magicJack VocalTec Communications CEO Discusses Q2 2013 Results - Earnings Call Transcript

Aug. 8.13 | About: magicJack VocalTec (CALL)

magicJack VocalTec Communications Ltd (NASDAQ:CALL)

Q2 2013 Earnings Conference Call

August 08, 2013, 05:00 PM, ET

Executives

Jose Gordo - Chief Financial Officer

Gerald Vento - Chief Executive Officer and President

Analysts

Timothy Horan - Oppenheimer & Co.

Operator

Good day and welcome to the magicJack VocalTec Second Quarter 2013 Financial Results Conference Call. Today’s conference is being recorded. Joining us today on the call are Gerald Vento, Chief Executive Officer; and Jose Gordo, Chief Financial Officer.

At this time I would like to turn the call over to Mr. Gordo. You may begin, sir.

Jose Gordo

Thank you, operator. Good afternoon and welcome to the magicJack's second quarter 2013 earnings call. I’m Jose Gordo, CFO. With me on the call today is Gerry Vento, President and CEO.

During the call we may make statements related to our business that may be considered forward-looking in nature under Federal Securities Laws. These statements reflect our current views regarding the future only as of today and should not be reflected upon as representing our views as of any subsequent date. These statements are subject to a variety of risks and uncertainties that could cause actual results to differ materially from expectations.

For a discussion of the material risks and other important factors that could affect our actual results please refer to our annual report on Form 10-K which was filed with the SEC on April 2, 2013. Also during the course of today's call we will refer to certain non-GAAP financial measures. There is a reconciliation schedule showing GAAP versus non-GAAP results currently available in our press release issued after the close of the market today, which is located on our website at www.vocaltec.com.

With that I will turn the call over to Gerry.

Gerald Vento

Great, thanks Jose. Good afternoon everyone and thanks for joining our earnings call to discuss our second quarter financial results.

Today I'd like to update you on the launch of our third generation product, the new magicJack PLUS with strong initial sales. Our expansion into international markets later this year, updates on our financial performance for Q2 and our product development initiatives.

So let's begin with an overview of some of the key financial and operating metrics, that highlighted our strong Q2 results. We grew our subscriber base in the quarter ending with 3.36 million active subscribers, an increase from 3.27 million active subscribers from our last call. We define active subs as users of our magicJack devices that are under an active subscription contract. For the quarter we had a cost for gross subscriber add of about $4.78. APP only mobile users are not included in those figures.

For the sixth consecutive quarter we generated strong profits as we transition to the new magicJack PLUS. We grew access rates revenues by 33% to $14.1 million on a year-over-year basis demonstrating the value proposition for our customers and the growth of our reoccurring revenue business. We generated $32.9 million in GAAP revenue and $34.9 million in non-GAAP revenue. We generated $13.8 million of adjusted EBITDA for the quarter and $29.4 million of adjusted EBITDA for the six months ended June 30, 2013 which was a 99% increase year-over-year chiefly due to lower advertising spent and lower network costs.

We continue to maintain a strong balance sheet with $48.6 million in cash and marketable securities and no debt. So with two quarters as CEO under my belt let me underscore why we are positioned to grow this business. The magicJack literally developed an entirely new market for voice services by essentially productizing the concept of a high quality low price voice service encapsulated in the magicJack device.

The magicJack remains a ground breaking product and has been the foundation for the business to-date. The magicJack PLUS and now the new magicJack have provided valuable product and feature enhancements while continuing to leverage our ultra-low cost efficient voice network compelling brand, unique marketing positioning, high traffic retail distribution channels and innovative pricing plans, which validate the entrepreneurial spirit that permeates our corporate culture.

Contrasted to those who try to follow in our footsteps we have a simple and elegant business model. We sell a combined device and service package and provide immediate cash flows and eliminate the need for ongoing bill collection. We have refined our low cost customer acquisition strategies and we believe we lead the category in that key metric. This results in a low cost operating model that delivers regular and solid cash flows.

As anyone watching cable or satellite TV knows we’ve been running our trademark commercials for years. These recognizable ads have served us well. We have a highly established brand in the market place. In fact our brand is so well known that our competitors virtually name us in their own advertisements. In Q2 alone one of our competitors spent over $6.5 million in advertising to promote their own voice service. At our cost of customer acquisition that scale of marketing spend would result in hundreds of thousands of new customers.

When we acquire a customer we generate profitable cash flow in the same period and while our customer acquisition cost may increase some as we accelerate the pace of customer adds and advertising we will still have a cost efficient CPGA well below competitors. This year we generated an average of over $1.1 million in adjusted EBITDA per week.

Our record of driving cash flow on a reoccurring basis distinguishes us from many competitors. The stable cash flows provide us with highly valuable assets to grow our business. Expanding our international distribution channels and enhancing our mobile offers are two areas in which we intent to allocate resources going forward to generate double digit growth. Over the last quarter we’ve been focused on ensuring a successful launch of the new magicJack PLUS. In June we began selling the device to both Internet and retail customers.

In the seven weeks following initial launch over 204,000 units were sold, representing a 41% increase in the amount of units sold over the same period as compared to our last product launch in 2011. In an effort to continue to improve our operational efficiencies we increased our direct sales efforts at the onset of new product launch, marketing to our extensive Internet internal database. As the result, of the 204,000 unit sold a 101,000 units were sold directly on our website, while a 103,000 units were sold through our retail partners.

The new magicJack PLUS is currently being sold in approximately 9,000 stores nationwide as over the first seven weeks into this launch. Just remember the legacy magicJack APP has been selling in over 30,000 stores nationwide. So this means we are only getting started with our launches. We optimized retail inventory stocking levels across our traditional retail doors. We had a strong product launch, but this more to do to make it easier for consumers to buy our popular new device at 1,000s of additional retail stores throughout the U.S. and Canada.

Now let me turn to our plans for launching our international business. International represents a meaningful, untapped growth opportunity for our company. A significant percentage of our current traffic originates outside the United States. In particular emerging markets are hungry for low cost means of communicating with friends, family and business contacts in the States. We believe that these factors will drive strong immediate demand for our existing products outside of United States, and we now have plans underway to capitalize on this demand.

We intend to launch magicJack into international markets by partnering with in-country distributors with extensive retail reach. We expect to begin selling the magicJack in several Latin American countries in the fourth quarter of this year.

Now turning to the magicJack APP; our app works on any iOS or Android device as well as on a PC. It allows users to make and receive calls on any of these devices for free when connected to a Wi-Fi network. For the period ending June 30, 2013, we had approximately 4.37 million registered APP users. The magicJack APP has experienced positive reviews from our users throughout social media platforms and they recognized the quality of our app and its ease of use.

In the second half of the year, we intend to add free texting to our mobile device app. And while other messaging apps restrict their users from messaging outside of their network, our texting feature will enable users to text across any U.S. network, the way mobile users message across networks. For international users, this will mean the ability to text their friends, family or business contacts on their existing mobile phones irrespective of whether the receiving party has an APP on their device.

We also expect the APP to be an import addition to our international customer base, as they begin to utilize our service on all of their devices, not just their home phones. The app provides other means of productizing our ultra-low cost network infrastructure. We believe that our cost structure for both voice and text is among the lowest in this industry. And as I said in our last earnings call, we do not expect revenues in 2013 from the sales of the APP to be material, but our objective is to continue to grow the customer base for revenue contributions for the future.

Turning to product development, we’ve taken a critical look in plans and process in order to ensure that we are able to consistently develop and deliver compelling new products that leverage our recognized brand and distribution channels. We are just beginning to invest in our mobile services with the current app reflecting our initial efforts in this area.

We believe that the opportunities in the mobile space, both in the U.S. and the international markets represent significant growth areas for our company. We see opportunities to bring the same type of disruptive products and services into the mobile space as we have in the home replacement market. As carriers continue in deployment of 4G and LTE we are once again seeing an opportunity for early stage product and platform disruption and we intend to be fully engaged in the mobile space and seek out opportunities to continue with our history of innovation.

Finally, before turning the call over to Jose let me briefly say that we continue to expand beyond our core magicJack product offering. We produced another quarter of solid financial results and have launched our new magicJack PLUS product with strong sales momentum. We have got products under development that we believe will continue to add value to our core business and for the first time ever we are expanding magicJack into international markets in the fourth quarter of this year. We got the balance sheet, management team and a developing roadmap to organically grow our current business and selectively look at opportunities that build up on our core competencies.

So with that I will turn the call back over to Jose.

Jose Gordo

Thank you, Jerry. Good afternoon everyone. We are pleased with our second quarter performance as we experienced our sixth consecutive quarter with strong profitability and promising sales of our recently launched new magicJack PLUS. I will first provide details on the company’s second quarter performance followed by a summary of our financial results for the first six months.

Starting with the P&L we reported total GAAP net revenues of $32.9 million compared to $38.6 million for the same period last year. The decrease in revenues was largely driven by two one-time revenue items totaling $2 million which I will further discuss in a few moments and the ramp down in sales of the magicJack PLUS as we transitioned to sale the new magicJack PLUS.

Revenues from magicJack sales for the quarter were 11.2 million and accounted for 34% of revenues while access rights renewal revenue was 14.1 million and accounted for 43% of total revenues.

Access rights renewal revenue represents the recurring portion of our business, as Gerry highlighted, as we continue to grow and become a stronger component of our overall revenue stream. magicJack units sold through retail outlets represented 78% of total sales as compared to 61% for the second quarter of last year. Direct sales represented 22% of units sold as compared to 39% of units sold for the same period last year.

Cost of revenues for the quarter decreased 20% year-over-year to $12.1 million from $15.1 million for the second quarter in 2012. The decrease in cost of revenues was primarily attributable to $2.4 million decrease from lower magicJack sales and $1.6 million reduction in network and carrier charges as we continue to negotiate better rates of carriers and groom our network to derive increased cost efficiencies.

Total operating expenses for the quarter decreased 15% year-over-year to $11.2 million from $13.2 million for the second quarter in 2012. The decrease in operating expenses was primarily due to a $3 million year-over-year decrease in advertising related expenses driven by reduction in long-form and short-form advertising for the magicJack PLUS.

Turning to profitability for the quarter GAAP operating income was $9.6 million compared to GAAP operating income of $10.3 million the second quarter of 2012. For the quarter we had a tax expense of $3.3 million as compared $19,000 for the second quarter in 2012. The tax expense reflects our current projected and effective 2013 tax rate of approximately 34.6%.

GAAP net income for the quarter was $6.5 million, after taking into account the increase in tax expense as compared to GAAP net income of $10.3 million for the same period last year. GAAP diluted earnings per share for the second quarter was $0.35 based on 18.6 million weighted average diluted shares outstanding as compared to $0.50 based on 20.6 million weighted diluted average diluted outstanding for the same period last year.

Turning to our results on a non-GAAP basis, we had a few noteworthy items impacting the quarter. We had $1.2 million in transition cost related to the introduction of the new magicJack PLUS. These costs reduced revenue by the same amount. We had approximately $800,000 in severance cost related to the resignation of our former CFO. These cost increased G&A by the same amount. We book a reserve of $750,000 for certain tax matters. This expense reduced revenue by the same amount. So for the quarter adjusted EBITDA increased 24% to $13.8 million from $11.1 million for the same period last year taking into account the forgoing items:

Non-GAAP net income increased $17% to $12.4 million from $10.6 million for the same period last year. Non-GAAP net income per diluted share increased 30% to $0.67 based on 18.6 million weighted average diluted shares outstanding compared to $0.51 per share based on $20.6 million weighted average diluted share outstanding for the same period last year.

A reconciliation of GAAP to non-GAAP financial measures have been provided in the financial statement tables included in our earnings press release from earlier today and is available on our website. Turning to a quick summary of our results for the six months ended June 30, 2013. We reported GAAP net revenues of $69.8 million as compared to GAAP net revenues of $76.1 million for the same period last year.

Revenues for magicJack sales was $26.2 million as compared to $34 million for the same period last year. Access rights renewal revenue was $27.7 million as compared to $20.9 million for the same period last year. GAAP operating income increased to $24.9 million from $16.1 million from the same period a year ago.

GAAP net income for the first six months decreased to $16.1 million from $18.5 million for the same period last year which reflects income taxes we expensed for the first six months totaling $8.5 million when compared to $49,000 for the same period a year ago. GAAP diluted earnings per share for the first six months was $0.86 cents based on 18.6 million weighted average diluted share outstanding compared to earnings per share of $0.87 based on 21.3 million weighted average diluted shares outstanding for the same period last year.

Deferred revenues were $124.2 million as of June 30, 2013. Operating cash flows for the six months ended June 30th, 2013 were $18.4 million as compared to $36.1 million for the same period last year. This $17.7 million decrease was primarily due to higher sales of access rights renewals in Q1, 2013 in anticipation of a price increase; a $10.2 million in estimated tax payments in 2013 and lower sales of the magicJack PLUS in anticipation of the launch of our new magicJack PLUS. These items were offset in part by increased profitability Q2, 2013.

Taking a look at our results on a non-GAAP basis; adjusted EBITDA increased to $29.4 million from 14.8 million a year ago. The significant increase in adjusted EBITDA was driven primarily by a decrease in advertising expense, higher renewal revenues and lower network cost due to better negotiated rates and settlements. These items were partially offset by lower revenues from the sale of magicJack devices and other products and higher R&D expense.

Non-GAAP net income per diluted share for the first six months was $1.44 based on 18.6 million weighted average diluted share outstanding compared to $0.65 per share based on $21.3 million weighted average diluted shares outstanding for the same period last year.

For the first six months the company generated $18.4 million in free cash flow compared to $35.9 million in the same period last year. This difference is primarily due to estimated tax payments of $10.2 million; executive severance payments of approximately $800,000; acquisition of certain patent rights were $900,000; lower sales due to ramp down in sales of the magicJack PLUS as we transition to sales of the new magicJack PLUS.

These items were partially offset by the lower advertising expenses and lower network cost discussed earlier. As we’ve said before we’ve got one of the strongest balance sheets in our industry. As of June30, 2013 we had cash, cash equivalents and marketable securities of $48.6 million and no debt. In this first half of the year we generated an average of over $1.1 million of adjusted EBITDA per week and $4.9 million per month.

We believe our ability to drive cash flow on a recurring visible basis distinguishes us from many of our competitors. Our cash on hand and ongoing cash flow generation give us significant flexibility to pursue the initiatives Gerry outlined in his comments. These include the continued development of our magicJack product line, international sales and marketing, new product innovation and R&D and selective acquisitions of businesses or assets that meet our criteria for growth and profitability.

Turning to our financial outlook for the full year 2013 there is no change to the revenue and adjusted EBITDA guidance we provided on our last call.

With that I would like to turn the call back to Gerry.

Gerald Vento

Great, thanks Jose. I will be brief, just to summarize. We produced our sixth consecutive profitable quarter. We got a promising product launch underway, got a strong balance sheet with close to $50 million in cash and marketable securities and no debt. We are aggressively pursuing multiple areas of growth to build and further diversify our business. We have the talent and the capital execute on all the plans that we outlined today.

So with that I will turn it over to questions.

Question-and-Answer Session

Operator

(Operator Instructions). And we will take Tim Horan with Oppenheimer.

Timothy Horan - Oppenheimer & Co.

Thanks for the info, appreciate it. Just some housekeeping, I think you said the $2 million, one of them was a tax item, of $750,000 the tax line of 1.2 million transition cost. How did they lower revenue by $2 million and what revenue line item was it? Was it hardware, renewals or other revenue? Thanks.

Jose Gordo

The $1.2 million lower sales Tim.

Timothy Horan - Oppenheimer & Co.

Was that a one-time item of lower sales?

Jose Gordo

That’s right. Actually they both were in the category of one-time.

Timothy Horan - Oppenheimer & Co.

We just never really come across one-time items on revenue too often or ever. Could you just delve into that a touch more?

Jose Gordo

Yeah the 1.2 is really retailer concessions. A lot of our retailers had product inventory some product inventory on the old Jack and we needed to accommodate their needs to lower the price so that it could be commensurate with the new product and so that inventory would move and not became stale.

Timothy Horan - Oppenheimer & Co.

I see. So this is inventory that had shipped over the last six or nine months.

Jose Gordo

That’s right.

Timothy Horan - Oppenheimer & Co.

I got you. And this is from a historical perspective. And the 750 on the tax?

Jose Gordo

Yeah it’s an active matter. So we really prefer not to get into too much detail on it it's really not too material but we did want to perform it out. It does relate to potential taxes associated with our revenue generation but we do not expect it to be recurring at this time.

Timothy Horan - Oppenheimer & Co.

Got you and were both of these items in the hardware category line item or renewals or other?

Jose Gordo

Yes, hardware.

Timothy Horan - Oppenheimer & Co.

And then the tax rate any more color on that? What did you pay the 10 million for and where are you with the process of trying to run more the income through…?

Jose Gordo

On the first part of your question we are solving to that 34.6 rate currently. That is our tax provision and so the 10.2 represents an estimated tax payment towards that. We made a lower payment in the first quarter and we just we needed to catch up. And then in terms of…

Gerald Vento

On the second part of the question Tim we put a lot of work into actively taking certain steps some of which are underway right now. We are moving to a more favorable tax zone in Israel. We are undertaking to transfer some of the manufacturing that has been done in other places to our very good management team in Israel and so we are pretty optimistic.

I don't want to talk about tax strategies and tax positions in great detail on this call but I am pretty confident that, that 30 is where we are today and we have told you that we forecasted that through the end of 2013. But in subsequent years I am very confident that we’re going to improve that substantially in a relatively short period of time after the first of the year.

Timothy Horan - Oppenheimer & Co.

Got you, is there anything about this year, why have you to get to 34%, I mean it’s a little odd if you are running profitability so why it would not apply to this year’s tax rate also?

Jose Gordo

I think it’s probably early. We’re certainly going to do our best to employ whatever strategies we can. I mean we’re actively doing this right now. It’s a high priority for us. If we can bring it down we’ve got some ideas to do that, and we’ll be talking about that on the next subsequent calls.

Gerald Vento

Yeah, we’ll update you on next quarter, but right now I’d rather under promise and over deliver on that one, but we are pretty optimistic that things are going to move in right direction.

Timothy Horan - Oppenheimer & Co.

Okay. And then one-time items of $900,000, was that the R&D line item?

Jose Gordo

I believe that was, yes, acquisition of patent rights, believe that was in G&A, Tim, I’ll come back and confirm with you.

Timothy Horan - Oppenheimer & Co.

Okay.

Jose Gordo

May be higher than that, but I’ll double check.

Timothy Horan - Oppenheimer & Co.

Okay, may be you can just walk around how you are tackling the $13.8 million of EBITDA? Are you including the $2 million in revenue thru up and some more expense thru ups?

Jose Gordo

Yeah, I’m looking at, if you have our press release handy there, we’ve got the $1.2 million add back, the $800,000 add back for executive severance payments and the 750 for certain tax matters. And when you add that to the depreciation, sorry in amortization of about 1.4ish million that’s to the $9.6 million of the operating income actually true-up for you.

Timothy Horan - Oppenheimer & Co.

Yeah, I guess I’m little bit confused by the 1.2 and the 750, because that’s not actually. So did you actually receive cash of $35 million in the quarter? I mean, just trying to figure out, because like I said we never really deal with the kind of revenue true-ups? The 1.2 million, I just don’t know how that’s flowing through, but maybe we can talk about it offline.

Jose Gordo

Yeah, obviously the income statement will be different from the -- we can go, maybe we should speak with you offline and go through the cash flow statement. We can walk you through how the cash…

Timothy Horan - Oppenheimer & Co.

Okay, but did you actually received 35 million in cash in the -- well it’s probably not the way to look at it.

Jose Gordo

Yeah, I don’t think that’s -- we probably received more, to be honest with you.

Timothy Horan - Oppenheimer & Co.

Okay.

Jose Gordo

The sales are -- for us, sales and revenue never match, because we take the cash…

Timothy Horan - Oppenheimer & Co.

Sure. Yeah, yeah now I understand. Have you ever done a true-up upon EBITDA with our revenue true up on the EBITDA? I mean I can understand expense true-ups are calculated through EBITDA, just hadn’t heard of it done with the revenue. Yeah, just pretty confusing to do a revenue true-up I guess. Have you ever heard of that before, you done that before?

Jose Gordo

We've looked at different models to kind of regularize the way we receive cash versus kind of the way we recognize the revenue. But like I said if you want to walk through those kind of questions offline I’d be happy to walk you through it.

Gerald Vento

Yeah, and we’ll walk you through sales compared to revenue. You also got to look at the deferred revenue as well. So we’ll walk you through that.

Timothy Horan - Oppenheimer & Co.

Yeah, and the deferred revenue look like it dropped 3 million or 4 million sequentially, that’s correct right?

Jose Gordo

I’m just checking our numbers, give me a second. I know it’s down a bit.

Timothy Horan - Oppenheimer & Co.

So the actual cash revenues are 3 million, 4 million below what you’re kind of reporting here on the GAAP basis of the 34.9 or the 32.9?

Jose Gordo

Yeah.

Timothy Horan - Oppenheimer & Co.

Can you talk it all about how many units were shipped in the quarter or the sales in the quarter of the units of the second quarter and kind of what you’re expecting for the third quarter?

Jose Gordo

I think just taking a step back here. I think what we’ve done is move, we moved the needle of the acquired base. We hadn't ever put out unit sales information. We feel pretty good that this is a good step. We’re giving visibility on how the first several weeks have gone. Gerry and I talk a lot about moving to full units sales. We’re putting out our customer base now. We put out the cost per gross add. So definitely the data point of sales for this quarter, we haven’t put out, but I think we are talking about it for the future. We can update you on that as well along with number of other metrics and I know that are high on your list.

Timothy Horan - Oppenheimer & Co.

Sure. And well then you know maybe how does this launch kind of compare to the last PLUS launch? Did you look at the monthly sales or sales into the direct channels or what you are seeing now is it similar way so the last time it was better or worse?

Jose Gordo

It’s significantly better Tim. I think I gave you some data points in my script but just to remind myself if you compare apples-to-apples meaning Internet sales and retail sales for the first seven weeks in 2011 when we launched PLUS compared to what we did in the last seven weeks and I know seven weeks are just the beginning. So we got some big sales. We are up 41% in terms of the total number of units that were sold in that period of time. So just volume wise we see a big uptick here going on.

Timothy Horan - Oppenheimer & Co.

That’s great. Can you talk about maybe how many are the shipments? When you talk about 200,000 is this sell into the stores or sell-through? I know you sold 100,000 yourself, have the stores sold 100,000 or that’s what they have taken in terms of inventory?

Jose Gordo

They have taken in terms of inventory but you know our numbers are up significantly up over I think plus 20% over the first quarter. So you are going to start to see the same kind of trend that you saw last time when we had you know a new product launch. And some of those retailers are already on even in the seven-week period they are already on the third re-order for units. So it’s not as we just send 100,000 units to our top retailers and they are just sitting on it. They are already starting to replenish those orders.

Timothy Horan - Oppenheimer & Co.

Great. And to fill out all the retail channels do you have a rough idea how many units you need to ship to do that? I mean do you have like rough idea of order of indication at this point?

Jose Gordo

On retail?

Timothy Horan - Oppenheimer & Co.

Yeah.

Jose Gordo

I can tell you we just went through that and you know without giving numbers this month is looking good and next month is looking better.

Gerald Vento

Yeah I mean Tim they typically go every two weeks and then go to replenish. So it’s not a long horizon that they look at.

Timothy Horan - Oppenheimer & Co.

Got you. And when do you think you are going to get the full 30,000 store distribution?

Jose Gordo

I would say very soon within the next month or within a month.

Timothy Horan - Oppenheimer & Co.

Great, and any more thoughts bundling with the Wi-Fi module or chord that kind of you would insert on the top of it?

Jose Gordo

I think what we really believe is that the reality is we are going to grow this business and we are going to grow it I think pretty aggressively. We are in a unique position sitting on 50 million of cash and growing at about 1 million per week that cash. So right now we are focused on the app, the voice and text application. As the first example we talk about international as another example and you know we have been talking about a mobile opportunity, that’s a big opportunity.

Our network provides a point of leverage. When you get too hung up on Wi-Fi I would look at it this way. We are actively exploring, we are talking with potential partners, we are into product development as we have never been into it before but sort of putting it into context instead of saying okay we are going to come out with a dongle or we are going to come out with a Wi-Fi device what we are really saying is that we are going to take a holistic view in the future, that we are going to be more methodical you know alpha beta versus episodic.

We are going to go after this thing in a big way and whether Wi-Fi is an adjunct to that or not I mean I just see our focus has been more holistic than just pay the next quick potential opportunity to enhance the magicJack device and right now our voice and text app in the mobility space is the first example of how I think we you know we should go and what we should prioritize and what we should exploit because right now the numbers on the APP adoption and the response in social media is really extraordinary.

We got a great product and it’s only voice right now. It’s changing the way people are talking to family and friends and the word is spreading and that’s why we went from a relatively attractive number in the last quarter to over 4.5 million roughly APP users on the network today.

Timothy Horan - Oppenheimer & Co.

You know that’s really impressive. On the APP side would you start marketing, sorry the text APP will you be marketing the app once you get the text out there.

Gerald Vento

Yeah, I am sorry Tim, say that again.

Timothy Horan - Oppenheimer & Co.

Will you start advertising the APP once you have the text capabilities and when we start charging for it?

Gerald Vento

We are delighted that we are over 40,000 downloads a day right now. APP usage is extraordinary and that’s just with voice. When we get texting going and it will be on the second half of this year. So it’s going to I wouldn’t right now it’s third quarter but it’s certainly before the end of the year and it’s somewhere probably between third and fourth quarter. We’ll do I think will do a very good job of monetizing what we’ve been able to achieve and also leveraging the ultra-cost sensitive network that we put in place.

So we’ll have more to say about. We probably have we probably take the whole marketing whether it’s international or the international venture that we are getting into or whether it’s a product piece and take it off of an earnings call and really have a product call to go through that detail.

Timothy Horan - Oppenheimer & Co.

Yeah that’s a great idea. And just lastly on the network and the new device I know the quality is definitely a lot better. But do you measure dropped calls and eco in the calls or latency or length of calls and versus the old device versus the new device or other ways to measure it?

Gerald Vento

Yeah, we do all of that and voice quality is excellent on the new magicJack PLUS. And minutes of use we measure, we measure origination, termination that’s why we have a strong view as to where we ought to start to take advantage of customers who originate outside the U.S. who are calling family, friends and business folks inside of the U.S.

The call quality right now is really the best we’ve ever had and we’ve got -- we’ve had we have I don’t know how many chats a day but I can get back to you on the chat experience. But we’ve had really good response from the early adopters and the early purchasers of the new magicJack PLUS product.

Timothy Horan - Oppenheimer & Co.

Great and has there been any resistance moving to a six months license or one year license for the retailers?

Jose Gordo

No, not at all.

Timothy Horan - Oppenheimer & Co.

Great okay great. Okay, guys great quarter congratulations on getting the launch out there. We look forward to see turn outs going thanks.

Jose Gordo

Yeah Tim just a couple of quick comments on that last question. I think they view it as a lower price point for the consumers. So that was our kind of a main part of our idea so I think they have very enthused about that, but I did if it’s okay we’d like to go back to your deferred revenue question so I just fill this information.

But just some quick data points, we were at about 125.2 million at the end of last year in deferred revenue to include current and long term portions. We went up some at the end of the first quarter to almost 128. And we are now as of the end of the quarter we were at just over 124. I mean I think the way we look at that when you take into account that we are really ramping down sales is it's not a lot of movement one way or another. We sort of see it as more or less not big fluctuations.

I think as we launch the product and begin to sell renewal packages as we’ve historically done that’s when we tend to see a kind of a more material move in the increased direction.

Timothy Horan - Oppenheimer & Co.

Yeah that’s great. And lastly on any more thoughts on the five year renewals on the pricing of that or keeping it in place or how you are kind of thinking about that?

Jose Gordo

We really not seen a need to change as people -- it's been very popular for five year and the one year of course so we have gotten nothing in the pipeline right now to change the pricing on the package.

Timothy Horan - Oppenheimer & Co.

Great thanks guys.

Gerald Vento

Thanks Tim.

Operator

(Operator Instructions). There are no further questions at this time. Mr. Gordo I'd like to turn the conference back to you for any additional or closing comments.

Jose Gordo

Well, thank everyone. We will talk to you on the next call.

Operator

And that does conclude today's conference. We appreciate your participation

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