Earthlink 2005 Annual Report Download - page 71

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EARTHLINK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
may purchase EarthLink’s products and services in addition to providing marketing services. If the retailer or manufacturer does not purchase
EarthLink’s products or services, the Company classifies the fees as sales and marketing expenses when incurred. In this scenario, the retailer
or manufacturer is not a reseller and the accounting in EITF Issue No. 01-09 does not apply. If the retailer or manufacturer purchases and then
resells EarthLink’s products or services, the Company accounts for the fees as a reduction in revenue in accordance with EITF Issue No. 01-09
because the consideration is presumed to be a reduction of the selling price of EarthLink’s products or services; however, if the Company
receives an identifiable benefit whose fair value can be reasonably estimated in exchange for the fees, the Company classifies the fees as
operating expenses.
Certain Risks and Concentrations
Credit Risk. By their nature, all financial instruments involve risk, including credit risk for non-
performance by counterparties. Financial
instruments that potentially subject the Company to credit risk consist principally of cash, cash equivalents, investments in marketable
securities and trade receivables. The Company’s cash investment policy limits investments to investment grade instruments. Accounts
receivable are typically unsecured and are derived from revenues earned from customers primarily located in the U.S. Credit risk with respect
to trade receivables is limited due to the large number of customers comprising the Company’s customer base. As of December 31, 2004 and
2005, two companies each accounted for more than 10% of gross accounts receivable.
Regulatory Risk. EarthLink purchases broadband access from incumbent local exchange carriers, competitive local exchange carriers
and cable providers. Please refer to “Regulatory Environment” in the Business section of this 10-K for a discussion of the regulatory
environment as well as a discussion regarding the Company’s contracts with broadband access providers.
Supply Risk. The Company’s business substantially depends on the capacity, affordability, reliability and security of third-party
telecommunications and data service providers. Only a small number of providers offer the network services the Company requires, and the
majority of its telecommunications services are currently purchased from a limited number of telecommunications service providers.
Telecommunications service providers have recently merged and may continue to merge, which would reduce the number of suppliers from
which the Company could purchase telecommunications services. Although management believes that alternate telecommunications providers
could be found in a timely manner, any disruption of these services could have a material adverse effect on the Company’s financial position,
results of operations and cash flows.
The Company also relies on the reliability, capacity and effectiveness of its outsourced contact center service providers. The Company
purchases contact center services from several geographically dispersed service providers. The contact center service providers may become
subject to financial, economic and political risks beyond the Company’s or the providers’
control which could jeopardize their ability to deliver
services. Although management believes that alternate contact center service providers could be found in a timely manner, any disruption of
these services could have a material adverse effect on the Company’s financial position, results of operations and cash flows.
Sales and Marketing
Sales and marketing expenses include advertising and promotion expenses, fees paid to distribution partners to acquire new paying
subscribers, personnel-related expenses for sales and marketing personnel and telemarketing costs incurred to acquire and retain subscribers.
The Company’s marketing strategies
70