Broadband appeared to buoy EarthLink Inc. in the second quarter, as the Atlanta-based Internet-service provider posted improved earnings that saw broadband subscribership on the rise.
For the first time, in the a quarter the ISP signed on more retail cable-modem customers than retail digital subscriber line customers. But while the broadband numbers are growing, EarthLink has yet to turn a profit on its high-speed-data business.
EarthLink's revenue totaled $335.5 million for the quarter, up 10.4 percent compared to second-quarter 2001. Earnings before interest, taxes, depreciation and amortization (EBITDA) came in at $12 million, compared to an $8.2 million loss a year ago. Overall net losses for the ISP were in lower, totaling $40.4 million compared to $98.7 million in losses posted in 2001.
EarthLink added 72,000 broadband subscribers, for a total of 604,000, with broadband revenue coming in at $57.9 million, up 42.6 percent from second-quarter 2001. Between 30 percent and 40 percent of those customers are upgrading from EarthLink's narrowband service.
UP IN 39 MARKETS
EarthLink has finished rolling out service to all 39 Time Warner Cable markets, and recently announced it would debut service in AT&T Broadband's Seattle system, followed this fall by the Boston area.
Broadband revenue now constitutes 17.2 percent of EarthLink's revenue stream, compared to $260.7 million for the narrowband business. For the remainder of the year, EarthLink expects to add between 250,000 and 300,000 broadband customers.
But it isn't a cash-flow positive business. With the cost to sign up new subscribers somewhere between $225 and $250, EarthLink has yet to generate continuing subscriber revenue to pay down that expense.
When it started its broadband service, EarthLink expected it would initially cost more money than it collected, "and when you include the sales and marketing investment that we are making growing the broadband business rapidly, broadband would be EBITDA-negative at that point, and that is still true," said chief financial officer and executive vice president, finance and administration Lee Adrean.
While EarthLink's broadband business looks fairly healthy, there are still some potentially troubling questions for industry observers.
"Like any start-up, to gain your first customers is generally at a loss. The challenge is, however, are you gaining the right customers?" asked Leichtman Research Inc. president Bruce Leichtman. "Or are you putting out the offer, and they will leave after the offer is done?
"And that is the challenge. I don't know if they are getting the right customers."
EarthLink appears to be committed to broadband over the long term, and has done much to increase its cash on hand in this quarter, according to Jupiter Research Inc. broadband analyst Dylan Brooks. But there is still one troubling trend.
"My bigger fear, frankly, is that when I do some calculations on that broadband revenue and do some average customer counts, I see that continuing to trend downward every month," said Brooks. "It's well less than the $42 list price, of course, but it is trending downwards."
Brooks estimates that EarthLink's average revenue per customer has dropped from $40 per month in the third quarter of 2001 to $30 per month at present. The culprit? Introductory discounts.
Because other providers offer broadband signup discounts, EarthLink has to keep up with the Joneses in terms of incentive. But that trims the overall revenue intake — not just for EarthLink, but for other cable-modem providers, Brooks said.
"It's ironic because I've seen, in my view, some faulty analysis of broadband prices going up," he said. "Even when we looked at last year — when broadband prices were up and that was a problem — when you look at the average revenues being paid by each subscriber on a monthly basis, it continued to fall throughout 2001, and has been falling in 2002 as well, and we don't see that trend ending any time soon."