Earthlink 2005 Annual Report Download - page 36

streamlining our contact center operations and relying on outsourced contact center service providers. We continue to analyze opportunities to
more cost effectively deliver our Internet access services without sacrificing the quality of services we provide.
We generate lower percentage gross profit margins on our broadband access services than on our other principal forms of Internet access
and related services. In addition, customer and technical support costs per subscriber for broadband services generally exceed those of our other
services. Despite broadband access services becoming a larger percentage of our business, we have improved overall operating profit margins
to date by reducing telecommunications costs per customer in all product lines and reducing total operations and customer support expenses.
We believe gross margins on our broadband access services will improve over time as a result of our continuing to reduce telecommunications
costs per customer. We will also continue to evaluate opportunities to more cost effectively provide customer and technical support to
broadband customers and utilize direct sales and marketing expenses required to add new broadband customers.
Looking Ahead
Although we have successfully improved overall profits during the three-year period ended December 31, 2005, we expect overall profits
to decline in 2006 due to the implementation of our growth strategies, including our VoIP service and municipal broadband initiatives, as well
as the proportionate share of losses we expect to incur as a result of the start-up nature of HELIO’s operations. Implementation of new services
involves initial product development and infrastructure costs in addition to sales and marketing costs. The operating models for these services
are similar to the ISP operating model upon which we have based our current operations. Specifically, after developing an infrastructure to
support the offering, we plan to invest in sales and marketing to add customers who generate recurring revenues, while we incur customer
support and telecommunications costs to provide these services. Because we expect 2006 to be a year in which we invest in product
development, infrastructure and sales and marketing efforts for our VoIP and municipal broadband services, our profitability in 2006 is
expected to be adversely impacted because revenues for these services are not expected to exceed these initial costs. However, we believe
management can exercise discretion in deploying product development and sales and marketing resources to manage the growth of the VoIP
and municipal broadband customer bases. We also expect HELIO to incur losses in 2006, as HELIO is in a similar stage with respect to its
service offerings. We record our proportionate share of HELIO’s losses in our results of operations, so our profitability in 2006 will also be
adversely impacted because of HELIO’s losses.
The factors we believe are instrumental to the achievement of our goals and targets, including the factors identified above, may be subject
to competitive, regulatory and other events and circumstances that are beyond our control. Further, we can provide no assurance that we will be
successful in achieving any or all of the factors identified above, that the achievement or existence of such factors will favorably impact
profitability, or that other factors will not arise that would adversely affect future profitability.
Strategic Initiatives
Broadband Access
We have an agreement with Time Warner Cable and Bright House Networks, companies whose networks pass more than 19 million
homes, to offer our broadband Internet access services over their systems. In connection with the agreement, Time Warner Cable and Bright
House Networks receive consideration from EarthLink for carrying the EarthLink service and related Internet traffic. As of December 31, 2005,
more than 25% of our broadband subscribers were serviced via either the Time Warner Cable or Bright House Networks network.
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