Earthlink Shares Rally Four Percent Following Upgrade By Jefferies

Shares of EarthLink Holdings Corp. ELNK were trading higher by more than four percent Friday afternoon following an upgrade by analysts at Jefferies. In a report published Friday, Jefferies analyst Tudor Mustata upgraded shares of Earthlink to Hold from Underperform with a price target raised to $5 from a previous $3.75 after the company delivered strong second quarter results on the back of price increases, a delayed product rationalization and considerably better cost cutting. EarthLink provides network, communications, and IT services to business and residential customers. The company operates two segments which consists of Business Services that sells high-speed and dedicated Internet access, switched access, hosted IP, among other products. The second segment, Consumer Services offers customers broadband access, home networking, email storage, among other products. Mustata noted that following the company's restructuring plans which were announced in the fourth quarter, management was able to remove $6 million of employee costs and $1 million of rent costs in the quarter. Combined with prior improvements, this has translated into an improvement outlook, as evidenced by management's comments that it could see gross margin improvements in the future. However, the analyst added that sales momentum in the Managed Network & Cloud Services segment remains "lackluster," while the delayed CLEC production rationalization will pressure revenue trends for the rest of the year. As such, Mustata speculated that a new organizational structure and new focus on sales productivity will only impact sales trends next year. Bottom line, despite near-term revenue challenges, EarthLink's new cost structure and the potential for future asset sales "introduce a backstop" to the current discounted valuation.