EarthLink's third-quarter results beat analyst estimates, but the company warned of higher marketing expenses in the name of building brand awareness, and of a competitive landscape that will not be easing soon.
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The company's acquisition of ISP OneMain.com was completed during the quarter and it is included in the results. Excluding OneMain, EarthLink lost $36.7 million, or $0.30 per share, on revenues of $240.7 million.
In announcing its financial results, EarthLink provides far more detail than most, if not all, of its competitors, a tradition for which the company's management should be commended. This allows a greater level of insight into the workings of the company and is an investor-friendly practice that others will hopefully adopt.
Subscriber growth and competition
EarthLink added 924,000 paying subscribers during the quarter, bringing the total to 4.6 million. However, 758,000 of those came through the OneMain acquisition, and some of the other 166,000 came through the acquisition of several small ISPs. In all, EarthLink's "organic" subscriber growth was minimal during the quarter.
During a conference call, CEO Garry Betty said EarthLink's ability to grow its narrowband subscriber base not counting acquisitions is feeling the impact of free Internet services. He also cited rebate programs that bundle Internet access with PCs. Up to 40% of PCs, he said, are sold in such bundles; Microsoft (Nasdaq: MSFT) and America Online (NYSE: AOL) are particularly active in this area. Betty said EarthLink is considering similar programs, but the costs are considerable.
In addition, said the CEO, "Not enough consumers are aware of EarthLink." The company is planning a new national advertising campaign to specifically build brand awareness. As a result, the company expects a fourth-quarter net loss before merger and acquisition costs of between $0.48 and $0.53 per share, slightly greater than consensus estimates, on revenues of between $290 million and $295 million.
The revenue mix
Increasing consumer interest in broadband, or high-speed, Internet access is also impacting EarthLink's subscriber growth, Betty said. Nevertheless, the company also stands to benefit from the changing technology landscape. Broadband subscribers increased by 59,000, including 6,000 from OneMain, and stood at 139,000 at the end of the quarter, up 874% from one year ago, and up 74% from last quarter.
Broadband coverage expanded from 55 to over 70 metropolitan markets, the company said, with subscriber growth benefiting from increased availability of self-installation kits. High-speed access is the fastest-growing segment of EarthLink's business and contributes a growing piece of the revenue pie. Still, narrowband dial-up services dominate EarthLink's revenue picture, representing 84% of the total.
As detailed in Tuesday's press release, revenues from narrowband subscribers were $210.6 million, up 7% from last quarter. As a percentage of total revenues, however, that number is down 3% from last year, and down 1% from last quarter, a small move in the right direction. The contribution of broadband revenues increased to 6% of the total during the September quarter, from 4% last year and last quarter. The company said Q3 broadband revenues increased by 49% over the second quarter to $15.5 million.
As a percentage of total revenues, EarthLink's business Web-hosting services increased from 4% to 6% over last year, but was down from 7% last quarter. Similarly, revenues from content, commerce, and advertising increased from 2% to 3% over last year, but declined from the 4% reported in June. During an admittedly difficult quarter for online advertising, EarthLink's revenues in this segment were $6.65 million in September, down 19% from $8.24 million in June.
Your Turn:
Will a new ad campaign boost brand awareness and help the No. 2 ISP grow subscribers faster, and fend off competition from freebie services and the marketing muscle of much larger rivals? Share your thoughts on the EarthLink discussion board.
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