IP Democracy: EarthLink Almost Triples Sub. Loss Estimates

The rumors that I reported yesterday are, in fact, true. EarthLink made it official this morning that the company is laying off hundreds of employees (900) and is restructuring for a smaller future.

In addition to the staff cuts, EarthLink is closing its Orlando, FL, Knoxville, TN, Harrisburg, PA and San Francisco, CA offices and will substantially reduce its “presence” in Pasadena, CA, and Atlanta, GA. The ailing ISP expects to save $25 million to $35 million for the remainder of the year.

Lots more bad news, but one point in particular: customer losses will accelerate even faster than the company predicted one short month ago. When it released its Q2 07 earnings results, EarthLink predicted that it would lose 500,000 customers during 2007, which would have brought the company’s year-end customer count down to 4.799 million by the end of the year, compared to 5.299 million at the end of 2006.

But, in today’s press release, EarthLink predicts it will end the year with approximately 3.9 million customers, a 2007 loss of 1.4 million customers for the year, almost three times the amount predicted in late-July.

The company offered a garbled explanation for the radically lower customer projections saying, on the one hand, that Internet customer growth is down for the industry as a whole and that, on the other hand, EarthLink plans to shut off its marketing efforts to all but the best kinds of customers. This last tactic has the added benefit of pumping up cash flow.

Given current trends in the Internet access industry, management expects industry-wide gross subscriber additions to decelerate in 2008. This will result in fewer gross subscriber additions for EarthLink as it will no longer add new subscribers that do not yield a positive lifetime value for our shareholders. Additionally, as subscriber growth slows, the company expects to realize fewer migrations from narrowband to broadband. This trend should result in longer tenured existing subscribers generating higher life-time cash values. EarthLink expects that as it reduces its marketing efforts aimed at acquiring new customers who have high early life churn characteristics, our overall churn will come down over time as our longer tenured existing customers become the predominant part of our base. As a result of this change in strategy, EarthLink preliminarily estimates that it will generate cash flow from operations in the low to mid $200 million range in 2008.

A conference call is slated for tomorrow. Stay tuned.

Other news: EarthLink now has a new COO, Joe Wetzel, and the Board has approved an additional $200 million for share buybacks.

Posted by Cynthia Brumfield on August 28, 2007 2:18 PM to IP Democracy