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Executives

Leslie Arena - VP, IR

Marc Lefar - CEO

Dave Pearson - CFO

Jerry Maloney - Controller

Analysts

Bill Dezellem - Titan Capital

Doug Lane - Citi Investments

Matt Sherwood - Cooper Creek Partners

Brian Horey - Aurelian Management

David Canon - Aegis Capital

Robert Routh - National Alliance

Vonage Holdings Corporation (VG) Q2 2013 Earnings Call July 31, 2013 10:00 AM ET

Operator

Good day everyone, and welcome to the Vonage Holdings Corporation Second Quarter 2013 Earnings Conference Call. Just as a reminder, today's call is being recorded. At this time, for opening remarks and introductions, I would like to turn the conference over to Ms. Leslie Arena, Vice President of Investor Relations. Please go ahead Ms. Arena.

Leslie Arena

Thank you. Good morning and welcome to our second quarter 2013 earnings conference call. Speaking on our call this morning will be Marc Lefar, Chief Executive Officer, and Dave Pearson, CFO. Marc will discuss the company’s strategy and progress and Dave will review our financial results. Slides that accompany Dave’s discussion are available on the IR website. At the conclusion of our prepared remarks, we will be happy to take your question.

As referenced on slide two, I would like to remind everyone that statements made during this call may be forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These and all forward-looking statements are based on management's expectations and depend on assumptions that maybe incorrect or imprecise. Such forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially.

More information about those risks and uncertainties is highlighted on the second page of the slides and contained in our SEC filings. We caution listeners not to rely unduly on these statements and disclaim any intent or obligation to update them. During this call, we will be referring to non-GAAP measures. A reconciliation to GAAP is available on the IR website.

And now, I will turn the call over to Marc.

Marc Lefar

Thank you, Leslie. Good morning everyone and thank you for joining on the call today.

We reported a solid second quarter with positive net line additions and our lowest level of churns in 2010. Executing on our growth priorities we achieved a number of milestones. First and perhaps the most significant we successfully launched the BasicTalk flanker nationally in the latter half of May. Second, we made meaningful progress building the foundation for our communication business in Brazil. Third, we grew the number of downloads and active customers on the Vonage mobile app and Vonage Extensions with the help of major feature enhancements in each applications. And lastly, we enhanced our new global digital calling card.

A reflection of our stable core business, steadfast focus on cost efficiencies and our planned investments in growth, we generated $27 million in EBITDA squarely inline with the guidance we provided last quarter. This includes the impact to planned investments to build awareness and fund merchandizing for the national launch of BasicTalk. We also continued to execute on the stock repurchase and bought back 5 million shares in the quarter.

With that as an overview, I'll now discuss our results in more detail. Net line additions in the quarter were positive reversing the recent trend. This improvement reflects the combination of higher sequential gross line addition due to the late May launch of BasicTalk and a 10 basis point decline in churn sequentially and from the prior year. These factors resulted in an improvement of 15,000 from the prior quarter as we finished 3,000 positive net lines.

Revenue in the quarter declined by 2% sequentially due to lower Universal Service Fund fees a pass-through with no EBITDA impact, and the carry over effect of line losses from prior quarters. Churn has been an important good new story for us, and this quarter was no different as churn declined to 2.4%, a result of attractive value proposition and high quality of service. We've now reported churn of 2.5% or lower for five consecutive quarters, concrete evidence of the stability of our customer base.

Although the third quarter typically shows a modest up tick in the non-pay component of churn, we expect churn to remain stable in the mid 2% range. During the quarter, we also continued to execute well against our multi-year structural cost savings initiatives. We reduced customer care cost per line by 17% and cost of telephony services by 8% in the prior year. This is the fifth consecutive quarter of reduction to customer care cost per line.

This improvement was accomplished while simultaneously improving all major customer care metrics. First call resolution increased to an all time high of 79.6%, average handle time declined by 6% from a year ago and contact rate, which measures the average number of times per year a customer contacts us, declined by 5%.

We see further opportunities to reduce costs through negotiations with key partners like the long term call termination agreement we recently with Tata and by gaining direct access to telephone numbers, and we will continue to our long term efforts to lower customer care cost, to improve self-service and by addressing some of the root causes that continue to drive call volume into our care centers. Simply stated, the core business is stable and generates substantial cash enabling us to fund the investments in our growth initiatives while we also return value to shareholders through the buyback.

Let me briefly discuss our progress in each of the areas we are targeting for growth. Since launching BasicTalk in May, we have now deployed in all of Wal-Mart's 3700 stores nationwide and our web sales and service experiences are running smoothly. Early results are strong and consumer feedback has been very positive with consistent comments about good call quality and ease of set up and use.

Our post launch research involving 2200 BasicTalk subscribers is also enlightening. Customers cited four principal reasons for purchasing BasicTalk. One, core and home cell coverage; two, the added security of always having a phone within reach; three, the convenience of having multiple home phone extensions; and four, the low price. Many buyers view BasicTalk as a complement to their cell phone. Perhaps most encouraging is the fact that 42% of all buyers said they did not have home phone service from another provided at the time they signed up for BasicTalk. Many chord cutters were simply not satisfied with cell-only service, and they're coming back. The remaining 58% of purchases, half of them reported that they left a bundle to buy BasicTalk.

In addition, we've been very pleased with the success of our self-service portal. The number of calls into customer care has been low, reinforcing our confidence in the post acquisition profitability of this segment.

As I've discussed previously, we are carefully monitoring the risk cannibalization of the Vonage base by BasicTalk, and we're pleased that so far customer migrations at the very low end of what we forecast based on our market test. Although the establishment of a new brand does require upfront marketing investments to build awareness and drive traffic, our test markets prove that this is a far better strategic approach than one that would create significant ARPU risk by launching under the Vonage brand. While it is still early, cohort analysis from our test market customers and recent purchases suggest a churn on the BasicTalk customer will be below 2%.

Given the size of the opportunity, strong consumer reaction and limited migration, we plan to continue to invest and to build the BasicTalk brand and subscriber base. We expect to spend several million incremental dollars in the third quarter to support this effort.

While the launch related cost contributed to higher subscriber line acquisition cost in the second quarter, we expect these costs to decline over time. We anticipate that BasicTalk will ultimately grow to be a meaningful contributor to gross line additions and revenue. At the same time, our flagship Vonage World product continues to provide strong value to international long distance callers. Our patented Extension service has successfully extended its value to mobile. Today, 29% of our international calls are made on the mobile phone, up from 18% one year ago.

There were some bright spots for the Vonage World business as well as some challenges. In June, we launched a new national advertising campaign Crazy Generous. The campaign features a new character, Vonage's Chief Generosity Officer who is endearing, authentic and memorable. It gives a passion for providing, innovative, affordable and generous communication options to our customers in an industry with a reputation for doing exactly the opposite. Consumer reaction, especially among international callers have been positive. Our research has shown significant increases in willingness to consider Vonage for their next home phone service and an overall preference for Vonage among all providers being considered.

While we're encouraged by the initial response to the new campaign, we do continue to see persistent decline in the efficiency of television media and direct mail. We're aggressively testing new media approaches and formats to drive cost effective lead generation.

Retail sales in big box and regional stores were strong, posting a 18% increase in gross line additions before accounting for the impact of BasicTalk. This gain reflects continued strength in our assisted selling program.

As of the end of June, we provided assisted sales in 600 stores, up from 490 at the end of the first quarter. This represents the eight consecutive quarter of growth in retail. In addition, the performance of our community sales teams grew by 9% sequentially and continues to be a cost effective channel to reach ethnic segments.

As we look for the remainder of the year in 2014, we expect to reduce our marketing investment in television media and direct mail, and increase our use of digital media and search to more effectively target international calling segments.

Let me now discuss our progress building our business in Brazil. In the past 12 weeks, we formally established the joint venture legal entity, secured headquarters facility and successfully hired key executives to operate the venture, including our Managing Director and heads of technology and operations. We also received certification of our device from Anatel, the Brazilian National Telecommunications Agency and solidified our solutions and operation plans and delivery timelines.

Technical development is currently underway on systems and engineering elements of the business. Testing of the network components will commence in the third quarter to be followed by testing of the business operations components before year-end. We expect to complete testing of financial and regulatory elements of platform and final integration by the end of the first quarter of 2014 with a full featured launch to follow shortly thereafter.

Our conviction remains strong that Brazil presents a substantial opportunity for growth due to its large and dynamic market, increasing penetration of broadband and relatively high priced service providers. In addition to Brazil, we're in active discussion with other prospective international partners in additional target geographies.

Turning to mobile, the recent addition of video to the mobile app and the addition Wi-Fi calling to Vonage Extensions have accelerated both downloads and usage. The standalone Vonage mobile app now provides one of the most broadly functional over the top app in the market. And competitive product testing suggests that our quality is unsurpassed.

Customer response to the addition of video has been positive with average daily downloads increasing by 33% since the feature launched. Video calls on Android and iOS phones are now 25% and 12% wall and net calls respectively.

We continue to see a positive response to our quality improvements and feature additions. The app is highly rated receiving 4.5 starts in the iTunes app store and 4.2 stars in Google Play. The number of downloads, active users and revenues continues to grow. Although we're behind our original internal expectations for the standalone mobile app, we're encouraged the downloads, usage and number of paying customers accelerated during the quarter. Our product roadmap is robust and we expect that new services that leverage our core platform will further differentiate us and drive growth in the future.

Use of our Extensions mobile service continues to grow rapidly. Currently, 85% of our international callers have an Extension, and 76% have used the service in the last 90 days. Extensions is clearly delivering value to our subscribers and making them stickier, contributing to the stability of our international calling base.

Our Vonage Global phone card, a digital calling card for mobile phones, provides an additional path to penetrate the international calling market. In the second quarter, we improved our service to integrate direct web purchases with Vonage mobile providing a seamless smartphone experienced without the commissions charged by app stores. This has also allowed us to price more aggressively and to invest in targeted search engine marketing programs to meet the needs of light and medium use international callers who prefer a pay-per-minute pricing.

In the future, we plan to expand the global phone card service to include physical cards sold at retail locations.

Finally, we continue to make progress towards a commercial launch of our international roaming feature Reach Me Roaming, which is scheduled for later this year in the US. This feature allows users to save on high cost roaming fees when traveling internationally.

Our commitment to protect our valuable intellectual property has intensified in the past year. This is reflected in the strong progress we've made to grow our pat portfolio. So far in 2013, we have filed 63 patent applications and have already been granted 9, eclipsing our performance for all of last year. We now have 27 US patents, 52 foreign patents and 284 pending application.

During the second quarter, we continue to executive on our balanced approach to capital allocation. We repurchased 5 million shares for $13 million and remain on track to complete our $100 buyback by the end of 2014. In addition, we just closed on an amendment to our bank facility in the past week. This gives us even greater flexibility to repurchase stock. Dave will discuss this in greater detail in a few moments.

In summary, this is a solid quarter. We reduced churn to the lowest level at headquarters, increased gross line additions and grew net subscriber lines. Our customer base is stable and our cost structure continues to improve. As I've reinforced, revenue growth remains our top priority and we're executing upon our plans to grow the top line.

Consistent with our prior guidance we continue to expect positive net line addition for the third quarter. We expect to invest several million dollars above second quarter levels to continue to grow awareness, drive traffic and provide merchandising support on the BasicTalk brand. Our investment shift from primarily six launch costs which comprise a large portion of second quarter spend to a mix of fixed and variable costs allowing us to ramp on investment up or down depending upon the level of our success.

We will continue to exercise financial discipline and will continue to accelerate or moderate spending based upon our progress. Consistent with the level of prior quarter commitments we will continue to invest in international expansion and mobile development activities.

With that, I'll pass the call to Dave.

Dave Pearson

Thanks, Marc, and good morning everyone. I'm pleased to review our financial results and provide you with an update on our outlook. Beginning on Slide 3 we reported $27 million in adjusted EBITDA, down $7 million in the first quarter, down $8 million year over year. The changes are primarily due to our investment in the nationwide launch of BasicTalk.

Cash flow generated from our core business prior to investments on BasicTalk, Brazil and mobile remained strong reflecting the stability of our customer base and improvements in our cost structure.

Moving to Slide 4, net income excluding adjustments was $12 million or $0.06 per share, down sequentially from $21 million or $0.10 per share and down also from $21 million or $0.09 per share in the year ago quarter. As with EBITDA these numbers reflect our planned investments in growth priorities.

GAAP net income was $7 million or $0.04 per share, down from $13 million or $0.06 per share sequentially. GAAP net income was up from a loss of $3 million or $0.01 per share in the year ago quarter. Note that the year ago quarter included one time non-cash adjustment in connection with the abandonment of certain software assets.

Moving to Slide 5, revenue was $205 million down sequentially from $209 million primarily due to the non-operational impact of lower universal service funds for USF fees, lower subscriber addition in prior period and retention activities. These impacts were partially offset by selective pricing actions taken in late 2012.

Revenue declined from $212 million a year ago due to the same factors with USF which is a pass-through contributing $3 million of the decline. ARPU was $29.06, down from $29.61 sequentially and $29.98 in the prior year quarter primarily due to lower USF and rate plan mix, which includes the impact of incremental volume behind the new BasicTalk plan.

Moving to Slide 6, we continue to reduce our cost structure by implementing efficiencies and structural cost improvement in key areas of our business. In the second quarter, were reduced our cost to $54million driven by a lower domestic and international termination costs and interconnect expenses as well as the decline in USF fees. This is a reduction of $1 million over the prior quarter and nearly $5 million over the prior year. Importantly, the year over year reductions in COTS more than offset the effect of customer plan changes in ARPU resulting in an improvement in direct margins 69% from 68%. COTS per line was $7.60, reduced from $7.82 sequentially and from $8.23 in the second quarter of last year.

In addition to the cost reductions, we have already realized our recent termination agreement with Tata and potential savings from gaining direct access to telephone numbers both provide a meaningful path to reduce our cost structure going forward. Under the agreement, Tata provides international call terminations for portions of our traffic to India, Canada, and rest of the world. With access to some of the lowest termination rates available we are well-positioned to continue to provide highly competitive offers to nearly any international calling destination. And we continue to be encouraged by the FTC recent notice to propose rule making to allow VoIP providers like Vonage to have direct access to their own telephone numbers.

As a reminder, in April, the FTC granted Vonage approval to conduct numbering trial concurrent with the rule making. Trial is progressing well. If the proposed rules are adopted that will facilitate the shift to direct IP to IP inter connection and enable long term structural cost savings in the double digit millions of dollars in the subsequent two to three years.

Moving to Slide 7, selling, general and administrative expense $61 million, down $2 million sequentially due to the one time benefit from the favorable resolution of an insurance claim as well as from continued reductions in the cost of customer care per line which declined by 17% year over year, the lowest level in company history.

SG&A was up $3 million from the year ago quarter due to higher selling expense as we expanded our retail and community sales teams, partially offset by lower G&A.

Moving to Slide 8. Marketing expense was $58 million, up from $52 million sequentially and $55 million a year ago reflecting planned investment for the nationwide launch of BasicTalk. Subscriber line acquisition cost was flat, increased to $357 from $349 sequentially and $336 a year ago as a significant course and of the launch cost were fixed in nature and not variable with customer acquisition, as Marc mentioned.

Turning to slide 9. Gross line additions or GLA were 155,000, up from 148,000 sequentially benefiting from a partial quarter of BasicTalk line additions, down from 163,000 in the prior year's quarter. Churn results were strong as we decreased churn to 2.4% from 2.5% sequentially and in the prior year's period. Higher gross line additions combined with lower sequential churn was open in a gain of 3,000 net line additions in the quarter.

We will now move to a discussion of CapEx, cash flow and the balance sheet on Slide 10. For the quarter CapEx, including the acquisition in developmental software assets, was $8 million, which was primarily for network infrastructure and systems improvements. This is up from $4 million sequentially and in the year ago quarter. We are updating our full-year 2013 CapEx guidance to be no greater than $30 million from the prior in the range of $30 million to $35 million due to greater visibility on expenditures for the remainder of the year.

Free cash flow in the second quarter was $11 million, increasing from $5 million sequentially reflecting seasonality in working capital to the timing of payment. Free cash flow was down from $25 million in the year ago quarter due primarily the lower EBITDA and higher CapEx.

Reflecting the strength of our core business cash flow generation, cash and cash equivalents as of June 30 were $103 million, including $4 million in restricted cash. We ended the quarter with a strong balance sheet reflected in total leverage to adjusted EBITDA of 0.6 times with net cash of $26 million.

We are executing on our $100 million stock repurchase plan which was authorized in February and replaced our prior $50 million program. During the second quarter, we repurchased a total of 5 million shares for $13 million. At the end of the second quarter we had repurchase the total of 23 million shares for $58 million since launching our program in August of 2012.

In the past week, we obtained an amendment to our credit facility that increases our restricted payments amount from $50 million to $80 million. This amendment gives the flexibility to buyback up to $80 million stock in any 12 months period for the relevant covenants test as applied to repurchase additional amount as and if allowed within our covenant calculations.

In addition to continuing with our buyback program, we will also evaluate additional opportunities for growth organic and inorganic, including in mobile, international and adjacent markets. With our strong balance sheet, cash flow generation and $75 million revolving credit facility, we believe we have sufficient capacity to pursue compelling inorganic growth opportunities where there is strategic fit.

In summary, we are well-positioned to execute our balance approach to capital allocation. We will continue to invest for long-term growth and international expansion and mobile, consistent with the level of prior quarter investments, and plan to spend an incremental several million dollar above second quarter level to build the basic top brand and customer base. Thank you for your interest in Vonage.

I will not turn the call back over to Leslie to initiate Q&A session.

Leslie Arena

Thank you Dave. Operator, please open the line for questions.

Question-and-Answer Session

Operator

(Operator Instructions). And one moment for our first question.

Our first question will come from the line of Bill Dezellem of Titan Capital. Your line is open, please go ahead.

Bill Dezellem - Titan Capital

Thank you. I would like to start with CapEx. You mentioned that you were lowering that number simply because you have more clarity. Is that simply an estimating function that you are talking about having clarity or have you actually changed the some of the planned investment?

Dave Pearson

That is an estimating function. We have not changed our investments. It's up in the second quarter based on the timing of some projects that we have done and you can long planned. And the $30 million is really about the greater visibility for the remainder of the year we have not. We have not changed our outlook or the projects that we are pursuing.

Bill Dezellem - Titan Capital

Thank you. And then, secondarily you referenced the incremental multimillions of investment for BasicTalk. Would you quantified at further may be put some number behind it please?

Dave Pearson

Sure. We talked about several million and I think that is the right way to think about it. We guided in the last quarter that we would spend $5 million to $7 million on BasicTalk in that quarter and $5 million to $10 million on other growth initiatives. In total, we are spending on mobile and international, spending on BasicTalk and the incremental amount on BasicTalk that we referenced would still be in that range if we have those numbers up, if we have that prior guidance up in a per quarter basis.

Marc Lefar

This is Marc. We are not going to give specific numbers because that is going to vary from week to week based upon the productivity of our channels. In addition to the heavy advertising to build initial awareness of a new brand which is required and we want to continue to build that awareness and track that weekly. We will be doing a number of variable based programs like direct mail in high traffic Wal-Mart locations, much more digital activity now that we have created some awareness to the brand. All those things will vary based upon the actual throughput. So that's about the best we can give to you. What we shared is, previously we do look at these things on what was required to get launch, what's the ongoing sustain profitability and what kind of MPV we do need to make this a smart investment over time.

Churn rates are good. We see virtually zero cannibalization of the Vonage core brand. That is an extremely important point as folks understand the ARPU story. We have seen virtually zero cannibalization of the base. So, you think about that as incremental dollars or revenue on the core business, an area we really was not competing before at all. And yet, it will have an impact on service ARPU as you blend that into the mix.

When you look at total revenue and say hey guys, how come you are not moving that faster, that's because of the key motive impact of net line losses which -- it is history, it is the fact we do not like it but that is what was there. And you have the net BasicTalk of that. And that impact of loosing prior period net lines at the Vonage World case rate, that is what is driving your total service revenue numbers.

I will offer to you the notes that we expect the second half of the year total revenues to exceed first half total revenues as we get the benefit of that BasicTalk and then positive net adds in the balance of the period.

Leslie Arena

Next question, operator?

Operator

Our next question is comes from the line of Doug Lane of Citi Investments. Your line is open, please go ahead.

Doug Lane - Citi Investments

Thanks for taking the question. My first question is how much of the sequential churn improvement and the increase in gross adds was attributable both to the BasicTalk launch in the quarter, and secondly if you can provide us an update on the competitive environment from a pricing perspective for the core home replacement service excluding BasicTalk?

Marc Lefar

Sure, I'll take that one. This is Marc. So, churn improvement would actually cross the board on our core business, very little of that was affected by BasicTalk just because the apps with numbers relative to our total customer base was still relatively small. So, even though BasicTalk is lower than the average you're not going to see an averaging in benefit of that for some period of time. So, the 10 basis points was core and reflected improvements in virtually all of our segments both ethnic, international callers, as well as domestic.

On the second question relative to competitive situation, we only seek competitive pressure. We've seen continued stability in bundles. We've seen since the beginning of the year and was probably just continuation of the second quarter strong competition both from cable companies as well as the telcos providing large amounts of gift cards but there's not been a significant acceleration in the second quarter from the big telephone cable companies.

We do see sporadic promotions from some of these smaller ethnic targeted international long distance companies pretty tactical respond to those high segment as necessary. That does have some impact as we protect those customers when they call to suggest that they can get better rates, we managed that very proactively in our retention centers. That does and Dave mentioned have some impacts on ARPU period over period because the value of those customers once acquired the contribution margin is high, we want to keep them even if it means re-rating them to lower rate plans as necessary to match what competition is delivering, so you see some of that in our service ARPU rate decline as well as USF. So that's kind of a high level, but I'll mention also on the competitive front it does appear that BasicTalk is hurting other lower end competitors.

Well, we got a slower start than we would have liked. We launched advertising in mid to late May and took us longer than we expected actually to get a hold of our merchandising through the Wal-Mart distribution channel, so that continues to accelerate for us. But we saw within two weeks of launch both magicJack take competitive action in terms of a major price rollback and what most folks may not realize is their pricing in Wal-Mart not only rolled back the price but extended the time for which you get service under that $49 up to 12 months from six. They took a very large price decline to try to protect business, so we know we're taking a chunk out of them. We've also seen some advertising from other low end competitors. That said, we're pleased with our BasicTalk progress and continue to support that brand and we're seeing very positive results from customers that have signed up.

Leslie Arena

Okay. Next question, operator?

Operator

Our next question comes from the line of Matt Sherwood of Cooper Creek Partners. Your line is open. Please go ahead.

Matt Sherwood - Cooper Creek Partners

Hi, guys. Congrats on a good quarter on the ad side and the churn side. Just have a quick question for you. If add a 157, 000-ish adds to the quarter but BasicTalk is really only one month of the quarter, does that mean that hey, you were like running at 148,000 run rate for the first two months and you're out like a $175,000 of the June month? Was there a material acceleration in ads as the quarter progressed?

Marc Lefar

It's a good question, Matt. We're not going to provide specific numbers in the case of week by week and kind of forecast but your basic thinking that says, hey, you got a run rate of your core Vonage business that seems pretty stable and you've launched BasicTalk late in the quarter, shouldn’t you get benefit from a longer period of time as you move forward, the answer is yes, of course. There's clearly a ramp to BasicTalk, the last couple of weeks are much stronger than the initial weeks that you're ramping distribution, so you definitely see that.

One thing that you should keep in mind, however, is that prior to the most recent quarter we were running BasicTalk direct marketing programs nationally under the Vonage brand. So that was in that run rate we ramped that down in the second quarter as a national launch occurred but what we are doing for those who were not in previous calls with us is we were testing this with people who had already quit Vonage for one reason not that we know who they are, we remarketed to them on the Vonage BasicTalk service and we also ramped for those people who had incomplete sales, people that we had through digital tracking or in down telemarketing who are unable to close the sale on a higher end rate plans in the past. And we've been doing this as part of our test markets for an extended period of time.

So, we do have, what I would say is not immaterial compared to the May-June timeframe, run rate BasicTalk that was also in that base and funded out of the core budgets. So, I just caution you as you start doing your multiplier effects and trying to forecast GLAs to keep that historical run rate in mind, but we do expect there'll be a fourth quarter of GLA BasicTalk, in the next quarter we expect it to be larger than was certainly all things in Q2, and we do expect that ad and reaffirm that guidance from last week before the third and fourth quarters.

Matt Sherwood - Cooper Creek Partners

Right, but you're not going to help us with sort of improvements in July or how the quarter progressed?

Marc Lefar

No, I'm not. The competitive environment and distribution certainty along I think has too much variability for me to try to give you a specific numbers other than say the direction is up.

Matt Sherwood - Cooper Creek Partners

Okay, fair enough. I guess, second, you usually give your amount of investment spend on the new initiatives plus I guess in this case BasicTalk for the quarter in aggregate I didn't see that in the press release.

Dave Pearson

That's right. I think in the first question I referenced the fact that its going to fall within the guidance in the third quarter that we gave for the second quarter. And the second quarter also fell within that guidance if you think about the two buckets of the 5 to 10 of mobile and international and the 5 to 7 in BasicTalk.

Marc Lefar

Maybe to add a little more perspective on that, I think we talked about $6 million of investments last quarter and that last quarter was lion share related to mobile international. We did not significantly shift mobile international spending, yet some ups and downs, and the remainder of that spend which you actually fall through in EBITDA quarter over quarter is the BasicTalk launch.

Matt Sherwood - Cooper Creek Partners

Fair enough, that's helpful. Okay, then I guess number three, share repurchase you got a covenant waiver that will allow you to repurchase shares much faster. Is that an indication that that could be something you're interested in or did you just get it to give you maximum flexibility?

Marc Lefar

This is Marc. I will take the tail end of that. It is just responsible management to give us the maximum flexibility. We saw an opportunity, we got a good partners in our bankers and we're able to do this for very, very little cost. We thought it was a good opportunity to give an opportunity to plan for the future and deal with whatever situation might arise.

Matt Sherwood - Cooper Creek Partners

I mean, because if you're about to materially accelerate your ad profile with BasicTalk and then Brazil coming up might be a good time to sort of accelerate the share repurchase plan.

Dave Pearson

Yeah, I think the way we think about it is we certainly have that flexibility, I think we already have that flexibility. Now, we don't really have to, up to a certain point, focus on the covenant as we make decisions and judgments about the buyback. So, it's a very good tool and we expect to continue the program in each quarter, adjust the program based on a variety of factors including market conditions.

Matt Sherwood - Cooper Creek Partners

Okay, fair enough. And then I guess final question on Brazil, now that you have a lot of these approvals that you didn't have before, is there any update and more clarity on launch timeline?

Marc Lefar

Well, I'll repeat what I shared in my opening comments. We got a quarter by quarter plan that gets us through all of our testing by the late in the first quarter which includes final integration testing. We'll have a number of key milestones before that that will friendly user testing to make sure that operationally things are working, and we expect very late first quarter early second quarter for a full feature complete launch.

Leslie Arena

Okay. We'll move to the next question, operator?

Operator

Thank you. Our next question is from the line of Brian Horey of Aurelian Management. Your line is open, please go ahead.

Brian Horey - Aurelian Management

First, just wanted to little housekeeping. You said the lines added from the retail assisted selling were up 18%, is that correct? Did I hear that correctly?

Marc Lefar

What I said was retail sales in what would be big box or mass merchants and regional stores were 18% up separate from BasicTalk. It did not include the impact of BasicTalk.

Brian Horey - Aurelian Management

Okay, so 18% of the total adds.

Marc Lefar

For that channel, for retail, mass merchants and regional stores, yes, the physical bricks and mortar retail stores.

Brian Horey - Aurelian Management

Okay, got it. You also gave a set on the community sales. Can you repeat that as well, community sales teams?

Marc Lefar

Yeah, the community sales teams grew by 9% sequentially, and we continued to increase staffing in those areas, so continued to increase productivity and would expect that number to increase as well. And this reflects a long term over the past really five, six quarters shift to move to more variable cost, direct selling model particularly into ethnic communities or in stores where we can see ethnic communities and engage them for the value proposition and shift our spending away from what is now a more cluttered and more expensive television media environment. So, we're moving to more targeted vehicles which is digital when you think about buying as well as the ability to actually put people in front of our customers and engage selling there if (inaudible) helps us target those customer base a little bit more cost effectively and it variablizes our costs.

Brian Horey - Aurelian Management

Okay. And that's the number of teams and not the number of lines added through that channel, is that -- just to be clear, right?

Marc Lefar

Well, I didn't mention the number of teams, so let me be clear. The 9% was actually the gross line additions generated by our community sales teams.

Brian Horey - Aurelian Management

Okay, got it. And then, just trying to think about the difference impact on line additions outside of that. Would you say that the BasicTalk adds were able to offset the impact of the declining efficiency that you referenced in TV and direct mail and kind of the -- some of the more traditional channels that you used for the core offering?

Marc Lefar

Yeah, I will probably rephrase it a little bit in that BasicTalk as a long-term growth drive, where we feel a lot of confidence then and this is going to help us to deliver that net ads, positive net ads and total top-line revenue growth as a over time, that is going to be a major contributor for us. Relative to the -- digital offset obviously, our selling and acquisition cost is up on a per line basis to reflecting what is upfront more than kind of a normal per GLA rate. We have to invest in advertising reasonably heavily to build awareness and drive traffic into retail stores and online. So, your overall subscriber line acquisition cost was higher, which means that by definition it is not completely offsetting but it also suggest to you that that number over time will come down significantly. The reason why it is so high was because of the upfront investment on BasicTalk.

Brian Horey - Aurelian Management

Right. I understand that. I was just trying to get out the number of lines added as opposed to the cost, whether the volume of ads from BasicTalk was enough to offset the weakness in the core product through the traditional marketing needs?

Marc Lefar

Yeah. So I think, it is way to think about it is, there is little bit of softness. And obviously, with the increase in total net line ads, I think by the definition BasicTalk offset any weakness that we saw in Vonage World during the quarter.

Brian Horey - Aurelian Management

Okay. Fair enough. I am sorry. Can you go back through the stats on the mobile, you said average downloads I think we up 33% on a daily basis I guess versus last quarter, is that the right comparison?

Marc Lefar

It is versus the time -- it versus only launch the video service, so we looked at kind of the average number downloads for the two months prior to the launch of video and then, we looked at the subsequent three months post launch and that overall downloads increased by a third post versus pre.

Brian Horey - Aurelian Management

Okay, great. And then, you gave some stat about usage of the iOS in the Android app, I think with the video, can you just reiterate that as well?

Marc Lefar

Well, we are seeing that of all our on net calls and on net calls obviously are those where both that parties have the software. Our products differentiated from a lot of other companies, but we allow you to make calls to anybody and we bill this calls obviously through our prepaid plan for international long distance. But if you are on net, meaning both people have the software, we are much like some of the other smaller companies that have on net free. Video only works if both people have the software. And for those on net customers, our video calling rate has been 25% of all calls on net on Android or video calls. So, one out of four calls during the period has been a video call on Android and the level for iOS is about half of that. I attribute that two things, one is face time, so iOS does have functionally iOS-to-iOS. As well as, I think the user experience generally speaking for Android tends to deal with better for all over the top operators; they give a little more flexibility for developers than does iOS.

Leslie Arena

Our next question, operator?

Operator

Thank you. (Operator instructions)

Our next question comes from a line of David Cannon from Aegis Capital. Your line is open. Please go ahead.

David Canon - Aegis Capital

Good morning. Getting back to the rule out of BasicTalk through Wal-Mart, can you tell me when you were fully operational in all 3700 stores?

Marc Lefar

I would say it is difficult because we don't have instantaneous audit. We do have merchandizing firm that are actually in stores, so did a count each week. I would say that we were fully operational across all stores in early June.

David Canon - Aegis Capital

Okay. And then, I know somebody attempted to ask this question but I was still ambiguous of the answer. Of the $6.50 million of incremental marketing spend, how much of that went towards BasicTalk versus international versus mobile, if you can give me a breakdown?

Marc Lefar

All of the incremental went to BasicTalk and then some.

David Canon - Aegis Capital

Okay. So, I mean, this is my concern or question, what is the payback on that? If you are investing $6 million, what is your internal expense expectation in terms of subscriber additions, and how long will it take you to recover that investment? Have you guys through kind of what is your internal model on that?

Marc Lefar

We have. I'm going to get into details on specific GLA numbers based upon modeling; I will give you some of the component parts on target goal that make it a good investment. We build our -- a big piece of this also relates to customer life. We had expectations internally that customer life would be in the mid 2% range. We are seeing early indication because it is going to be well below 2%, which extends customer life on churn.

In addition, ARPU, we obviously have that is very easy to calculate. And we then look at what are the other cost components internally, we are very comfortable with our assumptions on customer service cost, all of our online sales and service is meeting our internal expectations from our core model.

When we think about that we look to get a net present value on these customers -- if we look to get the kind of net present value on these customers that we consider be reasonable return and reasonable discount rate, it allows us a long-term slack where once we get out of the initial startup phase to be somewhere around the $200 range. We shared that previously and as churn declines you might get some additional flexibility, but that's what the sales and marketing teams are focused on. You are not going to see that in the first 20 weeks of any major new brand launch, and as we look at our long-term three to seven year kind of program of BasicTalk in a GLA that we expect to get as the percentage of our total that $6 million will have no problem being paid out.

Leslie Arena

Okay, operator -- do you have one more question, Dave?

David Canon - Aegis Capital

Yes, regarding mobile, to me it seems like mobile is a more exciting opportunity. You reference here international roaming product. When do you anticipate marketing that full throttle?

Marc Lefar

We expect to expand our roaming product into the U.S. marketplace before year end. We have not given specific timetable. We are completing our testing on multiple networks and I do not want to try to predict something that I do not have enough visibility for to give you a specific month and I would not do it for competitive reasons anyway.

David Canon - Aegis Capital

Okay. And then, somebody asked about the Philippines, can you give me I guess of your partner Globe, what is the status of that and if there is any impact or contribution?

Marc Lefar

So, our relationship with Globe continues. We have got solid and stable gross line additions from Globe. We market it a lot less in the second quarter against Globe than we had in the prior periods. We saw concerns from our partner about some heavy users, so we restructured our rate plan from unlimited plan to a high number of minutes capped plan and have just started marketing again at the levels that we are doing in Q4 of last year. So, our subscriber line acquisition cost on Globe customers has been below $300, so we think that that is a very good investment, but we did stand down and redeploy some of those dollars during the last quarter.

Leslie Arena

Okay. Next question, operator?

Operator

Thank you. Our next question comes from the line of Robert Routh with National Alliance. Your line is open, please go ahead.

Marc Lefar

Rob, are you with us?

Operator

Please check with your phone, it is on mute.

Robert Routh - National Alliance

Sorry about that. And thanks for taking my question. Just two quick ones. First, I was wondering if you could remind us, are you still subject to (inaudible) limitations as it relates to potential stock buybacks going forward now that you are making money and free cash flow and things are doing well? And second, if you could remind us about your NOL situation a while back because these change in reverse order to NOLs, you can't reverse all of them. Why don't you give us as sense as to when you could possibly be a cash tax payer and if then how much in NOLs do you still have and potentially could be reversed in the future as the outlook continues to look very bring for the company?

Marc Lefar

Rob, you broke up a little bit while you were talking, so we're going to try to make sure we got those captured. I'll turn it to Dave and he may incorporate one of his guys who's here with us Jerry, who is our controller and could perhaps provide some additional specificity on those two points. So, I think the first one is related to 382 buyback limitations?

Robert Routh - National Alliance

Yes, sir.

Jerry Maloney

And we're subject to that. We still have a $740 million. It continues to be valuable. We released a portion of that based on visibility on being the fact that we would have been a cash tax payer or going into that scenario. We do not anticipate paying cash taxes anytime in the foreseeable future based on what we released but also what's in unreleased as part of that $740 million NOL.

Robert Routh - National Alliance

Great. And do you think, I know its obviously (inaudible) to say, but is there a chance that you will be able to release the remaining portion of that $740 million if things continue to progress as they have?

Jerry Maloney

At some point but that's a calculation we'll make in the future. It's not something that feels near term.

Leslie Arena

Okay, operator, if there are no additional questions that will conclude the call. Thank you for joining us today.

Operator

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program and you may all disconnect. Have a great rest of the day.

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