Income is a big part of investors' returns. Stocks, mutual funds and fixed income ideas in this column are featured because they are relatively solid in their ability to pay dividends or interest. We're giving income investors a resource to start their research for investments that give better yields with lower risk.

August 25, 2010 - Earthlink, Inc. (ELNK-NASDAQ) provides Internet access and related value-added services to individual and business customers in the United States. The company operates in two segments, Consumer Services and Business Services.

Business Services provides secure IP-based networks, including virtual private networks (VPN) and CPE-based VPNs; high-speed and dial-up Internet access for business customers; and wholesale services comprising network services to communications carriers. This segment also leases server space and provides Web hosting services that enable customers to build and maintain an online presence, including domain names, storage, mailboxes, software tools to build Web sites, e-commerce applications, and 24/7 customer support.

In addition, Business Services has installation programs, managed network services, remote access, and disaster recovery services. EarthLink primarily sells its products and services to telecommunications carriers and network resellers through direct sales force, telephone, Web sales groups, search engine marketing, affinity marketing partners, resellers, sales agents, referral partners, and marketing alliances.

The company has strategic marketing alliances with Time Warner Cable Inc. and Bright House Networks. EarthLink was founded in 1994 and is headquartered in Atlanta, Georgia.

Earthlink has seen revenues drop over the last three years, starting in 2007 with $1.216 billion, then $955.6 million, and $723.7 million last year. This year, consensus from 4 analysts is for $593.66 million. Next year, they go even lower: $498.85 million. Management is very aware of the slowdown and has been cutting costs aggressively. Operating expenses were down 22% in the second quarter compared to last year's second period. The June quarter was the 16th straight quarter with lower revenues. Analysts don't see a change in direction unless a few things happen. More on that after the earnings picture.

The most likely fixes for ELNK: getting its current core customer base using narrowband services to upgrade to premium services like broadband and Cable. It also needs to affiliate with more Internet providers to drive traffic to its services. No matter what else it does, it has to start evolving away from a narrowband service as the core of its business since that sector of the market is only getting smaller.

So why would investors looking for income invest in a shrinking company? Because there's lots of cash, and a rebound is very feasible. First, the cash. There's $561.5 million of it sitting in the bank. That's $5.19 a share. The annual dividend is 64 cents a share. Furthermore, cash flow is very strong. Paying the dividend, buying other companies or pursuing other growth opportunities are all possibilities, in conjunction, not isolated.

The natural business solution is to increase DSL services, to combine delivery of TV, telephone and Internet into one broadband line. Certainly all of its narrowband customers will eventually have the service so the sooner ELNK can offer it, the more likely it will capture that client base. If it waits too long, its customers will go elsewhere. Furthermore, the longer it waits, the more competitive that sector becomes as cable and telephone providers penetrate its markets. They also will drive pricing lower.

More numbers: Market cap is $918.13 million. Forward P/E is 12. Price to sales ratio is 1.43. Price to book is 1.22. Operating margin for the last 12 months was 30.01%. Profit margin was 42.80%. Return on Equity was 42.83%. Return on assets was 12.42%. Total debt is $236.17 million with less than 5 years to maturity. There is no long term debt. Current ratio is 2.04. Book value per share is $7.01. Beta is 1.01. There are 108.14 million shares outstanding with a Float of 107.32 million. Insiders own .70% of the stock. Institutions own 100% of the Float.

Income investors will be drawn to the high yield but need to be cautious. Even with lots of cash to pay dividends for years, the company can't afford to stay in a shrinking mode. At some point it has to use some of that cash to buy other companies, increase advertising, develop joint ventures, or some other effort to stop shrinkage. Adventerous investors looking for income while they wait for the management to make its move will find this stock interesting.

- Company Web site: www.earthlink.com

- Ted Allrich