February 6, 2007 11:07 AM PST
Helio a drag on EarthLink's earnings
The Internet service provider on Tuesday reported a net loss of $24.8 million, compared with a profit of $29.2 million during the same period a year earlier. The latest quarter included an equity loss of $35.7 million from Helio, EarthLink's wireless joint venture with South Korea's SK Telecom, which launched in May. EarthLink said it lost $85 million on the venture for the year.
In terms of the entire company for the full year, EarthLink earned $5 million on revenue of $1.3 billion. Revenue increased a little less than 1 percent, while profits were down from $143 million in 2005.
Helio's total losses were $74 million for the quarter and $191.5 million for the year. But the management team said it sees promise in Helio despite heavy losses.
"EarthLink is pleased with Helio and the niche it's carved out," Kevin Dotts, chief financial officer for EarthLink, said during a conference call with investors and analysts on Tuesday. "ARPU (average revenue per user) is well above the industry average, and the brand recognition in the demographic they're targeting is very good."
Mobile virtual network operator Helio was created to go after young hipsters with a lot of cash to spend on high-end cell phone services. After an aggressive marketing campaign launched in the summer of 2006, Helio had about 70,000 subscribers as of December 31, 2006. It said it expects to increase that figure to about 100,000 by the second quarter of 2007. Dotts said he expects the venture to sign up between 200,000 and 250,000 subscribers by the end of 2007.
Unlike the major cell phone companies, which generate average revenue per subscriber of between $40 and $50, Helio is generating average revenue per subscriber of about $100. More than 25 percent of this money is coming from data services, according to Michael Grossi, vice president of strategy and business development for Helio. He said that more than 70 percent of subscribers have used many of the advanced data features offered by Helio, including mobile MySpace.com access, WAP browsing, GPS-enabled Google maps or the location buddy beacon system.
With service plans that include voice and all-you-can-eat data services for a flat fee priced between $65 and $135, it's little surprise that the company would generate high revenue per subscriber. As a result, EarthLink expects Helio to triple its revenue in 2007, generating between $140 million and $170 million in sales for the year.
But the cost of acquiring these subscribers is massive. And EarthLink executives said they expect losses to continue at least through 2007 and into 2008, with Helio not generating positive cash flow until 2009. High marketing costs will drive losses to between about $300 million and $360 million for 2007, Dotts said.
For EarthLink, which owns 50 percent of Helio, this will result in an equity charge of $160 million to $180 million. In total, EarthLink expects to lose between $110 million and $150 million on flat to slightly higher revenue of $1.3 billion to $1.35 billion for 2007.
EarthLink and SK Telecom each have already committed $220 million in funding to Helio, but Dotts said EarthLink could pony up an additional $50 million to $100 million in 2007 to keep the venture going. So far, no official plans have been made to commit more cash, he added.
In separate news, Helio launched an over-the-air music service that will allow subscribers to purchase music from their handsets for $1.99 a song. The service, which is available starting Tuesday, works with the latest Helio handset, the Drift. It is not available for the older devices, the Hero and the Kickflip. But going forward, all future Helio phones will support the service.
Verizon Wireless and Sprint Nextel already offer over-the-air music download services. Cingular Wireless, now part of the new AT&T, is also expected to launch an over-the-air download service. Cingular recently announced it will be the exclusive carrier for Apple's new iPhone.
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