What a difference a year makes: Last summer, EarthLink (ELNK) was burning millions on “virtual” wireless carrier Helio, which rival Virgin Mobile (VM) just bought for peanuts; and municipal wi-fi projects that never panned out. Now it’s a smaller company making a handy profit: The Atlanta-based Internet service provider just posted solid Q2 results, with revenues in line with the Street’s expectations and earnings far surpassing them. Shares are up 10.3% to $9.60.
What changed? About a year ago, CEO Rolla Huff came in with a mission: Cut costs, and focus the company on cash-generating businesses. And it’s worked pretty well.
The problem: Where to go from here? In the company’s earnings release, Huff says that most of his cost-cutting measures are implemented. And EarthLink’s subscriber growth is still shrinking: With 3.3 million customers at the end of Q2, It’s lost 24% of its subscribers in the last year, including 30% of its biggest customer base — home dialup subscribers.
The next step(s), as relayed by Huff during this morning’s earnings call: EarthLink is looking for deals, specifically in the dialup Internet business or “adjacent” industries. Huff estimates there’s about 15 million dialup subscribers in the U.S., and that there will still be 8-10 million in 2014. He says consolidation “simply makes good economic sense” and that EarthLink could be “best positioned to be the consolidator in this industry.” A deal to combine EarthLink with AOL’s (TWX) dialup business would require some engineering, but other potential targets include MSN (MSFT), United Online, etc. Huff, who’s been talking about a dialup rollup at least since March, promised “more clarity” by the end of the year.
EarthLink reported $245.6 million of Q2 revenue, down 21% year-over-year but in line with analysts’ expected $245.6 million consensus. Earnings were more impressive: EarthLink posted $0.48 per share of net income, beating the Street’s $0.36 consensus by $0.12 and just besting the $0.47 high estimate.
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