Earthlink 2014 Annual Report Download - page 29

Table of Contents
Our business may suffer if third parties are unable to provide services or terminate their relationships with us.
Our business and financial results depend, in part, on the availability and quality of certain third-
party service providers. Specifically, we rely on
third parties for customer service and technical support, web hosting services, certain billing and collection services and E911 service for our
VoIP services and our Consumer Services segment relies primarily on one customer service and technical support vendor. We may have to
increase the price we pay or find a new supplier, which could impact our customers' experience and increase churn. We are not currently
equipped to provide the necessary range of service and support functions in the event that any of our service providers become unable or
unwilling to offer these services to us. Our outsourced customer support providers utilize international locations to provide us with customer
service and technical support services, and as a result, our customer support providers may become subject to financial, economic, environmental
and political risks beyond our or the providers' control, which could jeopardize their ability to deliver customer service and technical support
services. In addition, our VoIP services, including our E911 service, depend on the proper functioning of facilities and equipment owned and
operated by third parties and is, therefore, beyond our control. If one or more of our service providers does not provide us with quality services,
or if our relationship with any of our third party vendors terminates and we are unable to provide those services internally or identify a
replacement vendor in an orderly, cost-effective and timely manner, our business, results of operations and cash flows could suffer.
We may be required to recognize impairment charges on our goodwill and other intangible assets, which would adversely affect our results of
operations and financial position.
As of December 31, 2014, we had approximately $137.8 million of goodwill and $91.5 million of other intangible assets. Of the goodwill, $48.8
million was allocated to our Business Services reporting unit and $88.9 million was allocated to our Consumer Services reporting unit. We
perform an impairment test of our goodwill annually during the fourth quarter of our fiscal year or when events occur or circumstances change
that would more-likely-than-not indicate that goodwill or any such assets might be impaired. We evaluate the recoverability of our definite-
lived
intangible assets for impairment when events occur or circumstances change that would indicate that the carrying amount of an asset may not be
recoverable. Factors that may be considered a change in circumstances, indicating that the carrying value of our goodwill or intangible assets
may not be recoverable, include a decline in stock price and market capitalization, reduced future cash flow estimates, higher customer churn
and slower growth rates in our industry. Deterioration in estimated future cash flows in our reporting units could result in future goodwill
impairment. As we continue to assess the ongoing expected cash flows and carrying amounts of our goodwill and other intangible assets,
changes to our business strategy, changes in economic conditions, changes in operating performance or other indicators of impairment could
cause us to record a significant impairment charge during the period in which the impairment is determined, negatively impacting our results of
operations and financial position.
We may have exposure to greater than anticipated tax liabilities and we may be limited in the use of our net operating losses and certain
other tax attributes in the future.
As of December 31, 2014, we had approximately $666.2 million of gross tax net operating losses for federal income tax purposes and
approximately $33.9 million of net tax net operating losses for state income tax purposes, which includes federal and state net operating losses
acquired in connection with our acquisitions. The tax net operating losses for federal income tax purposes begin to expire in 2020 and the tax net
operating losses for state income tax purposes began to expire in 2013.
Our future income taxes could be adversely affected by changes in tax laws, regulations, accounting principles or interpretations thereof. Our
determination of our tax liability is always subject to review by applicable tax authorities. Any adverse outcome of such a review could have a
negative effect on our operating results and financial condition. In addition, the determination of our provision for income taxes and other tax
liabilities requires significant judgment, and there are many transactions and calculations where the ultimate tax determination is uncertain.
Although we believe our estimates are reasonable, the ultimate tax outcome may differ from the amounts recorded in our financial statements
and may materially affect our financial results in the period or periods for which such determination is made.
An “ownership change” that occurs during a “testing period” (
as such terms are defined in Section 382 of the Internal Revenue Code of 1986, as
amended) could place significant limitations, on an annual basis, on the use of such net operating losses to offset future taxable income we may
generate. In general, future stock transactions and the timing of such transactions could cause an “ownership change”
for income tax purposes.
Such transactions may include our purchases under our share repurchase program, additional issuances of common stock by us and acquisitions
or sales of shares by certain holders of our shares, including persons who have held, currently hold, or may accumulate in the future five percent
or more of our outstanding stock. Many of these transactions are beyond our control. Calculations of an “ownership change”
under Section 382
are complex and to some extent are dependent on information that is not publicly available. The risk of an “ownership change”
occurring could
increase if additional shares are repurchased, if additional persons acquire five percent or more of our outstanding common stock in the near
future and/
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