The company's sales did inch up 2% to $332 million, but its second-quarter profit was cut by more than half to $17 million, or $0.12 per share, on a year-over-year basis. Gross margins decreased and expenses increased, and that's hardly music to investors' ears at this point. Although much has been made about the cash flow that EarthLink generates from its ISP offerings, its aggressive plans mean that it's throwing the greenbacks around at a pretty good clip. As a result, free cash flow generation dropped 43% to $32 million. Meanwhile, on a year-over-year basis, the company's cash reserve dropped 45% to $236 million.
Last quarter, I remarked on what seemed mystifying to me -- investors pumped up EarthLink shares despite a drop in profitability and a continued challenging competitive landscape. Of course, judging by this chart, it seems that investors rapidly lost faith in the months to follow.
It's not just about the challenges EarthLink faces in repositioning itself as a broadband Internet provider from its long history in dial-up, along the lines of United Online
Of course, EarthLink has some plans to differentiate itself -- and they're aggressive and pricey. Agreements to provide Wi-Fi to municipalities and a plan to offer high-speed Internet over power lines by 2007 may prove to be bright spots. In other attempts to bolster earnings, EarthLink's trying to get into other areas such as Internet calling, Helio wireless service with SK Telecom
EarthLink trades at just 8 times earnings, and granted, that's unusual in a tech company. And to give some credit where it's due, EarthLink's got guts. It has to, considering how its premium dial-up service continues to leak subscribers and competition intensifies, as everyone knew it would. Regardless, EarthLink faces a long, hard road to keep itself relevant. It's not the kind of risk I would be willing to take, and I'm not surprised investors have been giving EarthLink shares the cold shoulder now and in recent months.
Alyce Lomax does not own shares of any of the companies mentioned.