EarthLink restructures, cuts 900 jobs

Amid declining subscribers for its Internet services EarthLink unveiled a restructuring that will shutter a handful of locations and eliminate 900 jobs.

The restructuring, outlined in a statement on Tuesday, comes as the company is repositioning for the future. Rolla P. Huff, EarthLink President and CEO, said: "These changes get our cost structure in line, but there is much more to do. We expect to announce additional steps as we continue our work over the coming weeks and months."

Specifically, EarthLink said it will close offices in Orlando, Knoxville, TN, Harrisburg, PA and San Francisco. It will also "substantially reduce its presence in Pasadena, CA and Atlanta. EarthLink will take a charge of $60 million to $70 million for restructuring costs, but generate $25 million to $35 million in annual savings. The charge and savings will appear in the second half of 2007.

EarthLink also cut its outlook. The company sees third quarter revenue of $290 million to $300 million. The company also sees a third quarter net loss of $33 million to $43 million. According to Thomson Financial EarthLink was expected to report third quarter sales of $297 million. EarthLink says it will end 2007 with 3.9 million subscribers and revenue of $1.19 billion to $1.2 billion. Analysts were expecting revenue of $1.23 billion. The full year net loss will be $79 million to $109 million.

Subscribers are also expected to decline as EarthLink becomes more selective about its customers.

"Given current trends in the Internet access industry, management expects industry-wide gross subscriber additions to decelerate in 2008. This will result in fewer gross subscriber additions for EarthLink as it will no longer add new subscribers that do not yield a positive lifetime value for our shareholders. Additionally, as subscriber growth slows, the company expects to realize fewer migrations from narrowband to broadband. This trend should result in longer tenured existing subscribers generating higher life-time cash values. EarthLink expects that as it reduces its marketing efforts aimed at acquiring new customers who have high early life churn characteristics, our overall churn will come down over time as our longer tenured existing customers become the predominant part of our base."

To ease the pain a bit EarthLink also noted that it plans to buy back shares. The company also named a new chief operating officer, Joe Wetzel.

But the overarching question for EarthLink revolves around the future. Dial-up access is a passing memory. EarthLink offers digital subscriber line service, but that looks increasingly passe relative to cable and services like Verizon FiOS. It also has bundles with satellite TV and home phone service, but it's hard to imagine EarthLink competing with the big telecom companies. EarthLink dabbles in selling Helio service and has a business developing municipal Wi-Fi networks, but neither of those businesses can offset declining subscribers.