<DAILY DOUBLE>
Thursday, February 25, 1999

EarthLink Network Inc.
<% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ELNK)") else Response.Write("(Nasdaq: ELNK)") end if %>
Phone: 626-296-2400
Website: http://www.earthlink.com
Price (2/24/99): $61 1/16

HOW DID IT DOUBLE?

What do you get when you multiply a number greater than zero by four, and then divide by two? The answer is a double. And, if you're talking about a stock, the answer is also quite a wild ride. Among the many Internet companies that have seen their stocks absolutely soar over the past year, only to come down with an acute case of gravity recently, is EarthLink Network <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ELNK)") else Response.Write("(Nasdaq: ELNK)") end if %>, one of the largest Internet Service Providers (ISPs) in the country.

Because it went public in early 1997 at a split-adjusted $6.50 per share, many EarthLink shareholders are staring at darn impressive returns. 1998 saw the shares quadruple, going from $12 7/8 all the way up to $57. Even those who bought shares in a June 1998 secondary offering at $30 per share were given much to smile about.

In a memorable first week of January, EarthLink saw its shares spike as high as $96 3/4 on extremely high volume as the company announced that it had surpassed the million-member mark, more than doubling the number of subscribers under its wings in less than a year. Although an impressive milestone, the company's chairman called it "just the beginning." Taking advantage of a flying stock, the company sold another 2.75 million shares to the public (some of which were sold by insiders) in January at $73 5/8 per share, significantly adding to EarthLink's cash horde.

While recent weakness has dampened the market's enthusiasm a tad, longtime shareholders in the company have nevertheless seen their shares multiply in value.

BUSINESS DESCRIPTION

Founded in 1994 by 20-something Sky Dayton, EarthLink has quickly become one of the nation's largest Internet Service Providers. The company offers, among other things, nationwide dial-up Internet service, email, and Web page hosting for individuals and businesses. Like most ISPs these days, a vast majority of its individual customers pay roughly $20 per month for unlimited Internet access.

In June of 1998, the company agreed to purchase Sprint's <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: FON)") else Response.Write("(NYSE: FON)") end if %> Internet service (and its 130,000 subscriber accounts) in exchange for giving Sprint an approximately 28% stake in the company. The deal also called for EarthLink to become Sprint's exclusive ISP partner for individuals, and for Sprint to give EarthLink access to its data network. Sprint has also promised to deliver more than 750,000 additional subscribers over the next five years through its own marketing efforts.

EarthLink is based in Southern California and owns many of its points of presence (POPs) there. Leasing the rest of its POPs from Sprint, UUNet (a subsidiary of MCI WorldCom), and another recent Double, PSINet <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: PSIX)") else Response.Write("(Nasdaq: PSIX)") end if %>, over 90% of the U.S. can access EarthLink via a local telephone call. By the beginning of 1999, EarthLink had signed up more than a million customers.

FINANCIAL FACTS

Income Statement
12-month sales: $175.9 million
12-month income: ($17.4 million)*
12-month EPS: ($0.66)*
Profit Margin: NA
Market Cap: $1906.3 million
(*Before amortization and transaction costs)

Balance Sheet
Cash: $140.4 million
Total Assets: $266.3 million
Long-term Debt: $7.7 million
Total Liabilities: $69.0 million

Ratios
Price-to-earnings: NA
Price-to-sales: 10.8

HOW COULD YOU HAVE FOUND THIS DOUBLE?

For one keeping an eye on the Internet sector, EarthLink would have been nearly impossible to ignore. Simply knowing about a company is the very first step to researching further. Digging a little deeper at EarthLink's fundamentals would have shown a company adding subscribers at an astonishing rate, something that should have warranted further attention.

Some of EarthLink's marketing efforts were even targeted at disgruntled America Online <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AOL)") else Response.Write("(NYSE: AOL)") end if %> users, promoting EarthLink's relative lack of busy signals and speedy customer service. This obviously struck a chord with many, as people flocked to the service en masse. For those using a subscriber-based valuation, this was manna from heaven, as large numbers of users are the foundation for building an online business.

Another way to have spotted EarthLink is by paying attention to companies that beat earnings estimates. In each of the last four quarters, EarthLink reported smaller losses than analysts were expecting, which is typically a sign of strength.

WHERE TO FROM HERE?

On the financial side, it looks like EarthLink has a shot at actually posting some black ink in the coming quarters -- a rarity in the fledgling Internet sector. EarthLink's margins have been generally increasing, an important sign to look for as companies mature from the development/start-up stage. Thanks to the recent secondary offerings, the balance sheet is also extremely healthy with roughly $4 per share in cash and negligible debt, giving the company plenty of fuel for at least the next few quarters. Much of these funds are slotted for building infrastructure to support even more users.

Even though EarthLink has had great success in recent quarters, there are some significant challenges ahead. As AOL's reliability and service improved, the number of folks fleeing for other ISPs has slowed a bit. Plus, there are literally hundreds of other ISPs offering essentially the same services EarthLink offers at similar and sometimes lower prices. In other words, ISPs have many commodity-like qualities, and differentiating products in the market is a significant challenge. EarthLink has managed to grow and retain its subscribers by working hard on customer service, yet customer service is often the first thing to go when a company starts experiencing growing pains. Investors should keep an eye on the quality of EarthLink's service as it continues to expand.

For better or worse, EarthLink's stock is ultimately going to go the same direction the subscriber count goes. The company is extremely confident it can continue its member-acquisition momentum, and there is little reason to doubt those claims. EarthLink added 185,000 new subscribers in the fourth quarter alone, and some expect total subscriber count to top 2 million by the end of the year.

Having Sprint as a partial owner and partner will certainly help EarthLink's marketing efforts, as will established relationships with the likes of CompUSA <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CPU)") else Response.Write("(NYSE: CPU)") end if %> and Apple Computer <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: AAPL)") else Response.Write("(Nasdaq: AAPL)") end if %>. However, the Sprint partnership puts the company at odds with some of the largest names in the communications business, such as AT&T <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: T)") else Response.Write("(NYSE: T)") end if %> and MCI WorldCom <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: WCOM)") else Response.Write("(NYSE: WCOM)") end if %>. On the high-speed end of the spectrum, the company's partnership with cable firm Charter Communications appears to be outgunned by the likes of @Home <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ATHM)") else Response.Write("(NYSE: ATHM)") end if %>. Nevertheless, competing with the "big boys" has not hurt the company's business in the past, and it will be interesting to see if EarthLink can continue to scrap its way to the top.

There is little doubt that the demand for fast and reliable Internet access is going to continue skyward for the foreseeable future, and having the wind at the company's back is sure to help fuel growth. While it's far from certain which way the cards are going to fall in the sector, it's clear that EarthLink has positioned itself as a major player in the high-stakes Internet game. And, unlike some other companies at the table, measuring EarthLink using traditional valuation techniques is not an effort in futility. At a minimum, EarthLink is a company worth keeping an eye on.

-- Paul Larson
([email protected])