EASYLINK SERVICES (NASDAQ:ESIC)

On 06/10/2011 we added ESIC to the GeoSpecial list @ $4.76

 Catalyst: Strong third quarter 2011 results and conference call.  See our GeoSpecial note from 6/28/2011

We are now removing ESIC from the GeoSpeicial List @ $4.63

Potential road block: Slight reduction in 2012 EPS guidance. Favorable GeoPowerRanking (GPR ) does not seem likey until  2013.

• Peak performance: Reached a high of  $6.35 on 07/12/2011 for a maiximum potential return of 33%
• Current Price: $4.63

First Quarter 2012 Results

• Revenue for the first quarter of fiscal 2012 was a first quarter record at $47.0 million, up 107%, compared to $22.7 million in the first quarter of fiscal 2011.
• Gross profit for the first quarter of fiscal 2012 was $31.3 million, up 94%, compared to $16.1 million in the first quarter of fiscal 2011.
• Non-GAAP net income ex-items was $5.4 million, or $0.17 per adjusted basic share and $0.16 per adjusted diluted share compared to approximately $3.2 million, or $0.11 per adjusted basic and diluted share in the first quarter of fiscal 2011.

"These results demonstrate that enterprises across a broad range of industries continue to migrate their global communications requirements to the cloud and are increasingly choosing us for our innovative value-added solutions and services." said Tom Stallings, CEO of EasyLink. "Delivering these solid results speaks to EasyLink's exceptional value proposition of cloud delivered mission-critical messaging and communications services and our recurring revenue model which continues to produce consistent levels of predictive revenue and significant cash generation."

Fourth Quarter Results:

• Revenue for the fourth quarter of fiscal 2011 was approximately $46.8 million compared to $19.9 million in the fourth quarter of fiscal 2010.
• GAAP net income attributable to common shareholders was approximately $16.4 million or $0.54 per basic share and $0.50 per diluted share.
• Fourth quarter Adjusted EBITDA was approximately $13.9 million compared to $4.5 million in the fourth quarter of fiscal 2010. Non-GAAP EPS for fourth quarter 2011 was $0.32 vs a loss of $0.03 in fourth quarter 2010.

"EasyLink delivered another strong quarter of positive financial results and the conclusion of a year of major accomplishments. We are delighted by these results and their implications for creating long-term stockholder value," stated Tom Stallings, Chief Executive Officer of EasyLink. "We enter 2012 with a foundation of positive momentum and a commitment to driving long-term profitable growth."

NORCROSS, Ga., Sept. 23, 2011 (GLOBE NEWSWIRE) -- EasyLink Services International Corporation ("EasyLink" or "Company") (Nasdaq:ESIC) (www.easylink.com), a global provider of comprehensive messaging services and e-commerce solutions, today affirmed the high-end of its fiscal 2011 Guidance Range and announced plans to release its fiscal 2011 fourth quarter and year end financial results on Wednesday, October 5^th, after the market closes.

On June 10, 2011, we coded ESIC as a GeoSpecial @ $4.76. Some of the reasons for this include:

• Has a cloud based angle

  "offers a comprehensive portfolio of "any to any" cloud-based messaging and transaction services"

• Competitive Advantage: Offers software products that target multiple messaging and transaction applications.
• Recent acquisition expands customer accounts to 30 thousand from 14 thousand.
• Fiscal 2011 3rd quarter non-GAAP EPS grew 122.2% to $0.20 representing a breakout quarter, eclipsing analyst estimates by $0.07.
• During the 3rd quarter conference call, the company issued guidance that implies a continuation of the quarter's raw numbers. Management also commented that it strives to under-promise and over-deliver.

Reasons why we did not code ESIC as a GeoBargain:

• The debt to equity ratio of 1.08 is over our 0.20 maximum threshold. On a positive note, annual cash flow from operations is tracking at about $25 million vs. about $1.6 million in interest expense.
• The current ratio of 1.19 is less than our 2.0 minimum threshold.
• Earnings and asset quality could be up for debate at some point:
  • A good deal of recent EPS growth has come from adding back non-cash items such as goodwill to GAAP net income. While we prefer to value companies on a non-GAAP basis by stripping out unusual non-cash items, we cannot rule out the possibility of future investor scrutiny based on the nature of some of the non-cash items the company has added back to its GAAP earnings.
  • ~60% of total assets is comprised of intangibles and goodwill.

Condensed Consolidated Balance Sheets as of October 31, 2010 and July 31, 2010 (Unaudited)

		October 31, 2010				July 31, 2010
ASSETS
Current assets:
Cash and cash equivalents		$	18,084,541			$	20,474,709
Accounts receivable, net of allowance for doubtful accounts and allowance for sales returns and allowances of $1,920,556 and $1,662,502, respectively			30,869,495				11,480,688
Prepaid expenses and other current assets			3,627,507				1,865,013
Deferred tax asset			6,602,064				6,597,983
Total current assets			59,183,607				40,418,393
Property and equipment, net of accumulated depreciation of $17,205,845 and $16,379,755, respectively			20,895,100				5,521,146
Goodwill			62,776,775				34,454,935
Other intangible assets, net			67,126,403				15,874,281
Deferred tax asset, net of valuation allowance			7,134,343				7,588,257
Other assets			1,104,414				629,261
Total assets		$	218,220,642			$	104,486,273

• Economic sensitivity:

"Global macro economic trends are important barometers for our business. Changes in the level of economic activity are reflected directly in the volumes of our services used by our customers in both segments of our business. As the United States and global economies have experienced recession, we have seen a decrease in the volume of demand for our services from existing customers, as well as increasing pricing pressure and customer bankruptcies and reorganizations. However, extended economic slowdowns can possibly improve customer acquisition opportunities as larger companies look to outsource business functions in our service segments to reduce internal costs. We expect volume trends to reverse when and as the United States and global economies move into a more robust recovery and current unemployment levels begin to decline. Our management has taken steps to adjust our cost structure to reflect the decrease in demand for our services, which steps have positively impacted our profitability. However, there can be no assurance that we can achieve further offsetting cost reductions if revenue was to drop significantly."

• GPR currently stands at 2, meaning that EPS could grow at least 30% for the next two quarters. We prefer to see a GPR of at at least 3.

• We are not certain that the company will be capable of generating above average EPS growth past the next few quarters.

All of the above referenced items could limit sustainable long-term P/E expansion.

We plan to interview the company to:

• Determine how it plans to grow in spite of its admission that it requires healthy economic activity to accomplish this task
• Develop a clear understanding of its exposure to the "cloud"
• Determine how the company plans to service its debt obligations and associated time line for doing so.
• Determine if the company can grow organically.

Conclusion:

While ESIC does not appear to be the cleanest company to add to our portfolio, we believe its short-term stock performance could be positively driven purely by an acceleration in non-GAAP EPS growth and ""excitement" surrounding its involvement in the "cloud." The long-term performance will partly depend on ESIC's ability to successfully integrate acquisitions into its operation, while being able to service its debt obligations. Given current cash flow trends, the company may be able to pay down a substantial amount of its debt burden within the next four years.

Third Quarter Results:

• Revenue for the third quarter of fiscal 2011 was a record $47.8 million, up 132%, compared to $20.6 million in the third quarter of fiscal 2010
• Non-GAAP net income ex-items was $6.5 million, or $0.22 per adjusted basic share and $0.20 per diluted share, compared to approximately $2.7 million, or $0.09 per adjusted basic and dilutive share, in the third quarter of fiscal 2010.
• Revenue guidance for full year 2011 of $163 to $165 million
• Full year non-gaap EPS of $0.66 to $0.69

"We are pleased to report record results on a quarter-over-quarter basis as well as on a year-over-year basis for both top-line and bottom-line growth," said Tom Stallings, CEO of EasyLink. "Our team built upon the momentum we experienced in the previous quarter, growing new and existing customer revenues to record levels. While it is too early to be certain, we believe the increased customer activity is a favorable indicator of our future performance and assurance of our strategy to deliver a broader portfolio of productivity enhancing solutions over the cloud."