A big part of EarthLink’s short-term growth plan: A technology whose heyday was last decade — dial-up Internet access.
At Bear Stearns’ annual media conference, newish EarthLink CEO Rolla Huff said today he’ll be looking to make deals with other dial-up companies.
Possible tie-ups: United Online (UNTD), which owns Juno and NetZero, Time Warner (TWX), which is looking to unload its AOL dial-up business, and Microsoft (MSFT), whose MSN still has almost a million dial-up subscribers.
Since he was hired last summer, EarthLink’s (ENLK) newish CEO Rolla Huff has made it clear that he’s all about generating cash, cash, and more cash. He’s cut off the lousy investments the company made before he arrived, including an ill-fated citywide wi-fi business and a big investment in Helio, a “virtual” wireless carrier that’s lost half a billion dollars in three years.
That hasn’t left him with much: A rapidly shrinking business of about 2.7 million dial-up subscribers and 1.1 broadband subscribers. But Huff thinks strategic dial-up acquisitions can keep the cash generating engine churning while he figures out what’s next. We’re “not going to do anything wild and crazy,” he said today.
3:31 Starting with slides. Talking about saving money, reducing Helio and muni wi-fi investments, etc. Q&A to follow. Focused totally on cash flow — and taking a glancing look at some growth opportunities. Looking to grow strategically, not organically.
3:32 What is going to happen to the dialup industry? Learned lessons at AT&T Wireless, which had a big pager business. Think there’s about 15 million to 18 million dialup lines. We’re number 2 player with just 2.5 million dialup subs.
3:35 1/3 of our subs are on a broadband circuit. Recently voted best broadband provider in 2 of its 4 regions. Funny thing: ELNK doesn’t even own a broadband network.
3:36 Low-end dialup subs are lower income, lower education. Premium dial, broadband are higher income, higher education. Most subs are people with relationship longer than 4 years. Churn actually going down.
3:39 Expect to continue small scale M&A, also looking at home phone/broadband bundle to drive churn down.
3:40 Announced a while back that won’t be investing in “virtual” wireless carrier Helio anymore. Relatively easy decision to make. Didn’t want to get crushed with existing relationship. No financial exposure anymore — at $0 value on our books, so a complete upside to our business.
3:41 Focus on strategic acquisitions. Given our brand, our passion for customer care, well positioned to be a consolidator in this industry. When Covad deals closes, another $60 million to EarthLink.
3:43 Expecting FCF in $220 million range. Haven’t given guidance for 2009.
3:44 Clearly AOL is largest piece of pie with 36%, United Online, Microsoft’s (MSFT) MSN has just under a million subs. We think there’s a big opportunity to bring these things together on a fixed cost base.
3:46 Q&A begins. Where we have DSL and voice bundle, why wouldn’t we do it on cable? It was born out of partnership with Covad, which has colocations in essentially “all of the NFL cities.” Cobbling together cable partnerships — trying to do it, have a great partnership with Time Warner Cable (TWC), but not with Comcast (CMCSA) etc. Most of cable companies have their own Internet phone service.
3:50 If you are making acquisitions, what do you pay pro forma vs. buybacks? With AOL declaring that it will get rid of dialup — how would combination work/make sense? Have had oppty over years to have lots and lots of customers be EarthLink customers. If largest percentage of customers are 4+ year customers, we put a value on them. If customer 6 months or less, won’t put much value. Boils down to what we believe churn characteristics are, ARPU.
3:52 AOL deal wouldn’t just be a pure subscriber acquisition. I suspect having a tax efficient transaction would be important to them. We’d be looking at relative valuations. There are public market comps out there. United Online would be another example. MSN would be more like a subscriber purchase, if that ever happened. Any time you put massive amounts of scale on fixed cost elements, you make cash. As it relates to AOL, we bring a tax efficient deal, operating smarts. Don’t know a lot of details about AOL’s cost structure, but know ours. Substantial amounts of cost structure we could optimise.
3:57 Lots of nitty gritty about potential M&A, debt structure, etc. Hypothetical spin transaction. Debt markets will be a governor.
4:02 At end of 2009, you could be private company with all that cash. Is that appealing or would you prefer to be public? I don’t have a strong desire one way or the other. If you can’t grow, tough being public. But we can grow — strategically. We’ve convinced ourself that picking up customers one at a time doesn’t work. But we can get significantly bigger by buying customers in bulk, and that seems like the right thing to do and our public company status might help us in six months or a year.
4:03 Not going to do anything wild and crazy! Lots of opportunities to buy things, and they’re getting cheaper by the day. We’d love United’s access business. We’d certainly take their media business at the right valuation to our shareholders. Depends on valuation of access business in light of valuation of media business. But that’s up to their shareholders.
4:07 Q&A finished.
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