Earthlink 2009 Annual Report Download - page 35

Table of Contents
and adding customers that have similar characteristics as our tenured customer base and are more likely to produce an acceptable rate of return.
While this change has resulted in a decline in our revenues, we expect the rate of revenue decline to decrease as our subscriber base becomes
more tenured and churn rates decline. Our consumer subscriber churn rates improved from 5.2% during the year ended December 31, 2007, to
4.4% and 3.6% during the years ended December 31, 2008 and 2009, respectively.
Consistent with trends in the Internet access industry, the mix of our consumer access subscriber base has been shifting from narrowband
access to broadband access customers. Consumer broadband access revenues have lower gross margins than narrowband revenues due to the
costs associated with delivering broadband services. This change in mix has negatively affected our profitability and we expect this trend to
continue as broadband subscribers continue to become a greater proportion of our consumer access subscriber base. However, our consumer
broadband access customers also have lower churn rates than our consumer narrowband access customers. Accordingly, we expect to realize
benefits from a more tenured subscriber base, such as reduced support costs and lower bad debt expense.
Business services.
The markets in which we operate our business services are characterized by industry consolidation, an evolving
regulatory environment, the emergence of new technologies and intense competition. We sell our services to end user business customers and to
wholesale customers. Our end users range from large enterprises with many locations, to small and medium-sized multi-
site businesses to
business customers with one site, often a home-
based location. Many of our end user customers are retail businesses. Our wholesale customers
consist primarily of telecommunications carriers and network resellers. Our business has become more focused on end users as a result of
consolidation in the telecommunications industry. In addition, our business customers, including retail businesses, are particularly exposed to a
weak economy. We have experienced pressure on revenue and operating expenses for our business services, given the current state of the
economy, including increased subscriber acquisition and retention costs necessary to attract and retain subscribers. However, we are seeking
ways to grow our business services revenue while operating this segment more efficiently.
2009 Highlights
Total revenues decreased $231.8 million, or 24%, from the year ended December 31, 2008 to the year ended December 31, 2009, as our
subscriber base decreased from approximately 2.8 million paying subscribers as of December 31, 2008 to approximately 2.2 million paying
subscribers as of December 31, 2009. The decrease in subscribers was attributable to reduced sales and marketing activities, continued
competitive pressures and continued maturation of the narrowband Internet access market. Offsetting the decline in total revenues was a
$249.4 million, or 32%, decline in total operating costs and expenses. Total operating costs and expenses decreased as our overall subscriber
base has decreased and become longer tenured. Our longer tenured customers require less customer service and technical support and have a
lower frequency of non-
payment. We also experienced benefits from workforce reduction initiatives and other cost cutting initiatives. The
decrease in total operating costs and expenses during the year ended December 31, 2009 compared to the prior year period also reflects a decline
in goodwill and intangible asset impairments, which decreased $54.5 million from the year ended December 31, 2008 to the year ended
December 31, 2009. Net income increased $108.5 million, or 61%, from $178.6 million during the year ended December 31, 2008 to
$287.1 million during the year ended December 31, 2009. The increase in net income reflects the changes noted above, as well as a $93.9 million
increase in our income tax benefit, primarily due to an increase in the release of our valuation allowance related to our deferred tax assets, and an
$8.5 million decrease in loss from discontinued operations, net of tax.
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