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Article by DailyStocks_admin    (01-22-09 09:56 AM)

The Daily Magic Formula Stock for 01/22/2009 is EarthLink Inc. According to the Magic Formula Investing Web Site, the ebit yield is 35% and the EBIT ROIC is >100%.

Dailystocks.com only deals with facts, not biased journalism. What is a better way than to go to the SEC Filings? It's not exciting reading, but it makes you money. We cut and paste the important information from SEC filings for you to get started on your research on a specific company.


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BUSINESS OVERVIEW

Overview

EarthLink, Inc. is an Internet service provider, or ISP, providing nationwide Internet access and related value-added services to individual and business customers. Our primary service offerings include dial-up Internet access, high-speed Internet access, voice services and web hosting services. We also provide value-added services, such as search, advertising and ancillary services sold as add-on features to our Internet access services. In addition, through our wholly-owned subsidiary, New Edge Networks, we provide secure multi-site managed data networks and dedicated Internet access for businesses and communications carriers.

We operate two reportable segments, Consumer Services and Business Services. Our Consumer Services segment provides Internet access and related value-added services to individual customers. These services include dial-up and high-speed Internet access and voice services, among others. Our Business Services segment provides Internet access and related value-added services to businesses and communications carriers. These services include managed data networks, dedicated Internet access and web hosting, among others.

Our corporate offices are located at 1375 Peachtree St., Atlanta, Georgia 30309, and our telephone number at that location is (404) 815-0770.

General Developments of Our Business

We operate our business in the Internet access market, which is characterized by intense competition, changing technology, changes in customer needs and new service and product introductions. During the year ended December 31, 2007, in response to declining revenues, changes in our industry and changes in consumer behavior, we refocused our business strategy to reduce our back-office cost structure and our sales and marketing efforts related to the acquisition of new subscribers. Additionally, although the Internet access market has reached a mature stage of growth, analysts still predict a market for dial-up customers for many years to come. Our prospective marketing strategy is to focus on retaining existing subscribers, adding subscribers that generate an acceptable rate of return and increasing the number of subscribers we add through partnerships and acquisitions from other ISPs. The following are the more significant developments during the year ended December 31, 2007:

The primary challenges we face in executing our business strategy are responding to competition, reducing churn, maintaining profitability in our access services and purchasing cost-effective wholesale access. The factors we believe are instrumental to the achievement of our goals and targets, including the factors identified above, may be subject to competitive, regulatory and other events and circumstances that are beyond our control. Further, we can provide no assurance that we will be successful in achieving any or all of the factors identified above, that the achievement or existence of such factors will favorably impact profitability, or that other factors will not arise that would adversely affect future profitability.

Service Offerings

Our service offerings include dial-up Internet access, high-speed Internet access and voice services provided to individual customers, and managed data networks, dedicated Internet access and web hosting services, provided to businesses and communications carriers.

Consumer Services

Narrowband Access

Premium Dial-up Internet Access. Dial-up, or narrowband, access is a way to access the Internet, using a modem to dial the Internet service provider's node. A dial-up server type such as the Point-to-Point Protocol and TCP/IP protocols is used to establish a modem-to-modem link, which is then routed to the Internet. Our premium dial-up access is a subscription-based service that provides customers with access to the Internet and an interactive community offering a wide variety of content, features, services, applications, tools and 24/7 customer support. Such features include antivirus and firewall protection, acceleration tools and privacy and safety tools. Revenues primarily consist of monthly fees charged to customers for dial-up Internet access.

Value Dial-up Internet Access. We provide value-priced Internet access services through our PeoplePC™ Online offering. Our value dial-up access is a subscription-based service that provides customers access to the Internet with limited functionality and support services at comparatively lower prices. Revenues primarily consist of monthly fees charged to customers for dial-up Internet access.

Broadband Access

High-speed access offers a high speed, always on Internet connection that uses a modem to supply an Internet connection across an existing home phone line. The Internet service doesn't interfere with a customer's voice service, so there is no need for a second phone line. We provide high-speed access services via DSL, cable and/or satellite and offer three different speeds of service (up to 1.5Mbps, 3.0Mbps and 6.0Mbps). Availability for these services depends on the telephone, cable or satellite service provider and the distance from the provider's equipment. Our high-speed access service includes the same features and benefits included with our premium dial-up access service. Broadband access revenues consist of monthly fees charged for high-speed, high-capacity access services including DSL, cable, satellite and dedicated circuit services; installation fees; early termination fees; reactivation fees; shipping and handling fees; and equipment revenues associated with the sale of modems and other access devices to our subscribers.

IP-Based Voice

EarthLink DSL and Home Phone Service is a bundle offer that includes EarthLink high-speed Internet access at speeds up to 8.0Mbps and home phone service. It combines the last mile of traditional telephone copper wiring with the advanced features of VoIP by taking advantage of Digital Subscriber Line Access Multiplexer, or DSLAM, technology. We offer subscription-based service under various plans that include features such as voicemail, call waiting, caller ID, call forwarding and E911 service. We currently offer this service in 12 markets in the U.S. covering approximately 12.0 million households. Revenues primarily consist of monthly fees charged to customers for IP-based voice service plans.

Advertising and Other Value-Added Services

We generate advertising revenues by leveraging the value of our customer base and user traffic; through paid placements for searches, powered by the Google™ search engine; fees generated through revenue sharing arrangements with online partners whose products and services can be accessed through our properties; commissions received from partners for the sale of partners' services to our subscribers; and sales of advertising on our various online properties, such as the Personal Start Page.

We also offer services which are incremental to our Internet access services. Our value-added services portfolio includes products for protection, communication, performance and entertainment, such as security, web acceleration, Internet call waiting, mail storage, gaming, digital music and photo center, among others. We offer free and fee-based value-added services to both subscribers and non-subscribers, that are focused on making the Internet a more meaningful, secure experience.

Business Services

Narrowband Access

We provide dial-up Internet access for business customers. Revenues primarily consist of monthly fees charged to customers for dial-up Internet access.

Broadband Access

We provide high-speed access, hosted VPN networks and e-commerce solutions for business customers. In addition, through our wholly-owned subsidiary, New Edge Networks, we provide secure multi-site managed data networks and dedicated Internet access for businesses and communications carriers. Broadband access revenues consist of retail and wholesale fees charged for high-speed, high-capacity access services; fees charged for high-speed data networks for small and medium-sized businesses; installation fees; termination fees; fees for equipment; and regulatory surcharges billed to customers.

Web Hosting

We lease server space and provide web hosting services to companies and individuals wishing to have an Internet or electronic commerce presence. Features include domain names, storage, mailboxes, software tools to build websites, e-commerce applications and 24/7 customer support. Revenues primarily consist of monthly fees charged to customers for web hosting packages.

Customer Service and Retention

We believe that quality customer service and technical support increases customer satisfaction, which reduces churn. We provide high-quality customer service, invest in loyalty and retention efforts and continually monitor customer satisfaction for our services. We were recognized during the year by J.D. Power and Associates in its 2007 Internet Service Provider Residential Customer Satisfaction Study with the highest ranking for customer satisfaction for dial-up nationwide and for high-speed Internet in the East and South regions. Our customer support is available by chat, email and phone. We also offer printed reference material and help sites and Internet guide files on our web sites.

In addition to our customer support, our free tools offer protection against email viruses, spyware, spam, pop-ups and online scams, as well as dial-up Web acceleration. We were the first major ISP to provide many of these tools to our members free of charge. We believe that providing these tools also increases customer satisfaction, which reduces churn.

Sales and Marketing

In response to changes in our business and industry, we have significantly reduced the amount of sales and marketing spending. Our marketing efforts are currently focused on retaining tenured customers, adding customers that generate an acceptable rate of return and acquiring customers through partnerships and acquisitions from other ISPs. We offer our products and services primarily through direct customer contact through our call centers and through affinity marketing partners such as AARP and Dell.

Network Infrastructure

We provide subscribers with Internet access primarily through third-party telecommunications service providers. Our main provider for narrowband services is Level 3 Communications, Inc. We have agreements with Covad Communications Group, Inc. ("Covad"), AT&T Inc. ("AT&T"), Qwest Corporation ("Qwest") and Verizon that allow us to provide DSL services. We also have agreements with Time Warner Cable, Bright House Networks and Comcast Corporation ("Comcast") that allow us to provide broadband services over each company's cable network in substantially all Time Warner Cable and Bright House Networks markets and certain Comcast markets. We rely on Covad's line-powered voice access to provide our IP-based voice services.

We maintain a leased backbone connecting multiple cities and our technology centers. Our backbone is a networked loop of connections that we have acquired the right to use. Through a combination of backbone, peering and transit, our network is capable of supporting more than five gigabits per second of traffic at peak.

New Edge's network is comprised of ATM/frame relay/DSL switches in central office collocations. In addition, New Edge has access under wholesale agreements to additional central offices throughout the U.S. It has interconnection agreements with all major local exchange carriers to lease DSL and T-1 unbundled network elements, as well as commercial services agreements with regional bell operating companies ("RBOCs"), competitive local exchange carriers ("CLECs"), and cable and satellite service providers to provide last mile connectivity onto its network. The network provides coverage via frame relay, DSL, and/or T-1 access to service small and medium sized businesses and carriers.

Regulatory Environment

Overview

The regulatory environment relating to our business continues to evolve. A number of legislative and regulatory proposals under consideration by federal, state and local governmental entities may lead to the repeal, modification or introduction of laws or regulations which do, or could, affect our business. Significant areas of regulation for our business include Internet access regulation, telecommunications regulation and CLEC regulation.

Internet Access Regulation

Narrowband Internet Access

The regulatory environment for narrowband Internet access services, such as our dial-up ISP services, is well established. Beginning in the 1970s, the Federal Communication Commission's ("FCC's") policy has been to classify narrowband Internet access services as "information services", which are not subject to traditional telecommunications services regulation, such as licensing or pricing regulation. Under this framework, ISPs are assured access to the narrowband telecommunications transmission service of telephone carriers needed to provide narrowband Internet access information services.

One potential risk to our dial-up business would be a change to the rules governing how charges for traffic on telecommunications networks are levied. Currently, narrowband Internet access is not subject to the FCC's carrier access charge regime, which levies per-minute charges for traffic that uses the local telephone network. Any change to these rules that would apply per-minute carrier access charges to dial-up Internet access traffic would significantly impact our costs for this service.

Broadband Internet Access

In contrast to narrowband Internet access, the FCC classifies broadband Internet access as a single, commingled information service, whether provided over DSL by telephone companies or over cable modem by cable companies. As a result, cable companies and telephone companies that offer a broadband Internet access information service are not required by the FCC to offer unaffiliated ISPs stand-alone broadband transmission, which could adversely affect our ability to sustain and grow our broadband Internet access customer base and revenues. We have entered into several commercial arrangements with cable television and telephone companies to offer broadband access to our customers.

Broadband Internet Access Agreements

We have commercial agreements of varying terms with network providers that provide us with the transmission needed to offer broadband Internet access. Our largest providers of broadband connectivity are Covad and Time Warner Cable; we also have agreements with other national providers and with regional and local providers. The following table summarizes the expiration dates for our material agreements:

Our contract with Covad automatically renews on a month-to-month basis, and the contract will continue to renew unless either party elects to terminate the contract. In the event that Covad elects to terminate the contract, we would have six months to transition our customers to other providers' networks.

We also purchase wholesale DSL service from AT&T. While the parties are currently negotiating a commercial DSL agreement, AT&T continues to provide wholesale DSL services under pre-existing rates, terms and conditions. Pursuant to its FCC merger commitments (discussed below), AT&T will continue to offer wholesale DSL to unaffiliated ISPs, such as us, until at least through June 2010.

Industry Consolidation & Merger Conditions

In the past few years, a number of the telephone companies that we compete with or who provide us with broadband Internet access services have consolidated through merger activity. In each of these transactions, the Justice Department and the FCC have reviewed the mergers for compliance with the antitrust laws and the Communications Act. Continued consolidation in the telecommunications industry could impact our ability to provide broadband Internet access services. Given the significant changes in the regulatory environment, consolidation will result in a higher concentration of market power in our competitors and those telephone companies from whom we obtain wholesale DSL access for broadband Internet access services.

In connection with the FCC's approval of the merger of AT&T Corp. and BellSouth Corporation, the FCC required the merged entity to commit to a number of conditions which could affect our operations. Generally, AT&T must abide by these conditions until June 29, 2010, although several of them have longer or shorter compliance periods. The conditions obligate AT&T to offer: all existing Unbundled Network Elements ("UNEs") and collocations at current rates; high-capacity loops; special access services at current rates and on a non-discriminatory basis; wholesale ADSL transmission services at capped rates; rate rollbacks for DS1, DS3 and Ethernet services; service performance metrics for special access services; a commitment to abide by the FCC's Net Neutrality Policy Statement; settlement-free Internet peering; divestiture of the 2.5 GHz spectrum held by BellSouth; and build-out requirements for the 2.3 GHz band. Many of these conditions could benefit our services by having a positive impact on our costs and provisioning for our and New Edge services. In addition, the net neutrality obligation could provide a positive long-term impact by facilitating consumer use of the Internet.

Forbearance

Decisions by the FCC relying on its ability to "forbear," or not enforce, rules and regulations governing competitive entry into the broadband market could impact our business. The Communications Act provides the FCC with the authority to forbear from enforcing statutory requirements and regulations if certain public interest factors are satisfied. The ability for the FCC to forbear from regulations that have been established to enable competing broadband Internet access and VoIP could pose a significant risk to our business.

On December 4, 2007, the FCC denied a petition by Verizon that requested the FCC forbear from certain telephone facilities leasing rules in six major east coast markets, including New York and Philadelphia. If the FCC had approved Verizon's petition, our ability to provide broadband Internet access and VoIP services in those markets would have been diminished. Qwest filed a similar forbearance petition seeking regulatory relief in four major west coast markets, including Seattle, Washington, and the FCC must act on this petition by July 26, 2008.

Internet Taxation

The Internet Tax Non-Discrimination Act places a moratorium on taxes on Internet access and multiple, discriminatory taxes on electronic commerce. This moratorium was originally enacted in 1998 and was extended to 2014 by Congress in October 2007. As with the preceding Internet Tax Freedom Act, "grandfathered" states which taxed Internet access prior to October 1998 may continue to do so. Certain states have enacted various taxes on Internet access and electronic commerce, and selected states' taxes are being contested on a variety of bases. If these state tax laws are not successfully contested, or if future state and federal laws imposing taxes or other regulations on Internet access and electronic commerce are adopted, our cost of providing Internet access services could be increased and our business could be adversely affected.

Consumer Protection

Consumer protection laws and enforcement actions regarding advertising and user privacy, are becoming more prevalent. The Federal Trade Commission ("FTC") and some state Attorney General offices have conducted investigations into the privacy practices of companies that collect information about individuals on the Internet. The FTC and various state agencies as well as individuals have investigated and asserted claims against, or instituted inquiries into, Internet service providers in connection with marketing, billing, customer retention, cancellation and disclosure practices.

Other Laws and Regulations

Our business also is subject to a variety of other U.S. laws and regulations that could subject us to liabilities, claims or other remedies, such as laws relating to bulk email or "spam," access to various types of content by minors, anti-spyware initiatives, encryption, data protection, data retention, security breaches and consumer protection. Compliance with these laws and regulations is complex and may require significant costs. In addition, the regulatory framework relating to Internet services is evolving and both the federal government and states from time to time pass legislation that impacts our business. It is likely that additional laws and regulations will be adopted that would affect our business.

Telecommunications Regulation

We offer voice services to our customers through VoIP products. VoIP regulation is generally preempted at the state level and federal law does not require a telecommunications license to provide these services. However, the FCC has placed several regulatory requirements on VoIP services that interconnect with the public switched telephone network (PSTN). Along with these existing and future FCC regulatory requirements, there is also the possibility that states will continue to attempt to assert authority over VoIP services, which presents a business risk for our VoIP services.

Regulatory Classification

In 2004, the FCC initiated a proceeding to determine whether VoIP should be considered an "information service" or a "telecommunications service." This determination remains pending. The classification of VoIP as a telecommunications service would have significant ramifications for all VoIP providers, including us. Classifying VoIP as a telecommunications service would require the service provider to obtain a telecommunications license, comply with numerous legacy telephone regulations, and possibly subject the VoIP traffic to inter-carrier access charges, which could result in increased costs.

Jurisdiction

One regulatory issue that has been partially addressed is whether state regulatory agencies have jurisdiction of VoIP services. In 2004, the FCC held that Vonage's VoIP service was not subject to state regulation of telephone services because the service can be moved and the end points of the telephone call cannot be accurately determined. In March 2007, a U.S. Court of Appeals upheld the FCC's decision in Minnesota Public Utility Commission v. Federal Communications Commission.

Unlike Vonage, we offer fixed line VoIP services. Several state public utility commissions, which disagreed with the FCC's preemption decision for Vonage's VoIP service, are seeking to distinguish fixed line VoIP services and exert regulatory control over these services. Fixed line VoIP services are distinct from Vonage's service in that the service is stationary at the user's address, cannot be moved, and the end points of the telephone most likely can be determined. If successful, these states could regulate fixed line VoIP as a telephone service and, among other requirements, subject these services to the carrier access charge regime, which could raise the costs of providing service.

Regulatory Obligations

Regardless of regulatory classification or jurisdiction, the FCC has imposed seven distinct regulatory obligations on VoIP services that interconnect with the PSTN: (i) access to emergency calling; (ii) compliance with Communications Assistance with Law Enforcement Act (or CALEA); (iii) payments to the universal service fund; (iv) compliance with rules for disability access; (v) payments for regulatory fees; (vi) compliance with customer proprietary network information ("CPNI") procedures; and (vii) compliance with number portability rules. These obligations are primarily focused on social and law enforcement policies, rather than economic regulation of the service. In each case, our service is, or we expect it will be, in compliance with these regulatory obligations, and none of these obligations materially affect our ability to provide VoIP services.

CLEC Regulation

New Edge, our wholly-owned subsidiary, is a competitive local exchange carrier (or CLEC) that is licensed in most states and subject to both state and federal telecommunications regulation. As such, New Edge relies on certain regulatory rights of CLECs to provide services to business and enterprise customers, including rights to last-mile unbundled network elements of incumbent local exchange carriers (or ILECs) and rights to collocate New Edge equipment at ILEC facilities. As a CLEC, New Edge is also subject to federal and state regulation of its services, and it must comply with many telecommunications laws and regulations, such as contributing to state and federal universal service funds. In addition, New Edge makes use of the special access services and DSL services of ILECs and other CLECs in order to provision New Edge services to its customers.

CEO BACKGROUND

The Board of Directors has nominated Sky D. Dayton, William H. Harris, Jr. and Rolla P. Huff for election as Class III directors to the Board of Directors at the 2008 Annual Meeting of Stockholders, each to serve until the 2011 Annual Meeting of Stockholders or until their successors are duly elected and qualified. The Board of Directors has determined that Mr. Harris is "independent" as discussed below under "Corporate Governance Matters—Director Independence." Mr. Dayton was the Chief Executive Officer of HELIO, our joint venture with SK Telecom, from March 2005 until January 2008, and Mr. Huff is our Chairman, President and Chief Executive Officer. If a nominee is unavailable to serve as a director, proxies may be voted for another nominee proposed by the Board of Directors, or the Board of Directors may reduce the number of directors to be elected at the 2008 Annual Meeting of Stockholders.

Sky D. Dayton—Class III Director

Age: 36

Mr. Dayton founded EarthLink Network, Inc., or EarthLink Network, in May 1994, serving as Chief Executive Officer from the company's inception until May 1996; as executive Chairman until February 2000; and as our non-executive Chairman from August 2000 until March 2005. Mr. Dayton is the non-executive Chairman and a member of the Board of Directors of HELIO. He served as the Chief Executive Officer of HELIO from March 2005 until January 2008. Mr. Dayton is the founder or co-founder of several other Internet-related companies, including Boingo Wireless, Inc., where he serves as

William H. Harris, Jr.—Class III Director

Age: 52

Mr. Harris has served on our Board of Directors since October 2003. Mr. Harris currently is a private investor. Mr. Harris is the founder and chairman of several early-stage companies, primarily in the fields of financial services and electronic security. From October 1999 through March 2000, Mr. Harris served as Chief Executive Officer of PayPal, Inc. From 1993 through 1999, Mr. Harris served as the Executive Vice President and then subsequently as Chief Executive Officer of Intuit Inc. Mr. Harris serves as a member of the Board of Directors of several privately-held corporations.

Rolla P. Huff—Class III Director

Age: 51

Mr. Huff is our President and Chief Executive Officer and a member of our Board of Directors and has served in those positions since June 25, 2007. He was elected Chairman of the Board on January 23, 2008. Mr. Huff was appointed as the Chief Executive Officer of Mpower Holding Corporation in November 1999 and as the Chairman of the Board of Mpower in July 2001 and served in both capacities until its merger with a subsidiary of U.S. TelePacific Holdings Corp. in August 2006. From March 1999 until its acquisition in September 1999, Mr. Huff served as President and Chief Operating Officer of Frontier Corporation and served as Executive Vice President and Chief Financial Officer of that corporation from May 1998 to March 1999. From July 1997 to May 1998, Mr. Huff was President of AT&T Wireless for the Central U.S. region and Mr. Huff served as Senior Vice President and Chief Financial Officer of that company from 1995 to 1997. From 1994 to 1995, Mr. Huff was Financial Vice President of Mergers and Acquisitions for AT&T. Mr. Huff serves on the Board of Directors of HELIO.

THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT STOCKHOLDERS VOTE "FOR" THE ELECTION AS DIRECTORS OF THE NOMINEES NAMED ABOVE.

Directors Not Standing for Election

Below is certain biographical information furnished to us by each of the directors not subject to a vote at the 2008 Annual Meeting of Stockholders.

Marce Fuller—Class I Director

Age: 47

Ms. Fuller has served on our Board of Directors since October 2001. She was the President and Chief Executive Officer of Mirant Corporation, or Mirant, a U.S. marketer of power and natural gas, from July 1999 to September 30, 2005, and served as a member of Mirant's Board of Directors until January 2, 2006. From September 1997 to July 1999, Ms. Fuller served as President and Chief Executive Officer of the Mirant Americas Energy Marketing division of Mirant. From May 1996 to September 1997, Ms. Fuller was Senior Vice President of Mirant's North American operations and business development, and from February 1994 to May 1996, she was Mirant's Vice President for domestic business development. Mirant filed a Voluntary Petition under Chapter 11 of the United States Bankruptcy Code in July 2003. Mirant emerged from bankruptcy protection in January 2006 and continues to operate as an ongoing business. Ms. Fuller serves on the Board of Directors of Curtiss-Wright Corporation, Benevolink and the Leadership Board of the College of Engineering, University of Alabama.

Robert M. Kavner—Class I Director

Age: 64

Mr. Kavner has served on our Board of Directors since February 2001 and is our Lead Director. He served as our Chairman of the Board from January 2005 until January 23, 2008. He was a member of the Board of Directors of EarthLink Network, until its merger with MindSpring Enterprises, Inc., or MindSpring, in February 2000. Since 1995, Mr. Kavner has been a venture capital investor in technology companies and currently serves as a member of the Board of Directors of Idealab, Inc., Shop.com and Pandora Media. From January 1996 through December 1998, he served as President and Chief Executive Officer of On Command Corporation, a provider of on-demand video for the hospitality industry. From 1984 to 1994, Mr. Kavner held several senior management positions at AT&T including Senior Vice President and Chief Financial Officer, Chief Executive Officer of the Multimedia Products and Services Group, and Chairman of AT&T Venture Capital Group. Mr. Kavner also served as a member of AT&T's Executive Committee.

Thomas E. Wheeler—Class I Director

Age: 61

Mr. Wheeler has served on our Board of Directors since July 2003. Mr. Wheeler is a managing director of Core Capital Partners, a venture capital fund, and President and Chief Executive Officer of Shiloh Group, LLC, a strategy development and private investment company specializing in telecommunications services. From 1992 through October 2003, Mr. Wheeler served as the President and Chief Executive Officer of the Cellular Telecommunications & Internet Association. Mr. Wheeler is President of the Foundation for the National Archives and Chairman of VSA (Very Special Arts). Mr. Wheeler serves on the Board of Directors of HELIO.

Terrell B. Jones—Class II Director

Age: 59

Mr. Jones has served on our Board of Directors since October 2003. Mr. Jones currently is a self-employed consultant. Mr. Jones served as President and Chief Executive Officer of Travelocity.com Inc., a provider of online travel reservation capabilities, from January 1998 through May 2002. Mr. Jones served as a director of Travelocity.com Inc. from March 2000 through May 2002. Prior to that time, Mr. Jones served in a number of executive officer positions with Sabre Inc. and Sabre Holdings Corporation, including Chief Information Officer. Mr. Jones is managing partner of Essential Ideas, a consulting firm, and also serves as a special venture partner of General Catalyst Partners, a venture capital firm. Mr. Jones is Chairman of Kayak Software Corporation and a member of the Board of Directors of Rearden Commerce, Inc.

Linwood A. Lacy, Jr.—Class II Director

Age: 62

Mr. Lacy has served on our Board of Directors since February 2000 when EarthLink Network merged with MindSpring, and was a member of the Board of Directors of EarthLink Network from June 1996 until its merger with MindSpring. Mr. Lacy currently is a private investor. Mr. Lacy was the Chairman of 4Sure.com, Inc. from June 1998 to July 2001. From October 1996 to October 1997, he served as President and Chief Executive Officer of Micro Warehouse Incorporated. From 1985 to May 1996, he served as the Co-Chairman and Chief Executive Officer of Ingram Micro, Inc., a microcomputer products distributor and a then wholly-owned subsidiary of Ingram Industries Inc. From December 1993 to June 1995, Mr. Lacy was also President of Ingram Industries Inc. From June 1995 until April 1996, he was President and Chief Executive Officer of Ingram Industries Inc., and from April 1996 to May 1996, he served as its Vice.

Submitted by: Corporate Governance and Nominating Committee

Robert M. Kavner (Chairperson)
Marce Fuller
William H. Harris, Jr.
Terrell B. Jones
Linwood A. Lacy, Jr.
Thomas E. Wheeler

The Corporate Governance and Nominating Committee Report does not constitute solicitation material and should not be deemed filed or incorporated by reference into any of our other filings under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, except to the extent that we specifically incorporate this report by reference therein.


MANAGEMENT DISCUSSION FROM LATEST 10K

The following discussion of our financial condition and results of operations should be read in conjunction with the consolidated financial statements and notes thereto included elsewhere in this Annual Report on Form 10-K.

Safe Harbor Statement

The Management's Discussion and Analysis and other portions of this Annual Report include "forward-looking" statements (rather than historical facts) that are subject to risks and uncertainties that could cause actual results to differ materially from those described. Although we believe that the expectations expressed in these forward-looking statements are reasonable, we cannot promise that our expectations will turn out to be correct. Our actual results could be materially different from and worse than our expectations. With respect to such forward-looking statements, we seek the protections afforded by the Private Securities Litigation Reform Act of 1995. These risks include, without limitation (1) that changes to our business strategy may reduce our revenues and profitability; (2) that the continued decline of our consumer access services revenues could adversely affect our profitability; (3) that prices for certain of our consumer access services have been decreasing, which could adversely affect our revenues and profitability; (4) that we might not realize the benefits we are seeking from the corporate restructuring plan announced in August 2007 and our corporate restructuring plan might have a negative effect on our efforts to maintain our subscribers and our relationships with our business partners; (5) that as a result of our continuing review of our business, we may have to undertake further restructuring plans that would require additional charges including incurring facility exit and restructuring charges; (6) that we face significant competition which could reduce our market share and reduce our profitability; (7) that we may be unsuccessful in making and integrating acquisitions and investments into our business, which could result in operating difficulties, losses and other adverse consequences; (8) that we may not be able to successfully manage the costs associated with delivering our broadband services, which could adversely affect our results of operations; (9) that companies may not provide access to us on a wholesale basis or on reasonable terms or prices, which could cause our operating results to suffer; (10) that if we do not continue to innovate and provide products and services that are useful to subscribers, we may not remain competitive, and our revenues and operating results could suffer; (11) that our commercial and alliance arrangements may be terminated or may not be as beneficial as anticipated, which could adversely affect our ability to increase our subscriber base; (12) that our business may suffer if third parties used for technical and customer support and certain billing services are unable to provide these services, cannot expand to meet our needs or terminate their relationships with us; (13) that service interruptions or impediments could harm our business; (14) that government regulations could adversely affect our business or force us to change our business practices; (15) that we may not be able to protect our proprietary technologies; (16) that we may be accused of infringing upon the intellectual property rights of third parties, which is costly to defend and could limit our ability to use certain technologies in the future; (17) that we could face substantial liabilities if we are unable to successfully defend against legal actions; (18) that our business depends on the continued development of effective business support systems, processes and personnel; (19) that we may be unable to hire and retain sufficient qualified personnel, and the loss of any of our key executive officers could adversely affect us; (20) that our VoIP business exposes us to certain risks that could cause us to lose customers, expose us to significant liability or otherwise harm our business; (21) that we may not be able to sell our municipal wireless wireless broadband assets and that we may incur additional losses related to these operations; (22) that we may not realize the benefits we sought from our investments in the HELIO joint venture; (23) that the use of our net operating losses and certain other tax attributes could be limited in the future; (24) that our stock price has been volatile historically and may continue to be volatile; (25) that our indebtedness could adversely affect our financial health and limit our ability to react to changes in our industry; (26) that the convertible notes hedge and warrant transactions may affect the value of our common stock; and (27) that provisions of our second restated certificate of incorporation, amended and restated bylaws and other elements of our capital structure could limit our share price and delay a change of management.

Overview

EarthLink, Inc. is an Internet service provider, or ISP, providing nationwide Internet access and related value-added services to individual and business customers. Our primary service offerings include dial-up Internet access, high-speed Internet access, voice services and web hosting services. We also provide value-added services, such as search, advertising and ancillary services sold as add-on features to our Internet access services. In addition, through our wholly-owned subsidiary, New Edge Networks, we provide secure multi-site managed data networks and dedicated Internet access for businesses and communications carriers.

We operate two reportable segments, Consumer Services and Business Services. Our Consumer Services segment provides Internet access and related value-added services to individual customers. These services include dial-up and high-speed Internet access and voice services, among others. Our Business Services segment provides Internet access and related value-added services to businesses and communications carriers. These services include managed data networks, dedicated Internet access and web hosting, among others.

Our results of operations include the following items related to changes in our business strategy implemented during the year ended December 31, 2007:

whereby SK Telecom agreed to make up to $270.0 million in additional equity contributions to HELIO, while we retain the right to make additional investments in HELIO. This eliminates any future requirement to invest in HELIO, while allowing us to maintain a meaningful ownership position in HELIO with potential investment return in the future.

Industry Background

We operate in the Internet access market, which is characterized by intense competition, changing technology, evolving industry standards, changes in customer needs and new service and product introductions. The Internet access market has reached a mature stage of growth; however, growth is expected to continue at a slow rate as more services become available online, Internet access prices remain low, computer prices continue to decline and consumers increasingly gain access at places outside the home.

In the last few years, the composition of the Internet access market has changed and the number of households with broadband access surpassed the number of households with dial-up access. Consumers continue to migrate to broadband due to the faster connection and download speeds provided by broadband access, the ability to free up their phone lines and the more reliable and "always on" connection. The pricing for broadband services, particularly for introductory promotional periods, services bundled with video and telephone services, and services with slower speeds, has been declining and is approaching prices for traditional dial-up services, making it a more viable option for consumers that continue to rely on dial-up connections for Internet access. In addition, advanced applications such as online gaming, music downloads and photo sharing require greater bandwidth for optimal performance, which adds to the demand for broadband access. However, analysts predict a continuing market for dial-up customers.

Currently, most residential broadband consumers access the Internet via DSL or cable. One of the outgrowths from the rapid deployment of broadband connectivity has been the adoption of Voice over Internet Protocol ("VoIP"). VoIP is a technology that enables voice communications over the Internet through the conversion of voice signals into data packets. VoIP technology presents several advantages over the technology used in traditional wireline telephone networks and enables VoIP providers to operate with lower capital expenditures and operating costs while offering both traditional and innovative service features.

Revenue Sources

We provide access services (including traditional, fully-featured narrowband access and value-priced narrowband access; high-speed access via DSL, cable and satellite; IP-based voice; and high-speed data networks for small and medium-sized businesses and communications carriers) and value-added services (including ancillary services sold as add-on feature to our services, search and advertising). We earn revenues primarily from monthly fees charged to customers for services. We also earn revenues from usage fees; installation fees; termination fees; and fees for equipment used to access our services. Total revenues were $1.29 billion, $1.30 billion and $1.22 billion during the years ended December 31, 2005, 2006 and 2007, respectively. Our traditional, premium-priced narrowband revenues have been declining due to the maturity of this service. In addition, the mix of our narrowband customers has shifted towards value-priced narrowband access. However, the decrease in revenues were offset by an increase in revenues due to our acquisition of New Edge Networks in April 2006, an increase in revenues due to the launch of IP-based voice services during 2006 and an increase in value-added services revenues.


2007 Highlights

Total revenues decreased during the year ended December 31, 2007 compared to the prior year. In addition, our subscriber base decreased from approximately 5.3 million paying subscribers as of December 31, 2006 to approximately 3.9 million paying subscribers as of December 31, 2007. The decrease in paying subscribers was primarily due to the removal of approximately 753,000 wholesale broadband subscribers under our marketing relationship with Embarq Corporation ("Embarq") and a decrease in premium narrowband subscribers. We also saw a decrease in retail broadband revenues due to price compression in the industry. Overall operating expenses decreased during the year ended December 31, 2007 compared to the prior year primarily due to cost savings realized as a result our 2007 corporate restructuring plan. We recognized net income of $5.0 million during the year ended December 31, 2006 compared to a net loss of $135.1 million during the year ended December 31, 2007. This was due to the decrease in total revenues, increase in net losses of HELIO and increase in loss from discontinued operations, offset by the decrease in total operating costs and expenses, including $69.6 million in facility exit, restructuring and other costs.

Looking Ahead

We expect total revenues to continue to decrease as we reduce sales and marketing efforts aimed at customers that have a high acquisition cost and early life churn. However, we expect overall profits to increase in 2008 as the benefits realized from our corporate restructuring plan, the decreased sales and marketing activities and the decrease in loss from equity affiliate offset our decline in revenues.

Joint Venture

We have a joint venture with SK Telecom, HELIO. HELIO is a non-facilities-based mobile virtual network operator (MVNO) offering mobile communications services and handsets to consumers in the U.S. HELIO was formed in March 2005 and began offering its products and services in April 2006. As partners, we and SK Telecom invested an aggregate of $440.0 million of cash and non-cash assets in HELIO pursuant to the Contribution and Formation Agreement. As of December 31, 2006, we and SK Telecom each had an approximate 48% economic ownership interest and 50% voting interest in HELIO.

In July 2007, we and SK Telecom entered into a lending agreement with HELIO pursuant to which we and SK Telecom could lend up to $200.0 million to HELIO and each made an initial loan to HELIO of $30.0 million.

In November 2007, we and SK Telecom amended and restated the joint venture agreements. SK Telecom agreed to make up to $270.0 million in additional equity contributions to HELIO, while we retain the right to make additional investments in HELIO under the amended joint venture agreements. In November 2007 and December 2007, SK Telecom made a $70.5 million and $30.0 million equity contribution, respectively, to HELIO. As a result, as of December 31, 2007, we had an approximate 31% economic ownership interest and 33% voting interest in HELIO, while SK Telecom had an approximate 65% economic ownership interest and 67% voting interest in HELIO. We currently have no plans to make further investments in HELIO.

Also in November 2007, we and SK Telecom canceled the July 2007 loan and related lending agreement and HELIO issued to each of us a new $30.0 million secured exchangeable promissory note (the "New Notes"). Pursuant to the terms of the note purchase agreement, the New Notes bear interest at 10% per annum, payable at maturity, and may be prepaid by HELIO at any time without penalty. The New Notes mature on July 23, 2010, unless amounts thereunder become due and payable earlier by acceleration or otherwise. The New Notes are exchangeable for membership units of HELIO at any time up to the maturity date.

In February 2008, the HELIO joint venture agreements were further amended to make certain modifications to the terms of the outstanding membership interests owned by us, SK Telecom and the other HELIO investors.

Acquisition

In April 2006, we acquired New Edge. The acquisition of New Edge expands our service offerings for businesses and communications carriers. Under the terms of the merger agreement, we acquired 100% of New Edge in a merger transaction for 1.7 million shares of EarthLink common stock and $108.7 million in net cash, including cash to be used to satisfy certain New Edge liabilities and direct transaction costs. In July 2007, approximately 0.8 million shares of EarthLink, Inc. common stock that had been held in escrow were returned to us.

Marketing Alliances

We have an agreement with Time Warner Cable and Bright House Networks, companies whose networks pass more than 30 million homes, to offer our broadband Internet access services over their systems. In connection with the agreement, Time Warner Cable and Bright House Networks receive consideration from EarthLink for carrying the EarthLink service and related Internet traffic. As of December 31, 2007, more than 40% of our consumer broadband subscribers were serviced via either the Time Warner Cable or Bright House Networks network.

We had a marketing relationship with Embarq, a spin-off of Sprint Nextel Corporation's local communications business. The relationship provided that EarthLink was the wholesale high-speed ISP for Embarq's local residential and small business customers. The contracts associated with these arrangements expired in April 2007, and we and Embarq did not renew the wholesale broadband contract. Effective April 2007, we removed approximately 753,000 wholesale broadband subscribers under the marketing relationship from our broadband subscriber count and total subscriber count.

MANAGEMENT DISCUSSION FOR LATEST QUARTER

Certain statements in this Quarterly Report on Form 10-Q are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, and Section 21E of the Securities Exchange Act of 1934. The words “estimate,” “plan,” “intend,” “expect,” “anticipate,” “believe” and similar expressions are intended to identify forward-looking statements. These forward-looking statements are found at various places throughout this report. EarthLink disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Although EarthLink believes that its expectations are based on reasonable assumptions, it can give no assurance that its goals will be achieved. Important factors that could cause actual results to differ from estimates or projections contained in the forward-looking statements are described under “Safe Harbor Statement” in this Item 2.



The following discussion should be read in conjunction with the accompanying unaudited Condensed Consolidated Financial Statements and related Notes thereto and with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the audited Consolidated Financial Statements and the Notes thereto contained in the Annual Report on Form 10-K for the year ended December 31, 2007.



Overview



EarthLink, Inc. is an Internet service provider, or ISP, providing nationwide Internet access and related value-added services to individual and business customers. Our primary service offerings include dial-up Internet access, high-speed Internet access and web hosting services. We also provide value-added services, such as search, advertising and ancillary services sold as add-on features to our Internet access services. In addition, through our wholly-owned subsidiary, New Edge Networks, we provide secure multi-site managed data networks and dedicated Internet access for businesses and communications carriers.



We operate two reportable segments, Consumer Services and Business Services. Our Consumer Services segment provides Internet access and related value-added services to individual customers. These services include dial-up and high-speed Internet access and voice services, among others. Our Business Services segment provides Internet access and related value-added services to businesses and communications carriers. These services include managed data networks, dedicated Internet access and web hosting, among others.



Industry Background



We operate in the Internet access market, which is characterized by intense competition, changing technology, evolving industry standards, changes in customer needs and new service and product introductions. The Internet access market has reached a mature stage of growth; however, growth is expected to continue at a slow rate as more services become available online, Internet access prices remain low, computer prices continue to decline and consumers increasingly gain access at places outside the home.


In the last few years, the composition of the Internet access market has changed and the number of households with broadband access surpassed the number of households with dial-up access. Consumers continue to migrate to broadband due to the faster connection and download speeds provided by broadband access, the ability to free up their phone lines and the more reliable and “always on” connection. The pricing for broadband services, particularly for introductory promotional periods, services bundled with video and telephone services, and services with slower speeds, has been declining, making it a more viable option for consumers that continue to rely on dial-up connections for Internet access. In addition, advanced applications such as online gaming, music downloads and photo sharing require greater bandwidth for optimal performance, which adds to the demand for broadband access. Within the premium-priced narrowband Internet access market, access providers are competing for a decreasing customer base, as customers switch to broadband services and value-priced narrowband services. However, analysts predict a continuing market for dial-up customers due to the unavailability of broadband service in rural areas, the lower cost of dial-up Internet access and the sufficiency of narrowband speed, particularly for non-technical Internet users.

Revenue Sources



We provide access services (including traditional, fully-featured narrowband access and value-priced narrowband access; high-speed access via DSL, cable and satellite; IP-based voice; and high-speed data networks for small and medium-sized businesses and communications carriers) and value-added services (including ancillary services sold as an add-on feature to our services, search and advertising). We earn access services revenues primarily from monthly fees charged to customers for services. We also earn revenues from usage fees; installation fees; termination fees; and fees for equipment used to access our services. We earn value-added services revenues primarily from monthly fees charged for ancillary services; paid placements for searches; advertising our partners’ products and services in our various online properties and electronic publications; and referring our customers to our partners’ products and services. Total revenues were $298.0 million and $230.8 million during the three months ended September 30, 2007 and 2008, respectively. Our revenues declined over the past year primarily as a result of a change in our business strategy to reduce sales and marketing activities which were resulting in adding customers that did not provide an acceptable rate of return or that had a pattern of early life churn. Additionally, our traditional, premium-priced narrowband revenues have been declining due to the maturity of this service.



Business Strategy and Risks



Our business strategy is to sustain and build upon our strong position in the U.S. Internet access market by focusing on operational efficiency, retaining our existing tenured customers and seeking opportunities for growth.



• Opportunities for Growth . In response to changes in our business, we have significantly reduced our sales and marketing spending. However, we are focused on continuing to add customers that generate an acceptable rate of return and increasing the number of subscribers we add through partnerships and acquisitions from other ISPs. We will evaluate potential strategic transactions that could complement our business. We are also focused on adding customers organically by growing our services to business customers through New Edge Networks, our wholly-owned subsidiary. We believe this is a potential growth market and we will continue to differentiate ourselves by providing customers with choices for our business services.



The primary challenges we face in executing our business strategy are managing the rate of decline in our revenues, responding to competition, reducing churn, maintaining profitability in our access services, purchasing cost-effective wholesale broadband access and adding customers that generate an acceptable rate of return. The factors we believe are instrumental to the achievement of our goals and targets, including the factors identified above, may be subject to competitive, regulatory and other events and circumstances that are beyond our control. Further, we can provide no assurance that we will be successful in achieving any or all of the factors identified above, that the achievement or existence of such factors will favorably impact profitability, or that other factors will not arise that would adversely affect future profitability.

Third Quarter 2008 Highlights



We expect total revenues to continue to decrease during the remainder of 2008 and during 2009 as we reduce sales and marketing efforts aimed at customers that have a high acquisition cost and early life churn. We also expect cost savings associated with our decreased sales and marketing activities, decreased support costs from a more tenured customer base and benefits realized from our corporate restructuring plan to offset some of the decline in our revenues. However, although we expect operating costs and expenses to decrease, we do not anticipate the large-scale cost reduction opportunities that we have experienced during the three and nine months ended September 30, 2008.



Joint Venture



We had a joint venture with SK Telecom, HELIO. HELIO was a non-facilities-based mobile virtual network operator (MVNO) offering mobile communications services and handsets to consumers in the U.S. HELIO was formed in March 2005 and began offering its products and services in April 2006. In August 2008, Virgin Mobile USA, Inc. (“Virgin Mobile”) acquired HELIO in exchange for limited partnership units equivalent to 13 million shares of Virgin Mobile common stock. Our equity and debt investments in HELIO were exchanged for limited partnership units equivalent to approximately 1.8 million shares of Virgin Mobile common stock. As a result, we have an approximate 2% ownership interest in Virgin Mobile.



Marketing Alliance



We have an agreement with Time Warner Cable and Bright House Networks, companies whose networks pass more than 30 million homes, to offer our broadband Internet access services over their systems. In connection with the agreement, Time Warner Cable and Bright House Networks receive consideration from EarthLink for carrying the EarthLink service and related Internet traffic. As of September 30, 2008, more than 40% of our consumer broadband subscribers were serviced via either the Time Warner Cable or Bright House Networks network.


CONF CALL

Kevin M. Dotts

Thanks and welcome everyone to our call. This morning I’m joined by Earthlink’s Chairman and CEO Rolla Huff and our Vice President of Corporation Communications Michelle Sadwick and our Vice President of Investor Relations [Lewis Alterman] to discuss our third quarter results. Following our comments there will be an opportunity for questions.

Before we can continue I would like to point out that certain statements contained in our earnings release and on this call are forward-looking statements rather than historical facts that are subject to risk and uncertainties that could cause actual results to differ materially than those described. With respect to such forward-looking statements the company seeks the protection afforded by the Private Securities Litigation Reform Act of 1995.

These risks include a variety of factors including competitive developments and risk factors listed in the company’s SEC reports and public releases. Those lists are intended to identify certain principle factors that could cause actual results to differ materially from those described in the forward-looking statements but are not intended to represent a complete list of all risks and uncertainties inherent to the company’s business.

In an effort to provide useful information to investors our comments today also include non-GAAP financial measures. For details on these measures including why we use them and reconciliations to the most comparable GAAP measures please refer to our earnings release and the Form 8K that has been furnished to the SEC both of which are available on our website at www.Earthlink.net. Now, I will turn things over to Rolla.

Rolla P. Huff

I’m pleased to report that today we announced a solid quarter of operating performance. I think most of you would agree that the current business environment is causing most companies to reassess their cost structures, deleverage their balance sheets and focus on cash generation. As our investors know, Earthlink began following that script in August of last year and it looks to be serving us pretty well.

Our performance has come through our people and in my judgment the most remarkable thing about our performance has been the ability and willingness of our people to stay focused on customers while simultaneously doing the things necessary to create shareholder value. But, I’ve got to tell you it’s not been easy for them but they are the key reason that we’re creating the shareholder value that’s being created today.

As I’ve said before there’s no silver bullet in this business. We create value through a thousand little things and we do it with a team of dedicated people who clearly understand our business priorities. Our top priority is to solve for extending the we call it the tail on our access business for as long as possible while continuing to use better business processes as well as new technology to find creative ways to run our business more efficiently.

We’ve aligned compensation structures with business priorities to make sure everyone is pulling in the same direction. As a result of all of the above, Earthlink is in a good position at a time when underleveraged high cash flow businesses have greater relative strength and value in the technology sector. We are well aware of the substantial volatility in the capital markets. We also recognize this has begun to spill over in to the broader economy.

I’m pleased to tell you that at least as of right now our consumer business has not felt any meaningful impact from the uncertain economic environment. Neither churn nor bad debt has moved outside of historical ranges and we’re actually reporting higher average revenue per subscriber. But, it’s early and we don’t have complete clarity around whether the more difficult economic environment will help or hurt our business.

As we’ve been doing we’ll just continue to watch these metrics very closely. More importantly, well continue to run our business with the discipline we have been with a focus on driving cash flow and an eye towards strategic opportunities that can help us create incremental cash flow through future growth prospects. As I just indicated, our consumer business is operating in bands consistent with and in some cases above our expectations and historical trends.

Revenue continued to be slightly above our expectations due to better than projected organic customer additions. Importantly, broadband now represents 52% of our overall revenue. We know that tenured broadband customers have lower churn rates than tenured dial up customers but they also have lower gross margins. Clearly, our ability to continue to save our dial up customers to our broadband platform rather than simply losing them to a competitor is a key strength of the Earthlink business model.

It’s also a reason that we continue to believe that the tail on our business will be longer than most people give us credit for. We continue to benefit from operating process efficiencies and cost of revenue improvements despite the expected overall decline in reported revenue. We continue to improve our financial performance by our efforts to limit sales and marketing spend to only those activities that create positive shareholder return.

As a result of the above, we reported better than expected adjusted EBITDA, free cash flow and net income. Because we’re currently seeing nothing in data that would suggest that our operating performance will materially reverse in the near term, we’re increasing both the low end and the high end of the 2008 guidance. I’d like to provide a bit more commentary on some of the drivers of our operating results and then Kevin will walk everyone through a more detailed review of our financial performance in the quarter, our revised 2008 guidance and our preliminary guidance for next year.

As anticipated, new subscriber additions continue to decline quarter-over-quarter but are attracting ahead of our plan which we’re pleased to see given our tight controls on marketing spend. Overall, churn for the quarter was 4.25 down from 4.3% in the prior quarter and 150 basis points better than the prior year third quarter. We continue to see our lower price value dial People PC service account for a disproportionately large part of our churn. These subs represented 48% or nearly half of our overall subscriber decline even though that product comprises only 29% of our total subscriber base.

Value dial churn in this past quarter was 6.5% which represents a 220 basis point improvement over the year ago quarter. For the third quarter, value dial represented 17% of our consumer access revenue while our higher value or premium dial base of customers represented 31% of our consumer access revenue. Average monthly churn for premium dial narrow band improved to 3.7% which was 120 basis points better than the third quarter of last year.

As I previously mentioned, broadband now represents 52% of our overall revenue with our two largest broadband products being cable and DSL. Total broadband churn was 2.8%, down from the prior year quarter. While DSL and voice rates have improved over prior year, the cable product which has historically run in the low 3% churn range is now a larger percentage of our base of broadband subs.

As you can see, churn continues to improve across our consumer product lines as the mix of our customer base continues to shift towards increasingly tenured subscribers. At the end of the third quarter 64% of our consumer access customers had been with us for two years or more and had an average churn rate for this tenure cohort of 2.89%. Moreover, 28% of our entire base of access customers have been with us for over five years and that cohort has an average churn of 2.125 this quarter.

These tenure percentages have continued to increase and we expect this aging trend to continue. More importantly, as of the third quarter over 85% of our premium dial subscribers have been with us for more than two years and are churning below 3%. For DSL almost 70% of our subscribers have been with us for more than two years and are churning at approximately 1.5%. These two examples speak to the point that the highly profitable premium dial and DSL basis are well tenured and stable which should provide strong cash flow for the foreseeable future.

Now, let me spend a few minutes talking about our graphical ad, search and we security business. We saw average ARPU from these value added services increase from $2.75 per average subscriber to $2.85 per sub over the prior quarter. This was due in part to our launching our own targeted subscriber advertising engine. Our ad targeting implementation also allowed us to pass through a 17% price increase in our direct sold graphical advertising in Q3 from Q2.

Additionally, ARPU per sub was up in search and subscription due to a 9% higher RPM in our search business. Search ARPU was $0.84 per average sub up from $0.78 in the second quarter. Subscription ARPU from security and other products rose to $1.78 from $1.71 in the prior quarter demonstrating our ability to monetize our subscribers in a variety of ways. Another function of our more tenured customer base has been a notable reduction in the number of refunds, credits and charge backs and that’s contributed to our lower overall support cost structure.

Non-cost of revenue operating expenses improved from 52% of revenue in the third quarter 2007 to 34% at the end of this quarter. I think that’s particularly notable given that we’re seeing a negative scaling in our business because of the subscriber declines that we had planned for. So, we feel pretty good about that. It’s important to point out that while we’re driving more cost efficiencies in to the business we’re not doing so at the risk of our customers.

Our overall network services availability is tracking on target at 99.8%. We’ve put additional measures in place to prevent fraud and abuse which has helped our bad debt. For the quarter, customer support experienced the lowest calls volumes in several years as well as the best quarterly results in our recent history for customer satisfaction, sales close rates and cost per subscriber.

We’ve seen our combined customer and technical service contact rates for consumer services come down 40% on a per subscriber basis since this time last year. Overall our cost to support a subscriber is at its lowest point ever, down 10% versus just this past second quarter. Further cost efficiencies are coming from a variety of areas again, a thousand little things. Things like line migration to more cost effective transport networks, lower rate per minute contracts with outsourcing partners, broader level system consolidation and simplification.

We’re now well down the path of having reduced the complexity of our prior business model. In my experience taking complexity out of a business model generally results in lower cost and high quality and I think that idea is generally working out to be the case here at Earthlink. Joe [Wexel] and his team are certainly proving that point. We’ve reduced sales and marketing expenses by nearly 70% versus the year ago quarter. As we gained increase insight in to the effectiveness of our many loyalty and retention efforts we have the ability to make sure we’re getting better returns on the investments we make in these programs.

The same can generally be said about our efforts to optimize sales and partner relations. The sales and marketing teams have worked hard to test and then retain only those sales programs and partnership arrangements that yield the best acquisition economics. State conversions from narrow band to broad band as well as stronger than expected new subscriber adds in both our cable and our DSL product lines contributed to broadband now accounting for over half our access revenue.

While we are very proud of the highly profitable dial up business that we have, those who believe we are only a dial up business are simply wrong. In early September we announced that we expanded our broadband cable Internet footprint in the Los Angeles and Dallas markets to an additional 5 million households. Nationwide, our high speed Internet services now reach more than 74 million households with cable, DSL and some satellite.

Our ability to migrate many of our customers to a broadband platform, if they require that and if they want that, combined with the reality that not everyone needs or can afford broadband much less a triple or quadruple play price point is a key reason that we believe the tail in this business might be longer than some believe. Longer than some of the people on this call believe actually. It’s also a reason we believe we’re the best consolidation platform for the dial up industry.

Operating this business for a richer mix of tenured customers and a focus on positive lifetime value ultimately generates meaningful cash flow. Our free cash flow has increased to $72 million in this quarter, up from $28 million in the year ago quarter on $67 million less revenue. Kevin will provide more insight in to this metric in just a few minutes. I want to briefly talk about our business services division primarily comprised of our New Edge network subsidiary. As you’ll recall when I arrived a little less than a year and a half ago New Edge was a hot topic of conversation with all of you because it was consuming meaningful amounts of cash and was a drag on our EBITDA.

I told you that the highest priority for us was to first stop the consumption of cash and neutralize the negative EBITDA impact it had on a consolidated Earthlink business. Put another way, essentially we needed to stop the bleeding. That was paramount. We have executed on that strategy. We believe our small and midsize business customers are however, more exposed to a big downturn in the economy than our very tenured consumer base which is not yet showing, as I mentioned earlier, a noticeable impact from that economic downturn.

We’ve seen our retail business customers downsizing their business locations at an increased pace which puts pressure on revenue churn. On the other hand, we’re seeing a positive impact on ARPU in this segment as we continue to gain traction with our new MPLS class of service over our DSL product platform. 34% of all new installs in the quarter were on this platform versus our legacy products. We believe this product represents an attractive price point for prospects who are trying to cut costs.

Given the economic downturn and its impact on small business this seems like it should be the right product at the right price at the right time. To that point we’ve just recently booked a significant new contract in the quarter with UFPC, or Unified Food Service Purchasing Coop, the exclusive central procurement organization for more than 17,000 Yum! Brand restaurants which include KFC, Pizza Hut and Taco Bell. New Edge has been selected as the preferred provider of private high speed wide area networks for UFPC so we’re really pleased with that.

But, to be clear, while our sales teams are gaining some momentum, especially with the new products that I just mentioned, New Edge’s top line growth will remain under pressure. We’ll continue to work aggressively on the cost side of this business to keep expenses in line with the revenue trends. So, while our business services group is currently generating positive EBITDA and is modestly cash flow positive, we expect that things are not going to get easier or materially better over the next several quarters.

Clearly, this part of the business has not been the central part of our strategy or our future outlook. My objective for our business segment will continue to keep it at last neutral to our operating results while we ride out the current economic storm. When this storm passes I believe this business will be much healthier. Our business segment in fact could have real realizable value to our shareholders. Now, more than ever we have to continue our discipline of focusing on cash results in that business.

One last point I’d like to make before I turn the call over to Kevin for a more in depth review of the financial results. I’d like to underscore our very strong cash position. We ended the quarter with $485 million in cash. There’s no question that our cash balance is a strategic weapon especially in this market environment. Now, let’s turn the call over to Kevin who will take you through the details or our financial performance this quarter and our guidance for the remainder of 2008 and next year.

Kevin M. Dotts

Over third quarter and year to date results are recognition of the successful execution of our strategy launched in mid 2007. Over the past 12 months of more we have greatly simplified the consumer access business and eliminated several cash draining initiatives. We have focused our demand creation activities on channels where we can be confident we can add subscribers who tenure and value will be greater than the payback period needed to cover their acquisition costs.

We continue to maximize ARPU and the associated profit on our customer acquisition offers and [inaudible] offers to ensure we are acquiring and maintaining lifetime value positive customers. We have been able to successfully manage our cost structure to keep pace with the decline in the revenue curve. As a result we have increased profitability compared to prior year results and while we have realized results better than we expected coming in to this year we expect that aggregate subscriber revenue and profitability will continue to decline in to the foreseeable future.

Our current objective is to maximize the cash generated by keeping our EBITDA margins generally consistent with these results while we determine if there strategic opportunities available to use that will increase shareholder value. Our overall revenue for the quarter was $230.8 million, a 22.5% decrease from the third quarter of last year and a $14.8 million decrease from last quarter primarily driven by declines in narrow band subscribers.

As the company continues to transition through this group of early life higher churn subscribers that Rolla spoke about earlier we expect to realize further revenue contraction. As churn attenuates we also expect to see reductions in our passive subscriber gross additions. We believe that as a result of subscriber declines revenues could decrease in the same relative range through the next quarter.

While variable costs such as cost of revenue, customer support and bad debt should also decrease to offset some of the revenue declines. As we look forward to 2009 we expect the decline in revenue to attenuate. We also expect our cost structure declines to attenuate as variable costs become a lower percentage of our total cost structure. Related to the improvements in monthly subscriber churn that we previously discussed we continue to see the underlying quality and predictability of our subscriber base perform as expected.

As the maturity or our customer base continues to grow, these customers tend to be more engaged and use more of our service offerings. We were pleased that our value added services which includes search graphical advertising and security products on a per subscriber basis improved to $2.85 per month from $2.68 per month in the third quarter of 2007. The company should benefit from the increased tenure and predictability of the customers’ behaviors and our ability to further monetize our interactions with them helping to offset some of the expected revenue declines.

Earthlink continues to maintain a high quality network access experience while simultaneously reducing network costs. However, gross margin did decrease approximately $10 million in the third quarter compared to the second quarter of 2008. We expect that our gross margin will continue to decline in the coming quarter in a similar range in rate. Earlier on the call Rolla spoke about the continued expected reductions in gross subscriber additions.

This is directly related to the significant reduction in sales and marketing expense which is down to $22 million for the third quarter, a 14% decline from second quarter of 2008 and down $49 million from the third quarter of 2007. However, going forward for the next several quarters as we see the level of gross adds moderate we expect a commensurate decline in sales and marketing expenses as success based bounties are expected to make up the greatest percentage of our spending in this area.

For the third quarter of 2008 this strong and ongoing focus on support costs reduction coupled with the reduced sales and marketing expenses resulted in adjusted EBITDA of $74 million, a $27 million improvement from the third quarter of 2007. As a result of the improvement in adjusted EBITDA this quarter Earthlink’s income from continuing operations was $55 million, or $0.49 per share compared to a loss from the continuing operations of $48 million or -$0.39 per share in the prior year third quarter representing a positive swing of $103 million year-over-year.

The prior third quarter results also included at least $42 million of equity losses for our proportionate share of [HELIO] operations which are no longer applicable to our 2008 results and $34 million of facility exit and restructuring costs related to our 2007 corporate restructuring plan. For the third quarter of 2008 Earthlink generated net income of $55 million or $0.49 per share compared the net loss of $79 million or -$0.65 per share in the third quarter of 2007. We used $2 million for capital expenditures and cash payments.

We used $2 million for capital expenditures and cash payments for subscriber based adds in the quarter compared to $19 million in the third quarter of 2007. Combined with the increase in adjusted EBITDA we generated $72 million of free cash flow during the third quarter 2008, up significantly from the $28 million generated in the third quarter of last year. Because of the free cash flow we generated offset by the $23 million used to repurchase 2.5 million shares our common stock we experienced a cash increase of $43 million in the third quarter 2008.

We ended the third quarter of 2008 with $485 million of cash and marketable securities. We will now provide an update on our outlook for 2008 and preliminary 2009 guidance. I will remind you that these statements are forward-looking and actual results may differ materially. The company undertakes no obligations to update these statements. Earthlink is revising and increasing its previously issued guidance for the remainder of 2008.

For the year, the company now expects to generate $290 million to $300 million in adjusted EBITDA. This adjusted EBITDA should also translate to $270 to $290 million of free cash flow as we now expect to incur between $10 million and $20 million of capital expenditures for the full year of 2008. Additionally, for 2008 Earthlink expects record income from continuing operations of $200 million to $210 million.

Now, I would like to provide our preliminary thoughts on 2009 given the secular trends in the access business, the macroeconomic environment and what we believe is the possibility given our ability to manage the cost structure of the business. Throughout 2008 Earthlink has realized financial results that were above our initial expectations. Much of this was driven by the fact that we entered 2008, we had little experience on what to expect from our customers and our people in a significantly simplified access business focused on maximizing cash flow.

Now with several quarters’ worth of experience we can reflect on the better performance of passive subscriber additions, certain sales channels, the stable trend churn performance of our tenured customers, the cost benefits of a significantly tenured customer base and our peoples’ ability to reduce variable and fixed costs. Thus far the company has been successful in eliminating additional back office support costs to compensate for the declines in revenues and gross margins resulting in strong EBITDA performance.

On a go forward basis we do not anticipate the ability to implement the type of large scale reduction opportunities that we have seen over the past 12 months or so. Additional revenue and gross margin decline will continue to put pressure on Earthlink’s EBITDA compared to the levels the company has generated over the past three quarters. In addition we are currently in a very challenging and uncharted economic environment.

While the core consumer access business has not demonstrated any concerning trends to date our business services segment is seeing some moderate churn impact. As we look forward to 2009 our goal is to manage our adjusted EBITDA margin rate to be generally consistent with 2008 results. Our 2009 preliminary view is that we expect to record $210 million to $225 million in adjusted EBITDA. This adjusted EBITDA should translate to $180 million to $205 million of free cash flow.

For 2009 Earthlink expects income from continuing operations of $135 million to $155 million which includes a tax expense of $20 million to $25 million as a result of the utilization of net operating loss carry forwards. Actual cash taxes related to the alternative minimum tax will be $8 million to $10 million and monies paid under this simply extend our tax asset on a regular basis going forward. In early 2009 when we discuss 2008 final results we’ll revisit these preliminary views for 2009. I would now like to turn the call back over to Rolla for some concluding remarks.

Rolla P. Huff

I wanted to spend a few minutes providing a little more insight in to how we’re thinking about 2009 given the guidance that Kevin just shared with you. As he mentioned, we expect to deliver between $210 million and $225 million dollars in adjusted EBITDA next year. This guidance range reflects a few important points, primarily it represents our intention to keep our EBITDA margins generally in line with 2008.

It’s also based on the belief that churn will continue to be within the historical bands that we have been reporting. In taking in to account the volatility in the overall macroeconomic environment, we believe it’s prudent to build in some potential for increased pressure on the revenue side in two specific areas. First, in a more difficult economy we see potential for increased potential for increased pressure on ARPU. We haven’t seen it yet but we believe there’s clearly that potential.

The second area is within our business services division as I had mentioned earlier in my remarks. While we don’t see any impact on churn currently on the consumer side we are already seeing it within our business services segment where our customer bankruptcies accounted to 30 to 40 basis points of increased churn in this quarter in the business services division. We’re preparing and accounting for the eventuality that this trend may continue in the year ahead.

At a high level next year’s focus is actually the same as this year’s focus, keeping our cost structure in line with revenue trends. Let me make one final point on that, if you recall I started my remarks today attributing our operating performance to the efforts of our employees. I think it’s significant to note that during this third quarter we notified approximately 100 of our people that their positions would be eliminated in the coming months. We continue to make the difficult but essential decisions for our business and we’re doing so by treating our employees with the respect that they have earned and deserve.

We treat our people the right way while they are with Earthlink and we treat them the right way in the event that we need to separate them from the business and we’ve worked hard to create a transparency with our people and with you about what our business currently is and what it’s not. You can’t get through these situations and these times with spend. Our people know that we’re not currently a growth business but that we are a business that has the potential to create meaningful value for them and for our shareholders if first and foremost we’re aligned around taking care of the customers that we have while also being focused on the profitability.

Our people understand that we are not and will not be a venture capital fund regardless of our cash balance. They understand because we talk about it all the time and we talk about it very openly. I’m taking the time to tell you this because you should know that this is the cultural that is sustaining Earthlink. This is the culture that’s allowing us to post the results that we have today and providing us the opportunity to realize the meaningful long term cash creation that exists in this access business.


It’s a culture that I suspect a great many companies are going to have to learn to develop to survive the next several years. I guess you could say that we were blessed with being forced in to this by our business model to get a bit of a head start on this emerging reality. We continue to believe in the value and inevitability of consolidation in the narrow band segment. While we clearly believe Earthlink is the best position and most logical consolidator we support consolidation whether we’re a buyer or a seller because the reality is it’s the best way to maximize shareholder value with these kinds of assets.

But to be clear, until others in the industry are prepared to accept that reality there will not be consolidation and we believe the various shareholder groups will likely realize less value than they otherwise could have. We think that’s unfortunate for all shareholder groups. Earthlink will continue to aggressively exploration adjacent industries that that when combined with our business model and core competencies could create real operating synergies in shareholder value.

I hope by now no one doubts our commitment to running our business with discipline and in a way that creates shareholder value. Through stock buybacks we’ve already returned a meaningful amount of cash to shareholders just in the past 12 to 16 months. We’ve been disciplined in our use of cash. We’ve not been out doing deals that create a risk reward profile that destroys long term shareholder value and believe me, those opportunities have been presented to us.

We’re taking the prudent steps to consider the strategic leverage our cash position creates especially in this time of financial crisis. The world has changed over the past month I think you all would agree, our relative equity valuation gap with others and adjacent industries has been substantially reduced while the relative strength of our balance sheet has substantially increased. Those two realities have expanded our options but have not at all changed by view about the need for us to be disciplined in our approach.

Again, if we can find no alternatives that provide scale, operating synergy and most importantly an acceptable risk adjusted return in a reasonable time frame, we’ll happily pursue the process of continuing to return cash through stock buybacks and/or a more structured dividend process. Given the volatility debt markets the equity markets and actually the overall economy, I have to tell you I feel no rush about making decisions around deals or capital structure changes.

As I said on the last call we’ll update you about our thinking on our year end call and I do expect to have at least a little more firmness around our plans at that time. With that, operator why don’t we go ahead and open up the lines for any questions that might be out there.



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