EarthLink Q1 2007 Earnings Call Transcript

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EarthLink, Inc. (ELNK)
Q1 2007 Earnings Call
April 26, 2007 8:30 am ET

Executives

Kevin M. Dotts - Chief Financial Officer, Executive Vice President
Michael C. Lunsford - Interim President and Chief Executive Officer
Michael Gallentine - Vice President, Investor Relations

Analysts

Jennifer Watson - Goldman Sachs
Youssef Squali - Jefferies & Co.
Bryan Goldberg - Bear Stearns
Jim Friedland - SG Cowen & Co.
Suri Inanison
Ray Connelly

Presentation

Operator

Good morning. My name is Jocelyn and I will be your conference operator today. At this time, I would like to welcome everyone to the EarthLink first quarter earnings conference call. (Operator Instructions) Mr. Dotts, you may begin your conference.

Kevin M. Dotts

Thanks and welcome, everyone, to our call. This morning I am joined by EarthLink's Interim CEO, Mike Lunsford, and our Vice President of Investor Relations, Mike Gallentine, to discuss our first 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 protections 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 risk 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 on our website at www.earthlink.net.

Now I will turn things over to Mike.

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Michael C. Lunsford

Thanks, Kevin. I would like to welcome everyone to our call. I will start with a brief update on the CEO search.

Over the past quarter, the EarthLink Board has been actively conducting an executive search for the CEO position. This search includes external candidates as well as myself. While it is difficult to predict the exact timing of the announcement, presently the Board feels that they are very close to naming a CEO.

Now, on to the results; in the first quarter of 2007, we had another quarter of great performance on our access and audience business. We continued to deliver consistent adjusted EBITDA and free cash flow from these businesses. These cash flows allow us to continue to execute on our future growth strategy by investing in and growing our broadband initiatives in voice, municipal WiFi, and Helio.

First, in our new broadband voice services, EarthLink had its best quarter to date for our DSL and home phone bundle, generating over 10,000 net subscriber additions in the quarter, allowing us to cross another milestone by ending the quarter with over 50,000 voice subscribers.

We continue to make the improvements needed to achieve our 0.1% monthly penetration target with this product. Currently in some markets, like Atlanta, Georgia and Miami, Florida, we are already at the target level for new sign-ups. As we continue to improve the provisioning process, the company will increase sales and marketing efforts to drive consumer demand for these products. We believe the company will achieve its stated monthly incremental penetration targets in this growth business.

Let’s turn to municipal WiFi. During the first quarter, WiFi continued to gain momentum, both as a new way to connect to the Internet and as the lowest cost way to blanket cities with inexpensive wireless broadband. Underscoring our early progress, we were selected by the cities of Houston and Alexandria, Virginia to build, own, and operate municipal WiFi networks in these cities and we purchased an existing municipal WiFi network in Corpus Christi, Texas.

With the Corpus Christi agreement, in addition to acquiring an existing network, we also acquired applications for existing city services, such as meter reading. The City has agreed to purchase certain amounts of municipal WiFi services from us in the coming years. Additionally, we expect to market this service to other cities where we have WiFi agreements.

We are also encouraged by some of the early signs we are seeing in New Orleans. In the first quarter this year, over 15,000 unique users used our WiFi network and initiated over 100,000 sessions. Additionally, we have experienced an increase in the number of unique users in each month during the quarter.

While most of these users are presently using the service for free, this has proven to be a very cost-effective method of creating product and brand awareness and driving product adoption. We expect to use this free service as a low-cost catchment method, ultimately converting these users to paying customers in the future.

As we have discussed in the past, EarthLink management and the Board constantly evaluate the best use of our cash and our capital allocations. We are also closely monitoring the progress of our various growth initiatives to determine if they are developing in line with expectations.

Going forward with municipal WiFi in 2007, we expect to refocus our strategy for acquiring additional arrangements with other cities. We will focus on a few large incremental opportunities like Chicago and Los Angeles, as well as completing the cities that we currently have in progress.

We intend to demonstrate the marketability of the municipal WiFi service offering in these select cities prior to investing additional capital and operating funds in other cities.

Now I would like to talk about our progress with Helio, our joint venture with SK Telecom. In the first quarter, Helio continued to grow its business and expand its service and device offerings. Helio remains on track to surpass 100,000 members during the second quarter of 2007, as previously disclosed.

During the quarter, Helio introduced Helio Music, a music download service with a rich browsing experience, featuring a library of thousands of songs from well-known artists available to members to download over the air via the high-speed 3G network. Helio also launched its fourth exclusive device, the Heat, featuring a slim form factor design combined with Helio’s line-up of 3G content and services.

Finally, Helio announced its flagship device, the Ocean. The Ocean serves up multiple industry firsts, including: first dual-slide device with full qwerty and numeric keypads in one handset; first text, picture messaging plus IM and e-mail across all portals in one place; first full web search in idle mode; first integration of IM presence with address book; first to support over-the-air plus side load of al la carte and subscription downloads from major music stores; first photo and video upload with GPS tagging.

The Ocean has out-of-the box access to e-mail from EarthLink, Helio Mail, Yahoo!, AOL, Hotmail, G-Mail, Microsoft Exchange, and the ability to add additional personal e-mail accounts. Ocean also connects to IM on Yahoo!, AOL, Windows Live. No other company has ever had all these messaging tools in a single device. The Ocean will be available in Q2.

Kevin will share some additional financial information in a moment, but EarthLink is encouraged by Helio’s ramp-up, its differentiation, and the high ARPU characteristics of its subscriber base.

I will conclude with some comments on customer trends and results from our core access and audience services business before Kevin discusses the financial results. For access and audience services, we had another great quarter and continued to deliver consistent adjusted EBITDA and free cash flow.

The trends at EarthLink and the Internet market experienced over the past several years continued in the first quarter. These trends include growth in broadband and value narrowband, coupled with declines in mature premium narrowband services.

During the first quarter, overall subscribers declined by 42,000, primarily due to a 35,000 decrease in the consumer services segment. In the consumer segment, People PC had a record 19th straight quarter of subscriber growth by adding 47,000 net value subscribers. This growth was offset by declines in the premium narrowband market, so overall consumer narrowband declined by 53,000 net subscribers.

EarthLink finished the quarter with 3.2 million consumer narrowband subscribers, of which 1.6 million are People PC branded value subscribers.

As we expected, as the premium narrowband base has matured, we have seen a significant decrease in customer churn. In the first quarter, average premium narrowband monthly churn was only 4.6%. This is up slightly from the 4.4% figure recorded in the fourth quarter of 2006, a typical seasonal increase, but it is significantly lower than the 5.3% recorded in the first quarter of 2006. Over the next several quarters, management expects premium narrowband monthly churn to continue to be in the mid 4% range.

For consumer broadband, as previously disclosed, the wholesale subscriber agreement with Embark expired in April, 2007. Under the terms of that agreement, beginning in February, we no longer provision any new Embark subscribers on our systems. For the quarter, EarthLink achieved 15,000 net broadband subscribers with this decreased activity from Embark.

Additionally, included in the net subscriber additions are 11,000 net voice subscriber additions, of which 10,000 are DSL and home phone service subscribers who with their voice account also have a DSL line.

We finished the first quarter with 1.8 million broadband subscribers, including 54,000 voice subscribers. Beginning in the second quarter, we will transition 750,000 to 775,000 Embark subscribers out of our subscriber base counts as we will no longer provide services for them.

In the business services segment, total subscribers decreased by 7,000 due to declines in hosting and business narrowband.

This quarter, EarthLink made significant strides on our various growth initiatives. We won in new municipal WiFi markets, recorded our best quarter yet for our DSL and home phone bundled service, and Helio continued to introduce compelling new services and devices.

While we have been delivering on these growth initiatives, we have continued to generate the cash needed to fund these growth initiatives via our access and audience services business.

I would now like to turn the call back over to Kevin to discuss our financial results.

Kevin M. Dotts

Thanks, Mike. Before I get into the financial results, let me highlight some reporting changes we have made this quarter. As EarthLink has implemented our various growth initiatives, the nature of the business has evolved. As such, our management reporting has changed to reflect the current management of the business. This quarter, the company has implemented improved segment reporting into two reportable segments, as compared to the previous one segment, to provide additional transparency and to better allow investors to analyze results of operations.

Under the company’s new segment format, the reportable segments consist of consumer services and business services.

Consumer services consists of Internet access and value-added services. Internet access is comprised of consumer narrowband and broadband access. Consumer narrowband access includes premium EarthLink service and value People PC service. Broadband access includes consumer ADSL, cable, satellite, municipal WiFi, and voice services. Consumer value-added services include portal advertising, search, subscriptions, and partner and distribution.

Business services consist of Internet access and value-added services. Internet access consists of various narrowband and broadband Internet access products for single site, small office, home office, Soho, and multiple site small and medium enterprises, SME. Value-added services include web hosting domain registration fees.

In addition to the improved segment reporting this quarter, EarthLink has reclassified certain revenues between access and value-added services to more closely align these revenues with the internal management structure. These revenues primarily relate to value-added service security products sold by People PC and home networking products and services, which were previously reported in access and are now reported in value-added services.

Additionally, EarthLink has modified the way it counts subscribers related to the DSL and home phone service. Previously a customer that was subscribing to both of these services was classified as one subscriber. Now, that customer will be counted as a DSL subscriber and a voice subscriber.

Finally this quarter, the company has modified its definition for adjusted EBITDA to now exclude stock-based compensation from the calculation. For the full year 2007, stock-based compensation is expected to be $18 million, and for 2006 it was $14 million. With this change to adjusted EBITDA, we believe these results of operations will be more comparable to prior years.

Now, on to the results. In the first quarter of 2007, our core Internet access services continued to generate consistent amounts of EBITDA and free cash flow compared to 2006. We continue to reinvest this EBITDA and free cash flow into our various growth initiatives to generate revenue and earnings growth in future periods.

Consolidated revenues for the quarter were $324 million, a 5% increase from the first quarter of last year, driven primarily by the growth in business service revenues, partially offset by declines in consumer services.

The impact of our strategic growth initiatives is reflected in the quarter increase in business service revenues, which were $48 million, a $30 million increase compared to the first quarter of 2006. This revenue growth was primarily due to the addition of new edge networks in April 2006. This growth was partially offset by declines in the other business access products, like business narrowband and web hosting services.

The growth in business services was partially offset by declines in consumer services. Overall, consumer services revenue was $277 million, or a 5% decrease from the first quarter of last year. However, within the consumer services for the 15th consecutive quarter, value-added services revenue increased to $34 million, or a 23% growth compared to the first quarter of 2006.

This revenue growth was due primarily to an increase in subscription-based, value-added services like People PC Security Suite and Norton Security for EarthLink. Also driving the continued growth was search due to an increase in RPN, revenue per thousand searches, of approximately 20%. Also helping was growth in advertising revenue due to increased relationships with tier one advertisers and selling more updated ad units, like rich media ads.

While EarthLink continued to grow value-added service revenues, consumer access services declined $21 million, or 8% compared to the first quarter of 2006. This change was due to declines in narrowband revenue, partially offset by growth in broadband revenue.

Included in broadband revenue for the quarter was $7 million of voice revenue. We expect this service could generate $50 million of revenue this year and exit the year on an annualized rate of $80 million in revenue.

In the first quarter, our core access services generated $47 million of adjusted EBITDA, compared to $50 million in the same quarter of 2006.

As we have deployed or expanded our internal strategic growth initiatives, we indicated these would be funded through cash flows from our current operations. As such, our operating expenses and sales and marketing efforts have increased. This in turn has reduced adjusted EBITDA to $17 million, or a $16 million decline from first quarter of 2006.

Further impacting net income is our wireless initiative, Helio. As Helio has increased their initial ramp-up, our proportionate share of Helio’s loss has increased to $29 million, compared to $8 million in the first quarter of 2006. As such, coupled with the growth in operating and sales and marketing expenses, EarthLink generated a net loss of $30 million for the first quarter, compared to net income of $16 million in the first quarter of 2006.

Helio generated $30 million of revenues in the first quarter of 2007, compared to $5 million in the first quarter of 2006. However, Helio did not launch their premium Helio branded service until the summer of 2006.

For all of 2006, Helio generated $47 million in revenue all of last year. Helio’s total subscriber ARPU continues to be approximately $90 to $100, well above industry averages. Specifically because of its high ARPU and relatively low wholesale cost, Helio’s recurring gross profit on each of its subscribers is close to a typical U.S. carrier’s total ARPU in the $45 to $50 range.

Helio is still quickly growing but has not yet developed the advantages of economies of scale and as a result, Helio’s fixed costs and CPGA are above industry averages.

In addition to its initial investments in infrastructure, Helio’s CPGA costs are largely front-loaded with subscriber acquisition, so fast growth translates into greater capital requirements during the ramp-up period. As a result, for the quarter Helio generated a net loss of $63 million compared to $74 million in the fourth quarter of 2006.

We continue to expect that Helio will require additional capital to be invested this year. As previously indicated, commensurate with our partner, SK Telecom, EarthLink is likely to invest another $50 million to $100 million. However, no final decisions have been made. If additional investment is warranted beyond 2007, our current expectation is subsequent investments would likely be made by third parties.

During the first quarter, we increased the amount of operating cash flow used to fund the various growth activities, as previously noted in the $16 million adjusted EBITDA decline. Additionally, we used $8 million for capital expenditures and cash payments for subscriber base acquisitions in the quarter, compared to the first quarter of 2006. As a result, we generated $2 million of free cash flow during the first quarter of 2007, down from $25 million generated in the first quarter of last year.

We ended the first quarter of 2007 with $367 million of cash and marketable securities, an increase of $15 million compared to the first quarter of 2006.

We will now provide our outlook for 2007. These statements are forward-looking and actual results may differ materially. The company undertakes no obligations to update these statements.

Based on current results and future expectations, EarthLink is modifying its previously issued guidance. As a result of our current expectations to scale back our municipal WiFi efforts to concentrate on the current cities we have in progress, we have modified our expected subscriber contributions from our wholesale municipal WiFi partners. The company now expects to end 2007 with 200,000 to 250,000 fewer subscribers as compared to year-end 2006. This excludes the one-time impact related to the removal of 750,000 to 775,000 wholesale subscribers in the second quarter of 2007.

As a result, EarthLink now expects to generate approximately $1.3 billion in consolidated revenue for the full year 2007.

Further, we now expect to generate $190 million to $200 million in adjusted EBITDA from our core access services in 2007 and adjusted EBITDA of $108 million to $118 million. We expect our proportionate share of Helio’s loss will be $160 million to $180 million, and our net loss for the year will now be $110 million to $140 million.

EarthLink is reiterating our previously issued Helio guidance. We expect Helio will continue to aggressively grow their subscriber base during the year, more than tripling by the end of the year with 200,000 to 250,000 subscribers. For the year, EarthLink expects Helio’s revenues will more than triple to $140 million to $170 million.

EarthLink believes that as Helio continues to build their subscriber base, its cost structure will begin to realize the benefits of economies of scale, which should result in improved gross margins, lower CPGA, and better operating margins. However, as Helio will not yet have realized the benefits of economies of scale, EarthLink expects Helio will generate net losses of $330 million to $360 million in 2007.

For the second quarter of 2007, we expect revenues of $315 million to $320 million and adjusted EBITDA of $28 million to $33 million. Coupled with our proportionate share of Helio’s loss, which is expected to be $35 million to $40 million of loss, we expect a net loss for the quarter of $16 million to $26 million.

I would now like to turn the call back to Mike for some concluding remarks.

Michael C. Lunsford

In the first quarter, EarthLink continued to make progress on our broadband growth initiatives. We are improving the DSL and home phone service provisioning rate and growing that product. We are continuing to win municipal WiFi cities and realizing some early positive trends from the cities in which we have already launched.

Helio is continuing to launch new cutting edge services and devices to drive future growth, and EarthLink is continuing to manage its existing access and audience services business to generate the cash flows required to fund these growth initiatives.

We, together with our Board of Directors, are constantly analyzing the best use of our cash and the cash flow generated by our core access services. We are also closely monitoring the progress of our various growth initiatives to determine if they are developing in line with expectations. We continue to evaluate the potential shareholder return that could be realized from these various initiatives, from our core business, and from the overall company and will continue to refine our strategy in these areas to benefit our shareholders.

I will now turn the call over to the operator to open lines for questions.

Question-and-Answer Session

Operator

(Operator Instructions)

Your first question comes from Anthony Noto.

Jennifer Watson - Goldman Sachs

This is Jennifer Watson in for Anthony. A question on -- with the change in the management team, has the Board considered other structural options, such as going private, or strategic options that would just focus more on the core competency through Internet access, the WiFi and the access businesses?

Michael C. Lunsford

I don’t know that due to the change in management structure we are investigating any of those things. We always investigate options, none more so now than we have in the past though.

Jennifer Watson - Goldman Sachs

Thank you.

Operator

Your next question comes from the line of Youssef Squali.

Youssef Squali - Jefferies & Co.

Thank you very much. A quick question for you, Kevin, and then another one for Mike. Going back to guidance on the subscriber accounts, the midpoint of your previous guidance was a loss of about 125,000 subs. Now you are talking about 225,000. Part of it -- how much of it or is any of it due to the scaling back of muni WiFi? Or is all of it really related to just an acceleration, an accelerated decline in premium dial?

Second, on Helio, I was wondering if you could share with us some of SK Telecom’s thought about putting some additional money. You guys have come out now the second time talking about your willingness to put in 50 to 100. SK Telecom has not.

Kevin M. Dotts

Youssef, first of all on the subs question, it is all I would say predominantly muni. The rest of the subscriber trends remain pretty much on track. If anything, as we did highlight in the script that the dial-up premium base churn rates continue to decline, so we feel very positive we’ve got the stability of the access and audience business. So the subs change is really related to just the muni adjustment.

With regard to Helio, my thought there is that we have, we continue, as we have spoken in the past, to dialog with our partner, SK Telecom. I believe SK Telecom in this morning’s release was going to talk to that point that they are very supportive of Helio and would continue to participate in this funding round equivalently with EarthLink. So I will be honest with you -- I am not seeing the text from their release but I certainly know that is their intention.

Youssef Squali - Jefferies & Co.

Are you still targeting the end of ’08, early ’09 for free cash flow profitability? If so, would this be the last potential round if you guys were to put in 100 and SK were to put in the same amount? Would that be enough to get Helio to free cash flow profitability?

Kevin M. Dotts

I think their Chairman, their CEO, excuse me, came out a couple of weeks ago with something along the lines of at least SK Telecom’s expectations of where they are going to land. I think we have talked about it in the past that we said we think that’s in the ’09 timeframe and we are really not updating any guidance at this point from that. We continue to believe that is around the right timing when they are free cash flow positive.

From a -- I’m sorry, what was your second question?

Youssef Squali - Jefferies & Co.

It was just trying to figure out whether a couple hundred million bucks should be -- I mean, that really speaks to their current cash burn, which I think is somewhere between $20 million and $30 million a month.

Kevin M. Dotts

I think that’s about right. I think, as we said, that we believe at this point as we go through this round, obviously you go through the process of a funding event. You want to understand the valuation. You work with advisors and you certainly look at all your alternatives.

We feel very bullish about Helio. As we’ve said in the past, we think this is a good investment for EarthLink shareholders, this next round because that really gets them to that take-off point, that right trajectory which it will exit 2007 at that 200,000 to 250,000 subscriber rate with $140 million to $170 million of revenue.

If there is additional funding that is needed beyond that, as we’ve said we think that funding will likely come from third parties at that point.

Youssef Squali - Jefferies & Co.

Thank you.

Operator

Your next question comes from Bryan Goldberg.

Bryan Goldberg - Bear Stearns

A quick question on municipal WiFi; given your change in focus towards the larger cities this year, what should we expect in terms of CapEx spending on municipal in ’07?

Kevin M. Dotts

Bryan, I want to clarify one point. I think what we are suggesting again in our script when we talk about targeting big cities, that we are talking about targeting the big cities on a go-forward basis as far as city acquisition. We are still committed to the cities that we currently have already won at this point.

From a CapEx perspective, our CapEx as I think I said in the last earnings release, was somewhere between -- I want to say the 60 to 80 range, probably. That is cut in half right about now. The thing that you should also understand is about 70% of that CapEx that I am talking about is on a lease basis. It was likely to be leased and we have talked about I think publicly our GE capital lease that we have opened up.

So if you think about it, let’s say it’s in the terms of $30 million to $40 million of muni WiFi CapEx, 70% of that really is on lease and then you are amortizing that over about a five-year period. That kind of gives you the math and how to think about that kind of hits the -- you will see the capital lease show up but from a cash flow perspective, it is obviously substantively reduced from a cash firm perspective.

Bryan Goldberg - Bear Stearns

Okay, and one other question on line-powered voice. I apologize if you mentioned this in the script. What were LPV net adds in the quarter? Did I hear correctly you expect $50 million in voice revenue this year?

Kevin M. Dotts

Yes, so we said that we had about 10,000 net LPV adds and that this year, we think we are approximately about $50 million of revenues and that would be an exit rate somewhere around $80 million.

Bryan Goldberg - Bear Stearns

And exit rate is based upon like a last quarter annualized number, like a fourth quarter?

Kevin M. Dotts

That is correct.

Bryan Goldberg - Bear Stearns

Okay. Thank you.

Operator

Your next question comes from Jim Friedland.

Jim Friedland - SG Cowen & Co.

Thanks. Two questions; first, I just want to talk a little bit about the core business. So dial-up is obviously extremely profitable. I wanted to talk about the traditional broadband business, the broadband resale, and then line-powered voice. Can you give us a sense of what the EBITDA margin is on the traditional broadband resale business? For example, the customers that are coming where you are reselling Time Warner Cable, et cetera? And also talk about the deals that you have with RBOX. Have you pretty much locked in the current margins that you have for the foreseeable future?

Michael C. Lunsford

I don’t know that I can get into the specifics of the EBITDA margins. Kevin, maybe I would weigh in there, that may not be something that we share, but in terms of the agreements, we do have long-term agreements with the major [lax] and with [Cobad] and feel that we are in reasonably good shape there on ongoing economics and being able to offer those products at a positive lifetime value.

On the cable side, we have renewed the deal with Time Warner for another five years, and then we also do some work with Comcast in the markets that they have inherited from the Adelphia split with Time Warner. And again, we do not see any danger there of losing those contracts.

LPV versus traditional broadband, obviously the margins are better for us. We would like to sell more LPV than we would DSL. At current time, we still have enough provisioning issues in front of us that that is not always an even trade, and so we balance our spend between traditional, broadband, and new broadband for that reason. Over time, I would expect more of our spend to go towards “new broadband” with LPV but we are not there yet.

Jim Friedland - SG Cowen & Co.

How many subs do you think you need on LPV before you get there to where each incremental sub is decently profitable?

Kevin M. Dotts

I think what we said in the past is that we are trying to get to this target rate of 0.1% penetration on the LPV subs, so if we are passing about 12 million households right now on a sign-up basis, so we are saying we are trying to sign up roughly about 12,000 a month. I think those types of penetration rates are probably at this point, based on in some of the markets we are actually kind of on target. We talked about Atlanta, Miami. Some of the markets where, as Mike just suggested, we are still working through provisioning issues. We are kind of peeling back some of our sales and marketing dollars and pushing those out into the second-half of this year.

So when you put it all together, Jim, I mean, you talk about getting to those margins, it is going to be later this year that we think we are really hitting on all cylinders.

Jim Friedland - SG Cowen & Co.

Okay, thanks, and one quick follow-up on WiFi; so Sprint is rolling out its WiMAX trials and they are talking about two- to four-megabit download speeds. If you see the demand that you like out there, is it possible to upgrade your infrastructure to higher download speeds if the market will bear, even if you segment it at a higher price?

Michael C. Lunsford

Not only possible -- likely, and I think you will see from us in the coming quarter in some of our test markets, we will offer a three-megabyte down speed product.

Jim Friedland - SG Cowen & Co.

Great, thank you.

Operator

(Operator Instructions)

Your next question comes from [Suri Inanison].

Suri Inanison

Thank you. Just a couple of questions. Just going back to your core broadband business, if I am looking just at your broadband subscribers, the rate of net adds seems to be slowing down there. Is this purely a function of increased competitiveness from the incumbents, or is it just that EarthLink has decided just to be careful with their marketing spend?

The second question, sales and marketing seemed to be slightly lower than what you were expecting. Again, is the sales and marketing lower because of the provisioning issues with line powered voice service or was there something else going on here? Thank you.

Michael C. Lunsford

Kevin may want to weigh in here as well, but one effect is that we did not add wholesale broadband subscribers through the quarter, as we have in past quarters. That is usually a very large number, so that deflates the number that you are seeing, although I think if you were to take that out and normalize it, we are not off by very much.

The second effect, which you already hit on the head is adding LPV subs. We have moved a lot of our spend over to LPV from DSL in particular, and because that is a longer provisioning cycle and not as successful of a provisioning cycle to date, we would get fewer subs for that.

Kevin M. Dotts

The only thing I would add to that is I think our expectations are that when you think about traditional DSL and cable, expectations are that we will have between those two, we might have net subscribers but we do not have expectations that they are very fast growth subscriber groups for us any longer because of that competitiveness in the marketplace related to bundling opportunities and things like that.

But once you layer in like voice bundled into the DSL opportunity or you have the opportunity to sell an ATV product on top of a cable product, that is where we do believe that there is still some growth opportunity within the consumer broadband space.

Suri Inanison

Just one other quick question, Kevin, on the voice subscribers, could you just give us what were the total net adds just for voice and for WiFi?

Kevin M. Dotts

For voice, I think the total net adds we talked about was about 11,000 for the quarter. For WiFi, I think we have only added roughly what, another 1,000 at this point, for a total of 2,000. Most of that will really execute, as Mike said, as we move into this phase where we are really focusing on the existing markets and that is where we expect to really test out the driving of adding subscribers in WiFi.

Operator

Your next question comes from Ray Connelly.

Ray Connelly

I have a couple more questions on the WiFi market. Do you have any updates to your estimated CapEx per square mile for deployment?

Kevin M. Dotts

Again, those vary by markets. I think we are in the $40, plus or minus $5 or so range rate, so I think again, you can get into some areas, like when you look at San Francisco, where you have obviously the hills and topography issues to deal with, and you can look at other flat areas, Corpus Christi or Houston, where you can drive that down below that range.

Ray Connelly

So you are saying $40 per sub?

Kevin M. Dotts

I’m sorry, per household passed.

Ray Connelly

How many paying WiFi customers do you have right now?

Kevin M. Dotts

About 2,000.

Ray Connelly

What is the average rate you are getting on those now?

Kevin M. Dotts

I’m thinking that they are probably somewhere in a pretty broad range, probably 10 to 20 range, because you have probably a lot of new subscribers that as a paid subscriber are just coming on some type of discount plan, and so they haven’t really moved up to the $21.95. Probably what is also factoring a little bit into that revenue ARPU calculation is you actually do get a fair amount of traffic and a little bit more than we expected on the occasional use subscribers.

Over time, as we move to more city type services, our anchor tenant services, you are going to see that ARPU move dramatically over the expectation of a $21.95 customer as an average ARPU.

Ray Connelly

Got it. Can you just give a little more color on the reason the slow-down and focus on existing markets instead of continuing the land grab?

Michael C. Lunsford

I would not say that we have pulled away from talking to other cities at this point. We are focusing our efforts on some of the larger ones. We have to swallow some of what we have gotten already though. It is a little bit of the dog catching the tire on the car. Now that we caught it, what are we going to do with it?

I think we have to build out, focus our efforts there before we go get more markets and then not do a good job of building those out for the cities that we would partner with. We do not want to disappoint anybody.

Ray Connelly

Thank you.

Operator

Your next question comes from Youssef Squali.

Youssef Squali - Jefferies & Co.

Thank you very much. Just a question on a business that does not get much attention; New Edge. It looks like it did about $30 million in revenues this quarter, which is not that much higher than what it did last year when you first acquired it. Can you speak to that business? Is there much growth in that business and why is it taking longer than expected to get it up to speed?

Michael C. Lunsford

That’s a good call out, Youssef. The business is growing. It is not growing as quickly as we would like. We have done some clean-up on it over the past year, improving the quality there to get referenceable accounts. We feel like we now have that and are starting to see some growth in the pipeline. It just takes a while to get some of those actually provisioned because they are multi-site customers, so as you swallow a whale, as it were, sometimes it takes a while to get them in.

For example, we have signed and I think we announced this yesterday, we have just signed a contract with GNC which will give us hundreds of locations and a very big dollar number.

Youssef Squali - Jefferies & Co.

Okay, so when you look at the growth, we should start seeing some acceleration by the end of the year?

Michael C. Lunsford

We anticipate that we will grow on the industry average once we get on that curve. I think we are probably a quarter away from getting there, but then we should track with the industry.

Youssef Squali - Jefferies & Co.

And the industry being about 20%?

Michael C. Lunsford

Yes, 20%, 25%, in that range.

Youssef Squali - Jefferies & Co.

Thanks.

Michael C. Lunsford

I think we probably have time for one more question. No? That’s it. Okay, we’re done. Youssef, you got to bat clean-up today.

Operator

There are no more questions. Are there any closing remarks?

Michael C. Lunsford

I would just like to thank everybody for joining the call. Kevin?

Kevin M. Dotts

Thanks, everybody, and look forward to another great quarter in the second quarter.

Michael C. Lunsford

Thank you, Operator.

Operator

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

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