Earthlink Q4 2005 Earnings Conference Call Transcript (ELNK)
February 9, 2006
Garry Betty, President and Chief Executive Officer
Kevin M. Dotts, Executive Vice President and Chief Financial Officer
Keith Dalrymple of New York Global Securities.
Heath Terry, Credit Suisse.
Yousef Squalie, Jeffries
Brian Goldberg, Bear Sterns
Jennifer Connolly, Goldman Sachs.
Jim Friedland, SD Cowan
Good morning my name is Latasha and I will be your conference operator. At this time I would like to welcome everyone to the Earthlink 4th quarter full-year 2005 results conference call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press * and the number 1 on your telephone keypad. If you would like to withdraw your question, press * then the number 2 on your telephone keypad. I will now turn the call over to Kevin Dotts, CFO. You may begin your conference.
Kevin Dotts, Executive Vice President and Chief Financial Officer
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 4th 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 risk and uncertainties that could cause actual results to differ materially from those described. We respect that in 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 of the principle 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 in 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 8K that has been furnished to the SEC, both of which are available at our website at www.Earthlink.net. Now let me turn things over to Gary.
Garry Betty, President and Chief Executive Officer.
Thanks Kevin and I’d also like to welcome everybody to our earnings call. Earthlink had another great quarter and one of the most significant years in our company’s 11 year history. For 2005, our existing access business continued to perform well, delivering $214 million of adjusted EBITDA, $173 million of free cash flow and record net income per share of $1.02. Additionally, we started to deliver on a strategy that has been several years in the making. Earthlink began investing in becoming a total communication provider in 2003. Initially, we developed Earthlink free online calling, which enabled Earthlink high-speed access subscribers to make voice-over internet protocol or voice calls free of charge. In 2005 we extended free online calling to the mass market by creating a more user-friendly experience and offering the experience to all consumers including those not purchasing EarthLink access services. While we’re not expanding and updating our free service, Earthlink was also investing in monthly fee-based voice and traditional home phone replacement services. Both of these voice services will allow the user to call anyone, including those on public switch telephone networks or the PSTN.
In 4th quarter 2005, it was a significant period for us. We launched our voice service, Earthlink True Voice. This exciting new service is a plug and play solution that can be installed in minutes. Earthlink is marketing a $14.95 plan that including 500 minutes of local and long distance call in the continental US and Canada and a $24.90 plan that includes unlimited calling in the same area.
Additionally, both of these plans include enhanced calling features like voicemail, call waiting, caller ID and call forwarding, just to name a few. Additionally, all True Voice users enjoy the convenience of EarthLink’s exclusive My Voice portal where customers can view their own calling records, manage their address book and even check voicemail online.
During the quarter, we marketed Earthlink True Voice through email to our existing customers, direct mail, telemarketing as well as on our website. The offer we were promoting included the first month free. Consequently, since Earthlink does not count users as customers until they become paying customers, we have more signups than paying consumers in November and d4ecmeber. We’re very pleased with results thus far and have over 4,000 paying customers as of the end of the year.
Late in the 4th quarter of 2005, we also launched our 4 city trial of Covad for line powered voice services in Dallas, San Francisco, San Jose and Seattle. This offering combines the last mile of traditional telephone copper wiring with the advanced features afforded by taking advantage of the next generation V-Slam technology.
This next generation technology will also allow us to offer DSL2 plus, a higher speed broadband access with speeds up to 6-10mB per second, depending on the customer’s distance from the central office. Marketing for the product initially consisted of direct mail, emails to our existing customer base and some spot TV advertising. Initial marketing offer includes the first month free, so we do not have paying customers for this service in the fourth quarter.
In the 4th quarter, Earthlink was awarded the contract to implement a municipal wi-fi broadband network in the city of Anaheim California, covering approximately 50 square miles and approximately 100,000 households. For Anaheim, the exciting opportunity is the nearly 20,000,000 visitors annually that come to the city because of Disneyland. We intend to be able to offer these visitors occasional use access, which could result in revenues larger than our recurring access services in Anaheim.
In the first quarter of 2006, we’ve initiated the build out of the first phase of Anaheim and expect to sign up our first customers early in the 2nd quarter of this year.
Earthlink also successfully competed for and was awarded the contract to implement the nation’s largest municipal wi-fi broadband network in Philadelphia. This contract will cover approximately 135 square miles and will cover approximately 600,000 households. We expect to began the initial build in this late 1st quarter, early 2nd quarter of ’06 and begin provisioning our first customers in the 2nd quarter of ’06.
In the 4th quarter of 2005, Earthlink announced an agreement to acquire new Age networks. The acquisition of New Age Networks will enable Earthlink to expand this business in the fast-growing small and medium enterprise or SME market. In 2005 this is estimated to be a $1.5 billion market that industry analysts expect to grow over 20% annually through 2009. Under the terms of the agreement, Earthlink will acquire 100% of New Age Networks in a merger transaction for approximately $144 million. Consisting of 2.6 million shares of Earthlink common stock and $114.3 million in cash, including cash to be used to satisfy certain liabilities. The completion of the acquisition is subject to regulatory approvals and customary closing conditions.
In addition our exciting initiatives in voice, municipal wi-fi and SME services, Earthlink continues to effectively manage and maintain its profitable core access businesses. Over the past 2 years, we’ve had the fastest growing, most successful, value-priced internet service available, enabling us to grow market share in this space. In the 4th quarter, we grew our peoplePC service by 104,000 net subscribers. Over the past year, our peoplePC customer base has grown more than 42% to end the quarter at 1.2 million subscribers.
We also continue to generate solid growth in our broadband services. For the quarter, Earthlink added 63,000 net broadband subscribers, and ended the quarter with more than 1.6 million subscribers; an increase of 17.8% from the 4th quarter of 2004.
The trend of the declining premium narrowband market over the past couple of years continues. During the 4th quarter as a result our premium narrowband subscriber base decreased by 174,000 during the quarter, to end at 2.3 million subscribers.
For our access business, Earthlink expects the trends of growth in value narrowband and broadband and declines of premium narrowband will continue into 2006 and beyond. These trends have translated into a relatively flat customer base for us over the past 2 years, but the composition of the customer base has changed dramatically. At the end of 2005, the Earthlink customer base was less than 50% premium narrowband subscribers. However, as Kevin will discuss in just a moment, while revenues are down markedly from the prior year, they’ve not falling precipitously as many had predicted. In addition, our gross margins before sales incentives percentage, is at an all time high.
I’d now like to turn the call over to Kevin to discuss the financial results.
Thanks, Gary. Earthlink had another good quarter, delivering on the financial guidance that we provided. As Gary previously noted for the full year 2005 and for the 4th quarter 2005, we had strong adjusted EBITDA, free cash flow, and for the full year, record earnings per share for our access business.
These results are due in large part to the growth of our broadband and peoplePC businesses and the effective management of a mature, premium narrowband business, coupled with good back office cost control.
Broadband revenues were $111.4 million, a 4.9% increase compared to the 4th quarter of 2004, driven by the increase in broadband subscribers. Overall, broadband average revenue per user, ARPU, was $23.60, down from $26.78 in the 4th quarter of 2004. The decline in ARPU was primarily due to new lower retail DSL pricing and promotions and as a result of lower wholesale DSL pricing received from the I-LEX and greater growth in lower ARPU retail cable and wholesale customers.
Narrowband revenues were $172.3 million, a 17.4% decrease compared to the 4th quarter of 2004. The decrease in narrowband revenues was primarily due to the decline in premiums narrowband subscribers, partially offset by the growth in lower ARPU peoplePC subscribers.
One of EarthLink’s strategic initiatives has been to increase value-added services revenue without negatively impacting the customer experience through overly intrusive advertising techniques. To do this, we have significantly increased the Earthlink start page utilization, so that in December, 48% of Earthlink customers were using our total access software; almost double from a couple of years ago. Additionally, through partnerships with companies like Bank of America, which incorporates EarthLink’s search on a co-branded toolbar, we are able to increase search traffic and revenues from non-access customers. Both of these efforts drive search related revenues. For the fourth quarter of 2005, advertising, other value-added services and web-hosting revenues increased 24% to $29 million, compared to last year’s 4th quarter. This growth was due primarily to a significant increase of search-related advertising revenues and increases in revenues from our value-added services. These valued-added services now generate a record $1.20 incremental revenue per average user, per month, compared to only $.75 per user during the 4th quarter of 2004, a 60% improvement.
Overall, revenues for the quarter were $312.6 million, a 7.5% decline form the 4th quarter of last year, driven primarily by the decrease in premium narrowband revenue.
As Earthlink continues to evolve into a total communications company and away from a pure narrowband access provider, our reliance on premium narrowband revenues continues to decrease. During the 4th quarter of 2005, only 43% of our revenues were derived from premium narrowband services, while broadband revenues comprised almost 36% of total revenues.
Importantly though, gross margin percentages for our narrowband and broadband services have improved significantly over the past few years. Narrowband gross margins before sales incentives are now almost 90% and broadband gross margins before sales incentives are now a little over 40%. Gross margins before sales incentives continue to increase and are now at a record 72% of revenues, a 210 basis point improvement from the 4th quarter of 2004 and an increase of 40 basis points from just last quarter. However, due to the decrease in overall revenues, gross margins before sales incentives declined 4.8% compared to the 4th quarter of 2004, to $225 million.
Earthlink has focused on and significantly reduced its operating cost structure over the past couple of years while improving quality of service. As a result of these efforts, total support costs declined 2.4% to $85 million, compared to the 4th quarter of 2004. Sales and marketing expenses, including sales incentives, were $100.5 million, a decrease of 6.6% from the 4th quarter of 2004. This decrease was driven by a declining cost caused by lower premium narrowband and broadband subscriber additions, partially offset by higher peoplePC gross additions.
Overall, gross subscriber additions decreased over 12%, compared to 4th quarter of last year. The blended subscriber acquisition cost in the fourth quarter of 2005 was $154 per gross organic subscriber addition, up over 7% from the 4th quarter of 2004.
As a result of the declining gross margins before sales incentives, partially offset by a decrease in sales and marketing and support expenses, adjusted EBITDA was $47 million, a decline of $6.5 million from the 4th quarter of 2004.
For the full year 2005, adjusted EBITDA was $213.7 million, down 2% from the prior year, but still the second best year Earthlink has ever had. While overall adjusted EBITDA was down slightly from prior year, our adjusted EBITDA margin increased for the full year 2005 to 16.6%, an 80 basis point improvement from prior year. The adjusted EBITDA increase was driven by the continued narrowband and broadband gross margin improvements and reduced operating expenses.
Net income in the 4th quarter was $29.2 million or $.22 per share, a decrease of $6.4 million compared to the 4th quarter of 2004. the decrease in net earnings is primarily attributable to an $8.7 million increase in equity losses related to the Helio joint venture as Helio continues to ramp up its operations in anticipation of its 2006 product launches. A $6.5 million decrease in adjusted EBITDA, as noted above, and a $1 million increase in income tax expense, which is primarily a non-cash charge related to the realization of net operating loss of acquired companies.
These were partially offset by a $6.9 million decline in depreciation and amortization expense and a $2.5 million increase in interest income related to higher interest rates earned on our investments in the 4th quarter of 2005.
Net income for the year was a record $143 million, or $1.02 per share, compared to $.70 per share in 2004. Driving the net income improvement for 2005 was the facilities exit charge incurred in 2004, the reduction in 2005 depreciation and amortization expenses and the improvement in interest income. These benefits were partially offset by the increases in tax expense, the Helio partnership losses and the reduction in adjusted EBITDA in 2005.
During the 4th quarter of 2005, Earthlink spent $11 million to repurchase $1 million shares of stock. Earthlink generated $38.3 million of free cash flow during the 4th quarter of 2005. Capital expenditures and cash payments for subscriber based acquisitions in the 4th quarter aggregated approximately $9 million. During the 4th quarter of 2005, cash and marketable securities increased $21.2 million and we ended the quarter with $422 million of cash and marketable securities.
For the full year 2005, our current access business continued to generate strong cash flow of $174 million compared to $186 million in 2004. The slight decrease in year over year cash generation was primarily due to the decreased adjusted EBITDA in 2005 coupled with the $4 million of increase in external subscriber base acquisitions and $4 million increase in capital expenditures in 2005.
Capital expenditures were up slightly as we deployed equipment in our data centers to allow Earthlink to switch and route voice calls associated with our strategic voice initiatives.
With that I will turn the call back over the Gary for some concluding remarks before our question and answer session.
We’ve again demonstrated an ability to cost-effectively manage an ever-changing business. While the product mix will continue to evolve with growth in broadband and peoplePC, and the decline of premium narrowband, we continue to believe our core ISP services will generate significant EBITDA, net income and free cash flow for years to come. We expect to use the cash flow to continue to invest in our growth initiatives, primarily associated with voice, municipal Wi-FI and speech services, as well as the Helio joint venture.
The 4th quarter of 2005 was a significant period for Earthlink. Launching Earthlink TrueVoice, initiating our four market voice trials, being awarded 2 markets to our municipal wi-fi services and entering into an agreement o acquire New Age Networks.
In the first quarter of 2006, we expect Helio to launch their innovative wireless products and the initial phase of our municipal wi-fi network construction will begin.
Earthlink is well on its way to transforming itself into the nation’s next generation internet service provider. We believe our investments in these strategic initiatives represent significant grown opportunities, but may require significant investments over several years.
These investments could be in the form of initial product development in infrastructure costs as well as sales and marketing costs to generate subscribers and recurring revenues.
The operating models for these new initiatives are similar to the ISP operating model on which we’ve based our current operations. In the early stage of these products lifecycles, investments and sales and marketing expenditures are expected to exceed operating profits. Once a sufficient number of customers are added, their aggregate revenues and net recurring expenses are expected to exceed incremental investments in sales and marketing necessary to add such customers. At which point, we expect these new services to general free cash flow and operating profits for Earthlink.
At our Earthlink investment community meeting in New York in February 23, we will discuss each of these exciting initiatives and provide guidance for 2006, as well as longer-range expectation for the business.
I’ll now turn the call over to the operator to open the line for questions.
At this time I would like to remind everyone, if you would like to ask a question, please press * then the number 1 on your telephone keypad.
We’ll pause for just a moment to compile the Q&A roster.
The first question comes from Heath Terry of Credit Suisse.
Thanks. I was wondering if you could talk just a little bit, with the decline of premium voice…I’m sorry, premium narrowband, how successful you…is that either up to your broadband service or down to the peoplePC service. What percentage of those customers that have to go away are actually paying customers?
Hey it’s been pretty consistent; about 60% of our gross ads during any given month to broadband from our premium dialup subscriber base. We never have seen much of our premium narrowband customers moving to value. That continues to be 2-3% so, you know the macrotrend is something that we’ve seen over the last 3 years. About 40% of our premium narrowband churn is people moving to high speed; of those, we add somewhere around 30,000 a month of people moving from premium narrowband to broadband to one of our broadband services.
Talk to us about where relationships are and what kind of pricing and availability trends you’re seeing with your DSL and the cable partners that you have.
We started a new deal with Verizon mid-last year; we just announced and put out a press release earlier this week that we’ve signed a multi-year deal with Bell South. We’ve had a deal with Quest for sometime and we continue to give very favorable pricing for SPC. So, from an availability perspective, we don’t have any issues at all. It still is a very competitive marketplace. SPC continues to lead the way on that front. Interestingly, because of how aggressive they are on the retail side, we also get the lowest wholesale prices form them and that’s where we’re seeing the greatest growth. So even despite the fierce competition that we’re seeing in that area, we’re seeing the best success we have for DSL in the SPC territories. Cable continues to be a consistent performer. We continue to do very well with Time Warner and I don’t think our underlying business trends are going to continue on a broadband front a whole lot until we start seeing us rolling our some of these new services like home phone service with DSL and starting to sell this one megabit symmetrical product associated with our muni- wi-fi buildup. Then we should see some acceleration.
Thank you. And I guess just a last question, with the regulatory discussions seeming to be picking up this year, are there any issues that you see coming from a regulatory standpoint, either positive or negative that you’re going to be keeping your eye on?
I don’t think it can be any worse than it’s been fro the last three years. Hopefully, it’ll be a little bit better for us. I don’t think anything’s going to happen in 2006, but the debate about what’s going to happen to the telecomm rewrite will be held this year prior to something probably being done in 2007. the only things I can tell you that I feel strongly will take place is universal service as a concept will continue to remain in effect in some form, but I don’t know how that impacts us. But, they have to be able to find alternate ways to fund USF other than long-distance, as that revenue stream declines. The issue of net neutrality is going to be front and center. Just yesterday or the day before yesterday, the senate held hearings on net neutrality and I think there’s going to be a lot of interest in some of these alternative broadband schemes. Other than that, I don’t see anything really changing from the status quo as it exists today. At least over the near term.
Operator: the next question comes from Yousef Squalie of Jeffries.
Yes, good morning. A couple of questions. One for you Kevin. So your gross margins are at a record high, just as we think you guys are maxed out on gross margins you continue to eke out, to get out a lot more out of that line item. How are you thinking about it now, with all of these different moving parts… is 71.5% a sustainable level going forward? And for you Gary, AOL recently announced the signing of a DSL availability with pricing somewhere between $25 and $30. How does that change the competitive landscape? Do you expect kind of an acceleration in the rate of decline of their subscriber base and therefore having a potentially negative impact on yours and then I have a follow up.
With regard to gross margin, I would continue to suggest that it would continue to go sideways. We could anticipate some slight pressure on it. I think where we’ve seen the benefit Yousef has been the fact that while we’ve anticipated primarily a DSL product, that we’d have greater price pressure as our customer base moves off they’re rolling over price elements to newer prices, closer to the $39.95 that we’re offering in some of the markets. We’ve actually just been able to get the wholesale prices better than was anticipated and we’re not having really the pressure on the pricing side as much as we had anticipated. So I don’t expect to see that expanding whatsoever, if anything it goes sideways or slightly down.
And then on AOL, I’m happy to see that they’re doing this. They’re obviously trying to stem…I think they lost 650,000 net subscribers during the quarter. And, their announcement is, I think, an attempt to try to move some of those customers they’re losing to a paying relationship with AOL. As I understand it it’s a little bit of an oddball deal where they do a split bill and they aren’t’ actually providing the underlying access services. It’s more like a BYOA option. So if you sign up for AOL’s broadband service, you get a bill for $15 from SPC and $15 from AOL on the same bill. I don’t think it’s going to impact us. Hopefully it’ll help AOL. I’d like to see them continue to be a strong and viable competitor. And, perhaps this latest foray of them offering broadband services, we’ll see them starting to build a platform that they can leverage for the next several years.
Okay and then on the New Age Network acquisition, how is the business so far? I know you guys have not closed on it. What’s the timing on that? And, in that business, growth was somewhat hampered by just a lack of cash. Is that changing? Have you extended any funding to that division?
We haven’t yet. We filed our S-4. We will file our S-4. We’re currently in review with the SEC at this point. We’ve filed the S-4, it’s in review with the SEC, we don’t know when we’re going to be able to close. It will depend on the SEC either doing a formal review or not. We could close as early as the end of March or it could be as late as sometime early May. A lot will be…it depends on what the SEC comes back and says to us. Other than that, we filed all the necessary regulatory paperwork to assign their status agreements to Earthlink. That process is well underway. We’re having some preliminary meetings, but until the thing closes, we really can’t exercise much oversight or control over that business as we don’t own it. And, you know, their business continues to operate as it had been and we are anxious to be able to get started to help accelerate that buy, providing them some additional capital and start trying to take advantage of some of the synergies. But it really won’t happen until after the close takes place.
Everything remains consistent with what we discussed back on the 13th of December.
Okay, that’s helpful. Thanks a lot.
Operator: The next question comes from Brian Goldberg of Bear Sterns.
Hello. Two quick questions. On your last conference call you mentioned 20-25 municipalities representing about 10 million households were contemplating wi-fi networks. Could we get an update on where that stands? And I believe you had submitted proposals to Long Beach, San Francisco, Milwaukee, Minneapolis…
We’re close to finalizing something in Milwaukee. That looks pretty good. We’re one of two finalists in Minneapolis; we’re actually in a technical trial against another smaller firm. We’re both building out one square mile area to show the technical sensibility of our designs. We’re one of two finalists in Portland and we expect a decision to come down on Portland sometime mid this month. We had responded to a RFI in San Francisco and will actually submit our RFP, again later this month. Long Beach had pulled their RFP, but expect to re-submit it, again, I think in February. We’ve responded to an RFP in Aurora, Colorado and Alexandria, Virginia. I think we’re looking good on those fronts. And there’s a whole host of cities who have expressed interest now in submitting RFP’s during this year. The three largest of those are Chicago, Los Angeles and Atlanta. So, a lot still happening on the RFP front. We also submitted a proposal to a small city outside of Boston, who…I can’t think…Brookline, Mass.
Okay. Also one last quick one. Where do we stand with the share repurchase authorization? With the current availability right now?
The current availability right now is $180 million. And that’s about…that’s a little over $100 million related to our 10(b) 5.
Operator: The next question comes from Anthony Noto of Goldman Sachs.
Hi, this is actually Jennifer Connolly in for Anthony this morning. Broadly speaking, I know you guys will address this in more detail in New York on the 23rd but, is there any indication you can give us of the timing that you’re expecting for the payback of the increased investments that you’re planning in ’06 as far as when you think that you’ll get to the point where you’ll have enough subs to overcome the sales and marketing costs?
I mean, Jennifer, you can model it based on what we’ve done with previous businesses. All of these subscription businesses, you have to put the sales and marketing dollar investment up front and you earn that money back over time. So, it’s going to be no surprise the faster we grow, the more our losses will be in the short term. But, the quicker you’re going to get a payback because you’ve hit some type of scale. The good news is all of these leveraged the existing infrastructure we have across many…we’re providing services across many of our products and the relative investment it would take if you were doing it on a standalone basis should be better than not. But, as you suggest, we will provide a lot better visibility and insight into these issues when we meet on the 23rd and hopefully you all will feel very comfortable with the direction that we’re taking and be as excited as we are about the opportunities that we have in front of us.
Okay. And then also just with True Voice and voiceover IP products in general, what do you think is the biggest obstacle to getting people to adopt that type of technology?
Well both are different. Earthlink True Voice the big challenge is somewhat, it’s very early in the adoption stage. I think Vonage filed their IPO this morning and indicated they have 1.4 million subscribers and they are by far the largest of the voiceover IP providers. But, when you talk to a consumer about an ATA or putting some device in and it doesn’t work when your power goes out…for a lot of consumers, their eyes start glazing over. But it does provide a very compelling solution for users who can get naked DSL or use it on top of their cable platform versus having a land line, if you’re comfortable with your mobile phone as a backup. Which, increasingly, there’s larger numbers of people who are comfortable with that. Line powered voice is much different. This is a very compelling product offering and I think it’s just a matter of us getting the message out. Hopefully being able to expand the footprint from which we offer it and under that scenario you’re talking to consumers in terms of real benefit. I mean, an 8 megabit DSL solution is the fastest connection that anyone’s been able to offer to date and you combine that with the convenience of a voice solution which is integrated with a computer that provides unlimited local and long distance without you having to change any of your dialing habits from your home or the CPE, that’s a very, very nice product. And we have a range of prices from entry level at $50 a month to $70 a month. So I think that as we get this message out and consistently start telling it in the areas where it’s available, we’re going to see pretty good success with that.
Just a follow up to that. What percentage of your footprint does have access to that?
Today it’s only 2 million homes that have been built out in those four markets.
But we hope to have that in about 20 million household by year end.
Okay great. Thank you.
Operator: Again, I would like to remind everyone, if you would like to ask a question, please press * then the number one on your telephone keypad. Your next question comes from Jim Friedland of SD Cowan.
Thanks, two questions. First, on peoplePC, if you look at your results compared to NetZero, you’re adding a meaningful amount of subscribers and they’re actually in decline. So I wonder if you could address sort of why you think that is, what marketing channels have been effective for you and sort of the subscriber acquisition costs. And then I just had a quick accounting related question on your NOL.
I think, I’m not going to take a shot at NetZero. They’re continuing to do a good job on many fronts. Part of it’s the law of big numbers. NetZero has a larger number of customers and larger churn means they have to add a lot more customers just to stay even. We have been very successful on a number of fronts. We have affinity relationships with organizations like AARP which have done well for us. We continue to expand the availability of our services through the 20,000 retailers, which have traditional sold EarthLink’s premium dial services. We effectively use direct response television. We’ve had great success in the Hispanic arena so, peoplePC is executed extremely well and we’re bringing subs in for what we’ve traditionally targeted, that’s in the $80-$90 range and I don’t see that changing through 2006. We expect peoplePC to continue to grow nicely as we think are gaining share in this marketplace. So we’re pretty happy with what they’re doing. We had a very good quarter and that’s significantly one of the reasons why we believe we’re going to continue to generate a significant amount of free cash flow from this business. Because even as premium dial declines, we’re keeping our customer base flat through the growth of peoplePC in broadband offsetting losses in premium narrowband.
And on peoplePC the churn was down overall. How about the churn on peoplePC, has that been coming down as well?
About the same. When you have early…when you have a lot of growth, you’re going to have a lot of early lag churn. So until the base gets larger, you’re not going to see meaningful decline because a significant number of your customers have been with you less than 12 months.
Okay great. And then the question on the NOL. As you continue to offset the NOL with profits, but now you have the equity losses coming in from the SK/Earthlink/Helio venture, will those equity losses – can you use those to offset the gains from just general profitability or are they not used for deduction for the NOL?
No, those…the impact of the …our share of the losses of Helio will definitely be part of our impact to our tax, to our deferred tax assets. So we will be able to use those to shield further income tax payments.
Right. So that could push that out a year or two. Okay, great, thanks.
Operator: The next question comes from Keith Dalrymple of New York Global Securities.
Good morning, I have a couple of questions. First, just a quick one for Kevin. Can you tell me what the number of shares outstanding were at the end of the quarter?
I think we were 130 million and change.
Okay. And can you guys comment on line-powered voice, particularly with respect to the potential timing for rolling out to additional markets?
All we can say at this point is that we expect to be able to offer it to a significantly expanded footprint. Those discussions and work is under way. We wanted to get our feet wet with these four markets. We’re now starting to provision customers. I think we took orders for almost a thousand customers in January. So it’s off to a good start, we’re getting a lot of learning. We didn’t want to go too fast because it does require line number portability and all of these new processes that you provided interfaces to the lex provisioning systems, there’s plenty of places where you can go wrong and we didn’t want to get way ahead of ourselves. So we’re pleased with how it’s doing and we will, I’m sure, provide you some greater color on the 23rd.
Okay. So, significantly expanded footprint – can you put a timeframe around that?
By year end. I can’t tell you which month yet, but certainly by year end we expect to have a much, much bigger footprint.
Operator: Again, to ask a question, please press * then the number 1 on your telephone keypad. Please hold while we compile the roster. At this time, there are no further questions; I will now turn the call back over to you.
Alright, thank you all for joining us today and we look forward to seeing all of you up in New York on the 23rd. And, thank you for joining us this morning.
Operator: this concludes today’s Earthlink conference call. You may now disconnect.