EarthLink's Greenhouse Effect

EarthLink (Nasdaq: ELNK  ) may have posted higher first-quarter profits, but much like last quarter, there are certain things -- such as flagging sales, for example -- that might make investors pause for a moment. It might look like things are heating up for the Internet service provider, but a closer look reveals a company that still faces plenty of challenges.

The Internet service provider did improve its earnings to a profit as opposed to last year's first-quarter loss, with net income coming in at $33.3 million, or $0.22 per share -- which does indeed sound heartening. However, you have to dig further down in the press release for the sales figure -- and when you find it, you realize that EarthLink's total revenues fell 4.8% to $334.7 million compared with the same period last year.

EarthLink said it added 94,000 broadband and 109,000 PeoplePC (the latter is the company's low-price dial-up offering) subscribers, but the company lost 186,000 premium dial-up subscribers. When you include the loss of some Web hosting customers and the switching of some customers to wireless, the bottom line was that EarthLink added only a net 13,000 subscribers in the quarter. However, a bright spot is that the company ended the quarter with 5.4 million total subscribers, a 1.3% increase over the same period last year, although average churn for the quarter increased a bit, to 4.7% from 4.5% last time around.

It's common knowledge that EarthLink's suffering the effects of a sea change in attitude about Internet connectivity -- it's one of the companies that's bearing the brunt of Internet users' switch from old-school dial-up to broadband.

Unlike Time Warner's (NYSE: TWX  ) America Online unit, which is looking to bolster its service through a whole slew of initiatives including content, tools, and services, EarthLink's trying to migrate its users to its own broadband connections. The biggest challenge facing EarthLink is defection to other companies that already provide its customers other services, such as telecom giants like Verizon (NYSE: VZ  ) or cable heavyweights like Comcast (Nasdaq: CMCSA  ) .

Some probably feel a certain degree of relief that EarthLink was able to manage this profitable quarter, as well as offset losses in premium dial-up customers through its broadband offering on one end of the spectrum and its low-priced dial-up service on the other. On the other hand, looking forward, it's hard not to wonder whether the writing's on the wall in terms of growing its subscriber base.

There was a warm reception to the news, seeing how EarthLink shares increased by 11% in recent trading. Despite EarthLink's obvious ability to eke out profits through cost control, that might signal a certain degree of stagnation when it comes to keeping up with the times, leading to further issues down the road. Although EarthLink shares may look "cheap" to some at the moment, given the challenges that remain, the future's still a bit fuzzy.

Alyce Lomax does not own shares of any of the companies mentioned.

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