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EARTHLINK INC
FORM 10-K
(Annual Report)
Filed 02/24/12 for the Period Ending 12/31/11
Address 1375 PEACHTREE STREET
SUITE 400
ATLANTA, GA 30309
Telephone 4048150770
CIK 0001102541
Symbol ELNK
SIC Code 7370 - Computer Programming, Data Processing, And
Industry Computer Services
Sector Technology
Fiscal Year 12/31
http://www.edgar-online.com
© Copyright 2012, EDGAR Online, Inc. All Rights Reserved.
Distribution and use of this document restricted under EDGAR Online, Inc. Terms of Use.

Table of contents

  • Page 1
    EARTHLINK INC FORM 10-K (Annual Report) Filed 02/24/12 for the Period Ending 12/31/11 Address 1375 PEACHTREE STREET SUITE 400 ATLANTA, GA 30309 4048150770 0001102541 ELNK 7370 - Computer Programming, Data Processing, And Computer Services Technology 12/31 Telephone CIK Symbol SIC Code Industry ...

  • Page 2
    ... charter) Delaware (State of incorporation) 58-2511877 (I.R.S. Employer Identification No.) 1375 Peachtree St., Atlanta, Georgia 30309 (Address of principal executive offices, including zip code) (404) 815-0770 (Registrant's telephone number, including area code) Securities registered pursuant to...

  • Page 3
    ... of the registrant on June 30, 2011 was $819.9 million. As of January 31, 2012, 106,219,847 shares of common stock were outstanding. Portions of the Proxy Statement to be filed with the Securities and Exchange Commission and to be used in connection with the Annual Meeting of Stockholders to be held...

  • Page 4
    ...8. Financial Statements and Supplementary Data 72 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 130 Item 9A. Controls and Procedures 130 Item 9B. Other Information 130 PART III Item 10. Directors, Executive Officers and Corporate Governance...

  • Page 5
    ... Beneficial Owners and Management and Related Stockholder Matters Certain Relationships and Related Transactions, and Director Independence 131 Item 13. 132 Item 14. Principal Accounting Fees and Services 132 PART IV Item 15. Exhibits, Financial Statement Schedules 133 SIGNATURES 138

  • Page 6
    ... an extensive network including approximately 28,800 route miles of fiber, 90 metro fiber rings and four enterprise-class data centers and provide IP access services to customers across more than 90 percent of the United States. We were incorporated in 1999 as a Delaware corporation and EarthLink...

  • Page 7
    ... services providers and several new product and service capabilities. In December 2011, we launched a nationwide suite of business voice, data and Internet solutions. In addition to leveraging our regional fiber network and nationwide network reach to provide a broad range of communications services...

  • Page 8
    ... of new product and services capabilities, data centers, network assets or business customers to achieve greater national scale. Challenges and Risks The primary challenges we face in executing our business strategy are successfully transitioning from a traditional communications provider to...

  • Page 9
    ... as online faxing, email, POP services, web hosting, firewall and Virtual Private Networks ("VPN"), among others. Voice Services We offer a broad range of voice services to business customers, including local, domestic and international switched access, dedicated long distance services, hosted IP...

  • Page 10
    ... connectivity to the IP networks of ISPs. Other Services Equipment. We sell, install and perform on-site maintenance of customer premise equipment, such as telephones and PBX, in all of the markets in which we offer communications services. Web hosting. We also lease server space and provide web...

  • Page 11
    ...major local exchange carriers to lease unbundled network elements, as well as commercial services agreements with national communications companies, CLECs, and cable and wireless service providers to provide last mile access to our customers and connectivity onto our network. Fiber Optic Network. As...

  • Page 12
    ... Nextel Corporation; wireless and satellite service providers; cable service providers/multiple system operators (MSOs), such as Charter Communications, Inc., Comcast Corporation, Cox Communications, Inc. and Time Warner Cable; and stand-alone VoIP providers. We experience significant pricing and...

  • Page 13
    ...costs and reduced bad debt expense. We provide award-winning customer service, invest in loyalty and retention efforts and continually monitor customer satisfaction for our services. Our customer support is available by chat and phone as well as through help sites and Internet guide files on our web...

  • Page 14
    ...'s line-powered voice access to provide our VoIP bundle home phone service. The following summarizes the contract expiration dates for our largest providers of broadband access: Broadband Network Provider Contract Expiration CenturyLink Comcast Corporation Megapath AT&T Corp. Time Warner Cable...

  • Page 15
    ... no longer have a significant, if any, price advantage over certain broadband services. Most of the largest providers of broadband services, such as cable and telecommunications companies, control their own networks and offer a wider variety of services than we offer, including voice, data and video...

  • Page 16
    ...significantly the scope of the facilities that incumbent telephone companies must make available as UNEs to competitive carriers such as us at rates based on the Total Element Long Run Incremental Cost, or TELRIC, standard. Incumbent carriers must offer access to their copper loops and subloops, but...

  • Page 17
    ..., optical speed transmission facilities or dark fiber. Further, incumbent companies no longer are required to provide local switching as a UNE, which means that we cannot rely on the Unbundled Network Element-Platform, or UNE-P, to provide local services to customers at TELRIC-based rates. In...

  • Page 18
    ... of the cost of providing long distance service. The FCC has adopted policy changes that over time are reducing carriers' access rates. Under the FCC's November 2011 order, a uniform bill-and-keep framework for both intrastate and interstate access traffic will be the ultimate end state for all...

  • Page 19
    ...Special access is a service offered by incumbent local telephone companies that consists of dedicated transmission facilities or private lines used by wireline and wireless telecommunications carriers, Internet-based service providers and large enterprise endusers. We rely on the purchase of special...

  • Page 20
    ... for business customers, rather than on a percentage of collected interstate revenues. The objective behind the proposal is to capture USF revenues from the expanding number of new service providers using different technologies to offer communications services. In February 2011, the FCC issued...

  • Page 21
    ... pricing for other wholesale services, such as special access lines, that we seek to purchase at commercially acceptable prices. Upon being granted relief by the FCC, CenturyLink has substantially increased the prices for the network elements that we use to provide services in eight central offices...

  • Page 22
    ... pay intrastate access charges to local exchange carriers when they originate or terminate our intrastate long distance traffic. As a CLEC, we charge IXCs intrastate access charges for the origination and termination services we provide to them. Under the FCC's November 2011 order, state commissions...

  • Page 23
    ... state and local governments in connection with the franchising process. We cannot predict how these issues will be resolved, or the extent to which these developments will affect our ability to compete. Unresolved issues also exist regarding the ability of new local service providers to gain access...

  • Page 24
    ...are adopted, our cost of providing Internet access services could be increased and our business could be adversely affected. Consumer Protection. Federal and state governments have adopted consumer protection laws and undertaken enforcement actions to address advertising and user privacy. As part of...

  • Page 25
    ... web site is not meant to be incorporated by reference into this Annual Report on Form 10-K. We also provide a copy of our Annual Report on Form 10-K via mail, at no cost, upon receipt of a written request to the following address: Investor Relations EarthLink, Inc. 1375 Peachtree Street Atlanta, GA...

  • Page 26
    ... competitive local exchange carriers and several smaller companies which added new product and service capabilities. In December 2011, we launched a nationwide suite of business voice, data and Internet solutions. In addition to leveraging our fiber network and nationwide IP reach to provide a broad...

  • Page 27
    ... customers or strategic partners deciding to delay or forego business; difficulties combining product offerings and entering into new markets in which we are not experienced; difficulties integrating the sales organizations of acquired companies; the integration of departments, operating support...

  • Page 28
    ...or DOCSIS, technology offered by many cable broadband providers and advanced fiber-based technologies being utilized by AT&T and Verizon may adversely affect our broadband and dial-up access businesses. The increasing use of wireless communication, VoIP providers and the acceleration of the adoption...

  • Page 29
    ...may incur higher costs associated with new vendors. If we were required to purchase another manufacturer's equipment, we could incur significant initial costs to integrate the equipment into our network and to train personnel to use the new equipment. Any interruption in the services provided by our...

  • Page 30
    ... competitive factors in the communications and managed services industries include price, availability, reliability of service, network security, variety of service offerings, quality of service and reputation of the service provider. While we believe our business services compete favorably based on...

  • Page 31
    ...of providing long distance service. The FCC has recently adopted policy changes that over time are reducing carriers' access rates. These new rules significantly alter the manner in which all carriers, including carriers that use different service platforms such as wireless and VoIP, are compensated...

  • Page 32
    ... of broadband connectivity are AT&T, Bright House Networks, CenturyLink (formerly Qwest), Comcast, MegaPath (formerly Covad), Time Warner Cable and Verizon. Many network service providers have merged and may continue to merge, which would reduce the number of suppliers from which we could purchase...

  • Page 33
    ...Verizon and Windstream; cable companies providing broadband access, including Charter Communications, Inc., Comcast Corporation, Cox Communications, Inc. and Time Warner Cable; local and regional ISPs; established online services companies, such as AOL and the Microsoft Network; free or value-priced...

  • Page 34
    ...for consumer access subscribers is to engage in limited sales and marketing efforts and focus instead on retaining customers and adding customers that are more likely to produce an acceptable rate of return. If we do not maintain our relationships with current customers or acquire new customers, our...

  • Page 35
    ... have an adverse effect on our business. Federal and state governments have adopted consumer protection laws and undertaken enforcement actions to address advertising and user privacy. Our services and business practices, or changes to our services and business practices could subject us to...

  • Page 36
    ... of our new service offering initiatives. We are currently integrating certain business support systems in connection with our recent acquisitions and nationwide product launch, including systems used for quoting, accepting and inputting customer orders for services; provisioning, installing and...

  • Page 37
    ... 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 32

  • Page 38
    ...billing and collection services. Our Consumer Services segment relies primarily on one customer service and technical support vendor. Our contract with our primary customer service and technical support vendor ends in the second quarter of 2012. We may have to increase the price we pay or find a new...

  • Page 39
    ... originated or terminated on wireless or VoIP), the jurisdiction of traffic for intercarrier compensation purposes, the wholesale services and facilities available to us, the prices we will pay for those services and facilities and the regulatory treatment of new technologies and services. We may...

  • Page 40
    ... from a change in control of our company, with subsequent annual limitations on the use of our net operating losses, this could discourage a change in control. Risks Related to Our Liquidity and Financial Resources Our indebtedness could adversely affect our financial health and limit our ability...

  • Page 41
    ... may not be available to us on acceptable terms, or at all. We will require substantial capital to maintain, upgrade and enhance our network facilities and operations. We may also require additional capital to support our business growth, including the need to develop new services and products...

  • Page 42
    ... of stockholders to call special meetings of stockholders and authorize the Board of Directors to issue preferred stock in one or more series without any action on the part of stockholders. These provisions could limit the price that investors might be willing to pay in the future for shares of our...

  • Page 43
    ... States. We own an administrative office in Arab, Alabama. Data centers. We operate four data centers. We own a data center facility in Atlanta, Georgia and we lease data center facilities in Marlboro, Massachusetts, Rochester, New York and Columbia, South Carolina. Network. We own switch sites...

  • Page 44
    ... Issuer Purchases of Equity Securities. Market Information Our common stock is traded on the NASDAQ Global Market under the symbol "ELNK." The following table sets forth the high and low sale prices for our common stock for the periods indicated, as reported by the NASDAQ Global Market. EarthLink...

  • Page 45
    ... 31, 2011 are as follows: Total Number of Shares Repurchased Total Number of Maximum Dollar Average Shares Repurchased Value that May Price Paid as Part of Publicly Yet be Purchased per Share Announced Program (1) Under the Program (in thousands, except average price paid per share) 2011 October...

  • Page 46
    and other legal requirements, and subject to market conditions and other factors. The Repurchase Program does not require EarthLink to acquire any specific number of shares and may be terminated at any time. 40

  • Page 47
    ... financial statements and notes thereto included elsewhere in this Annual Report on Form 10-K. Year Ended December 31, 2008 2009 2010 (1) (in thousands, except per share amounts) 2007 2011 (1) Statement of operations data: Revenues Operating costs and expenses (2)(3) Income from operations Income...

  • Page 48
    ...,144 (1) On December 8, 2010, we acquired ITC^DeltaCom, a provider of integrated communications services to customers in the southeastern U.S. On April 1, 2011, we acquired One Communications, a privately-held integrated telecommunications solutions provider serving customers in the Northeast, Mid...

  • Page 49
    ... carriers on acceptable terms, our ability to offer competitively priced local telephone services will be adversely affected; (10) that our operating performance will suffer if we are not offered competitive rates for the access services we need to provide our long distance services; (11) that...

  • Page 50
    ... Internet access and related value-added services to residential customers. We operate an extensive network including approximately 28,800 route miles of fiber, 90 metro fiber rings and four enterprise-class data centers that provide IP coverage across more than 90 percent of the United States...

  • Page 51
    ... services providers and several new product and service capabilities. In December 2011, we launched a nationwide suite of business voice, data and Internet solutions. In addition to leveraging our regional fiber network and nationwide network reach to provide a broad range of communications services...

  • Page 52
    ... of new product and services capabilities, data centers, network assets or business customers to achieve greater national scale. Challenges and Risks The primary challenges we face in executing our business strategy are successfully transitioning from a traditional communications provider to...

  • Page 53
    ... longer sales cycles and increased customer demands for price reductions in connection with contract renewals. To combat trends in our business services revenue, we are focused on building long-term customer relationships. We believe that our customizable communications portfolio, blend of access...

  • Page 54
    ...or DOCSIS, technology offered by many cable broadband providers and advanced fiber-based technologies being utilized by AT&T and Verizon may adversely affect our broadband and dial-up access businesses. The increasing use of wireless communication, VoIP providers and the acceleration of the adoption...

  • Page 55
    ... 31, 2010 2011 2010 vs. 2009 $ Change % Change (dollars in thousands) 2011 vs. 2010 $ Change % Change 2009 Business Services Retail services $ Wholesale services Other Total revenues Consumer Services Access services Valueadded services Total revenues Total revenues $ Business Services 69,845...

  • Page 56
    ...-added services revenues over the past two years were due primarily to a decrease in search revenues and a decrease in subscribers for certain ancillary services, including security, home networking, Internet call waiting and email by phone services. The decreases resulted from the decline in total...

  • Page 57
    ... access services; fees paid to suppliers of our value-added services; fees paid to content providers for information provided on our online properties; and the cost of equipment sold to customers for use with our services. Our principal provider for narrowband services is Level 3 Communications...

  • Page 58
    ... assets acquired in purchases of businesses and purchases of customer bases from other companies. Property and equipment is depreciated using the straight-line method over the estimated useful lives of the various asset classes. Definite-lived intangible assets, which primarily consist of subscriber...

  • Page 59
    ... goodwill for the 2011 annual impairment test, which were Consumer Services, New Edge, ITC^DeltaCom, One Communications, STS Telecom, Managed Services and Web Hosting. The Consumer Services reportable segment was one reporting unit, while the Business Services reportable segment consisted of...

  • Page 60
    ...and businesses. Under the 2007 Plan, we reduced our workforce by approximately 900 employees, consolidated our office facilities in Atlanta, Georgia and Pasadena, California and closed office facilities in Orlando, Florida; Knoxville, Tennessee; Harrisburg, Pennsylvania and San Francisco, California...

  • Page 61
    ...related to EarthLink's acquisitions, including transaction related costs, such as advisory, legal, accounting, valuation and other professional fees; employee severance and retention costs; costs to settle stock-based awards attributable to postcombination service in connection with the ITC^DeltaCom...

  • Page 62
    ...2011 vs. 2010 $ Change % Change Interest expense$ (26,245) $ (29,692) $ (74,949) $ (3,447) Interest income 5,860 5,390 4,678 (470) Other, net (740) 893 (369) 1,633 Total $ (21,125) $ (23,409) $ (70,640) (2,284) 13% $ (45,257) -8% -221% 11% (712) (1,262) (47,231) 152% -13% -141% 202% The increase...

  • Page 63
    ... and equipment services to businesses, enterprise organizations and communications carriers. Our Consumer Services segment provides nationwide Internet access and related value-added services to residential customers. We evaluate the performance of our operating segments based on segment income from...

  • Page 64
    ... ended December 31, 2009, 2010 and 2011: December 31, 2009 December 31, 2010 December 31, 2011 Legacy EarthLink Business Metrics (a) Narrowband access subscribers Broadband access subscribers Web hosting accounts EarthLink Business Metrics Total fiber optic route miles (b) Colocations Voice and...

  • Page 65
    ...periods of free service at inception are not included in subscriber counts until they become paying customers. During the year ended December 31, 2009, we removed approximately 7,000 satellite subscribers from our broadband subscriber count and total subscriber count as a result of our sale of these...

  • Page 66
    ...-office support costs. The decrease in cash provided by operating activities from the year ended December 31, 2010 to the year ended December 31, 2011 was primarily due to an increase in interest payments, cash used to settle liabilities assumed in our acquisition of One Communications and cash used...

  • Page 67
    ... of our acquired companies, network and technology center related projects and customer acquisition costs. We continue to focus on investment in our technology infrastructure to support our long-term strategic plans. Financing activities The increase in net cash used in financing activities...

  • Page 68
    ... our fiber network and nationwide IP reach to provide a broad range of communications services, we are deploying a wide array of cloud, managed security and IT support services. We expect to invest cash in sales and marketing efforts for our business services. We also expect to invest cash to build...

  • Page 69
    ... and types of future acquisitions in which we may engage, the costs required to maintain our network infrastructure, the pricing of our access services and the level of resources used for our sales and marketing activities, among others. In addition, our use of cash in connection with acquisitions...

  • Page 70
    ... debt through maturity and commitment fees and borrowing costs under our senior secured revolving credit facility. Purchase commitments represent non-cancellable contractual obligations for services and equipment; minimum commitments under network access agreements with several carriers; and non...

  • Page 71
    ...require us to acquire any specific number of shares and may be terminated by the Board of Directors at any time. Non-GAAP Financial Measures In addition to our financial information presented in accordance with U.S. generally accepted accounting principles ("GAAP"), management uses certain "non-GAAP...

  • Page 72
    ...third-party vendor has latitude in establishing prices, we record revenue associated with the related subscribers on a net basis, netting the cost of revenue associated with the service against the gross amount billed the customer and recording the net amount as revenue. The determination of whether...

  • Page 73
    ... direct expenses associated with providing services to our customers and the cost of equipment sold. These costs include the cost of leasing facilities from incumbent local exchange carriers and other telecommunications providers that provide us with access connections to our customers, to some...

  • Page 74
    ...derived using the discounted cash flow methodology. The discounted cash flows for each reporting unit are based on discrete financial forecasts developed by management for planning purposes. Cash flows beyond the discrete forecasts are estimated using a terminal value calculation, which incorporates...

  • Page 75
    ... flows from customer contracts and acquired developed technologies, the acquired company's brand and competitive position, as well as assumptions about the period of time the acquired brand will continue to be used in the combined company's product portfolio and discount rates. Unanticipated events...

  • Page 76
    ... after December 15, 2011. The Company does not expect this guidance to have a material impact on its consolidated financial statements. In June 2011, the FASB issued authoritative guidance related to comprehensive income. This guidance was issued to increase the prominence of items reported in other...

  • Page 77
    ... lease obligations, as of December 31, 2010 and 2011: As of December 31, 2010 As of December 31, 2011 Carrying Carrying Amount Fair Value Amount Fair Value (in thousands) ITC^DeltaCom senior notes EarthLink convertible senior notes EarthLink senior notes Total debt, excluding capital leases $ 351...

  • Page 78
    Table of Contents Item 8. Financial Statements And Supplementary Data. EARTHLINK, INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page Reports of Independent Registered Public Accounting Firm Consolidated Balance Sheets as of December 31, 2010 and 2011 Consolidated Statements of Operations for the...

  • Page 79
    ... with the standards of the Public Company Accounting Oversight Board (United States), EarthLink, Inc.'s internal control over financial reporting as of December 31, 2011, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations...

  • Page 80
    ..., in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets as of December 31, 2010 and 2011, and the related consolidated statements of operations, stockholders' equity and comprehensive income, and cash flows for each of the...

  • Page 81
    ... cash Accounts receivable, net of allowance of $1,182 and $7,323 as of December 31, 2010 and 2011, respectively Prepaid expenses Deferred income taxes, net Other current assets Total current assets Long-term marketable securities Property and equipment, net Deferred income taxes, net Goodwill...

  • Page 82
    ... EARTHLINK, INC. CONSOLIDATED STATEMENTS OF OPERATIONS Year Ended December 31, 2009 2010 2011 (in thousands, except per share data) Revenues Operating costs and expenses: Cost of revenues (exclusive of depreciation and amortization shown separately below) Selling, general and administrative...

  • Page 83
    Table of Contents EARTHLINK, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME Additional Accumulated Paid-in Capital Deficit Accumulated Other Total Total Comprehensive Stockholders' Comprehensive Income (Loss) Equity Income Common Stock Shares Amount Treasury Stock ...

  • Page 84
    ... in connection with acquisition of One Communications 2,998 Return of One Communications escrow shares - Change in deferred tax asset - Repurchase of common stock - Unrealized holding losses on certain investments, net of tax - Net income - Total comprehensive income Balance as of December 31, 2011...

  • Page 85
    ... of businesses, net of cash acquired Purchases of property and equipment Purchases of marketable securities Sales and maturities of marketable securities Payments to settle precombination stock awards Proceeds received from investments in other companies Other investing activities Net cash (used in...

  • Page 86
    ... provides nationwide Internet access and related value-added services to residential customers. The Company operates an extensive network including 28,000 route fiber miles, 90 metro fiber rings and four secure data centers that provide IP coverage across more than 90 percent of the United States...

  • Page 87
    ... are classified as long-term marketable securities. Available-for-sale securities are carried at fair value, with any unrealized gains and losses, net of tax, included in accumulated other comprehensive income as a separate component of stockholders' equity and in total comprehensive income. Amounts...

  • Page 88
    ... to its Business Services customers to the extent they are recoverable. Customer installation costs represent nonrecurring fees paid to other telecommunications carriers for services performed by the carriers when the Company orders facilities in connection with new customers acquired by the Company...

  • Page 89
    ...party valuation specialist's appraisal. Intangible assets determined to have definite lives are amortized over their estimated useful lives. Subscriber bases acquired directly are valued at cost plus assumed service liabilities, which approximates fair value at the time of purchase. The Company does...

  • Page 90
    ... the sale of customer premises equipment and web hosting. Revenues generally consist of recurring monthly charges for such services; usage fees; installation fees; equipment fees; and termination fees. The Company's Consumer Services segment earns revenue by providing nationwide Internet access and...

  • Page 91
    ... costs of equipment sold to customers for use with the Company's services. The Company utilizes other carriers to provide services where the Company does not have facilities. The Company utilizes a number of different carriers to terminate its long distance calls outside of its network. These costs...

  • Page 92
    ...sales and marketing, customer service, network operations, information technology, regulatory, billing and collections, corporate administration, and legal and accounting. Such costs include salaries and related employee costs (including stock-based compensation), outsourced labor, professional fees...

  • Page 93
    ... service in connection with the ITC^DeltaCom acquisition; and integration-related costs, such as system conversion, rebranding costs and integration related consulting and employee costs. Post-Employment Benefits Post-employment benefits primarily consist of the Company's severance plans...

  • Page 94
    ... earnings per share. Basic earnings per share represents net income divided by the weighted average number of common shares outstanding during the reported period. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock...

  • Page 95
    ... this Annual Report on Form 10-K for a discussion of the regulatory risks to which the Company is subject. Supply Risk. The Company's business depends on the capacity, affordability, reliability and security of third-party network service providers. Only a small number of providers offer the network...

  • Page 96
    ... of ITC^DeltaCom On December 8, 2010, EarthLink acquired ITC^DeltaCom, Inc. ("ITC^DeltaCom"), a provider of integrated communications services to customers in the southeastern U.S., at a price of $3.00 per share. EarthLink acquired 100% of ITC^DeltaCom in a merger transaction with ITC^DeltaCom...

  • Page 97
    ... of Contents EARTHLINK, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) In connection with the merger, each ITC^DeltaCom stock option was cancelled in exchange for cash equal to the difference between the merger consideration and the exercise price, and certain ITC^DeltaCom restricted...

  • Page 98
    ... acquired in connection with the ITC^DeltaCom acquisition (in thousands): Fair Value Useful Life Customer relationships Developed technology Trade name Total intangible assets $ 117,600 9,900 3,700 $ 131,200 5 - 6 years 6 years 3 years In connection with the acquisition, EarthLink assumed ITC...

  • Page 99
    ...post-closing employment-related obligations of the Company on the terms provided in the escrow agreement. This was accounted for separately from the purchase price allocation. EarthLink issued a total of 3.0 million shares in connection with the One Communications acquisition, which consisted of the...

  • Page 100
    ...as the effects were not material to the Company's consolidated financial statements. Other During the year ended December 31, 2011, EarthLink acquired certain other companies and purchased certain assets to expand its services and products offerings for a total of $13.0 million of cash consideration...

  • Page 101
    ... FINANCIAL STATEMENTS-(Continued) Pro Forma Financial Information The following unaudited pro forma revenue and earnings assumes the acquisitions of ITC^DeltaCom and One Communications occurred on January 1, 2010: Year Ended December 31, 2010 2011 (in thousands) Total revenues Net income...

  • Page 102
    ... 31, 2003, 2004 and 2005, EarthLink executed a series of plans to restructure and streamline its contact center operations and outsource certain internal functions (collectively referred to as "Legacy Plans"). The Legacy Plans included facility exit costs, personnel-related costs and asset disposals...

  • Page 103
    ...related to EarthLink's acquisitions, including transaction related costs, such as advisory, legal, accounting, valuation and other professional fees; employee severance and retention costs; costs to settle stock-based awards attributable to postcombination service in connection with the ITC^DeltaCom...

  • Page 104
    Table of Contents EARTHLINK, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) The following tables summarize gross unrealized gains and losses as of December 31, 2010 and 2011 on the Company's marketable securities designated as available-for-sale: As of December 31, 2010 Gross Gross ...

  • Page 105
    .... NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) 6. Property and Equipment Property and equipment consisted of the following as of December 31, 2010 and 2011: As of December 31, 2010 2011 (in thousands) Communciations and fiber optic networks Computer equipment and software Office and other...

  • Page 106
    ... identifiable intangible assets consist of customer relationships, developed technology and software, trade names and other assets acquired in conjunction with the purchases of businesses and subscriber bases from other companies that are not deemed to have indefinite lives. The gross carrying value...

  • Page 107
    ... goodwill for the 2011 annual impairment test, which were Consumer Services, New Edge, ITC^DeltaCom, One Communications, STS Telecom, Managed Services and Web Hosting. The Consumer Services reportable segment was one reporting unit, while the Business Services reportable segment consisted of...

  • Page 108
    ... the New Edge name as EarthLink Business. The Company recorded a non-cash impairment charge of $1.7 million during the year ended December 31, 2010 to write-down its New Edge trade name. As a result, there is no remaining carrying value related to the New Edge trade name. Definite-lived intangible...

  • Page 109
    ... EARTHLINK, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) 9. Long-Term Debt and Capital Lease Obligations The Company's long-term debt and capital lease obligations consisted of the following as of December 31, 2010 and 2011: As of December 31, 2010 2011 (in thousands) ITC^DeltaCom...

  • Page 110
    ...to repay indebtedness under the ITC^DeltaCom Notes, or other indebtedness secured on a first-priority basis or (b) reinvest the net sale proceeds in its business, or (2) ITC^DeltaCom experiences a change of control, ITC^DeltaCom may be required to offer to purchase ITC^DeltaCom Notes from holders at...

  • Page 111
    ..., make certain types of restricted payments, incur liens on assets of the Company or the Restricted Subsidiaries, engage in asset sales and enter into transactions with affiliates. Upon a change of control (as defined in the indenture), the Company may be required to make an offer to repurchase the...

  • Page 112
    Table of Contents EARTHLINK, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) Conversion. The Convertible Notes were payable with cash and, if applicable, were convertible into shares of the Company's common stock. The initial conversion rate was 109.6491 shares per $1,000 principal ...

  • Page 113
    Table of Contents EARTHLINK, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) Company classified the Convertible Notes as a current liability in the Consolidated Balance Sheets as of December 31, 2010. Revolving Credit Facility General. On May 20, 2011, the Company entered into a credit ...

  • Page 114
    ..., on August 6, 2012. Share Repurchases Since the inception of the Company's share repurchase program, the Board of Directors has authorized a total of $750.0 million for the repurchase of EarthLink's common stock. As of December 31, 2011, the Company had $98.9 million available under the current...

  • Page 115
    ...ended December 31, 2009, 2010 and 2011, respectively. The Company has classified stock-based compensation expense within selling, general and administrative expense, the same operating expense line item as cash compensation paid to employees. Stock Incentive Plans The Company has granted options and...

  • Page 116
    Table of Contents EARTHLINK, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) In connection with the acquisition of ITC^DeltaCom, the Company assumed certain restricted stock units granted under ITC^DeltaCom's stock plans. These restricted stock units generally retained all of the rights...

  • Page 117
    ... cost is expected to be recognized over a weighted-average period of 2.7 years. The total fair value of shares vested during the years ended December 31, 2009, 2010 and 2011 was $15.4 million, $10.8 million and $15.6 million, respectively, which represents the closing price of the Company's common...

  • Page 118
    ... federal statutory tax rate and the Company's effective tax rate for financial statement purposes for the years ended December 31, 2009, 2010 and 2011: Year Ended December 31, 2010 2011 (in thousands) 2009 Federal income tax provision at statutory rate State income taxes, net of federal benefit...

  • Page 119
    ... of Contents EARTHLINK, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) Deferred tax assets and liabilities include the following as of December 31, 2010 and 2011: As of December 31, 2010 2011 (in thousands) Current deferred tax assets: Accrued liabilities and reserves Net operating...

  • Page 120
    ... under Internal Revenue Code Section 382 in 2010 and $406.3 million were limited in 2011. As of December 31, 2010 and 2011, the Company had NOLs for state income tax purposes totaling approximately $776.6 million and $796.5 million, respectively, which started to expire in 2011. The increase in the...

  • Page 121
    ... under various non-cancelable operating leases. The facility leases generally require the Company to pay operating costs, including property taxes, insurance and maintenance, and generally contain annual escalation provisions as well as renewal options. Total rent expense (including operating...

  • Page 122
    ... of the Company's restructuring plans, as of December 31, 2011 are as follows: Year Ending December 31, Operating Leases (in thousands) 2012 2013 2014 2015 2016 Thereafter Total minimum lease payments, including estimated operating expenses Less aggregate contracted sublease income $ $ Purchase...

  • Page 123
    .... The Company maintains adequate reserves for anticipated exposure associated with these billing disputes. The reserves are reviewed on a monthly basis, but are subject to changes in estimates and management judgment as new information becomes available. In view of the length of time historically...

  • Page 124
    ...of Contents EARTHLINK, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) securities. The following tables present the Company's assets that are measured at fair value on a recurring basis as of December 31, 2010 and 2011: Fair Value Measurements as of December 31, 2010 Using Quoted Prices...

  • Page 125
    ...managed network services, cloud hosting and equipment services, to businesses, enterprise organizations and communications carriers. The Company's Consumer Services segment provides nationwide Internet access and related value-added services to residential customers. The results of ITC^DeltaCom, One...

  • Page 126
    ...of segment performance. Information on the Company's reportable segments and a reconciliation to consolidated income from operations for the years ended December 31, 2009, 2010 and 2011 is as follows: Year Ended December 31, 2010 2011 (in thousands) 2009 Business Services Revenues Cost of revenues...

  • Page 127
    ... the sale of customer premises equipment and web hosting. Revenues generally consist of recurring monthly charges for such services; usage fees; installation fees; equipment fees and termination fees. The Company's Consumer Services segment earns revenue by providing nationwide Internet access and...

  • Page 128
    .... In connection with the registration of the Exchange Senior Notes and related guarantees, the Company is required to provide the financial information set forth under Rule 3-10 of Regulation S-X, "Financial Statements of Guarantors and Issuers of Guaranteed Securities Registered or Being Registered...

  • Page 129
    ... Marketable securities Restricted cash Accounts receivable, net Prepaid expenses Deferred income taxes, net Due from affiliates Other current assets Total current assets Long-term marketable securities Property and equipment, net Deferred income taxes, net Goodwill Purchased intangible assets, net...

  • Page 130
    Accumulated other comprehensive loss Total stockholders' equity Total liabilities and stockholders' equity (14) 969,151 - 296,903 - 278,527 - (791,437) (14) 753,144 $ 1,334,962 $ 624,047 $ 122 711,286 $ (989,844) $ 1,680,451

  • Page 131
    ... Marketable securities Restricted cash Accounts receivable, net Prepaid expenses Deferred income taxes, net Due from affiliates Other current assets Total current assets Long-term marketable securities Property and equipment, net Deferred income taxes, net Purchased intangible assets, net Goodwill...

  • Page 132
    income Total stockholders' equity (deficit) Total liabilities and stockholders' equity (deficit) 241 938,918 - (44,670) - 255,270 - (391,650) 241 757,868 $ 1,292,271 $ 126,886 $ 123 696,553 $ (591,732) $ 1,523,978

  • Page 133
    ...of Contents EARTHLINK, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) Condensed Consolidating Statement of Operations Year Ended December 31, 2011 Parent Guarantor Subsidiaries Non-Guarantor Subsidiaries Eliminations Consolidated Revenues Operating costs and expenses: Cost of revenues...

  • Page 134
    ... of goodwill and intangible assets Restructuring and acquisition-related costs Total operating costs and expenses Income (loss) from operations Interest expense and other, net Income (loss) before income taxes Income tax (provision) benefit Net income (loss) 11,319 - 15,603 308,614 185,836...

  • Page 135
    ... administrative (exclusive of depreciation and amortization shown separately below) Depreciation and amortization Impairment of goodwill and intangible assets Restructuring and acquisition-related costs Total operating costs and expenses Income (loss) from operations Interest expense and other, net...

  • Page 136
    ... Cash flows from investing activities: Purchase of business, net of cash acquired Purchases of property and equipment Purchases of marketable securities Sales and maturities of marketable securities Payment for investment in subsidiary Other Net cash provided by (used in) investing activities Cash...

  • Page 137
    ...: Purchase of business, net of cash acquired Purchases of property and equipment Purchases of investments in marketable securities Sales and maturities of investments in marketable securities Payments to settle precombination stock awards Proceeds received from investments in other companies Payment...

  • Page 138
    127

  • Page 139
    ... of property and equipment Purchases of investments in marketable securities Sales and maturities of investments in marketable securities Proceeds received from investments in other companies Net cash used in investing activities Cash flows from financing activities: Principal payments under capital...

  • Page 140
    ... statements since the acquisition date. Operating costs and expenses for the quarter ended December 31, 2010 includes a $1.7 million impairment to write off the Company's New Edge trade name, as a result of a decision to re-brand the New Edge name as EarthLink Business. The quarterly net income...

  • Page 141

  • Page 142
    ... and reported, within the time periods specified in the Securities and Exchange Commission's rules and forms, and that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions...

  • Page 143
    ...Reporting Compliance" and "Corporate Governance" in our Proxy Statement for our 2012 Annual Meeting of Stockholders ("Proxy Statement") or in a subsequent amendment to this Annual Report on Form 10-K. Such information is incorporated herein by reference. Item 11. Executive Compensation. Information...

  • Page 144
    ...(c). In connection with the closing, the Leadership and Compensation Committee approved the EarthLink, Inc. Stock Option Plan for Inducement Awards Relating to the Acquisition of New Edge Holding Company. The Leadership and Compensation Committee then granted options to purchase 657,000 shares of...

  • Page 145
    ...Merger Corp. and ITC^DeltaCom, Inc. (incorporated by reference to Exhibit 2.1 of EarthLink, Inc.'s Report on Form 8-K dated October 1, 2010-File No. 001-15605). 2.2- Agreement and Plan of Merger, dated as of December 20, 2010, by and among EarthLink, Inc., Egypt Acquisition Corp., One Communications...

  • Page 146
    ... Inc. Stock Option Plan for Inducement Awards Relating to the Acquisition of New Edge Holding Company (incorporated by reference to Exhibit 10.1 to EarthLink, Inc.'s Report on Form 8-K dated April 14, 2006). 10.6#- EarthLink, Inc. 2011 Equity and Cash Incentive Plan (incorporated herein by reference...

  • Page 147
    ... 2011-File No. 001-15605). 10.23- Summary of 2011 bonus payments and 2012 salaries for executive officers (incorporated by reference to EarthLink, Inc.'s Report on Form 8-K dated February 14, 2012-File No. 001-15605). 10.24+- High-Speed Service Agreement between EarthLink, Inc. and Time Warner Cable...

  • Page 148
    ... New York Mellon Trust Company, N,.A., as Collateral Agent for the First Lien Secured Parties referred to therein (incorporated by referent to Exhibit 4.3 to ITC^DeltaCom, Inc.'s Report on Form 8-K dated April 9, 2010-File No. 000-23253). 10.27- Credit Agreement, dated May 20, 2011, among EarthLink...

  • Page 149
    ... to this portion of Item 15 is submitted as a separate section of this Annual Report on Form 10-K. (c) Financial Statement Schedule The Financial Statement Schedule(s) described in Regulation S-X are omitted from this Annual Report on Form 10-K because they are either not required under the related...

  • Page 150
    ... any and all capacities, to sign any and all amendments to this Report, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, and hereby grants to such attorneys-in-fact and agents full power and authority to do and...

  • Page 151

  • Page 152
    QuickLinks -- Click here to rapidly navigate through this document Exhibit 21.1 Subsidiaries of the Registrant Name Jurisdiction of Incorporation EarthLink, Inc. EarthLink Business, LLC ITC^DeltaCom, Inc. New Edge Holding Company Delaware Delaware Delaware Delaware

  • Page 153
    QuickLinks Exhibit 21.1

  • Page 154
    ... 24, 2012, with respect to the consolidated financial statements of EarthLink, Inc. and the effectiveness of internal control over financial reporting of EarthLink, Inc. included in this Annual Report (Form 10-K) for the year ended December 31, 2011. /s/ Ernst & Young LLP Atlanta, Georgia February...

  • Page 155
    QuickLinks Exhibit 23.1

  • Page 156
    ... OF 2002 I, Rolla P. Huff, certify that: 1. 2. I have reviewed this annual report on Form 10-K for the year ended December 31, 2011 of EarthLink, Inc.; Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the...

  • Page 157
    QuickLinks Exhibit 31.1 CERTIFICATION OF CEO PURSUANT TO SECURITIES EXCHANGE ACT RULES 13a-14 AND 15d-14 AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

  • Page 158
    ...2002 I, Bradley A. Ferguson, certify that: 1. 2. I have reviewed this annual report on Form 10-K for the year ended December 31, 2011 of EarthLink, Inc.; Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the...

  • Page 159
    QuickLinks Exhibit 31.2 CERTIFICATION OF CFO PURSUANT TO SECURITIES EXCHANGE ACT RULES 13a-14 AND 15d-14 AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

  • Page 160
    ...ACT OF 2002 In connection with the Annual Report on Form 10-K of EarthLink, Inc. (the "Company") for the year ended December 31, 2011 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Rolla P. Huff, Chief Executive Officer of the Company, certify, pursuant to...

  • Page 161
    QuickLinks Exhibit 32.1 CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

  • Page 162
    ... OF 2002 In connection with the Annual Report on Form 10-K of EarthLink, Inc. (the "Company") for the year ended December 31, 2011 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Bradley A. Ferguson, Chief Financial Officer of the Company, certify, pursuant...

  • Page 163
    QuickLinks Exhibit 32.2 CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002