In the Q4 results and forward guidance released by Earthlink this morning, you can just tell that the transformation CEO Rolla Huff is trying to pull off has a lot of miles yet to go. They are looking to newer IT and managed services capabilities for growth, but the results of that effort are still dwarfed by the declining fiber, CLEC, and access businesses they are using to get there.
Revenue of $331.6M was $3M or so ahead of expectations, but included an $8M settlement benefit to get there. Likewise, EBITDA of $66.5M was up sequentially and ahead of guidance, but would have been on the low side without the one time benefit - the same goes for the earnings per share of $0.00. Guidance for 2013 revenues of $1.250-1.265B and EBITDA of $210-2525M were a bit lighter than expected as well. But they *did* provide revenue guidance, which they haven't done in the past and which suggests growing confidence in their visibility on the overall revenue streams.
But none of this matters as much as whether the reality of traction in the managed services growth engine they have been spending so much time on will match their hopes. The wholesale and wholesale and enterprise growth products now make up 22% of total revenue, which is starting to be relevant but still small relative to the other 78% of course. It will take a long time to flip that ratio organically.
And lower-end CLEC sales were soft in the second half of 2012, impacted by cable penetration into the SMB market and economic softness, and that's going to dominate the overall numbers this year. As the layoffs news from the end of 2012 shows, Earthlink has been compensating via cost cutting. Managing a declining business is something Earthlink knows how to do, although that doesn't make it any less painful for those who get the short end of the stick.
During the call, they said 220 employees from the CLEC side of things focused on smaller markets were (or will be) affected, which will come as no surprise to Ramblings' readers. They're also phasing out new sales in the systems equipment business (aka PBX), which probably won't be the only product line that falls by the wayside as the process continues. In addition, they're putting both Sales and Marketing under Mike Toplisek, who came over from XO last May and is obviously expanding his influence.
On the cloud/datacenter expansion they talked about last quarter, Earthlink emphasized that it's not out there building space and power, it's assembling cloud platforms while leasing the infrastructure from two large providers. That seemed obvious to me at the time, as the phrase 'data center' is one of the most fungible in the sector - but there does seem to have been some confusion on the subject. The new fiber and cloud capacity is still coming online, and has only really affected the capex line thus far.
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