One's got to give EarthLink (Nasdaq: ELNK ) credit where credit's due -- it did manage to increase its fourth-quarter earnings, and by an enviable clip. However, its flagging sales are still enough to give investors something to worry about in an industry space that's become increasingly competitive in recent history.
EarthLink was able to shave expenses in order to deliver earnings of $35.6 million, or $0.23 per share -- that's more than tripled since this time last year. EarthLink subscribers increased to 5.4 million, up 3.5% from the same quarter last year, with churn increasing just a tad to 4.7% from 4.1% on a year-over-year basis. Revenues, however, decreased by 3% to $338.1 million. And investors surely weren't pleased with a lower sales forecast for the rest of the year.
Investors aren't unfamiliar with the types of troubles that face a company like EarthLink, which still has its roots in providing dial-up Internet access. Over the course of the last year, the costs for broadband Internet connections have dropped, and many Internet users are quickly adopting high-speed service -- often from providers of their other utilities, such as Verizon (NYSE: VZ ) and Comcast (Nasdaq: CMCSA ) .
Of course, EarthLink has tried to change with the times. And while it does offer high-speed Internet as well as a discount service and its familiar dial-up offering, one might hope that most EarthLink subscribers who have tried to migrate to the company's own broadband offering have fared better than my roommate did. She endured about a month's worth of trouble, which included deployment of a rather surly service technician to our apartment, having a telephone representative tell her that he did not know that "point-zero-three meant three cents," and a whopping overcharge to her account even though she was never able to get broadband installed, to name just a few of the highlights.
I know it's purely anecdotal. But overhearing her agonizing telephone calls to EarthLink night after night made me think that if it was that hard to get EarthLink's broadband installed for even a small percentage of customers, it's not a good sign, especially compared with how little hassle was involved in installing Verizon DSL in my own room. Needless to say, we're considering a wireless network in the apartment that would fulfill both of our computing needs, which of course would have nothing to do with EarthLink.
At any rate, the fact of the matter is that today, investors took EarthLink's news hard. It's not a surprise, really. As with any time when sales are flagging despite higher earnings, investors are going to start wondering just how long a company can squeeze expenses in order to boost profits. Add to that fear the inherent difficulty in the environment that ISPs like EarthLink and Time Warner's (NYSE: TWX ) AOL currently face, and you've got some pretty potent reasons for doubt.
Alyce Lomax does not own shares of any of the companies mentioned.
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