It is a S N 2 reaction.

C 2 H 5 O – attract the proton from phenol converting the later into phenoxide ion. This would then make nucleophilic attack on the methylene carbon of alkyl iodide, but C 2 H 5 O – is in excess C 2 H 5 O – is better nucleophile than C 6 H 5 O – (phenoxide) ion since while in the former the negative charge is localised over oxygen and in the later it is delocalised over the whole molecular frame work. So, C 2 H 5 O – ion make nucleophilic attack at ethyl iodide to give diethyl ether (Williamson’s Synthesis).