There are few things less hip than dial-up Internet access. Most folks don't even remember what a dial-up modem sounds (or looks) like. Nevertheless, there are millions of people that use pokey dial-up access and some are staying amid a weak economy.
We're reminded of that dial-up tidbit today as EarthLink reported first quarter results that showed better than expected earnings, lower churn and metrics that aren't all that bad. EarthLink ended the first quarter with 2.6 million subscribers, down from 3.58 million a year ago. But the churn rate was 3.9 percent, down from 4.9 percent a year ago. Average revenue per customer increased to $20.95, up from $20.38 a year ago.
Time Warner's AOL unit will also show a dial-up business that is hanging in there and represents half of the revenue pie. The consensus dictates that AOL will unload its dial-up business to focus advertising, but it really can't afford to right now. Why? AOL's ad business is unraveling as the dial-up business throws off cash.
Simply put, dial-up access isn't glamorous, but you could do a lot worse.
EarthLink delivered net income of $32.5 million, or 30 cents a share, on sales of $199.1 million, down 24 percent from a year ago. Wall Street was expecting earnings of 27 cents a share on revenue of $202.9 million.
More importantly, EarthLink has cut its first quarter operating costs 33 percent from a year ago and generated $65.7 million in cash flow. Sure, that cash flow was down from $81.7 million a year ago, but EarthLink has $565.8 million in cash and marketable securities and has bought back 3.6 million shares.
If you forgot that EarthLink was in a business of a bygone era you'd think that the business wasn't so bad. For good measure, EarthLink raised its outlook for 2009.
CEO Rolla Huff says EarthLink's plan is to "to opportunistically return cash to shareholders" and "evaluate strategic alternatives" and its capital structure.
Those comments refer to a few options:
- Paying a fat dividend or buying back more stock;
- Acquiring AOL's dial-up business;
- Buying dial-up companies to consolidate the customer base;
- Or use low valuations to buy other businesses.
In any case, EarthLink is a zombie company---with a great balance sheet. Jeffries analyst Youssef Squali expects that these EarthLink options will be sorted out throughout 2009.