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Scorched EarthLink

EarthLink (Nasdaq: ELNK  ) shares zoomed out of control yesterday, rising 7% as investors cheered the company's decision to cut costs -- and jobs. This is one of those strange situations where many investors view a mixed bag as good news.

Let's see what got Wall Street so excited:

  • EarthLink will cut 900 jobs in connection with a restructuring.
  • It will close a few offices.
  • It's lowering guidance for the year.
  • Its subscriber additions are expected to slow next year.

Pardon me for not considering any of those points a reason to celebrate. As far as I can tell, these moves show a company struggling to reinvent itself. Earthlink's now having to tighten its belt, since its previous plans were more about cash burn than growth. EarthLink's legacy as an Internet access provider focused on dwindling dial-up customers resembles what Time Warner's (NYSE: TWX  ) AOL was, and what United Online (Nasdaq: UNTD  ) still is. Such Internet access businesses have faced serious challenges as heavyweights like Verizon (NYSE: VZ  ) and Comcast (Nasdaq: CMCSA  ) increasingly bundle high-speed Internet service with their customers' existing phone and cable packages.

Some investors may have taken heart in EarthLink's plans to provide municipal Wi-Fi in some cities, but that effort has its own challenges. Look no further than EarthLink's attempts to team up with Google (Nasdaq: GOOG  ) in San Francisco to see why this idea's better in theory than in practice. Last I heard, the deal was on hold, as the local government voted yet again over whether San Franciscans even wanted the service. (EarthLink's San Francisco office is one of the locations slated to close.)

EarthLink CEO Rolla Huff has said that the company is reassessing whether the municipal Wi-Fi deals are even still viable, and news reports suggest that the company and local government are having trouble even getting in touch about the plan.

Yesterday, EarthLink also said it will buy back an additional $200 million of its own shares. Given all the company's challenges, is that really the best way to deploy cash, or is EarthLink just trying to keep shareholders pacified? After all, the company expects a net loss of $139 million to $174 million for 2007, quite a jump from the forecasted net loss of $110 million to $140 million a month ago.

Many companies need to evolve in order to keep up with a changing competitive landscape. However, that's often easier said than done, and EarthLink's evolution has been particularly confusing. As far as I can tell, the company has mostly attracted speculative investors in the past couple of years. It hasn't generated a profit over the trailing 12 months, and at the moment, analysts don't expect it to return to profitability until 2009 at least. Although cutting costs should certainly help the company's efforts to regain profitability, abundant uncertainties remain. After throwing so many ideas around, the company may also have to leave a few by the wayside.

At the end of last year, I reviewed EarthLink's 2006, wondering whether the company was losing focus in its attempts to find growth strategies. Continued confusion about the viability of its growth plans is one good reason for potential investors to look elsewhere.

Link up with further Foolishness:

Time Warner is a Motley Fool Stock Advisor recommendation. To find out what other companies David and Tom Gardner have recommended to subscribers, take a 30-day free test drive.

Alyce Lomax does not own shares of any of the companies mentioned. The Motley Fool's disclosure policy is not confused.

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