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EarthLink, Inc. (NASDAQ:ELNK)

Q1 2006 Earnings Conference Call

April 20, 2006, 8:30 a.m. EST

Executives

Kevin Dotts - CFO

Gary Betty - CEO

Analysts

Jennifer Connelly - Goldman Sachs

Youssef Squali - Jefferies & Co.

Scott Kessler - Standard & Poor's

Heath Terry - Credit Suisse

Keith Dalrymple - New York Global Securities

Jim Friedland - SG Cowen

Bryan Goldberg - Bear Stearns

Presentation

Operator

Good morning. I would like to welcome everyone to the EarthLink first quarter 2006 earnings conference call. (Operator Instructions) Mr. Kevin Dotts, Chief Financial Officer of EarthLink, you may begin your conference.

Kevin Dotts

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 Ballantyne, 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 principle factors that could cause actual results to differ materially than 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 investor, our comments include non-GAAP measures. For details on those 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, which has been furnished to the SEC, both of which are available on our web site at www.EarthLink.net. Now I will turn things over to Gary.

Gary Betty

Thanks, Kevin. I also want to welcome everyone to our first quarter earnings call. In the first quarter of 2006, EarthLink continued to execute on its strategy to become a total communications provider. During the quarter, we actively marketed our bundled home phone service and 8 MB DSL service in Dallas, Seattle, San Francisco and San Jose, which we introduced in late December of 2005 and early 2006.

We also invested $50 million in Covad, which will allow them to build approximately 600 additional central offices in eight markets including L.A., New York, Atlanta, Chicago, Miami, San Diego, Philadelphia, and Washington, D.C. We expect the first of these additional markets to be completed in the third quarter of 2006, with the remaining markets targeted to launch by the end of the year.

However, the current market rollout expectations have been delayed about a quarter from our initial plans and consequently, this will impact our full-year expectations which Kevin will address later on the call. Once these markets are built out, we expect to be able to provision a bundled 8 MB DSL and home phone voice service to over 10 million households in the United States.

In the first quarter of 2006, we continued to nationally market EarthLink's True Voice over IP solution primarily through direct mail and e-mails. In the second quarter, EarthLink expects to expand the distribution channels to include both national and regional specialty retailers.

Through the first quarter of 2006, with limited marketing and very limited footprint for some of our voice products, EarthLink has already added 13,000 voice subscribers. As we continue to expand our marketing efforts and footprint, EarthLink expects the number of subscribers to increase substantially.

During the first quarter, we also expanded our municipal Wi-Fi footprint by winning the city of Milpitas, California. Additionally, we announced our partnership with Google and jointly submitted a proposal to the City of San Francisco. Subsequent to the end of the quarter, EarthLink's proposal was selected by the City of San Francisco.

These markets, together with the cities of Anaheim and Philadelphia provide us with the opportunity to address over 1 million households around the country. We continue to believe that we'll successfully compete for additional cities in the coming quarters.

In addition to the progress that we've made on our strategic voice and municipal Wi-Fi efforts during the first quarter, subsequent to quarter close EarthLink completed the acquisition of New Edge Networks. New Edge Networks will enable EarthLink to quickly expand its business in the fast-growing small and medium enterprise market, focusing on IP VPN services. This market is estimated at several billion dollars and industry analysts expect the IP VPN market to grow at 20% through 2009.

Additionally, EarthLink and New Edge expect synergies by being able to package their voice, web hosting and enterprise protection and security tools to meet the rapidly growing demand in the small office/home office market, as well as the small and medium enterprise area.

For the existing access services over the past two years, we've had the fastest-growing, most successful value-priced Internet service available, enabling us to gain market share in this space. During the first quarter, we grew our PeoplePC service by 125,000 net subscribers. Over the past year, our PeoplePC customer base has grown by 39% to end the quarter at 1.4 million subscribers.

We also continue to generate solid growth in our broadband services. For the quarter, EarthLink added 85,000 net broadband subscribers and ended the quarter with 1.7 million subscribers, an increase of 16% compared to the first quarter of 2005.

The trend of a declining premium narrowband market over the past couple of years continued during the first quarter. As a result, our premium narrowband base decreased by 179,000 during the quarter, to end at 2.1 million subscribers.

For our core access business, EarthLink expects the trends of growth in value narrowband and broadband and declines in premium narrowband will continue throughout 2006 and beyond. These trends have translated into a relatively flat customer base over the past few years, but the composition of the customer base has changed dramatically. At the end of the first quarter, only 40% of our customers were premium narrowband, down from 52% just one year ago.

That number is expected to continue to climb. In fact, by the end of 2006, our traditional premium narrowband subscribers could account for only about one-third of our [unique] subscribers.

However, as Kevin will discuss in just a moment, while our revenues are down marginally from the prior year, they have not fallen precipitously as many have predicted. In addition, our gross margin percentage remains very strong. I'd now like to turn the call over to Kevin to discuss our financial results.

Kevin Dotts

Thanks, Gary. Overall, the first quarter of 2006 was generally in line with our expectations which was marked by increased investment in the form of operating and sales and marketing expenses related to our strategic growth initiatives. Broadband revenues were $115.5 million, a 6% increase compared to the first quarter of 2005, driven by the increase in broadband subscribers.

Overall, broadband ARPU was $23.29, down from $25.69 in the first quarter of 2005. The decline in ARPU was primarily due to introductory price promotions, lower retail DSL pricing and a mix shift to lower ARPU retail, cable and wholesale customers.

Narrowband revenues were $164.6 million, an 18% decrease compared to the first quarter of 2005. The decrease in narrowband revenues was primarily due to the decline in premium narrowband subscribers and the transfer of EarthLink wireless subscribers to the HELIO joint venture at the end of the prior year's first quarter, previously included in narrowband revenues; partially offset by the subscriber growth in our value brand, PeoplePC.

For the first quarter of 2006, advertising, other value-added services, and web hosting revenues increased 18.4% to $29.6 million compared to the first quarter of 2005. This revenue growth was due primarily to an increase in search-related advertising revenues and an increase in our value-added service revenues. These value-added service revenues now generate a record $1.27 of incremental revenue per average user, per month compared to only $0.88 per user during the first quarter of 2005, a 45% improvement.

Additionally, during the first quarter of 2006, we signed a two-year contract extension with Google for search functionality. We've partnered with Google since February of 2002 and over this time have increased our value-added service revenue by over 470%.

Overall revenues for the quarter were $310 million, a 7.5% decline from the first quarter of last year, driven primarily by the increase in premium narrowband revenue. As EarthLink continues to evolve into a total communications company and away from a pure dial access provider, our reliance on premium narrowband revenues continues to decrease. During the first quarter of 2006, only 40% of our revenues were derived from premium narrowband services, down from 51% in the first quarter of 2005.

By the end of 2006, premium narrowband revenues are only expected to account for approximately one-third of our total revenue. Importantly though, gross margin percentages for our narrowband and broadband services have improved significantly over the past few years. Narrowband gross margins are almost 90% and broadband gross margins are more than 40%. However, due to the continued shift in subscriber mix to lower margin broadband, gross margins are now approximately 70.5% of revenues, a 10 basis point decline from the first quarter of 2005. Coupled with the decreased in overall revenues, gross margins declined 8% compared to the first quarter of 2005 to $218.2 million.

Total support costs were $91.9 million, an increase of 1.3% compared to the first quarter of 2005. However, included in the first quarter of 2006 expenses is approximately $3.7 million of stock-based compensation expense related to FAS-123R which was adopted on January 1, 2006. Additionally, the first quarter of 2006 also included $5.3 million of expense related to the ramp-up of our voice and Wi-Fi initiatives. The Company expects to benefit from these growth initiatives in the coming quarters and years.

Sales and marketing expenses were $105 million, a slight decrease from the first quarter of 2005. This decrease was driven by decline in cost caused by lower premium narrowband and broadband gross subscriber additions, partially offset by higher PeoplePC gross additions.

Additionally, included in the first quarter 2006 figure is $11 million of expense associated with our voice strategic growth initiative. This sales and marketing spending is expected to generate new revenue growth for our Company.

Overall, gross subscriber additions were level with the first quarter of last year. The blended subscriber acquisition cost in the first quarter of 2006 was $137 per gross organic subscriber addition, compared to $138 in the first quarter of 2005.

Adjusted EBITDA was $29.4 million, a decline of $21.4 million from the first quarter of 2005, driven primarily by the decrease in gross margins. Net income in the first quarter was $116.4 million or $0.12 per share, a decrease of $17 million compared to the first quarter of 2005. The decrease in net earnings is primarily attributable to a $21.4 million decrease in adjusted EBITDA as noted above and $7.3 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.

These were partially offset by a $5.2 million decrease in income tax expense, which was due to not accruing tax expense during the first quarter of 2006, resulting from no taxable income expected for the full year of 2006; a $3.7 million decline in depreciation and amortization expense and a $1.3 million increase in interest income primarily related to higher interest rates earned on our investments in the first quarter of 2006; and, $900,000 of investments recorded in the first quarter 2005.

EarthLink generated $21.5 million of free cash flow during the first quarter of 2006. Capital expenditures and cash payments for subscriber base acquisitions in the first quarter aggregated approximately $7.9 million. Additionally during the quarter, EarthLink provided a scheduled capital contribution of $39.5 million to HELIO, and as Gary previously noted, we also made a $50 million investment in Covad.

During the first quarter of 2006, cash and marketable securities decreased $69.4 million and we ended the quarter with $352.8 million of cash and marketable securities.

Now for the outlook. The following statements are based on management's 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 EarthLink completing the New Edge Networks acquisition on April 13th and a slower than initially expected build-out of certain line-powered voice markets, EarthLink now expects net subscriber additions of 50,000 to 75,000 subscribers and full-year 2006 revenue of $1.33 billion to $1.38 billion.

Due to the revised voice market rollout schedule, EarthLink expects to generate lower sales and marketing expense related to the voice initiatives than originally planned. The lower than expected sales and marketing spend will be partially offset by increased efforts related to growing the New Edge Network subscriber base. Accordingly, EarthLink now expects adjusted EBITDA to be $120 to $140 million.

As a result of the New Edge acquisition, we expect to increase amortization expense approximately $10 million. Accordingly, EarthLink now expects full-year net income to be between a loss of $40 million to breakeven. This includes approximately $14 million of FAS-123R expense and $90 million to $110 million of equity method losses associated with our proportionate share of HELIO's results.

In the second quarter of 2006, EarthLink expects between zero net subscribers additions and 25,000 net subscribers. Revenues are expected to be between $330 million to $335 million. Adjusted EBITDA is expected to be between $30 million and $35 million. Net income is expected to be between breakeven and income of $5 million. This income guidance includes our proportionate share of HELIO's expected equity method loss of approximately $20 million, as HELIO is expected to launch their initial products in the second quarter. With that, l will turn the call back over to Gary for some concluding remarks before our question and answer session.

Gary Betty

Thanks, Kevin. EarthLink had another good quarter with our existing business performing as expected in terms of subscribers, revenues, and profitability. We continue to make significant progress in our strategy to become a total communications provider. During the quarter, we invested in Covad to significantly expand our voice and data bundled offer, and we successfully competed for and won two additional municipal Wi-Fi markets.

As 2006 continues to unfold, EarthLink expects to continue to add voice subscribers with additional muni Wi-Fi markets and integrate and grow the New Edge Network acquisition. We expect to exit 2006 on a path to achieve our 2009 goals of 10% to 15%, compounded annual revenue growth and 17% to 19% EBITDA margins. With that, I'll turn the call over to the operator to open the line for questions.

Question-and-Answer Session

Operator

(Operator Instructions.) Your first question comes from Anthony Noto.

Jennifer Connelly - Goldman Sachs

Hi, this is actually Jen Connelly in for Anthony this morning. How are you?

Gary Betty

How are you?

Jennifer Connelly - Goldman Sachs

Good, thank you. We had a question regarding the contribution of New Edge Network to the updated fiscal year '06 revenue guidance. Previously New Edge was not in your numbers, correct?

Kevin Dotts

That's right, that's correct.

Jennifer Connelly - Goldman Sachs

So are you providing any breakout of the contribution you expect from New Edge?

Kevin Dotts

Jen, I think the way to look at that is we said last year that they would be approximately $120 million of revenues in 2005; this year we thought that would grow up to the 10% range. So that gets you to roughly in the -- you can do the math -- in the $130 million range. We're picking up only our stub share from April 13th on.

Jennifer Connelly - Goldman Sachs

Great. Do you expect their profitability to be basically in line with what it was last year?

Kevin Dotts

I would expect as we're investing in accelerating their growth and their lead cycle time that they'll actually be in roughly a breakeven position on EBITDA as we head indicated earlier.

Gary Betty

For '06.

Jennifer Connelly - Goldman Sachs

For '06, right. And their sub contribution will be on top or your numbers?

Kevin Dotts

Well, for the current period as we integrate them, they'll be in the 60,000 range and that will grow by about 10% over the year.

Jennifer Connelly - Goldman Sachs

Great. If I could just ask a follow up question -- well, it's not really related. With regard to HELIO as far as the timing of that launch and how that's tracking relative to your expectations?

Gary Betty

They've bitten off a big bite doing all the stuff they've got going on, but we're in line to launch our first handsets to the [inaudible]-American segment at the end of this month and should launch our first HELIO handset targeted for these tech-savvy users early in May. So we are really close.

Jennifer Connelly - Goldman Sachs

Thank you.

Operator

Your next question comes from Youssef Squali.

Youssef Squali - Jefferies & Co.

Good morning, everybody.

Gary Betty

Good morning, Youssef.

Youssef Squali - Jefferies & Co.

A couple questions. First with the line-powered voice. Could you go through and explain to us why there is a delay there?

Gary Betty

Well, the Covad deal took longer to do than we expected. We had originally hoped that we would be up in some additional markets in the second quarter. That's now not going to occur until probably August or September. If you don't have homes to sell to, it's hard to add customers. So it's all a timing issue.

The product's performing well. Where we are marketing, we're achieving early success, particularly in upselling to our customer base. We were a little bit late getting some of our bundles done, getting into retail, but all of that is coming together and you'll start seeing offerings both for EarthLink through voice product and LPV at retail during the second quarter. It is going to be back-half loaded much more so than we had originally hoped as we entered 2006.

Youssef Squali - Jefferies & Co.

In those four markets where you've been now for a few months, could you share with us any kind of quantification of what kind of penetration you've had?

Gary Betty

Well the only thing we've marketed to really is our customer base, to a great extent. We've done a little bit of integrated marketing up in Seattle, but we haven't had retail and we haven't had any channel partners. We haven't aggressively tried to upgrade our existing DSL customers in those market. This is what you expect as you roll out a new service. Where we have marketed to customers, it's working pretty well. People are pretty satisfied with it.

I spent two different sessions listening to our call center operations in the last month, and I'm very encouraged about (1) the awareness of the product we're offering to customers in that area and (2) their willingness to potentially buy those products from us. So early indications, Youssef, I'm pretty encouraged. We added about 8,000 customers, net voice, during the quarter.

Youssef Squali - Jefferies & Co.

8,000 customers, that's for line-powered?

Gary Betty

In total.

Youssef Squali - Jefferies & Co.

Just a clarification on the previous question. The New Edge customers have, I think you said 60,000; is that included, is that embedded in your subscriber net adds for the year?

Gary Betty

It will be. We originally had zero to 50,000 net loss, I think was our original guidance, or flat for the year. Now we're saying zero to 50,000 adds. We really didn't change our guidance. We did have a pretty good first quarter with 28,000 net adds for Q1. I think it was 28,000 or 29,000.

Kevin Dotts

27,000. When we gave the forward guidance, that does include what we expect to be in the high 60s as far as New Edge.

Youssef Squali - Jefferies & Co.

Lastly on PeoplePC, we keep getting nicely surprised there. You guys keep pushing the envelope at 125,000. How sustainable is that? Do you at some point just hit a glass ceiling there, just to be able to add enough customers to replace the churners; does that become a monstrous problem? How far are we from getting there for you guys?

Gary Betty

We don't expect that happen this year, for sure. We continue to expect pretty robust growth. We are seeing customer growth from all areas. I think we've benefited a little bit in Q1 from AOL's price changes that they made on the premium dial side. We may also be benefiting, Youssef, from the fact that United seems to be focused more on their content business than on their access business. All of those things are positive for PeoplePC continuing to take share, and they had a blow-out quarter.

Youssef Squali - Jefferies & Co.

That's great. Well, congratulations. Nice quarter.

Gary Betty

Thank you.

Operator

Your next question comes from Scott Kessler.

Scott Kessler - Standard & Poor's

Hi. I was wondering if you could provide an update. I think at the investor gathering, you talked a little bit about a number of municipalities across the country where you are essentially in the final stages related to either an RFP or an actual announcement. If you could just maybe provide us with some information about that. Also, if you could talk a little bit about why you think things didn't work out, I think that would be interesting.

Gary Betty

Sure, we're in a bake-off with one other company up in Minneapolis, we're building out one square mile that they will be doing tests on. That's happening this month. We're a finalist in Aurora, Colorado. We were selected as a finalist in Long Beach, I think against one or two other candidates. We're a finalist in Arlington, Virginia. We're a finalist in Milwaukee, Wisconsin and we are negotiating, as I said earlier, with San Francisco. New Orleans has filed a -- I don't know exactly what they call it -- but a certificate or something to provide us a franchise agreement in New Orleans. That's going to happen in early May. So we could get some good news from New Orleans sometimes perhaps in May. It's not really a competition, per se.

We have lost, so far, two deals that we went after. One was up in Brooklyn, Massachusetts. The principal reason we lost is they were very interested in the person doing it supporting 4.9 megahertz spectrum for public safety. We didn't think that was consistent with what we were trying to do. It increases your cost three to four times and as such, we were somewhat non-responsive to what they wanted to do.

Up in Portland, we lost to a company called MetroFi, who is a start-up company on the West Coast. They are trying to provide services that are just add supportive. Again, we don't think that model is consistent with what we want. Ultimately, Portland went with what sounds to be a great deal of free for their citizens, but time will tell whether that model is going to work or not.

I think you'll see some municipalities trying to do that. I don't think there's going to be unlimited amounts of capital that will chase those kinds of models until it works, and we clearly aren't going to do that on a comprehensive basis, although we are doing something on a limited front with Google in San Francisco.

Scott Kessler - Standard & Poor's

If I could follow up, Gary. Obviously you guys referenced during the meeting about a month or two ago, about the fact that you might be participating with Google in another endeavor for another municipality and there has been some press speculation along those lines. Do you care to comment?

Gary Betty

Not so much on a build out. What I said was Google will work with us in a second market where we are going to provide a free low-speed wireless offering in San Francisco of 300K that Google is going to help fund. In another market, Google is going to provide us with the equivalent of free local search. So what we're going to try to see is which model works best.

Let's say we pick market X that we win, we build it out, and anyone who has access to Wi-Fi could do free local search like online yellow pages via Wi-Fi, but they couldn't do anything else. That's what I was referring to in the secondary market. That is part of our agreement.

Scott Kessler - Standard & Poor's

What that implies then is that you guys with Google will choose the city. It's not necessarily that Google is a primary participant.

Gary Betty

That's right. And they're a great partner of ours. As Kevin indicated, we just signed our second extension of an agreement we originally signed in 2002. That relationship has gone well. Our revenues are doing fine. We worked with them on a number of fronts to do a better job monetizing the traffic we do have with our customer base.

Scott Kessler - Standard & Poor's

Great. Thanks a lot.

Operator

Our next question comes from Heath Terry.

Heath Terry - Credit Suisse

I was wondering if you could talk a little bit more as we get closer to the physical build-out of some of your muni Wi-Fi cities, are you waiting anymore what the costs are going to be like?

Gary Betty

No changes, we actually went soft. We did a soft launch yesterday in Anaheim for 3.5 square miles. I think we had 30 customers that were using the network, but we had it all interconnected. Interesting, the one thing we did find pretty funny, as soon as we turned it up, 500 people the first day tried to access it for occasional use. We will start getting some learnings. We're pulling up the first square mile in Minneapolis this month, we have the 3.5 square miles in Anaheim which will grow to 10 pretty quickly. We will start, we'll actually have a little bit of revenue for muni Wi-Fi in Q2. You'll start seeing that ramp as we bring on Philly and Milpitas and get hopefully the San Francisco agreement completed and maybe even have something in New Orleans. No changes on the cost front. It is doing about what we expected.

Heath Terry - Credit Suisse

Have you been surprised one way or another in terms of the amount of time or effort it's taking, the physical build-out?

Gary Betty

Actually no. Once they do it, they are pretty efficient in getting these things up on those poles.

Kevin Dotts

The pace of the build out we're fine with. The amount of time is very variable. Some cities obviously, they are very quick and some are protracted.

Heath Terry - Credit Suisse

Obviously you guys are capturing a lot of headlines with this as you win more cities. As you start new processes, are you seeing more competition, or how much more competition?

Gary Betty

It's funny. In Grand Rapids, there were 20 people who responded to the Grand Rapids request to build out a muni Wi-Fi network; in Houston where we went to this bidders conference, there were only three. It's very funny. It's hard to say how people are going to respond.

In Long Beach, we're competing against two very small companies; in Houston, it's two other large companies; Grand Rapids, it's all over the place. There's no set pattern yet.

Heath Terry - Credit Suisse

Great. Thank you very much.

Gary Betty

You bet.

Operator

Your next question comes from Keith Dalrymple.

Keith Dalrymple - New York Global Securities

Good morning. I have a couple of clarifying questions. First, can you tell me, with New Edge Networks, those subs are going to be bundled in with your broadband line?

Gary Betty

That's right.

Keith Dalrymple - New York Global Securities

Can you tell me what the approximate ARPU is there, or has been?

Kevin Dotts

Between $150 to $170.

Keith Dalrymple - New York Global Securities

Can you tell me the total number of RFPs for Wi-Fi that you're participating in right now?

Gary Betty

Well, we're finalists in six, we've submitted RFPs additionally in Denver, Grand Rapids, Pasadena, and Houston. I think there was one more. Then there's interest on a number of fronts: Atlanta, Boston, Honolulu, Houston, and L.A. There's a boat load in the pipeline. Between now and next year, there's probably going to be 20 or 30.

Keith Dalrymple - New York Global Securities

Can you give me a little clarification on voice? I thought you mentioned you had 13,000 voice subs and then there was I think an 8,000 customer number mentioned. What's the split?

Gary Betty

It was 6,000 paying subs at the end of Q4. Now we have about 14,000.

Keith Dalrymple - New York Global Securities

Do you have a split between line-powered voice and the ATA-based service?

Gary Betty

It is mostly ATA voice services right now. Just about 1,000 LPV.

Keith Dalrymple - New York Global Securities

All right. And lastly. It appears that HELIO is on track to launch. Can you comment on the financial position of the company. Do they have adequate cash to execute on their plans?

Kevin Dotts

At this point, no change from what we've been saying since the launch last year. We said, we'll take our share of their equity losses, that will be $90 million to $110 million on our income statement. By the end of 2006, they'll have been funded roughly $360 million worth of cash. There'll be another $40 million that will be funded by both partners next year. As we see that right now, that will be adequate capital.

The only caveat to that discussion will be how quickly they actually grow. If they grow faster, it may require more capital. That would be a good problem to have. If they're growing slower, then certainly it's not going to require more capital.

Keith Dalrymple - New York Global Securities

So at this point, to build out the initial sales channels and to launch, they have adequate cap?

Kevin Dotts

That's correct.

Gary Betty

The product looks great. I'm really excited about what they've done and they're anxious to get some of these in the hands of consumers.14 months of a lot of hard work is going to come in, in the next two or three weeks.

Keith Dalrymple - New York Global Securities

Great. Thank you.

Operator

(Operator Instructions) Your next question comes from Jim Friedland.

Jim Friedland - SG Cowen

Just a couple financial questions. First, it looks like a small amount, $3.9 million was spent on sub acquisitions in the quarter. What was the total amount of subs and were they value and premium? The second question is on stock-based comp. Could you break out where those expenses are allocated in the P&L and the difference expense line items? I have one quick follow up.

Kevin Dotts

Of the $3.9 million on the acquisition front, believing there's probably some payments from some prior period acquisitions that were made, as we weren't able to realize in the subscriber's base, and I'm thinking that was probably a mix of those narrowband premium, as well as some PeoplePC subscriber additions. Any recent acquisition activity that happened in this quarter, I think is primarily very small.

Gary Betty

It might have been 5,000 subs.

Kevin Dotts

Less than 5,000.

Jim Friedland - SG Cowen

The stock-based comp breakout?

Kevin Dotts

Stock-based, we're absorbing that all in one line within general and administrative expense.

Jim Friedland - SG Cowen

That makes it easy. Just on the change in the EBITDA guidance. Given your comments, I want to confirm that pretty much all the upside in the change in EBITDA is really not due to the New Edge acquisitions, since that's going to be breakeven. It's just due to the slower rollout with Covad so the marketing expense is going to be a bit lower?

Gary Betty

That's right.

Jim Friedland - SG Cowen

Great. Thanks a lot.

Gary Betty

We will take one more question.

Operator

Your next question comes from Bryan Goldberg.

Bryan Goldberg - Bear Stearns

Good morning. Just two quick questions. First, it looks like your proportionate share of HELIO losses in the first quarter was about half of what you were guiding to. I was wondering if you could comment on what was driving the variance there?

Gary Betty

Quickly, we're just a couple months behind what we originally thought we were going to do in terms of rolling out the handsets.

Bryan Goldberg - Bear Stearns

Going forward, as you add voice customers, from a reporting standpoint, should we expect to see those in the broadband subscriber category?

Kevin Dotts

They're showing up in broadband, voice is, at this point.

Bryan Goldberg - Bear Stearns

So of your 85,000 net adds for the first quarter, embedded in that number are 13,000 voice customers?

Kevin Dotts

8,000 of incremental adds.

Bryan Goldberg - Bear Stearns

Thank you.

Gary Betty

Thank you very much for joining us. We look forward to sharing with you our continued progress as we go through this exciting year.

Kevin Dotts

Thanks.

Operator

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

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