiment over the past six months or so, and its trailing P/E currently sits at what looks like a cheap 10. (Then again, compare that with its forward P/E of 108, and there's an entirely different story.) It's not hard to imagine EarthLink as a gamble for investors.
Time Warner is a
Motley Fool Stock Advisor
recommendation. Microsoft is a
Motley Fool Inside Value
selection.
Alyce Lomax does not own shares of any of the companies mentioned.
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