Eschelon Telecom, Inc. Achieves Record-Setting Business Performance in 2006

Share Name	Share Symbol	Market	Type
Eschelon Telecom (MM)	NASDAQ:ESCH	NASDAQ	Common Stock

Eschelon Telecom (NASDAQ:ESCH)
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(NASDAQ:ESCH): Eschelon Telecom, Inc., a provider of integrated communications services to small and medium sized businesses in the western United States, today announced results for the quarter and year ended December 31, 2006. �This has clearly been our best year yet,� stated Richard A. Smith, Eschelon�s President and Chief Executive Officer. �We have proven the ability to scale the business while continuing to meet or exceed our aggressive financial and operating targets. Achieving these results during a year in which we are integrating multiple acquired companies and simultaneously expanding our sales force and network footprint reflects excellent operating execution � a testament to the strength of the business we have built. I am excited about our future as we capitalize on this operating and financial momentum. We have a base of Associates (a.k.a. employees) that are making the right decisions � customer by customer � and you see that in our results.� The following table highlights financial and operating results (dollars in thousands, except per unit amounts): For the twelve monthsended December 31, 4Q 2005 � 3Q 2006 � 4Q 2006 � 2005 � 2006 Total Revenue $58,377� $69,806� $76,744� $ 227,743� $ 274,526� Total Gross Profit (a) $33,841� $39,452� $44,517� $ 125,690� $ 157,435� Total Gross Margin (%) (a) 58% 57% 58% 55% 57% Adjusted EBITDA $11,492� $14,105� $16,008� $ 41,063� $ 55,546� Net Income (Loss) $(5,127) $(608) $10� $ (30,991) $ (2,780) Capital Expenditures $8,843� $12,781� $21,254� $ 35,905� $ 54,658� Cash and Investments (at end of period) $31,818� $76,965� $39,467� $ 31,818� $ 39,467� � Voice Lines In Service (at end of period) 270,662� 322,702� 363,375� 270,662� 363,375� Data Lines In Service (at end of period) 144,790� 191,190� 234,954� 144,790� 234,954� Total Lines In Service (at end of period) 415,452� 513,892� 598,329� 415,452� 598,329� Lines On-Net (%) (at end of period) 86.0% 83.0% 85.0% 86.0% 85.0% Lines Sold 26,308� 39,782� 44,471� 108,626� 151,336� Average Monthly Line Churn (%) 1.29% 1.10% 1.03% 1.34% 1.28% Average Network Revenue per Line per Month $42.00� $40.91� $39.77� $ 42.27� $ 40.84� � Total Employees (at end of period) 1,118� 1,250� 1,385� 1,118� 1,385� Quota-Carrying Network Service Salespeople (at end of period) 204� 268� 265� 204� 265� (a) Gross profit is defined as revenue less network services expense (excluding depreciation and amortization) and business telephone systems cost of revenue. Total revenues for the fourth quarter of 2006 were $76.7 million, an increase of $6.9 million from the third quarter of 2006 and an increase of $18.4 million from the fourth quarter of 2005. The increases were primarily due to the inclusion of the companies acquired during 2006, new telephone system sales and access line growth. Gross profit for the fourth quarter of 2006 was $44.5 million, an increase of $5.1 million from the third quarter of 2006 and an increase of $10.7 million from the fourth quarter of 2005. The increases were primarily due to the inclusion of the companies acquired during 2006, new telephone system sales and access line growth. Gross profit as presented is defined as revenue less network services expense (excluding depreciation and amortization) and business telephone systems cost of revenue. Gross profit is not intended to replace operating income (loss), net income (loss), cash flow and other measures of financial performance reported in accordance with generally accepted accounting principles (�GAAP�) in the United States. Management uses this definition of gross profit as a measure of operating performance. Below is a schedule reconciling reported GAAP operating income (loss) to gross profit as presented. Eschelon Telecom, Inc. Consolidated Operating Income (Loss) to Gross Profit Reconciliation (In Thousands) � For the twelve monthsended December 31, 4Q 2005 � 3Q 2006 � 4Q 2006 � 2005 � 2006 Operating Income (Loss) $ (2,007) $ 2,764� $ 4,032� $ (4,273) $ 11,619� Sales, general and administrative expense 22,487� 25,849� 29,048� 90,310� 103,569� Depreciation and amortization expense 13,361� 10,839� 11,437� 39,653� 42,247� Gross Profit $ 33,841� � $ 39,452� � $ 44,517� � $ 125,690� � $ 157,435� Sales, general and administrative expenses for the fourth quarter of 2006 were $29.0 million, an increase of $3.2 million from the third quarter of 2006 and an increase of $6.6 million from the fourth quarter of 2005. The increase from 2005 was primarily due to the inclusion of companies acquired during 2006, an increase in costs associated with the sales force expansion, operating taxes and share-based compensation. The increase from the third quarter was primarily due to the inclusion of OneEighty Communications and Mountain Telecommunications. Adjusted EBITDA for the fourth quarter of 2006 was $16.0 million, an increase of $1.9 million from the third quarter of 2006 and an increase of $4.5 million from the fourth quarter of 2005. Adjusted EBITDA is a non-GAAP measure. Below is a schedule reconciling reported GAAP net income (loss) to EBITDA and Adjusted EBITDA. Eschelon Telecom, Inc. Consolidated Net Income (Loss) to EBITDA and Adjusted EBITDA Reconciliation (In Thousands) � For the twelve monthsended December 31, 4Q 2005 � 3Q 2006 � 4Q 2006 � 2005 � 2006 Net Income (Loss) $ (5,127) $ (608) $ 10� $ (30,991) $ (2,780) Interest expense, net 3,324� 3,294� 4,011� 27,434� 14,367� Income taxes 4� -� -� 4� -� Depreciation and amortization 13,361� � 10,839� � 11,437� � 39,653� � 42,247� EBITDA 11,562� 13,525� 15,458� 36,100� 53,834� Stock-based compensation expense 139� 503� 538� 936� 1,679� Loss on disposal of assets 2� 17� 2� 260� 67� (Gain) loss on sale of available-for-sale securities (127) -� 19� (326) (77) Other (income) expense, net -� 60� (9) -� 43� Global Crossing settlement -� -� -� 4,748� -� (Income) loss from discontinued operation 242� -� -� (329) -� Gain on sale of discontinued operation (326) � -� � -� � (326) � -� Adjusted EBITDA $ 11,492� � $ 14,105� � $ 16,008� � $ 41,063� � $ 55,546� Capital expenditures for the fourth quarter of 2006 were $21.3 million, an increase of $8.5 million from the third quarter of 2006 and an increase of $12.4 million from the fourth quarter of 2005. Capital expenditures typically fluctuate by quarter depending upon timing of major equipment purchases. The primary drivers for these increases are the collocation expansion and line/customer growth, including the addition of approximately 7,000 lines acquired from another carrier during the quarter. Net income for the fourth quarter of 2006 was $0.01 million, compared to a loss of $0.6 million in the third quarter of 2006 and a loss of $5.1 million in the fourth quarter of 2005. The improvements were primarily due to the inclusion of the companies acquired during 2006 and higher access lines in service. Cash, restricted cash and available-for-sale securities at December 31, 2006 were $39.5 million, a decrease of $37.5 million from the third quarter of 2006. In November we paid approximately $37.3 million to acquire Mountain Telecommunications, Inc. Supplemental Information Supplemental information with additional detail for the quarter and year ended December 31, 2006 as well as 2007 guidance is available on Eschelon�s web site at www.eschelon.com. Investor Call Management is holding an investor conference call today, February 26, 2007 at 10:00 a.m. (CT) to discuss quarterly results. Investors are invited to participate by dialing (800) 218-0713. A replay will be available through March 5, 2007 by dialing (800) 405-2236 (pass code 11083780#). About Eschelon Telecom, Inc. Eschelon Telecom, Inc. is a facilities-based competitive communications services provider of voice and data services and business telephone systems in 45 markets in the western United States. Headquartered in Minneapolis, Minnesota, the company currently employs approximately 1,400 telecommunications/Internet professionals, serves over 60,000 business customers and has approximately 600,000 access lines in service throughout its markets in Arizona, California, Colorado, Minnesota, Montana, Nevada, Oregon, Utah and Washington. For more information, please visit our web site at www.eschelon.com. Forward Looking Statements This announcement contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The forward-looking statements are based on Eschelon Telecom�s current intent, belief and expectations. These statements are not guarantees of future performance and are subject to certain risks and uncertainties that are difficult to predict. Actual results may differ materially from these forward-looking statements because of the company�s history of losses, ability to maintain relationships with RBOCs, substantial indebtedness, difficulties inherent in making and integrating acquisitions, intense competition, dependence on key management, changes in government regulations, and other risks that may be described in the company�s filings with the Securities and Exchange Commission. Existing and prospective investors are cautioned not to place undue reliance on these forward-looking statements, which speak only as of today�s date. Eschelon Telecom undertakes no obligation to update or revise the information contained in this announcement, whether as a result of new information, future events or circumstances or otherwise. Eschelon Telecom, Inc. Consolidated Statement of Operations (Dollars In Thousands, Except per Share Amounts) For the twelve monthsendedDecember 31, 4Q 2005 3Q 2006 4Q 2006 2005 2006 Revenue: Network services $ 51,891� $ 62,373� $ 68,624� $ 201,835� $ 244,702� Business telephone systems 6,486� 7,433� 8,120� 25,908� 29,824� Total revenue 58,377� 69,806� 76,744� 227,743� 274,526� � Costs and expenses: Network services expense (excluding depreciation and amortization) 20,311� 25,735� 27,386� 85,914� 98,664� Business telephone systems cost of revenue 4,225� 4,619� 4,841� 16,139� 18,427� Sales, general and administrative 22,487� 25,849� 29,048� 90,310� 103,569� Depreciation and amortization 13,361� 10,839� 11,437� 39,653� 42,247� Operating income (loss) (2,007) 2,764� 4,032� (4,273) 11,619� � Other income (expense): Interest income 189� 1,482� 691� 691� 3,165� Interest expense (3,513) (4,776) (4,702) (28,125) (17,532) Other income (expense), net 124� (78) (11) 65� (32) Income (loss) before taxes (5,207) (608) 10� (31,642) (2,780) Income taxes (4) -� -� (4) -� Net income (loss) before discontinued operation (5,211) (608) 10� (31,646) (2,780) Income (loss) from discontinued operation, net of tax (242) -� -� 329� -� Gain on sale of discontinued operation, net of tax 326� -� -� 326� -� Net income (loss) $ (5,127) $ (608) $ 10� $ (30,991) $ (2,780) � Basic net income (loss) per share: Continuing operations $ (0.36) $ (0.03) $ 0.00� $ (5.32) $ (0.17) Discontinued operations 0.01� -� -� 0.11� -� Net income (loss) per share $ (0.35) $ (0.03) $ 0.00� $ (5.21) $ (0.17) � Diluted net income (loss) per share: Continuing operations $ (0.36) $ (0.03) $ 0.00� $ (5.32) $ (0.17) Discontinued operations 0.01� -� -� 0.11� -� Net income (loss) per share $ (0.35) $ (0.03) $ 0.00� $ (5.21) $ (0.17) � Weighted average shares outstanding: Basic 14,601,133� 17,513,871� 17,568,620� 5,949,310� 16,467,972� Diluted 14,601,133� 17,513,871� 18,155,609� 5,949,310� 16,467,972� Eschelon Telecom, Inc. Consolidated Balance Sheets (In Thousands) � December 31, December 31, 2005 � 2006 � Assets Current assets: Cash and cash equivalents $ 26,062� $ 21,146� Restricted cash 996� 1,224� Available-for-sale securities 4,760� 17,097� Accounts receivable, net 22,996� 27,592� Other receivables 3,052� 4,025� Inventories 2,927� 3,552� Prepaid expenses 2,294� � 2,314� Total current assets 63,087� 76,950� � Property and equipment, net 126,452� 145,785� � Other assets 1,506� 2,185� Goodwill 7,168� 59,670� Intangible assets, net 33,333� � 45,931� Total assets $ 231,546� � $ 330,521� � Liabilities and stockholders' equity Current liabilities: Accounts payable $ 16,400� $ 17,641� Accrued telecommunication costs 4,227� 5,730� Accrued office rent 2,035� 2,521� Accrued interest expense 2,646� 3,829� Other accrued expenses 5,485� 7,433� Deferred revenue 7,921� 10,109� Accrued compensation expenses 2,809� 4,174� Capital lease obligations, current maturities 2,430� � 3,131� Total current liabilities 43,953� 54,568� � Long-term liabilities: Other long-term liabilities 251� 1,262� Capital lease obligations, less current maturities 2,964� 2,201� Notes payable 92,125� � 141,040� Total liabilities 139,293� 199,071� � Stockholders' equity: Common stock 146� 176� Additional paid-in capital 248,199� 289,101� Accumulated other comprehensive income 56� -� Accumulated deficit (155,047) (157,827) Deferred compensation (1,101) � -� Total stockholders' equity 92,253� � 131,450� Total liabilities and stockholders' equity $ 231,546� � $ 330,521� Eschelon Telecom, Inc. Consolidated Statements of Cash Flows (In Thousands) Twelve months ended December 31, 2005 � 2006 Operating activities Net loss $ (30,991) $ (2,780) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization expense 39,653� 42,247� Other non-cash items 8,949� 7,940� Changes in operating assets and liabilities: Restricted cash (274) (228) Accounts receivable (5,145) (1,476) Other receivables (76) (634) Inventories (54) (492) Prepaid expenses and other assets 495� 259� Discontinued assets held for sale, net of liabilities 222� -� Accounts payable and accrued expenses 2,133� (374) Deferred revenue 621� 381� Accrued compensation expense (779) � 882� Net cash provided by operating activities 14,754� 45,725� � Investing activities Purchase of subsidiaries, net of cash acquired (48) (67,208) Purchase of assets held for sale, net of liabilities (216) -� Purchases of available-for-sale securities (30,526) (95,765) Proceeds from sales of available-for-sale securities 32,312� 83,462� Purchases of property and equipment (19,227) (34,277) Cash paid for customer installation costs (13,551) (18,914) Proceeds from sales of assets 239� 174� Proceeds from sale of discontinued operation, net of fees 320� � -� Net cash used in investing activities (30,697) (132,528) � Financing activities Proceeds from issuance of notes payable -� 45,600� Payments made on notes and capital lease obligations (51,362) (2,730) Proceeds from issuance of stock, net of fees 67,280� 40,353� Increase in debt issuance costs (348) � (1,336) Net cash provided by financing activities 15,570� � 81,887� � Net decrease in cash and cash equivalents (373) (4,916) Cash and cash equivalents at beginning of period 26,435� � 26,062� Cash and cash equivalents at end of period $ 26,062� � $ 21,146� � Supplemental cash flow information Cash paid for interest $ 20,837� � $ 13,133� � Supplemental non-cash activities Equipment purchases under capital leases $ 3,127� � $ 1,467� Value of common stock issued to management and certain members of the board of directors $ 27� � $ 6,045�

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ESCH Eschelon Telecom (MM)