Revenue Rises for EarthLink as Its Loss Widens
On the heels of completing its merger with MindSpring Enterprises, Internet service provider EarthLink Network reported that the combined company’s annual revenue more than doubled, but warned that profitability is still more than a year away as it races to close the gap with industry leader America Online.
EarthLink, now with 3.1 million Internet customers, is in a neck-and-neck race with free Internet service provider NetZero for the No. 2 spot behind AOL, which has 21 million members.
EarthLink’s and MindSpring’s combined revenue jumped to $670 million for the year, up from nearly $291 million for 1998. EarthLink and MindSpring took in a total of $199 million in revenue in the last three months of the year, compared with a total of $98 million for the same quarter a year earlier.
But as with most of their Internet brethren, the companies lost money. For the quarter ended Dec. 31, EarthLink and MindSpring lost $25.8 million, or 22 cents per share, before merger-related costs and income taxes. That’s less than the combined 32 cents a share the companies had been expected to lose for the quarter, according to analysts surveyed by First Call/Thomson Financial. For the ’98 fourth quarter, the companies would have earned a combined 1 cent a share.
For all of 1999, the combined company lost $25.4 million, or 22 cents per share. For 1998, the combined loss would have been $1.1 million, or 1 cent per share.
The biggest drag on earnings, analysts say, continues to be the tremendous marketing costs to attract new Internet customers, most of whom pay $19.95 a month for unlimited Net access with a standard dial-up modem. Six months ago, the companies were spending an average of $130 for each new customer; by the end of 1999, the figure had ballooned to $265. This year, EarthLink will spend an average of $285 for each of the 1.4 million customers it expects to add by the end of 2000, according to analysts at Sands Bros. & Co. in New York.
“If we continue growing at the aggressive rate we’re growing, we expect to be profitable in 2001,” EarthLink Vice President Kirsten Hamling said.
Some analysts said EarthLink, which is now based in Atlanta but which maintains a significant presence in Pasadena, might not be profitable until 2002. “I don’t mind forgoing profitability for market share,” said Jeff Sadler, an analyst with FAC Equities in Boston. “Right now, this company is bent on becoming a solid No. 2 behind AOL. I think that’s an achievable goal.”
As America Online knows, one benefit of a big subscriber base is the ability to make money from advertising and from collecting transaction fees from online commerce. Only 3% of EarthLink’s revenue came from advertising and e-commerce in the last quarter of 1999--contrasted with 86% from basic Net access.
EarthLink shares closed unchanged on Monday at $31.44 in Nasdaq trading.
Although EarthLink is spending quite a bit to attract new customers, the company typically manages to hold on to them. Its churn rate--a figure that reflects the number of customers quitting the service as well as ones that join--is 4.5%, below the industry average range of 6% to 8%.
