@import url(http://finance.paidcontent.org/client/paidcontent/privatelabel.css);
February 05, 2009 at 07:00 AM EST
EarthLink Announces Fourth Quarter and Full Year 2008 Results

Generates Record Total Year Income from Continuing Operations, Adjusted EBITDA and Free Cash Flow

ATLANTA, Feb. 5 /PRNewswire-FirstCall/ -- EarthLink, Inc. (Nasdaq: ELNK) today announced financial results for its fourth quarter and full year ended December 31, 2008. Highlights for the fourth quarter include:

  • Income from continuing operations of $27.3 million, or $0.25 per share, versus $22.6 million, or $0.19 per share, in the fourth quarter of 2007
  • Net income of $27.2 million, or $0.25 per share
  • Adjusted EBITDA (a non-GAAP measure) of $72.4 million
  • Free cash flow (a non-GAAP measure) of $70.1 million
  • 2008 year-end cash and marketable securities balance of $534.4 million

"I am pleased to report that EarthLink generated $308.9 million in Adjusted EBITDA for the full year 2008, a 66 percent increase over 2007," said Rolla P. Huff, EarthLink's chairman and chief executive officer. "During the course of 2008 we made meaningful progress in optimizing our business model around excellent customer service, continuous operating improvements and shareholder value creation."

Added Huff, "With a healthy balance sheet anchored by $534 million in cash and marketable securities, and a consumer access business that we expect will continue to generate significant cash flow, EarthLink is in a strong financial position. Our company's financial strength and relative value in the technology industry have substantially improved over the past year. As a result, EarthLink has an expanded set of potential strategic alternatives that we are considering."

Financial and Operating Results

EarthLink reported revenue of $216.1 million in the fourth quarter and $955.6 million for the full year 2008. This represents a 23 percent decrease over the prior year quarter and a 21 percent decrease compared to the 2007 full year result. The expected year over year variances were primarily driven by reductions in EarthLink's narrowband and broadband customer base, given the company's revised business focus on more tenured and profitable subscribers.

Total sales and marketing, operations, customer support, and general and administrative expenses for the fourth quarter and full year 2008, were $71.0 million and $328.9 million, respectively. This represents a decrease of 40 percent versus the prior year quarter, and a decrease of 49 percent versus the full year 2007 comparable expenses.

Profitability and Other Financial Measures

EarthLink realized $27.3 million, or $0.25 per share, and $198.1 million, or $1.80 per share, of income from continuing operations in the fourth quarter and full year 2008, respectively, compared to $22.6 million, or $0.19 per share, and a loss of $(54.8) million, or $(0.45) per share, in the fourth quarter and full year 2007, respectively. The fourth quarter and full year 2007 results included $31.2 million and $65.4 million, respectively, of facility exit and restructuring costs, compared to $5.0 million and $9.1 million, respectively, in the fourth quarter and full year 2008. In addition, the fourth quarter and full year 2008 results included a $78.7 million non-cash impairment charge for goodwill and intangible assets, compared to a $4.3 million non-cash impairment charge in the prior year periods, and included an income tax benefit of $56.1 million and $32.2 million, respectively, compared to $1.6 million and $1.2 million, respectively, in the fourth quarter and full year 2007. The income tax benefit during 2008 was primarily due to the partial release of EarthLink's valuation allowance related to its deferred tax assets.

Net income was $27.2 million or $0.25 per share for the fourth quarter, and $189.6 million or $1.72 per share for the full year 2008, compared to a net loss of $(9.5) million, or $(0.08) per share, and $(135.1) million, or $(1.11) per share, for the fourth quarter and full year 2007, respectively.

Due to improvements in customer churn and better than expected passive subscriber additions, coupled with reductions in sales and marketing and back office support expenses, EarthLink generated Adjusted EBITDA (a non-GAAP measure, see definition in "Non-GAAP Measures" below) of $72.4 million for the fourth quarter of 2008, a 2 percent increase compared to the fourth quarter of 2007. EarthLink generated Adjusted EBITDA of $308.9 million for the full year 2008, a 66 percent increase compared to the full year 2007.

Balance Sheet and Cash Flow

Free cash flow (a non-GAAP measure, see definition in "Non-GAAP Measures" below) was $70.1 million and $301.9 million during the fourth quarter and the full year 2008, respectively, compared to $59.1 million and $125.1 million during the fourth quarter and the full year 2007, respectively. The company had capital expenditures, including subscriber base acquisitions, of $2.2 million in the fourth quarter and $7.0 million for the full year 2008, down from $12.0 million and $60.8 million during the fourth quarter and full year 2007, respectively.

EarthLink ended the fourth quarter with $534.4 million in cash and marketable securities, an increase of $245.8 million from December 31, 2007.

Non-GAAP Measures

Adjusted EBITDA is defined as income (loss) from continuing operations before interest income (expense) and other, net, income taxes, depreciation and amortization, stock-based compensation expense under SFAS No. 123(R), net losses of equity affiliate, gain (loss) on investments, net, impairment of goodwill and intangible assets, and facility exit and restructuring costs.

Free cash flow is defined as income from continuing operations before interest income (expense) and other, net, income taxes, depreciation and amortization, stock-based compensation expense under SFAS No. 123(R), net losses of equity affiliate, gain (loss) on investments, net, impairment of goodwill and intangible assets, and facility exit and restructuring costs, less cash used for purchases of property and equipment and purchases of subscriber bases.

Adjusted EBITDA and free cash flow are non-GAAP financial performance measures. They should not be considered in isolation or as an alternative to measures determined in accordance with U.S. generally accepted accounting principles. Please refer to the Consolidated Financial Highlights for a reconciliation of these non-GAAP financial performance measures to the most comparable measures reported in accordance with U.S. generally accepted accounting principles and Footnote 5 of the Consolidated Financial Highlights for a discussion of the presentation, comparability and use of such financial performance measures.

Business Outlook

The following statements are forward-looking, and actual results may differ materially. See comments under "Cautionary Information Regarding Forward-Looking Statements" below. EarthLink undertakes no obligation to update these statements.

As announced in the company's third quarter 2008 earnings press release, for full year 2009 management expects Adjusted EBITDA of $210 million to $225 million. Today, the company is updating its previously presented guidance for free cash flow and income from continuing operations. EarthLink is increasing its full year guidance for free cash flow to $190 million to $215 million, based upon the aforementioned Adjusted EBITDA guidance along with estimated capital expenditures of between $10 million and $20 million. Additionally, EarthLink now expects income from continuing operations to be $75 million to $95 million for full year 2009, with the largest change from the prior guidance related to non-cash book tax rates following the company's aforementioned valuation release in the fourth quarter of 2008.

Conference Call for Analysts and Investors

Conference Call Details

    Thursday, February 5, 2009, at 8:30 a.m. EST  hosted by EarthLink's
    Chairman and Chief Executive Officer, Rolla P. Huff and Chief Financial
    Officer, Kevin Dotts.
    U.S. and Canada Dial-in Number      800-706-0730
    International Dial-in Number        706-634-5173
    Participants reference the EarthLink call and dial in 10 minutes prior to
    scheduled start time.

Webcast

A live Webcast of the conference call will be available at:

http://ir.earthlink.net/index.cfm

Replay

    Replay available from at 11:30 a.m. EST on February 5 through midnight on
    February 12.
    Dial 800-642-1687 from US and Canada, International callers dial
    706-645-9291.
    The replay confirmation code is 80008097.

The Webcast will be archived on the company's website at:

http://ir.earthlink.net/events.cfm

About EarthLink

"EarthLink. We revolve around you(TM)." A leading Internet service provider, Atlanta-based EarthLink has earned an award-winning reputation for outstanding customer service and its suite of online products and services. EarthLink offers what every user should expect from their Internet experience: high-quality connectivity, minimal online intrusions and customizable features. Whether it's dial up, high speed, voice, web hosting or "EarthLink Extras" like home networking or security, EarthLink connects people to the power and possibilities of the Internet. Learn more about EarthLink by calling (800) EARTHLINK or visiting EarthLink's website at www.EarthLink.net.

Cautionary Information Regarding Forward-Looking Statements

This press release includes "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. We disclaim any obligation to update any forward-looking statements contained herein, except as may be required pursuant to applicable law. With respect to forward-looking statements in this press release, the company seeks the protections afforded by the Private Securities Litigation Reform Act of 1995. These risks include, without limitation, (1) that the continued decline of our consumer access subscribers, combined with the change in mix of our consumer access subscriber base from narrowband to broadband, will adversely affect our results of operations; (2) that we face significant competition which could reduce our profitability; (3) that adverse economic conditions may harm our business; (4) 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; (5) 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; (6) 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; (7) that our business is dependent on the availability of third-party telecommunications service providers; (8) that our commercial and alliance arrangements may not be renewed, which could adversely affect our results of operations; (9) 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; (10) that service interruptions or impediments could harm our business; (11) that government regulations could adversely affect our business or force us to change our business practices; (12) that privacy concerns relating to our technology could damage our reputation and deter current and potential users from using our services; (13) that we may not be able to protect our proprietary technologies; (14) 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; (15) that we could face substantial liabilities if we are unable to successfully defend against legal actions; (16) that our business depends on effective business support systems, processes and personnel; (17) 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; (18) 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; (19) that we may be required to recognize additional impairment charges on our goodwill and intangible assets, which would adversely affect our results of operations and financial position; (20) that the use of our net operating losses and certain other tax attributes could be limited in the future; (21) that our stock price has been volatile historically and may continue to be volatile; (22) that our indebtedness could adversely affect our financial health and limit our ability to react to changes in our industry; and (23) 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. These risks and uncertainties, as well as other risks and uncertainties that could cause our actual results to differ significantly from management's expectations, are not intended to represent a complete list of all risks and uncertainties inherent in our business, and should be read in conjunction with the more detailed cautionary statements and risk factors included in our Annual Report on Form 10-K for the year ended December 31, 2007.

                                 EARTHLINK, INC.
            Unaudited Condensed Consolidated Statements Of Operations
                      (in thousands, except per share data)

                                     Three Months Ended  Twelve Months Ended
                                        December 31,         December 31,
                                      ---------------    -------------------
                                        2007      2008        2007      2008
                                        ----      ----        ----      ----
    Revenues:
      Access and service            $251,215  $193,496  $1,085,132  $855,079
      Value-added services            30,774    22,573     130,862   100,498
                                      ------    ------     -------   -------
        Total revenues               281,989   216,069   1,215,994   955,577

    Operating costs and
     expenses:
      Cost of revenues               104,839    83,265     442,697   360,920
      Sales and marketing             44,452    19,299     291,105    98,212
      Operations and
       customer support               46,917    29,883     221,443   136,797
      General and administrative      27,068    21,868     128,412    93,878
      Amortization of
       intangible assets               3,798     2,196      14,672    13,349
      Impairment of goodwill
       and intangible assets (1)       4,250    78,672       4,250    78,672
      Facility exit and
       restructuring costs (2)        31,219     4,973      65,381     9,142
                                      ------     -----      ------     -----
        Total operating costs and
         expenses                    262,543   240,156   1,167,960   790,970

    Income (loss) from operations     19,446   (24,087)     48,034   164,607
    Net losses of equity affiliate         -         -    (111,295)        -
    Gain (loss) on investments, net       15    (2,969)     (5,585)    2,708
    Interest income (expense) and
     other, net                        1,542    (1,747)     12,824    (1,381)
                                       -----    ------      ------    ------
        Income (loss) from
         continuing operations
         before income taxes          21,003   (28,803)    (56,022)  165,934
    Income tax benefit (3)             1,592    56,107       1,227    32,184
                                       -----    ------       -----    ------
        Income (loss) from
         continuing operations        22,595    27,304     (54,795)  198,118
    Loss from discontinued
     operations, net of tax (4)      (32,059)      (68)    (80,302)   (8,506)
                                     -------       ---     -------    ------
        Net income (loss)            $(9,464)  $27,236   $(135,097) $189,612
                                     =======   =======   =========  ========

    Basic net income
     (loss) per share
      Continuing operations            $0.19     $0.25      $(0.45)    $1.81
      Discontinued operations          (0.27)    (0.00)      (0.66)    (0.08)
                                       -----     -----       -----     -----
      Basic net income
       (loss) per share               $(0.08)    $0.25      $(1.11)    $1.73
                                      ======     =====      ======     =====
      Basic weighted
       average common
       shares outstanding            118,247   108,449     121,633   109,531
                                     =======   =======     =======   =======

    Diluted net income
     (loss) per share
      Continuing operations            $0.19     $0.25      $(0.45)    $1.80
      Discontinued operations          (0.27)    (0.00)      (0.66)    (0.08)
                                       -----     -----       -----     -----
      Diluted net income
       (loss) per share               $(0.08)    $0.25      $(1.11)    $1.72
                                      ======     =====      ======     =====
      Diluted weighted
       average common
       shares outstanding            119,229   109,617     121,633   110,051
                                     =======   =======     =======   =======



                             EARTHLINK, INC.
      Reconciliation of Income (Loss) from Continuing Operations to
                            Adjusted EBITDA (5)
                              (in thousands)

                               Three Months Ended   Twelve Months Ended
                                  December 31,         December 31,
                               ------------------   ------------------
                                 2007      2008      2007       2008
                                 ----      ----      ----       ----

    Income (loss) from
     continuing operations      $22,595  $27,304  $(54,795) $198,118
    Income tax benefit           (1,592) (56,107)   (1,227)  (32,184)
    Depreciation and
     amortization                11,629    6,982    48,614    36,333
    Stock-based
     compensation expense         4,472    5,814    19,553    20,133
    Net losses of equity
     affiliate                        -        -   111,295         -
    Gain (loss) on
     investments, net               (15)   2,969     5,585    (2,708)
    Interest income
     (expense) and other,
     net                         (1,542)   1,747   (12,824)    1,381
    Impairment of goodwill
     and intangible
     assets (1)                   4,250   78,672     4,250    78,672
    Facility exit and
     restructuring costs (2)     31,219    4,973    65,381     9,142
                                 ------    -----    ------     -----
      Adjusted EBITDA (5)       $71,016  $72,354  $185,832  $308,887
                                =======  =======  ========  ========

    Depreciation - cost
     of revenues                 $3,892   $2,031   $17,194   $11,453
    Depreciation - other          3,939    2,755    16,748    11,531
    Amortization of
     intangible assets            3,798    2,196    14,672    13,349
                                  -----    -----    ------    ------
      Depreciation and
       amortization             $11,629   $6,982   $48,614   $36,333
                                =======   ======   =======   =======


                             EARTHLINK, INC.
      Reconciliation of Income (Loss) From Continuing Operations to
                            Free Cash Flow (5)
                              (in thousands)


                             Three Months Ended   Twelve Months Ended
                                December 31,         December 31,
                             ------------------   ------------------
                                2007     2008       2007      2008
                                ----     ----       ----      ----

    Income (loss) from
     continuing operations      $22,595  $27,304  $(54,795) $198,118
    Income tax benefit           (1,592) (56,107)   (1,227)  (32,184)
    Depreciation and
     amortization                11,629    6,982    48,614    36,333
    Stock-based
     compensation expense         4,472    5,814    19,553    20,133
    Net losses of equity
     affiliate                        -        -   111,295         -
    Gain (loss) on
     investments, net               (15)   2,969     5,585    (2,708)
    Interest income
     (expense) and other, net    (1,542)   1,747   (12,824)    1,381
    Impairment of goodwill
     and intangible assets (1)    4,250   78,672     4,250    78,672
    Facility exit and
     restructuring costs (2)     31,219    4,973    65,381     9,142
    Purchases of property
     and equipment              (11,161)  (1,877)  (53,478)   (5,754)
    Purchases of
     subscriber bases              (789)    (352)   (7,290)   (1,232)
                                   ----     ----    ------    ------
      Free cash flow (5)        $59,066  $70,125  $125,064  $301,901
                                =======  =======  ========  ========


                             EARTHLINK, INC.
       Reconciliation of Guidance Provided in Non-GAAP Measures (5)
                              (in millions)

                                      Year Ending
                                      December 31,
                                          2009
                                      -----------
    Income from continuing
     operations                        $75 - $95
    Depreciation                              19
    Amortization of
     intangible assets                         9
    Stock-based compensation
     expense                                  17
    Income tax provision                 75 - 70
    Interest income
     (expense) and other, net                 15
                                     -----------
      Adjusted EBITDA (5)            $210 - $225
                                     ===========

                                      Year Ending
                                      December 31,
                                          2009
                                      -----------
    Income from continuing
     operations                        $75 - $95
    Depreciation                              19
    Amortization of
     intangible assets                         9
    Stock-based
     compensation expense                     17
    Income tax provision                 75 - 70
    Interest income
     (expense) and other, net                 15
    Purchases of property
     and equipment                    (20) - (10)
                                      -----------
      Free cash flow (5)             $190 - $215
                                      ===========



                                  EARTHLINK, INC.
               Supplemental Financial Data and Key Operating Metrics


                            December 31, June 30,   September 30, December 31,
                               2007       2008           2008          2008
                               ----       ----           ----          ----
    Balance Sheet Data                      (in thousands)
    Cash and marketable
     securities              $288,595   $441,589       $484,967      $534,373
    Long-term debt            258,750    258,750        258,750       258,750
    Stockholders' equity      261,473    371,077        411,781       448,485

    Employee Data
    Number of employees
     at end of period (6)         983        857            789           754


                            December 31, June 30,   September 30, December 31,
                               2007       2008           2008          2008
                               ----       ----           ----          ----
    Subscriber Data (7)
    Consumer services
      Narrowband access
       subscribers          2,624,000  2,130,000      1,920,000     1,747,000
      Broadband access
       subscribers (8)      1,059,000    988,000        933,000       896,000
                            ---------    -------        -------       -------
        Total consumer
         subscribers        3,683,000  3,118,000      2,853,000     2,643,000

    Business services
      Narrowband access
       subscribers             27,000     24,000         19,000        17,000
      Broadband access
       subscribers             66,000     63,000         61,000        59,000
      Web hosting
       accounts               100,000     94,000         91,000        87,000
                              -------     ------         ------        ------
        Total business
         subscribers          193,000    181,000        171,000       163,000

    Total subscribers
     at end of period       3,876,000  3,299,000      3,024,000     2,806,000
                            =========  =========      =========     =========


                            Three Months Ended          Twelve Months Ended
                               December 31,                 December 31,
                            ------------------          -------------------
                              2007       2008           2007          2008
                              ----       ----           ----          ----
    Subscriber Activity
    Subscribers at
     beginning of period    4,139,000  3,024,000      5,313,000     3,876,000
    Gross organic
     Subscriber additions     363,000    114,000      1,994,000       666,000
    Acquired subscribers            -      6,000         65,000         8,000
    Adjustment (9)                  -          -       (753,000)      (15,000)
    Churn                    (626,000)  (338,000)    (2,743,000)   (1,729,000)
                             --------   --------     ----------    ----------
    Subscribers at end
     of period              3,876,000  2,806,000      3,876,000     2,806,000
                            =========  =========      =========     =========

    Churn Rate (10)               5.2%       3.9%           5.1%          4.4%

    Consumer Data
    Average subscribers
     (11)                   3,817,000  2,747,000      4,321,000     3,130,000
    ARPU (12)                  $20.50     $21.18         $19.77        $20.76
    Churn rate (10)               5.3%       3.9%           5.2%          4.4%

    Business Data
    Average subscribers
     (11)                     197,000    167,000        207,000       179,000
    ARPU (12)                  $79.87     $82.70         $76.62        $81.64
    Churn rate (10)               2.8%       2.7%           2.6%          2.8%



                             EARTHLINK, INC.
            Supplemental Schedule of Segment Information (13)
                              (in thousands)


                                Three Months Ended Twelve Months Ended
                                   December 31,       December 31,
                                 ---------------   -------------------
                                   2007     2008        2007     2008
                                   ----     ----        ----     ----
    Consumer Services
      Revenues
        Access and service     $204,621 $152,578    $897,423 $682,135
        Value-added services     30,094   21,958     127,985   97,741
                                 ------   ------     -------   ------
        Total revenues          234,715  174,536   1,025,408  779,876
      Cost of revenues           75,442   58,798     324,465  259,851
                                 ------   ------     -------  -------
      Gross margin              159,273  115,738     700,943  520,025
      Segment operating
       expenses                  86,271   42,740     506,975  207,236
                                 ------   ------     -------  -------
      Segment income from
       operations               $73,002  $72,998    $193,968 $312,789
                                =======  =======    ======== ========

    Business Services
      Revenues
        Access and service      $46,594  $40,918    $187,709 $172,944
        Value-added services        680      615       2,877    2,757
                                    ---      ---       -----    -----
        Total revenues           47,274   41,533     190,586  175,701
      Cost of revenues           29,397   24,467     118,232  101,069
                                 ------   ------     -------  -------
      Gross margin               17,877   17,066      72,354   74,632
      Segment operating
       expenses                  13,505   11,968      58,548   51,276
                                 ------   ------      ------   ------
      Segment income from
       operations                $4,372   $5,098     $13,806  $23,356
                                 ======   ======     =======  =======

    Consolidated
      Revenues
        Access and service     $251,215 $193,496  $1,085,132 $855,079
        Value-added services     30,774   22,573     130,862  100,498
                                 ------   ------     -------  -------
        Total revenues          281,989  216,069   1,215,994  955,577
      Cost of revenues          104,839   83,265     442,697  360,920
                                -------   ------     -------  -------
      Gross margin              177,150  132,804     773,297  594,657
      Direct segment
       operating expenses        99,776   54,708     565,523  258,512
                                 ------   ------     -------  -------
      Segment income from
       operations                77,374   78,096     207,774  336,145
      Stock-based
       compensation expense       4,472    5,814      19,553   20,133
      Amortization of
       intangible assets          3,798    2,196      14,672   13,349
      Impairment of goodwill
       and intangible assets
       (1)                        4,250   78,672       4,250   78,672
      Facility exit and
       restructuring costs (2)   31,219    4,973      65,381    9,142
      Other operating expenses   14,189   10,528      55,884   50,242
                                 ------   ------      ------   ------
      Income (loss) from
       operations               $19,446 $(24,087)    $48,034 $164,607
                                ======= ========     ======= ========



                              EARTHLINK, INC.
              Footnotes to Consolidated Financial Highlights

    1. During the fourth quarter of 2008, EarthLink concluded that the
    goodwill and certain of the intangible assets recorded as a result of its
    April 2006 acquisition of New Edge Networks were impaired and recorded a
    non-cash impairment charge of $78.7 million. EarthLink concluded the
    carrying value of its goodwill, customer relationships and trade names
    related to the New Edge acquisition were impaired in conjunction with its
    annual test of goodwill and intangible assets deemed to have indefinite
    lives as well as an updating of its long-term outlook.

    2. In August 2007, EarthLink adopted a restructuring plan (the "2007
    Plan") to reduce costs and improve the efficiency of the Company's
    operations. The 2007 Plan was the result of a comprehensive review of
    operations within and across the Company's functions and businesses.
    Under the 2007 Plan, the Company reduced its workforce by approximately
    900 employees, closed office facilities in Orlando, Florida; Knoxville,
    Tennessee; Harrisburg, Pennsylvania and San Francisco, California and
    consolidated its office facilities in Atlanta, Georgia and Pasadena,
    California. The 2007 Plan was primarily implemented during the later half
    of 2007 and during 2008.

    Facility exit and restructuring costs consisted of the following for the
    periods presented:


                                  Three Months Ended  Twelve Months Ended
                                     December 31,       December 31,
                                     ------------       ------------
                                      2007    2008      2007     2008
                                      ----    ----      ----     ----
                                             (in thousands)
      2007 Restructuring Plan
        Severance and personnel-
         related costs              $1,105    $(13)  $30,303     $461
        Lease termination and
         facilities-related costs   11,487   1,456    12,216    4,808
        Non-cash asset
         impairments                17,134   3,618    20,621    4,132
        Other associated costs         383     (88)    1,131       (7)
                                       ---     ---     -----       --
                                    30,109   4,973    64,271    9,394
      Legacy Restructuring Plans     1,110       -     1,110     (252)
                                     -----    -----    -----     ----
        Total facility exit and
         restructuring costs       $31,219  $4,973   $65,381   $9,142
                                   =======  ======   =======   ======

    3. During the fourth quarter of 2008, EarthLink released approximately
    $66.0 million of its valuation allowance related to its deferred tax
    assets.  These deferred tax assets relate primarily to net operating loss
    carryforwards which EarthLink determined, in accordance with SFAS No. 109,
    "Accounting for Income Taxes," it will more likely than not be able to
    utilize due to the generation of sufficient taxable income in the future.
    Of the total valuation allowance release, approximately $56.0 million was
    recorded as an income tax benefit in the Statement of Operations
    and the remainder relates to acquired net operating losses and reduced
    goodwill on the Balance Sheet.

    4. The Company has reflected its municipal wireless broadband results of
    operations as discontinued operations for all periods presented.
    The following is summarized results of operations related to the Company's
    discontinued operations for the periods presented:

                                  Three Months Ended  Twelve Months Ended
                                     December 31,       December 31,
                                     ------------       ------------
                                      2007    2008      2007     2008
                                      ----    ----      ----     ----
                                             (in thousands)
      Revenues                        $729      $-    $2,097   $1,305
      Operating costs and
       expenses                     (4,918)    (35)  (33,871)  (4,568)
      Impairment and other costs   (27,870)   (246)  (48,528)  (6,327)
      Income tax benefit                 -     213         -    1,084
                                   -------     ---    ------    -----
      Loss from discontinued
       operations, net of tax     $(32,059)   $(68) $(80,302) $(8,506)
                                  ========    ====  ========  =======

    5. Adjusted EBITDA is defined as income (loss) from continuing operations
    before interest income (expense) and other, net, income taxes,
    depreciation and amortization, stock-based compensation under SFAS No.
    123(R), net losses of equity affiliate, gain (loss) on investments, net,
    impairment of goodwill and intangible assets, and facility exit and
    restructuring costs.  Free cash flow is defined as income (loss) from
    continuing operations before interest income (expense) and other, net,
    income taxes, depreciation and amortization, stock-based compensation
    under SFAS No. 123(R), net losses of equity affiliate, gain (loss) on
    investments, net, impairment of goodwill and intangible assets and
    facility exit and restructuring costs, less cash used for purchases of
    property and equipment and purchases of subscriber bases.

    Adjusted EBITDA and free cash flow are non-GAAP measures and are not
    determined in accordance with U.S. generally accepted accounting
    principles.  These financial performance measures are not indicative of
    cash provided or used by operating activities and may differ from
    comparable information provided by other companies, and they should not be
    considered in isolation, as an alternative to, or more meaningful than
    measures of financial performance determined in accordance with U.S.
    generally accepted accounting principles. These financial performance
    measures are commonly used in the industry and are presented because
    EarthLink believes they provide relevant and useful information to
    investors. EarthLink utilizes these financial performance measures to
    assess its ability to meet future capital expenditures and working capital
    requirements. EarthLink also uses these financial performance measures to
    evaluate the performance of its business, for budget planning purposes and
    as factors in its employee compensation programs.

    6. Represents full-time equivalents.

    7. Subscriber counts do not include nonpaying customers. Customers
    receiving service under promotional programs that include periods of free
    service at inception are not included in subscriber counts until they
    become paying customers.

    8. Paying customers who subscribe to EarthLink DSL and Home Phone service
    are counted as both a broadband subscriber and a voice subscriber.

    9. In April 2007, EarthLink removed 753,000 EarthLink supported Embarq
    customers from its broadband subscriber counts due to the expiration of
    EarthLink's wholesale contract with Embarq. During the year ended December
    31, 2008, EarthLink removed 15,000 EarthLink supported Sprint customers
    from its broadband subscriber counts due to the termination of the
    wholesale arrangement by Sprint.

    10. Churn rate is used to measure the rate at which subscribers
    discontinue service on a voluntary or involuntary basis.  Churn rate is
    computed by dividing the average monthly number of subscribers that
    discontinued service during the period by the average subscribers for the
    period.

    11. Average subscribers for the three month periods is calculated by
    averaging the ending monthly subscribers or accounts for the four months
    preceding and including the end of the quarterly period. Average
    subscribers for the twelve month periods is calculated by averaging the
    ending monthly subscribers or accounts for the thirteen months preceding
    and including the end of the period.

    12. ARPU represents the average monthly revenue per user (subscriber).
    ARPU is computed by dividing average monthly revenue for the period by the
    average number of subscribers for the period. Average monthly revenue used
    to calculate ARPU includes recurring service revenue as well as
    nonrecurring revenues associated with equipment and other one-time charges
    associated with initiating or discontinuing services.

    13. EarthLink's business segments are strategic business units that are
    managed based upon differences in customers, services and marketing
    channels. EarthLink's Consumer Services segment provides Internet access
    services and related value-added services to individual customers. These
    services include dial-up Internet access, high-speed Internet access and
    voice service, among others. EarthLink's Business Services segment
    provides of integrated communications services and related value-added
    services to businesses and communications carriers. These services include
    managed private IP-based networks, dedicated Internet access and web
    hosting, among others.

    EarthLink evaluates performance of its operating segments based on segment
    income from operations. Segment income from operations includes revenues
    from external customers, related cost of revenues and operating expenses
    directly attributable to the segment, which include expenses over which
    segment managers have direct discretionary control, such as advertising
    and marketing programs, customer support expenses, site operations
    expenses, product development expenses, certain technology and facilities
    expenses, billing operation and provisions for doubtful accounts. Segment
    income from operations excludes other income and expense items and certain
    expenses that segment managers do not have discretionary control over.
    Costs excluded from segment income from operations include various
    corporate expenses (consisting of certain costs such as corporate
    management, human resources, finance and legal), amortization of
    intangible assets, stock-based compensation expense under SFAS No. 123(R),
    impairment of goodwill and intangible assets and facility exit and
    restructuring costs, as they are not evaluated in the measurement of
    segment performance.

SOURCE EarthLink, Inc.

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