Vonage Holdings Corporation (NYSE:VG)
2013 Annual Stockholders' Meeting Conference Transcript
June 6, 2013 10:00 AM ET
Marc Lefar - Chief Executive Officer
Jeffrey Citron - Chairman
Mike Krupka - Lead Independent Director
Steve Fisher - Director
Jeffrey Misner - Independent Director
John Roberts - Independent Director
Morton David - Independent Director
Dr. David Nagel - Independent Director
Joe Redling - Independent Director
Peggy Smyth - Independent Director
Carl Sparks - Independent Director
Tom Thighe - Broadridge, Inspector of Elections
Leslie Arena - Vice President, Investor Relations
Pardon me this is the Operator and thank you for waiting. The Vonage Annual Meeting of Stockholders’ will now begin.
Good morning, ladies and gentlemen. I’m Marc Lefar, Chief Executive Officer of Vonage. It’s a pleasure to welcome you today. I now call the 2013 Annual Meeting of Stockholders of Vonage Holdings Corporation to order.
Like last year, format of this meeting is a virtual Annual Meeting of Stockholders. The audio bit of this meeting is being webcast and this webcast incorporates stockholder’ validation capabilities, which means a couple of things. First, any stockholder can vote in real-time during the meeting until the polls are closed and second, any stockholder can submit questions while the meeting is in progress.
We believe that virtually annual meeting extend access any of our stockholders anywhere in the world can attend this meeting. We also hope that the real-time voting ability will increase the level of voting participation. The polls to vote online are open now.
Please stay on after the formal part of the meeting is being adjourned as we will provide an update on our business and conduct the question-and-answer session if we receive any questions from stockholders.
With that said, I would like to begin by introducing the other directors that are present via webcast today. Jeffrey Citron, our Chairman; Mike Krupka; Steve Fisher; Jeffrey Misner; John Roberts; Morton David; Dr. David Nagel; Joe Redling; Peggy Smyth; and Carl Sparks. Members of our senior management team are also in attendance.
In addition, representatives of BDO USA, our independent registered public accounting firm are present today and will be available to answer any appropriate questions at the end of the meeting.
We will first attend the official business. As noted, following the formal part of today’s meeting we will report on the general business affairs of Vonage and we will then have a question-and-answer session during which stockholders may ask questions. We will not be taking questions during the formal part of the meeting.
Tom Thighe from Broadridge will serve as Inspector of Elections of the meeting and he has executed a customary oath that is available for inspection.
I have also received an affidavit from our transfer agent certifying that the notice of the annual meeting and proxy statement went -- were sent to all stockholders of record as of April 12, 2013. This affidavit is available for inspection by any stockholder along with the list of the record holders of our common stock as of the close of business on April 12, 2013.
The stockholder list was also open to examination at the company’s offices by any stockholder of the company during ordinary business hours for a period of at least 10 days prior to this meeting.
Mr. Inspector, will you please report the number of shares entitled to vote the meeting and the number of shares present here today in person or by proxy.
The stockholder ledger of the company shows that on the record date of April 12, 2013, they were 212,434,614 shares entitled to vote at the meeting. More than a majority of those shares are present in person or by proxy at this meeting.
Thank you. I hereby declare our quorum exists and the meeting is dually convened and open for business. The polls for each matter will open when that matter is call to a vote and will remain open until I announce that the polls are closed.
If you’ve already mailed in your proxy there is no need to vote via Internet because your proxy will be voted in a manner that you have directed. However, any stockholders who have submitted a proxy but wish to revoke their proxy or change their vote may do so by following instructions on the website.
First matter to be voted on is the election of three Class I Directors. The three nominees for election as Class I Directors are Mike Krupka; David Nagel and Peggy Smyth. No other persons have been nominated under the procedures required by our bylaws and explained in the proxy statement.
We will now proceed directly to a vote. Do I hear a motion that Mr. Krupka and Nagel, and Ms. Smyth be elected as Class I Directors of the company to serve until the 2016 Annual Meeting of Stockholders.
I so move.
I second the motion.
The matter is now called to a vote. The second matter to be voted on is the ratification of the election of Stephen Fisher to our Board of Directors. We will now proceed directly to a vote. Do I hear a motion that the election of Stephen Fisher to our Board of Directors be ratified?
I so move.
I second the motion.
The matter is now called to a vote. The third matter to be voted on is the ratification of the appointment of BDO USA as the company’s independent registered public accounting firm for the fiscal year ending December 31, 2013. We will now proceed directly to a vote. Do I hear a motion that the appointment of BDO USA LLP as the company’s independent registered public accounting firm for the fiscal year ending December 31, 2013 be ratified?
I so move.
I second the motion.
The matter is now called to a vote. The fourth matter to be voted on is the approval of the amendment and reinstatement of our 2006 Incentive Plan to increase the maximum number of shares available for issuance under the plan. We will now proceed directly to a vote. Do I hear a motion that the amendments and reinstatements of our 2006 Incentive Plan be approved?
I so move.
I second the motion.
The matter is now called to a vote. The fifth matter to be voted on is the ratification of the extension of our Tax Benefits Preservation Plan. We will now proceed directly to a vote. Do I hear a motion that the extension of our Tax Benefits Preservation Plan be ratified?
I so move.
I second the motion.
The matter is now called to a vote. This concludes the formal business items on the agenda for this meeting. The polls are now closed. Will the Inspector please tabulate the votes? We now have the preliminary report of the results of the meeting. Mr. Inspector, could you please read the results of the four motions?
I report that the stockholders elected, Mike Krupka, David Nagel and Peggy Smyth to serve as Class I Directors until the 2016 Annual Meeting of Stockholders. The stockholders ratified the election of Stephen Fisher to the Board of Directors. The stockholders ratify this election of BDO USA as Vonage’s independent registered public accounting firm for the fiscal year ending December 31, 2013. The stockholders approve the amendment and reinstatement of the 2006 Incentives Plan and the stockholder ratify the extension of the Tax Benefits Preservation Plan.
Thank you. While all the proposals are passed, I would like to acknowledge the opposition of some shareholders to proposal number four. The approval, the amendment and reinstatement of our 2006 Incentive Plan to increase the maximum number of shares available for issuance under the plan.
Vonage has committed to a compensation program that focuses our executives on key business objectives that create shareholder value. The company and the board plan to conduct a comprehensive review of our compensation program particularly with respect to equity compensation.
We appreciate the shareholder feedback that we have received and will carefully consider the views of our shareholders together with those of management and the compensation committee as we conduct our annual review of our compensation program and assess modifications to that program.
As there is no further business to come before the meeting, I would now like to adjourn the formal part of this meeting. Like to hear a motion to adjourn.
I so move.
I second the motion.
I declare the formal part of this meeting adjourned. We’ll now move to a discussion of our business results and outlook. As a matter of policy, I’d like to remind everyone of the Safe Harbor Statement which cautions investors regarding forward-looking statements we’re making in today’s presentation.
Over the past five years, we’ve fundamentally transformed the company, strategically, operationally and financially. These changes have resulted in an increase of $182 million in EBITDA and $214 million in free cash flow. Strategically, we shifted our primary focus to the rapidly growing but underserved ethnic segments in United States.
We were the first to deliver flat rate unlimited calling to more than 60 countries with the launch of our Vonage world plan and the first to provide easy-to-use enhanced product and features such as voice-to-text translations and mobile extension services at no extra costs. These strategic shifts have resulted in new customers with the higher life-time value and a better churn profile from those in the past.
Our focus on operations has resulted in a greatly improved cost structure. Since 2008, we have reduced network and domestic termination cost by 63% and reduced international long-distance termination rates by 30%. In addition, we’ve dramatically reduced customer care cost per line resulting in $50 million in annual savings.
We have also significantly improved our balance sheet. With three refinancings, we have achieved $43 million in annual interest expense savings and reduced the interest rate on our debt from a high of 20% to less than 4% today. As a result, we’ve greatly increased our free cash flow.
Our team has also handled the spirit of innovation. It is our heritage. In 2012, the U.S Patent Office ordered Vonage seven new patents and we filed 59 patent applications, 21 of which are mobile related. We now have 24 U.S. patents, 51 foreign patents and 257 pending patent applications. With our business stabilized, we entered 2012 with a plan to meaningfully increase the level of investments in our strategic growth priorities while continuing to profitably manage our core business.
For the year, we delivered solid financial and operating results, and achieved key milestones in each of our three strategic growth priorities. We generated $135 million in adjusted EBITDA after investing in growth priorities and $93 million in free cash flow on revenue which declined a modest 2% from the prior year.
We continue to drive meaningful savings in customer care costs per line down 7% from the prior year and we lowered monthly customer churn by 30 basis points from 2.8% in the first quarter to 2.5% at the end of the year. A level was maintained in each of the last four quarters.
We also reduced the total cost of telephony services by 2%, even as we absorbed a 12% increase in the use of international minutes. We see additional opportunities to reduce cost in the future.
We’re encouraged by the FCC’s recent notice of proposed rulemaking to allow VoIP providers to have direct access to their own telephone numbers and we are appreciative of the FCC’s grants to Vonage of a numbering trial to be conducted concurrently with the rulemaking. If the proposed rules are adopted, they will enable potential long-term structural cost savings in the double-digit millions of dollars in the subsequent two to three years.
Last month we signed a strategic long-term international call termination agreement with a leading provider to secure attractive rates to India and other international destinations. This agreement is expected to result in improved operating efficiency and reduced cost structure.
We continue to focus our efforts on driving revenue in three major areas. The first is expansion of our core premium business in international long distance under the Vonage brand, while driving market share in the low-end domestic market with our new flanker brand, BasicTalk, the second is international expansion outside of North America through strategic partnerships and the third area of focus is mobile services.
During 2012 we continue to strengthen our customer base as we increase the percentage of international long distance callers to 40%, targeting the substantial market opportunities for customers calling Mexico and Southeast Asia. We were the first providers to offer unlimited calling to mobile phones in both Mexico and South Korea. We’ve also seen solid growth among customers calling to Philippines as part of our partnership with Globe telecom.
Let me now spend a few minutes talking about our new flanker brand, BasicTalk. BasicTalk is a low-priced home phone service with unlimited calling throughout the U.S. for flat rate of $9.99 a month. It includes the basic features of voicemail, caller ID and call waiting with no upfront cost and no contract.
With 40 million broadband enabled households that have existing home phone service with broadband but only called domestically, this ultra price sensitive market represents a substantial incremental opportunity for the company.
In multiple market tests customers cited many reasons for purchasing BasicTalk, including poor in-home cell coverage and the convenience of having shared home phone extensions.
In mid-May, we launched BasicTalk nationally and early results are strong. We anticipate that it will be a meaningful contributor gross line additions and revenue overtime. An important element in the national expansion of BasicTalk is our exclusive relationship with Wal-Mart.
BasicTalk is sold in Wal-Mart nationwide across more than 3,500 locations and is currently supported with substantial incremental merchandising and freestanding displays in more than 1,500 of those stores. Both online and retail distributions are running smoothly, with complete merchandising in Wal-Mart to be completed in the coming weeks. Online chat and emails are working effectively to answer customer questions and resolve issues, virtually eliminating the need to call live cell support or customer care.
The growing global communications market represents an important opportunity first to expand our geographic footprint. In the past 12 months, we’ve signed two new partnerships and on active discussion with prospective partners to enter other markets, our first partnership which we announced last July was with Globe in the Philippines and delivers low-cost calling to customers calling from the U.S. to the Philippines.
In February of this year, we announced our second partnership, a joint venture with Brazilian-based Datora Telecom. Brazil is an attractive opportunity for several reasons. The market is large and rapidly growing with $20 million of the country’s $67 million households already connect with broadband.
The government is committed to expanding broadband access in advance of the 2014 World Cup and 2016 Olympics. As a result, broadband penetration is expected to double over the next two years. Brazil is home to more than a million experts and has a vibrant small-business community. These factors combine to provide a highly favorable set of conditions for Vonage to drive penetration in a marketplace that is dominated by relatively high-priced service providers.
Four months after announcing this venture, we are making progress building the foundation to deliver services. We expect to launch the service commercially at the end of the year or in early 2014. And we are optimistic about the opportunity to drive meaningful revenue through this partnership.
Mobile is central to all we do. It built the product for our U.S.-based international long distance calling customers and a platform over which we can serve the global communications market. We continue to make great strides improving the quality, capabilities and appeal the Vonage mobile app launched in early 2012. With our recent launch of video calling, we have brought together the most popular features of mobile communications into one simple high quality multi functional app.
Vonage Mobile now has a level of completeness and quality is unsurpassed by any other communications app in the market. Vonage Mobile users can communicate with each other in whatever manner they choose, voice, video or messaging.
And unlike some other apps, the Vonage app uses the existing mobile identity and contact list, and with Vonage users can also make calls to phones without the app at international calling rates that are 70% to 80% less than major mobile carriers and on average 30% less than Skype.
We’ve seen a positive response to our quality improvements and feature additions. The app has received 4.5 stars in the iTunes App Store and 4.2 stars in Google Play, and the average length of video calls is very high suggesting very good call quality.
In the coming months, we expect to incorporate our international roaming feature, Reach We Roaming into Vonage Mobile with a commercial launch in Western Europe and North America.
Our Mobile Extension Service continues to be widely popular. More than 700,000 of our customers are realizing increased value and convenience from this feature, which extends to meet the benefits of our service including low-cost international calling, beyond the walls of the home to any other phone including mobiles.
As a result, 26% of our international calls now originate from a mobile phone. The successive of extensions also reinforces the importance of continued integration of our traditional business with a highly flexible and scalable mobile platform.
Our Vonage Global Phone Card, a digital calling card for mobile phones leverages the same platform and provides an additional path to penetrate the international calling market.
Later this year, we plan to expand the Global Phone Card service to include physical calling cards sold at retail locations that we can serve customers who prefer to pay in cash.
Reflecting our continued belief the buybacks can be an effective use of capital to create shareholder value. In February of 2013, our Board of Directors authorized a new $100 million share repurchase program to be concluded by the end of 2014. The $100 million buyback replaces the initial $50 million buyback announced last August. This beginning our repurchase program to the first quarter of 2013, we repurchased a total of 18 million shares of stock for $44 million and the price has responded positively, increasing by approximately 50%.
In summary, while we have much work ahead of us, I’m optimistic about the potential the markets we are pursuing and confident of the ability of our people to realize our vision to become a leading provider of communications services.
I want to close by expressing my appreciation to all of our employees for their hard work and dedication executing on our strategy. To our shareholders, thank you for your ongoing support and your trust. Vonage remains focused on creating greater value for you and our customers.
Now I'll pass the call to Leslie Arena, our Vice President of Investor Relations to initiate the Q&A session.
Thank you, Marc. At this point we will take question from our shareholders. Shareholders may submit your questions online. I remind you of the rules of conduct that are provided on the website. I see no question operator. Thank you very for your participation today.
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