Moodys: EarthLinks Future Tied to East Coast Operations

In credit ratings Friday, Moodys Investors Service painted a moderately positive picture of EarthLink and said the companys future is tied to its success as a competitive telecommunications provider on the East Coast where it has a deep network through acquisitions of ITC^DeltaCom and One Communications (One Comm).

Moodys notes that in the near-term EarthLink has the capacity to generate more free cash flow than its CLEC peers and that its financial metrics are strong for its rating category,” stated the New York-based credit ratings agency, which assigned a first-time B1 Corporate Family Rating and a B1 Probability of Default Rating to EarthLink.

But since EarthLink generates most of its free cash flow from an Internet service provider business that has been declining 20 percent annually, the companys future is dependent on its successful transformation to become a meaningful CLEC operator on the East Coast, where DeltaCom and OneComm have their greatest network depth.”

Revenues at One Comm have been declining for three years, presenting a challenge for EarthLinks management to turn the company around, according to Moodys, which defines a B rating as speculative” and subject to high credit risk.”  

As one of the nations first ISPs for consumers, EarthLink has been transforming itself into a telecom provider more oriented to businesses. In December, Atlanta-based EarthLink completed its acquisition of ITC^DeltaCom, a telecommunications provider in the southeastern United States.  And just last month, EarthLink acquired One Communications Corp., a telecom provider serving small and mid-sized businesses in 17 states across the Northeast, Mid-Atlantic and Upper Midwest.

Moodys indicated EarthLink will have to grow by taking customers from incumbents and other competitors in a relatively tough economy.

Moodys believes the organic market for business telecommunications services in the US will grow only at a modest rate in the intermediate term due to both economic conditions as well as pricing pressures,” the agency stated. Therefore, EarthLinks operating cash flow growth is dependent on its ability to take market share from the larger, better-capitalized incumbents, and other competitive providers of telecommunications services.”

The credit ratings agency also cautioned that CLECs such as EarthLink are increasingly vulnerable to attack from cable companies in the lower end of the SMB space.

In the first quarter of 2011, EarthLink posted net income of $16.4 million, or $0.15 per share, on revenues of $243 million.

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