EarthLink Q3 2006 Earnings Call Transcript

EarthLink, Inc. (ELNK)
Q3 2006 Earnings Call
October 19, 2006, 8:30 am ET

Executives

Kevin M. Dotts - Chief Financial Officer, Executive Vice President
Gary Betty – Chief Executive Officer
Mike Galentine - Vice President of Investor Relations

Analysts

Joan Connolly - Analyst
Youssef Squali - Jefferies & Co.
Heath Terry - Credit Suisse First Boston
Bryan Goldberg - Bear Stern
Christopher Rowen - Analyst
James Friedland - SG Cowen
Jack Howard - Analyst

Presentation

Operator

Good morning, my name is Carlanda, and I will be your conference operator today. At this time I would lake to welcome everyone to the EarthLink Third Quarter Earnings Conference Call. All lines have been placed on mute to prevent any background. After the speaker’s remarks there will be a question and answer session. [Operator Instructions]. Thank you, Mr. Dotts, you may begin your conference.

Kevin M. Dotts - Chief Financial Officer, Executive Vice President

Thanks and welcome everyone to our call. This morning I’m joined by EarthLink CEO, Gary Betty and our Vice President of Investor Relations, Mike Galentine to discuss our third quarter results. Following our comments there will be an opportunity for questions. Before we continue I would like to point out that certain statements contained in our earnings release and on this conference call are forward-looking statements rather than historical facts that are subject to risks and uncertainties that could cause actual results to differ materially from those described. With respect to such forward-looking statements the company seeks the protection afforded by the Private Securities Litigation Reform Act of 1995. These risks include a variety of factors including competitive developments and risk factors listed in the Company’s SEC reports and public releases. Those lists are intended to identify certain principal factors that could cause actual results to differ materially from those described in the forward-looking statements but are not intended to represent a complete list of all risks and uncertainties inherent to the Company’s business.

In an effort to provide useful information to investors our comments today also include non-GAAP financial measures. For details on these measures including why we use them and reconciliations to the most comparable GAAP measures please refer to our earnings release and the form 8-K that has been furnished to the SEC both of which are available at our Website at www.earthlink.net. Now I will turn things over to Gary.

Gary Betty – Chief Executive Officer

Thanks, Kevin, and I would also like to welcome everybody to our earnings call. In the third quarter of 2006 EarthLink continued to execute on its strategy to become a total communications provider. In doing so we leveraged our broadband IP infrastructure and back office support systems by providing additional broadband services like voice, expanding our broadband access message with Wi-Fi and increasing the breadth of our broadband services and our SME Business solutions group.

During the quarter we significantly expanded the addressable market for our DSL and home phone service to over 10 million household in 12 markets including Los Angeles, New York, Chicago and Atlanta to name a few. In the fourth quarter you’ll see EarthLink began to actively market this unique service bundle to create product awareness and generate consumer demand. This demand will begin improving our sign ups and gross adds. There are obviously start up issues as you go into these new areas and we think that it will take us around six months to achieve our target of 0.1% penetration per month in these markets served.

During the quarter we also continued to expand our footprint to offer an alternative last mile broadband product that further leverages our existing back office infrastructure. Presently we are installing Wi-Fi radios in Anaheim, Philadelphia, New Orleans and Milpitas, we began to expect construction on the network in Pasadena in the first quarter of 2007. However in our efforts to ensure the network meets critical quality standards we are targeting -- the overall network build out has progressed at a slower pace than originally expected. Importantly while the Wi-Fi network build out phase presently is not what we initially targeted we are still on target for overall build out costs. We feel these current construction earnings do not have a material negative impact on the overall Wi-Fi strategic initiative or our long-term corporate goals.

We continue to make strides in our broadband business solutions organization. During the quarter we integrate add management of New Edge networks into our previously existing business solutions group. This allowed us to more tightly and efficiently align our sales and distribution efforts. New Edge networks also introduced several new products like its multi-protocol label switching or MPLS product allowing New Edge to move up market and attract customers with larger bandwidth and performance requirements and those typically deploying DSL based networks, New Edge networks also introduced remote VP and access solution for mobile and remote workers to access corporate applications from any PC.

Additionally they released a broadband wireless solution that can be used as a fast network start for new store locations and substitute access to power self service and kiosk applications. Further expanding this addressable market New Edge is customizing its access product set for tapping the growing self service and kiosk market segment. According to the self service and kiosk association more than 800,000 kiosk will be deployed in 2007 representing an annual growth of over 30%. Together these products help New Edge complete a total package of network options for customers further strengthening its position as a signal source network provider.

Helio was also very active during the third quarter. It’s hard to believe it’s only been five months since the initial soft launch and two months since national TV and print advertising began but Helio is off to a positive start. During the quarter Helio continued to aggressively ramp up distribution with the service now sold to more than 2500 stores today and we expect to be in over 3,000 stores by year-end. While it’s too early to provide meaningful customer growth acquisition cost and churn details early usage trends are encouraging in meeting or exceeding our expectations. Presently MySpace is Helio’s number one Web site and over 80% of Helio members log into MySpace through their Helio device. Over 25% of revenue thus far has been generated from data that’s much more than double the industry average. Helio’s game sales are many times above industry average where one and three games is gifted or bagged thousands of games have been rented.

SMS and MMS traffic is more than doubling each month far exceeding industry average. Download of rings, screams and other personalization more than doubling each month and nearly half of the ring sales are coming from Helio’s unique video rings. Lastly the number of video streams are also more than doubling each month. These initial data points indicate that Helio’s unique content sharing offer is catching on and Helio members are utilizing the multi-immediate capability of our devices. Helio is successfully introduced a new mobile experience for young people. Helio is delivering devices people never had access to before exclusive services that extends their favorite PC experiences to mobile like MySpace and giving members simple, straight forward pricing and service they never experienced in the mobile marketplace.

While we accomplished a great deal this quarter by increasing the addressable market for our expanded suite of broadband services these offers had only a limited subscriber impact during the quarter because of delayed deployment in the quarter. For our existing access business this quarter we also announced a new cable broadband agreement with Time Warner. This agreement continues to allow EarthLink to market its cable broadband Internet service across the Time Warner cable properties including the newly acquired Adelphia properties. Combined this will cover 27 million households. EarthLink and embark have elected not to renew their DSL broadband agreement that is set to expire in April of 2007.

For the third quarter EarthLink recorded 7.7 million in revenue and included 750,000 subscribers in the total payer subscriber agreement. The nature of this agreement prospectively will be worked on between our companies and we will provide additional details as we have them. During the quarter EarthLink achieved 47,000 broadband net subscriber additions in the quarter at 1.9 million, narrow band declined 81,000 subscribers during the quarter, ended 3.3 million and web hosting also declined 3000 subscribers ended 116. I would now like to turn the call over to Kevin to discuss our financial results.

Kevin M. Dotts - Chief Financial Officer, Executive Vice President

Thanks, Gary. In the third quarter of 2006 our existing Internet access services continued to generate consistent amounts of EBITDA and free cash flow compared to 2005. EarthLink continued to reinvest this EBITDA and free cash flow into our various growth initiatives to generate revenue and earnings growth in future periods. Our strategic growth initiatives impact is reflected in the current quarter increase in broadband revenues which were $149.4 million, a 36.7% increase, compared to third quarter of 2005. This revenue growth is primarily due to the addition of New Edge networks employed services.

Our other area of growth this quarter as well as the previous 12 quarters was advertising and other value-added services which increased to $22.4 million, or 35.5% growth compared to the third quarter of 2005. This revenue growth was due primarily to an increase in search, advertising and value-added service revenues like e-mail by phone, Internet call manager and extra storage and security. Together these services now generate a record $1.40 per subscriber in incremental revenue per month for EarthLink compared to $1.03 during the third quarter of 2005.

While we generated revenue growth in our strategic areas our narrow band and web hosting services continued to decline. For the quarter narrow band revenues were $150.8 million, a 16.8% decrease compared to third quarter of 2005. The decrease in narrow band revenues was primarily due to the decline in premium narrow band subscribers partially offset by the subscriber growth in our value brand, PeoplePC. For the third quarter web hosting revenues also continued to do decline by 12.6% to $8.7 million on lower subscribers previously noted by Gary.

Overall revenues for the quarter were $331.3 million, a 4.5% increase from the third quarter of last year driven primarily by the growth of broadband revenues and advertising, other value-added services, partially offset by the decline in narrow band and web hosting revenues. As EarthLink has deployed or expanded our strategic growth initiatives we indicated these would be funded through cash flow from our current operations. As such EarthLink has increased our operating expenses and sales and marketing efforts. This in turn has caused pressure on adjusted EBITDA which declined to $31.6 million or 43.1% from third quarter of 2005.

Further pressuring net income is our wireless initiative Helio, that Gary spoke about earlier. Again as Helio has increased their operating activities our proportion of share of Helio’s loss has increased to $26.2 million compared to 4.6 million in third quarter of 2005. As such, coupled with the growth in operating of sales and marketing expenses EarthLink generated a net loss of $3.2 million for the third quarter compared to net income of $36.4 million in the third quarter of 2005.

During the third quarter EarthLink increased operating cash flow used to fund the various growth initiatives previously described. Additionally EarthLink used $11.4 million for capital expenditures and cash payments per subscriber based acquisitions in the quarter which is slightly lower than the third quarter of 2005.

Overall EarthLink generated $20.2 million of free cash flow during the third quarter of 2006, down 55.1% from the third quarter of last year. Also during the quarter we continue to see significant shareholder value creation by acquiring EarthLink common stock through our repurchase program. Accordingly the company purchased 8 million shares of EarthLink common stock for a total of $58.7 million. Since the inception of our share repurchase program EarthLink has acquired 61.4 million shares for $504.2 million.

Also in the third quarter EarthLink made a scheduled $39 million capital contribution to Helio. Under the original joint-venture agreement EarthLink has a commitment to contribute approximately $20 million of capital in 2007. EarthLink ended the third quarter of 2006 with $158.2 million of cash and marketable securities, a decrease of $78.1 million compared to prior quarter.

Now for the outlook. The following statements are based upon managements’ current expectations. These statements are forward-looking and actual results may differ materially. The company undertakes no obligation to update these statements. As a result of slower than expected Wi-Fi build outs and voice provisioning and adoption issues mentioned earlier in the fourth quarter of 2006 EarthLink expects net subscriber additions to be 25 to 50,000 net subscribers. Revenues are expected to be $330 million to $335 million.

Adjusted EBITDA is expected to be between $20 million and $25 million. We expect our proportionate share of Helio’s equity method loss will be $30 million to $35 million our net loss is expected to be between $15 million and $25 million. With that I will turn the call back over to Gary for some concluding remarks before our question and answer session.

Gary Betty – Chief Executive Officer

Thanks, Kevin. The third quarter was very important for EarthLink. Our existing access services continued to deliver the financial results enabling us to invest in our strategic growth initiatives. We significantly expanded the addressable market for our DSL and home phone service bundle. We expanded our Wi-Fi coverage area to run an additional city further integrated New Edge networks and expanded their product offering and increased Helio’s distribution and branding. Of course as with any significant undertaking as we transform EarthLink all of these initiatives have not will not go exactly as planned. We do believe however that the management team is in place to adopt, modify, and change our implementation strategies as needed and we have the track record to prove it. Just as we navigated the complex and changing environment related to premium narrow band, value narrow band and broadband we will continue to do the same thing for these growth initiatives.

Now I will turn the call over to the operator where we will open the line for questions.

Question-and-Answer Session

Operator

[Operator Instructions]. Your first question is from the line of Anthony Noto.

Joan Connolly - Analyst

Hi, this is Joan Connolly in for Anthony. How are you?

Gary Betty

Hi Joan, how are you doing?

Joan Connolly - Analyst

Good, just a question, what do you think would cause your fourth quarter numbers on revenue and subscriber side? What are those link factors there, what could drive it to be conservative?

Gary Betty

We could have a whole lot of passive demand for Wi-Fi as the cities come out. For example in Philly, in our outlook for net adds for Wi-Fi are pretty modest at this point. The bulk of the Philadelphia miles that will be built outcome on during the month of November. So, if you build out a lot of people, then sign ups just because they see the network that could be a nice subside. There’s not a whole lot of down side, I don’t think because we don’t, we haven’t put a lot in the forecast for these new initiatives beyond what we realistically think we absolutely can do. So…

Joan Connolly - Analyst

Okay, can you talk at all about the initial actions of some of those subscribers or users you are seeing at the Wi-Fi networks and how that is relative to the…

Gary Betty

That’s right, unfortunately I just don’t have a big footprint to sell to yet. The customers that are using it, like it. We are seeing more and more occasional users sign up every day as these networks get built out but we have every imaginable delay you can think of. I guess it goes with learning about how to do construction in these areas, getting permits from the cities, getting the ability to get towers turned up, getting circuits from different organizations. Every time you turned around you get two-weeked to death. So it’s been somewhat frustrating but we’ve learned we are getting ahead of that process and I think we will have some momentum as these first four networks get built out going into next year.

Joan Connolly - Analyst

Okay, and are there any deal or any cities that you anticipate being announced soon?

Gary Betty

A whole bunch of them. There’s probably seven cities that we anticipate will -- we will announce that we are going, entering definitive discussions for entering definitive agreements with between now and year-end. I think we are okay, the Arlington, -- there’s seven cities that we are going to, we think will have announced agreements with and there’s about five or six others that is we are fine lists in.

Joan Connolly - Analyst

Okay, great, just one final question. I think you said this on the call I just wanted to clarify, the CapEx for the full year is still anticipated to be on track with what you guys had previously provided. Is that correct?

Mike Galentine

It will be a little bit less.

Joan Connolly - Analyst

A little bitless? Okay.

Kevin M. Dotts

I am expecting that to be, let’s say the 60 to 70 million range – I think it was 70 to 80, down a little bit.

Operator

Your next question is from the line of Youssef Squali.

Youssef Squali - Jefferies & Co.

Good morning, sir just a few questions for you. First just to get into a little different from Wi-Fi, is there anything on the technology side that has caused this delay or…

Gary Betty

It’s all operational stuff.

Youssef Squali - Jefferies & Co.

Is it all operational on your ends or is it mainly politics?

Gary Betty

It’s politics, it’s our end, we had some self afflicted wounds and every -- Milpitas took us two months to get a circuit turned up with a lot of finger pointing, New Orleans has actually gone pretty well. Philly has just been Philly, so it’s been a combination of self afflicted wounds and getting permits from the city. So…(indiscernible)

Youssef Squali - Jefferies & Co.

Knowing what you know today and kind of exiting the year with those seven new cities that you talked about, et cetera, how does it look for next year if you had to kind of just guesstimate how big the opportunity it is going to be for you that you guys can achieve on, how big do you think it will be next year?

Gary Betty

In what measure?

Youssef Squali - Jefferies & Co.

You pick your revenue, subscriber, I will pick anything.

Gary Betty

The first thing is you have to have the footprint. So on the city side we feel very good that we continue to do the things necessary to allow us to get the rights to build out these networks. If anything, Youssef that, continues to accelerate. The unfortunate thing is we don’t have the build out the number of households build to correspond the opportunity yet. But I think during 2007 you will see that reverse itself and we will be hitting the targets that we expect to hit. Then I think the next question is how much penetration can we get and unfortunately because we don’t have anything built out yet, it’s not likely to be until the fourth quarter that we get some type of read in the first four markets that we generated. So, that’s been the unfortunate piece of it. But EarthLink, PeoplePC, our relationship with DirectTV, they are very excited about starting up and marketing this service to their customer base. It’s just very hard to do if you are going to get three square miles or six square miles or – a small footprint, it’s hard to target that effectively using math media.

Youssef Squali - Jefferies & Co.

Kevin, what was the New Edge contribution in the quarter?

Kevin M. Dotts

Revenue for New Edge in the quarter was about – roughly $32 million.

Youssef Squali - Jefferies & Co.

Okay, and so I know what you reported in terms of total broadband adds but when you clean it up and take out the New Edge guys and take out the voice guys how many kind of access or retail access broadband customers that you add, just quest to have an apples-to-apples comparison to what you were doing prior?

Gary Betty

I don’t think we’ve ever broken that out at that level, Youssef.

Youssef Squali - Jefferies & Co.

You’ve historically given wholesale and broadband.

Gary Betty

Wholesale and broadband together that would be, we did about 10,000, a little over 10,000 voice subs. We did a voice sub up 20% quarter-over-quarter. We did the rest of it would be about 38,000.

Youssef Squali - Jefferies & Co.

Okay. And lastly on Helio I guess we’ve all seen and heard about the ESPN issues, we are hearing grumblings about amp not doing too well. Give us a little more confidence about how you are thinking about Helio right now. Why do you think it will –

Gary Betty

I think what we try to do, I mean, first and foremost the customers who are buying our service are using exactly what we expected to. Our ARPU is much higher than industry average. Data at $25 ARPU is -- I think Sprint got the highest and is $9 it’s doing everything we expected and our stores are ramping. The product ramp is coming. Our product is significantly different than that was offered by -- the ESPN had one handset and it really was an ASP strategy it should have been probably from the beginning. Amps is a little bit more difficult to get your hands around but they are doing a lot of things very aggressively discounting handsets and going to lower price plans and trying to undercut the carrier. We are not trying to do any of that.

So as you look prospectively the things that we are continuing to target is that we maintained this high ARPU, that we start seeing a decline in our CPTA. as we are able to ramp the business that the customer engagement is what we expect that the underlying operating metrics that support investing in this business look attractive going forward. And I think as we execute for we will have a much more representative view of how that business is looking at the moment, how it’s going to trend when provide a much greater level of visibility and transparency for you all after we announced our Q4 operating results for Helio.

Youssef Squali - Jefferies & Co.

Okay. Thanks.

Kevin M. Dotts

So far I mean it’s an expensive proposition but things look pretty good.

Youssef Squali - Jefferies & Co.

Okay.

Operator

Your next question is from the line of Heath Terry.

Heath Terry - Credit Suisse First Boston

I was wondering if you could tell us, in the latest rounds of negotiations that you got with cities on municipal Wi-Fi, how are those negotiations changing? What are you seeing that’s different from the cities in terms of what they are looking for in awarding these contracts versus what you might have seen when you first started doing this a couple years ago?

Kevin M. Dotts

We are not getting free as much I mean things are going in that respect okay. The problem is it just takes time. I mean, you sit down with the city counsel’s and they say, well, we are going to announce something on October the 12th. And then October 12th comes and the meeting got postponed by three weeks so now it’s November the 7th. And everyone of these, there’s nothing really going on that’s changing our outlook or view or their interest in what we are doing but the timing of getting these cities having announcements completed, getting turn sheets completed, getting definitive agreements in place is taking significantly longer than we would like. But we are making great progress on a whole bunch of front.

Mike Galentine

I would also add -- at the same time we are not, on a specific city by city basis, I am not sure we are seeing any trends within the negotiation discussions but overall we continue to see more cities coming out (multiple speakers)

Gary Betty

They are very interesting, yes.

Heath Terry - Credit Suisse First Boston

And then on the narrow band side, have you since AOL changed their or updated their strategy on their dial-up business, have you seen any impacts on where your new dial up customers are coming from on the churn within that customer base?

Gary Betty

No, I don’t think we’ve seen any more trends. As we’ve talked about in the past the tale on this legacy access business is going to produce a lot of cash flow going forward in the future. So our churn rates on narrow band actually are I think now for this quarter will be at an all time low.

Kevin M. Dotts

Premium dial is now well under 5% again leaning toward probably four.

Heath Terry - Credit Suisse First Boston

Great. Thank you.

Operator

Your next question is from the line of Bryan Goldberg.

Bryan Goldberg - Bear Stern

Hi, good morning. Question on Helio, looking into 2007 you got another 20 million in commitments to the JV. Assuming the JV will require additional capital if that’s the case what would be the criteria you would use to evaluate an additional investment if one is required?

Gary Betty

Brian I think it’s too early to the even make that determination yet. Obviously we are monitoring what they are doing closely and that would be -- issue that we would have to address with our board before we would make any additional commitment at this point.

Mike Galentine

We certainly criteria would be what you would expect straight forward financial return basis.

Gary Betty

Very logical process.

Bryan Goldberg - Bear Stern

Okay. And on the Wi-Fi front, how would you gage the level of interest from other ISPs seeking to gain access to the networks you’re constructing, I know you’ve got, I seen an agreement announce with DirectTV, can you give us a rundown as to other …

Gary Betty

We have several small ISP who signed up to sell a service in Philly.

Bryan Goldberg - Bear Stern

Okay.

Gary Betty

That offer the network, DirectTV is the largest organization we’ve signed up for a nationwide agreement and I anticipate that sometime during the fourth quarter they will begin their marketing efforts in couple of markets. They are waiting for us to having completed build out of over the half the markets and half of a given market before they start spending any dollars and we are working with PeoplePC our own value brand going to be a marketing service and I would anticipate you will you see us announce other agreements with other ISPs over the coming months.

Bryan Goldberg - Bear Stern

Okay. Thank you. One final question, I think you mentioned you added 10,000 voice subscribers in the quarter.

Mike Galentine

That’s right.

Gary Betty

That’s right.

Bryan Goldberg - Bear Stern

What’s the break out between the EarthLink true voice product and the line powered solution and I guess could we get just an update on how true voice is trending?

Gary Betty

It’s probably 75, 25, 70, 30, EPV to LPV at this point but that’s going to reverse. You will see much more growth in LPV in future quarters versus EPV.

Bryan Goldberg - Bear Stern

Okay, thank you.

Operator

Your next question is from the line of Christopher Rowen (ph).

Gary Betty

Hi Christ.

Christopher Rowen - Analyst

Hi, can you give us some kind of indication on the gross margin and the net income contribution in the third quarter on the embark subs?

Kevin M. Dotts

We’ve never really disclosed kind of that level of information but its…

Mike Galentine

$7.7 million in revenues.

Kevin M. Dotts

We said $7.7 million of revenue was the contribution on about 751,000 subscribers.

Gary Betty

Any time you do one of these wholesale arrangements Christ, I mean they are nice pieces of business you get a lot of volume but it’s basically a way to cover some overhead. So we’ve had an eight-year relationship with Embark. It’s been great. We don’t no exactly how the relationship is going to look prospectively. All of these customers have an EarthLink email address. We are working with them on what type or transition plans. There’s nothing, the areas about this. I think Embark just wants to try to offer a different type experience for their users. We hope to play a part in that if this transition takes place and we have got between now and next April to work on those details to figure out exactly what role we play, how the transition ends up, what happens to the subscriber base and all those other issues that go along with it.

Christopher Rowen - Analyst

Yeah, now I understand that. I guess and I understand in the past not giving any kind of break up but now that we have to kind of model it, take it out or to some degree of model.

Gary Betty

7.7 million for 750,000 subs so it’s a pretty low ARPU.

Christopher Rowen - Analyst

Okay. And then can you talk about the, you seem to have kind of slow down on the VoIP saying it will take you six months to get to the 0.1% penetration per month. What’s change there?

Gary Betty

It’s not really changed it’s just a matter of getting our operational -- every time you open up a new CO or you open up a new market with a new vendor you inevitably have snagz and that in fact is in fact what’s occurred in San Francisco and San Jose today Seattle and Dallas. We expect it to be the same in any new large markets and rather than creating a bunch of negative goodwill by getting people to raise their hand that ultimately we end up not being able to vision, we are going a little bit slower and you will see us ramp up but nicely the number of sign ups we get in the given markets over the next six to nine months.

Kevin M. Dotts

Just to add to Gary’s point as an example when he mentioned the earlier markets that are primarily in AT&T, SBC territories what we are opening up now are obviously you are more of those as well as BellSouth and Verizon so those become new provisioning processes for those companies and those are the type of operation issues we are working through, some of that has slowed down from our sales and marketing efforts.

Christopher Rowen - Analyst

Okay. Thanks a lot.

Operator

As a reminder, [Operator Instructions]. Your next question is from the line of Jim Friedland.

James Friedland - SG Cowen

Thanks. Hi guys, most of my questions have been answered, just a couple of quick ones. What were the net adds of PeoplePC in the quarter?

Mike Galentine

All over 50,000 here -- 51.

James Friedland - SG Cowen

Okay and in that content and advertising line what percentage of that line is search and is that still becoming a bigger percentage, is that sort of the thing that you are most excited about that in that line or is it sort of a more of an even split?

Kevin M. Dotts

It’s about 50% right now but we have expectations that as a percentage on a go forward basis that will actually a lower percentage as we continue to ramp up partnership and other advertising activities. Also…

James Friedland - SG Cowen

Okay. With that 50 or 15?

Gary Betty

50.

Kevin M. Dotts

Fifty.

James Friedland - SG Cowen

Okay. Great. Thanks.

Gary Betty

And as you said it’s probably -- as we continue to grow that business the percentage of revenues from search will decline.

James Friedland - SG Cowen

Gotcha. Thanks, guys.

Operator

Your next question is from the line of Jack Howard.

Jack Howard

Good morning. You guys bought a lot of stock in the quarter. Is that, do you still have some authorized? Is that going to be something you continued to do with the stock trading where it is?

Gary Betty

Yeah, I don’t think we’ve ever kind of given perspective on exactly how much we will by Jack, but…

Jack Howard

Well, authorizations are still?

Kevin M. Dotts

We have an authorization outstanding -- I’m trying to figure out exactly what’s left, I think it’s about 90 to 100.

Jack Howard

Okay.

Kevin M. Dotts

We picked up 8 million shares last quarter.

Jack Howard

All my other question are answered, thanks.

Kevin M. Dotts

Okay.

Operator

You have a follow-up question from the line of Youssef Squali

Youssef Squali - Jefferies & Co.

Thanks a lot. Kevin, I just want to go back and look at your guidance and try to help me reconcile something. Your churn on the narrow band side seems to be declining, you lost actually less customers than we thought you were going to lose, you guided for 25 to 50,000 net adds in Q4, yet if I look at your revenues for Q4 they are kind of flat and considering that usually your non-access business tends to benefit from a seasonally strong Q4 where am I going wrong? Is there just a…

Kevin M. Dotts

(indiscernible) subs on in the quarter, Youssef, it is the number of billing unit, so as you ramp up the voice stuff for example we are ramping up our spend, we expect to have a pretty good December. But December doesn’t help your overall quarterly revenues. We generally get partial month revenue benefit.

Youssef Squali - Jefferies & Co.

Is there anything happening to unit pricing that is declining faster than you think.

Mike Galentine

No, I think what you are seeing really is when we talk about narrow band, you could see broadband and let’s say the value-added services that is slightly down. Let’s say on total revenues as a percentage Youssef versus the third quarter and then we expect that voice continue to grow and add offsetting that decline in the legacy access type of businesses, so those two were almost neutralizing each other at this time.

Kevin M. Dotts

It would be pretty small like Q4, it will pick up significantly in Q1 next year.

Youssef Squali - Jefferies & Co.

The better performance out of your premium business what’s causing gross margins to actual be slighting better than expected?

Kevin M. Dotts

I think what you are picking up probable there will is some of the value-added services and then probably a little bit of mix. It helps in the network but it might be a little of usage hours but it’s nothing that I would suggest is a market change.

Youssef Squali - Jefferies & Co.

Got it. Okay. Thanks a lot.

Mike Galentine

We will take one more question.

Operator

Ladies and gentlemen, at this time there are no further questions, Mr. Betty are there any closing remarks.

Garry Betty - Chief Executive Office

No. I think we are continuing to be on track to do the things we are trying to do with our businesses. We appreciate you all joining us on the conference call and we look forward to giving you an update as we continue to move forward on many different front. Thank you.

Operator

This concludes today’s conference. You may now disconnect.

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