Novice Investing - Earth Link Disconnect

Date: Friday 29th 2008f August 2008 09:53:21 PM

EarthLink Disconnect - 08/19/2007

By: Hari Wibowo

Earthlink had been on our watch list since November of last year. Earthlink is one of the leading players to build Wi-Fi networks in select US cities, which has a cost advantage compared to say, existing cable networks. Since then, cable companies had been fighting back (as we should expect) to defend their big investments in infrastructure. Businessweek wrote an article about some of these Wi-Fi cities project getting delayed or perhaps cancelled. Earthlink had hinted that it will not turn profitable anytime soon. With this in mind, is there any hope for Earthlink as a viable investment?

When we were estimating Earthlink's potential revenue from the Wi-Fi initiatives, we estimate around 25% of total households will sign up for the service. Thus far, only 1-2% of the households had signed up for it. Our assumption was a $ 20/ month subscription fee for each users and no advertising revenue from sponsors. While Earthlink may gain additional advertising revenue, it can only do so once there are a huge user base to begin with. There are some sporadic news that Earhlink is rethinking its strategy in this Wi-Fi arena, which is of course a huge blow for the company. We may even question its survivals without other newer source of revenue to stem the loss of its dial-up subscribers.

Earthlink has taken on $ 258 Million in long term debt, primarily to finance this Wi-Fi building projects. However, as it becomes more clear that cost is higher than expected while market penetration is low, Earthlink is predicted to sustain a considerable loss this year. Earthlink's balance sheet is still decent, with $ 190 Million in positive net cash ($1.56 per share). This net cash had been declining due to the capital expenditure of Wi Fi initiatives. But still, it has not reached dangerous level.

Earthlink shares had reached 52 week low partly due to the market sell off in the past month and partly due to the failure of this Wi Fi initiatives. While we would continue to look for investment opportunity in Earthlink, current share price had not plunged low enough to give us enough return, especially with the expected failure of its Wi Fi initiatives.

END

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Disclaimer: The sole purpose of this article is educational. This article is merely the opinion of the writer and is not in any way a buy/sell recommendation regarding Earthlink Inc. (ELNK) or any other securities.

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