Earthlink 2010 Annual Report Download - page 54

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Table of Contents
competitive pressures and continued maturation of the narrowband Internet access market. Partially offsetting the decline in total revenues was
an $81.1 million, or 15%, 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. Net
income decreased $205.6 million, from $287.1 million during the year ended December 31, 2009 to $81.5 million during the year ended
December 31, 2010. The decrease in net income was primarily due to a $182.9 million increase in our income tax provision, as we recorded an
income tax benefit in the prior year due to the release of a significant portion of our valuation allowance, and a decrease in revenues, partially
offset by the decrease in total operating expenses.
Looking Ahead
In our Consumer Services segment, we expect revenues to continue to decrease as a result of reduced sales and marketing efforts and as the
market for Internet access continues to mature. However, we expect the rate of revenue decline to continue to decelerate as our customer base
becomes longer tenured and churn rates go down. Consistent with trends in the Internet access industry, we expect the mix of our consumer
access subscriber base to continue to shift from narrowband access to broadband access customers, which will negatively affect our profitability
due to the higher costs associated with delivering broadband services. We will continue to seek cost reduction initiatives, such as consolidating
data centers and proprietary platforms. However, we believe that large-
scale cost reduction opportunities in our Consumer Services segment will
be more limited in the future and these initiatives may be costly to implement.
In our Business Services segment, we expect revenues to increase due to the inclusion of ITC^DeltaCom's revenues in our results for a full
year and due to potential future acquisitions, including One Communications. However, we expect economic conditions and competitive
pressures to put continued pressure on revenue and churn rates for our business services. We also expect operating expenses to increase due to
the inclusion of ITC^DeltaCom's costs and expenses for a full year. We expect the One Communications transaction to close in the second
quarter of 2011. We expect to incur additional closing and transaction costs, as well as integration costs related to both transactions. Once the
businesses are integrated, we expect to realize cost synergies from the combined businesses. However, we expect to incur upfront costs to gain
these synergies. Such costs may include severance and employee benefits or the elimination of duplicate facilities and contracts, and may result
in additional restructuring activities.
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