magicJack VocalTec's CEO Discusses Q3 2013 Results - Earnings Call Transcript

Nov.12.13 | About: magicJack VocalTec (CALL)

magicJack VocalTec Ltd. (NASDAQ:CALL)

Q3 2013 Earnings Call

November 12, 2013 5:00 PM ET

Executives

Jose Gordo – CFO

Gerald Vento – CEO and President

Analysts

Tim Horan – Oppenheimer

Operator

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

At this time I would like to turn the conference over to Mr. Jose Gordo. Please go ahead sir.

Jose Gordo

Thank you, operator. Good afternoon and welcome to the magicJack third 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 2nd, 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

Thanks Jose. Good afternoon and thanks for joining the call. As most of you know today we announced the significant transaction to repurchase held by two irrevocable trusts created by the company’s founder Dan Borislow. As part of that agreement Dan exits ongoing involvement in business operations of the company or any of its subsidiaries. The Board and management thank Dan for the business he created and a company we will now build upon.

So before getting started I want to simply say that I’m excited about our double-digit growth opportunities for 2014. The addressable market for us is huge and I came to magicJack to deliver increasing shareholder value and I intent to do that.

Now turning to our current business. I want to business with an overview of some of the key financial and operating metrics that highlight our Q3 results. We delivered our seventh consecutive profitable quarter with adjusted EBITDA of $14.8 million which represents a 6% increase year-over-year and represented 42% of revenue up from 34% last year. We grew Access rights revenue by 34% to $14.6 million on a year-over-year basis demonstrating the value that our customers derive from using the magicJack and the growth of our recurring revenue business.

For the quarter we had a cost per gross subscriber add $4.31 a 10% decrease from our last call. We continue to grow our strong balance sheet with $53 million in cash and correct cash equivalents and no debt. We had 3.3 million active users a slight decline from 3.36 million active users in the period, in the prior quarter. We define active subscribers as users of our magicJack device that are under an active subscription contract. And we ended the quarter with 5.61 million registered app users an increase of 28% from our last call. So, while these results continue to demonstrate the strong and profitable business model that we have, we believe we can do better.

The company, when the company launched the original magicJack in the spring of 2007 we offered a single and compelling value proposition for $40 per year. That message resonated with customers and we subsequently sold over 7 million of the original magicJack devices. Today nearly 49% of our active subscribers continue to use the original magicJack device created in 2007. In the fall of 2011 we delivered the second version product the magicJack PLUS that eliminated the need to plug the device into computed operate the call quality was also enhanced with the new product.

Again our offer was well received in over 2 million of the second generation magicJack PLUS devices were activated on our network. Today approximately 46% of our active subscribers use the magicJack PLUS. Our customers continue to recognize the benefits of our value offer and the Jack’s voice quality. As a company we succeed and we keep it simple and deliver high quality value price service to consumers. Much has changed since we introduced the Jack in 2007. In 2007 Comcast largest cable operator in the U.S. had approximately 4.6 million voice customers on their network. Today that number has more than doubled to over 10 million customers.

In 2007 the concept of voice was still new and consumers with some up-reticent about dropping their landline service. Market researchers estimate that five years ago approximately 11% of household with at least one mobile phone purchase no landline service by 2012 that percentage increased to 35.8%. Technology research firm IDC estimates that by 2016 the number of wireless only homes could climb to 50.8 million or approximately 43% of U.S. residence with telephone service. So the cord cutting phenomenon is well known and its more pronounced among younger generation where over two thirds of households led by 29 year olds are younger are like only on a mobile phone. Many of these customers are already seeking us out as a value price complement for mobile only. So our opportunity in the addressable market is substantial and growing. And the demographic composition of our target customer is changing. So, now it’s time for magicJack to evolve with the rest of market place.

In order to more aggressively pursue our growth strategy we are refreshing the magicJack brand. Over the next few weeks you’ll see an updated approach to how we present end market to magicJack. We will focus on messaging around value and quality. The design in presentation for the market will be clean and straight forward. We’re also refreshing the design of the current website as well, we’re delivering a new approach to our television advertising. And you can see previews of the ads on our website in the next few weeks.

We are moving more aggressively into digital channels as well as using social media to drive awareness, reinforce our brand message, increased product sales and renewals and enhanced customer care. Historically the company has spent virtually all of its marketing budget on national TV advertising. This has resulted in a high degree of brand awareness. In fact 63% of respondents in a recent survey have heard of the magicJack brand. We have device sales in all 50 states in each of each of the 210 BMAs. We clearly have a nationally recognized brand. We know that one of our competitors continues to spend millions per quarter in an effort to establish the type of national brand that we already have today.

We’ve completed a comprehensive analysis of our customer base and developed a deeper understanding, our existing customer segments in geographic reach of our brand. Our research indicates that certain ethnic segments are proactively seeking out our product today. To-date we have had no concerted marketing plan to target and reach those customers. We are now proactively targeting these segments both through our marketing initiatives as well as expanding our distribution channels but it’s not simply the packaging and promotions that need to evolve. We have been effective in selling the magicJack. However we have been somewhat less effective in ensuring that our cash paying customers renew their service.

Over 50% of our customers have never renewed after their initial device purchase. We have never made it easy for cash paying customers to renew at the point of sale. For example, we know that a majority of our sales come through retail channels. Many of those customers use cash to buy our product. However to renew our service we require the customer to go online and buy with a credit or debit card. For customers who transact in cash we force them to churn. The point is we don’t make it easy for that customer to renew, to address this issue we are developing mechanisms to enable cash purchasers to purchase renewals either at the point of sale or when they return to the retailer. We are working with one of our largest channel partners to pull over this new program in Q2 2014.

So with that said in Q3 we activated 273,534 subscribers a 21% increase quarter-over-quarter. Activations are defined as devices that become activated on to a subscription contract in a given period. This is a new metric we’re providing to deliver increased transparency. We believe activations are an important reflection of the health of our business. For the first time we are also providing quarterly churn data. In Q3 our average monthly churn was 3.4%. We expect our churn figures to continue to improve as we migrate 49% of the base of original magicJack users to the new magicJack PLUS with enhanced voice quality. As a prepaid offer we believe our churn rates are in line with those of major prepaid wireless carriers.

Turning to distribution, we remain a profitable SKU for our retail partners and they continue to express a strong desire to work together to increase unit volumes. Our partners continue to tell us that the demand for our offer is significant, but quite frankly our marketing and packaging has become a bit stale. We are undergoing change to both of those areas and our partners are encouraged by the new direction. Vonage has recently begun selling a new service under the basic top brand through one of our leading retail channels. We can report that we have experienced no material change in unit volume as a result of this new entrance. In fact we believe their entrance reinforces the market opportunity and has stimulated more interest in our product category.

Turning to an area of operational improvement. In certain instances our retail inventory volumes were not sufficient to meet market demand. We have taken steps to improve our in-store inventory management and have begun to see corresponding lifts in unit sales. We are also working together to enhance the positioning and placement of our product in the high traffic venues. We are also expanding our distribution channels, well we have always had strong presence in several big box retailers. The company has never had a formal channel management infrastructure nor have we had a focused strategy for expanding our distribution channels.

We are changing this and intend to announce incremental distribution partners in 2014.we are aligning these new distribution channels to target key high growth customer segments we have identified through our own data analytics. We continue to expand our international efforts and are currently working with key retail partners to explore distribution opportunities in Latin America and we expect to begin selling internationally by the end of this quarter.

Turning to pricing, we realized great success with a six month package introduction earlier this year. And as many of you know our previous retail offer included magicJack PLUS and one year of access to the network for $69.95. We and our channel partner see opportunities for a one year package as well as opportunities with other bundle offerings. We are viewing our current pricing plans and packages to determine the most appropriate mix for 2014 offerings.

Turning to mobility, we know that the magicJack business model offers lowest cost voice platform in the market. We will continue to utilize this advantage go acquire customers and explore the most effective means of monetizing our large and growing base of users. Regarding our Voice App we’ve begun limited trials on monetizing that opportunity for the app. Today those trials have been positive. As previously discussed, we have not expected the app to provide material contribution in 2013 however the app as a key part of our growth strategy while our user base continues to grow we continue to refine the user experience and enhance the features and functionality of the app.

Based on recent market research our customers are looking to magicJack to extend our high quality value priced offer into the mobile market. The success of our current app even at this early stage demonstrates the compelling value our platform provides. We are working closely with channel partners and others to explore opportunities to extend our current mobile offer and it should come to, as no surprise that our nationally recognized brands established customer base, high traffic distribution channels and growing number of app users provide an attractive asset for mobile providers. We believe we have a role to play in this market and are taking steps to capitalize on these opportunities and we will continue to update on developments in this area.

And with that I’d like to turn the call over to Jose.

Jose Gordo

Thank you Gerry. Good afternoon everyone. We are pleased with our third quarter performance which was highlighted by the strong profitably and operating cash flow as well as growth in Access rights renewal revenue and solid sales of our recently launched new magicJack PLUS.

Starting with the third quarter P&L we reported total GAAP net revenues of $35.5 million an increase of 8% compared to the second quarter of 2013. The quarter-over-quarter increase was primarily due to the launch of the new magicJack PLUS. Revenues from magicJack sales for the quarter were $13.2 million up from $11.2 million last quarter. Access rights renewals revenue was $14.6 million, an increase of 34% year-over-year and up sequentially from the $14.1 million we generated in the second quarter. Out of the percentage of total revenues access rates renewals accounted for 41% up from 27% for the same period last year.

Access rates renewal revenue represents the recurring portion of our business. It has continued to growth and become a stronger component of our overall revenue stream. As Gerry highlighted we will be making a concerted effort to increase our renewal rates including making cash renewals easily purchasable and actively reaching out to our customer’s product to contract expiration.

Network expense for the quarter was $5.2 million as compared to the $5.3 million we spent last quarter. Total operating expense for the quarter decreased 4% quarter-over-quarter to $10.7 million primarily due to an $800,000 decrease in R&D which was partially offset by an increase a few $100,000 in G&A expenses. Advertising expense for the quarter was $2.9 million consistent with the $2.8 million spent last quarter. The steadiness of these items on a quarter-over-quarter basis underscores a key point. The cost components of our business are very stable and predictable. We have continued to bring efficiencies on the network side to deliver lower cost as a percentage of revenue and our G&A is fairly steady. Having these costs under solid control is critical as we continue to find new areas of growth. We do expect advertising expense to increase during the fourth quarter of 2013 as we implement the new marketing initiatives that Gerry detailed earlier.

Turning to profitability GAAP operating income was $12.7 million an increase of 31% compared to the second quarter. For the quarter we had an income tax expense of $3.7 million as compared $3.3 for last quarter. The tax expense reflects our updated, projected, effective 2013 tax rate of approximately 32.9% this is lower than the projected rate of 34.6% we announced in the second quarter as we continue to refine our tax estimates for the year.

GAAP net income for the quarter was $8.9 million, after taking into account the increase in tax expense as compared to GAAP net income of $6.5 million for the second quarter. GAAP diluted earnings per share for the quarter was $0.48 based on 18.6 million weighted average diluted shares outstanding as compared to $0.35 based on 18.6 million weighted diluted average diluted shares outstanding for the second quarter. Operating cash flow for the quarter was $10.4 million as compared to $1.8 million for the last quarter primarily due to a $9.2 million tax payment we made in the second quarter.

Now turning to our results on a non-GAAP basis. For the quarter we reported adjusted EBITDA of $14.8 million, an increase of 8% over last quarter. Non-GAAP net income increased 19% to $13.9 million, non-GAAP net income per diluted share was $0.75 based on 18.6 million weighted average diluted shares outstanding as compared to $0.63 per share based on 18.6 million weighted average diluted shares outstanding for the second quarter. A reconciliation of GAAP to non-GAAP financial measures has 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 first nine months. We reported GAAP net revenues of $105.3 million as compared to GAAP net revenues of $116.9 million for the same period last year. Revenues from magicJack sales were $39.4 million as compared to $54.7 million for the same period last year. Access rights renewal revenue was $42.3 million up 33% as compared to $31.8 million for the same period last year.

GAAP operating income increased to $37.5 million a 37% increase over last year. GAAP net income for the first nine months decreased to $25 million from $33.6 million which reflects income taxes we paid for the first nine months of this year totaling $12.3 million as compared to the $78,000 we paid during the same period last year. GAAP diluted earnings per share for the first nine months was $1.34 based on $18.6 million weighted average diluted shares outstanding as compared to earnings per share of $1.64 for last year based on $20.4 million weighted average diluted shares outstanding.

Nine month operating cash flow was $28.8 million as compared to $44.5 million last year. The $15.7 million decrease was primarily due to $12.6 million in tax payments that we have made in 2013. Taking a look at our results on a non-GAAP basis adjusted EBITDA increased to $44.2 million from $28.7 million a year ago. The significant increase was driven primarily by higher renewal revenues a decrease in advertising expenses and a reduction in network and carrier charges as we continue to negotiate better rates and groom our network to drive increased cost efficiencies.

As a percentage of total revenue nine month adjusted EBITDA was 42% up from the 25% during the same period last year. Non-GAAP net income per diluted share for the first nine months was $2.19 based on $18.6 million weighted average diluted shares outstanding as compared to $1.31 per share based on $20.4 million weighted average diluted shares outstanding for the same period last year. Full deferred revenues were $122.9 million at quarter end as compared to $124.3 million last quarter. The decrease in deferred revenues was primarily due to the ramp down in sales of the magicJack PLUS in advance of the new magicJack PLUS.

Turning to our balance sheet, we are very pleased with our continued ability to generate strong cash flow. At September 30th we had cash and cash equivalent of $53 million, an increase of $10.4 million over last quarter and no debt. We believe we have one of the strongest balance sheets in our industry. Our ability to consistently generate significant cash flow provides us with substantial flexibility to enhance shareholder value. The repurchase of over 1 million shares we announced today not only highlights our strong conviction about the future growth potential of our business but it also demonstrates our willingness to utilize our strong cash position to repurchase our stock at what we consider to be attractive prices. This repurchase also ensured an orderly distribution of a large block of shares owned by irrevocable trust previously formed by the company’s founder.

As we had previously said we believe our stock price is significantly undervalued and we will continue to opportunistically evaluate additional share repurchases in the future. Our strong balance sheet also positions us well to pursue the various initiatives Gerry has outlined including 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. We expect total revenue to be in the range of $140 million to $142 million compared to our previously issued guidance of $155 to $160 million. We also expect adjusted EBITDA for the year to come in at the high end of the range we previously guided of $52 to $55 million. Our updated revenue guidance reflects the late launch of the new magicJack PLUS as well as lowered advertising spend in anticipation of our new marketing campaign.

As Gerry outlined sales have strengthened significantly as we have increased our retail store penetration. We have a number of new marketing and advertising initiatives underway to promote the new magicJack PLUS in anticipation of the holiday selling season and to create strong momentum going into next year. We are also pleased that we are projecting to achieve our bottom line estimates for the year. Although we will issue detailed 2014 guidance on next quarters call we are disclosing now that we will be projecting double digit revenue growth and strong profitability for next year.

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

Gerald Vento

Great thanks Jose. So in closing well much of the work of our management team has been less visible for the market place. The impact of this work will begin to take hold in the remainder of 2013 and 2014. As we transition we’ll continue to provide investors with increased transparency and provide better metrics with which to judge our performance as well as the health of our business. This Board and our management team are committed to executing against our growth objective.

With that that, would be happy to take questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) We’ll go to Tim Horan with Oppenheimer. Please go ahead.

Tim Horan – Oppenheimer

Thanks a lot guys. Gerry do you think you sold more devices in the fourth quarter than you did in the third quarter it sound like that’s the case, just curious what you are thinking?

Jose Gordo

Hey Tim its Jose. I think it’s early to say but I will tell you that we probably won’t sell as many. It’s hard to say where we’re coming because a lot of the initiatives that we’ve got going are about to hit here in the next two weeks and then the other thing is we had more momentum in the third quarter because that’s when we did our email blast so while we sit – we still think Q4 will do well, it’s unlikely it will do quite as well in Q3.

Gerald Vento

Hey Tim I was just taking a sip of water here. I mentioned on our last call that we had roughly I think it was about 9,000 doors we were in front of and when we get up to full speed we’d probably in front of closer to 30,000 doors that is. We’re probably around 13,000 doors today. I think the good news here is our channel partners are repositioning us highlighting us in the category and part of that is based on new band, packaging and TV. So I think we can be, we could probably be more efficient sooner if we could get that done quicker but I don’t disagree with what Jose has mentioned there.

Tim Horan – Oppenheimer

Got it, got it. So are you still in the [indiscernible] constrained or you just kind of holding back and shipping until you kind of repackage – it sounds like you’re going to come up with new packaging and a new way to brand or market it are you waiting for that before you ship the devices?

Jose Gordo

Well no, we are shipping but in terms of media spend and some of the other discussions we’ve had ongoing with channel partners I think we wanted to wait until we could transition to new brands, the refresh of the brand and new advertising. But look the demand for our product remains strong. Let’s recognize that the latest version of the product is quite good and the fact that we activated something in the neighborhood of 270,000 customers demonstrates that in the third quarter.

So, I’m very bullish about double digit growth. I think we are in a transition right now with respect to brand refresh, work refresh, packaging refresh and frankly the cooperation that we’ve been receiving from channel partners in terms of repositioning us and highlighting us in a category has been really over whelming.

Tim Horan – Oppenheimer

Got you, okay thanks. And when do you expect to refresh on this device and can the next device have Wi-Fi capabilities embedded in it or maybe an easy way to add Wi-Fi on to it do you still think that’s important?

Jose Gordo

I think it’s a good question. And I think we got into a bit of this because it was another you mentioned this question last time. Look I think first and foremost we’re about growing this revenue in a meaningful way. We talked about some of this in the script or at least I did. For us it’s all about profitability and driving unit sales and I think we feel very comfortable now in our projections of double digit growth for 2014. We have plenty ways to do just that with the product better into works our app product the mobility product the renewal cards. We haven’t talked about pricing schemes but we’re also, we also have that under review as well and whether the Jack with a Wi-Fi device is embedded we’ll have that under evaluation more to say about that in the near future.

Tim Horan – Oppenheimer

Great and how about the texting on the wireless app? I think you, we were kind of talking in the fourth quarter any update on timing there?

Jose Gordo

Yes. We’ll – look I think you got to start with the registered users continue to grow and grow at a very healthy pace. Our customers are telling us what they like about the app right now unique phone numbers, improving the ability to buy international minutes. So we think there is room for improvement in the customer experience and it’s all about our mobile strategy. We’re not ready to launch the texting device to consumers yet and that’s a reflection on really the test that we are, we have underway and the improvements that we think we can still yet make to the customer experience. So I’d say we’ll have to ask you to stay tuned with respect to when we are ready to launch the texting device. But we have already begun trials with respect to some monetization schemes and that’s been quite positive Tim.

Tim Horan – Oppenheimer

Great so probably we won’t see the texting device or the texting app this year. Do you think we can see it by mid next year or end of next year or do you have a rough timeframe?

Jose Gordo

I think – we have this in more than just data form right now but this is such a valuable and important asset to us with 5.6 million registered users and growing with the feedback that we’re getting from voice app users right now, but we really want to get it right whether that’s the very, very end of this year or early in 2014 I won’t predict yet because as I mentioned before I’m kind of fact based and I really want to…

Tim Horan – Oppenheimer

Okay but it sounds like you’re just a few months away…

Jose Gordo

Yes. We’re not very far but we just wanted to be right because we think the upside here is substantial.

Tim Horan – Oppenheimer

Great. And then I know you are examining your pricing plans. Are you also examining them for renewals your five year renewals at a fairly healthy discount meaning your one year renewals are probably low priced anything on raising the prices of the renewals?

Jose Gordo

Yes. We’re looking at the full suite Tim. We think we like the reaction of the 4,995 package in six months of access to network. We also know that we have done our own internal analytics and looked at our customer base and did our own research and really believe that there is an opportunity to potentially re-price and that is under serious consideration not just the 12 month 6,995 package but other incremental packages. And let’s just not forget that 49% of our customers are still under the old 2007 magicJack device and happy and sticking with us. The area that we think we can make significant incremental improvement on for example churn and the whole pricing scheme is to allow that texting customer to replenish or renew at a retail outlet and we have plans underway to make that happen.

Gerald Vento

Tim, I would just add that also the length of the renewal period is under review as well, five years that we may not something in between the one and five.

Tim Horan – Oppenheimer

Okay. But on the renewals do you think you can raise the five year price point?

Jose Gordo

I wouldn’t want to declare it today Tim. We got some more work to do but we’ve got it all under advisement right now.

Tim Horan – Oppenheimer

Unless I’m missing something I was calculating much lower churn here for this quarter I think that basically 275,000 gross sales well I’m looking at the wrong way but that’s fine. But anyway has churn been declining, I know it’s forcing to give the number, I appreciate that may be, have you been measuring with the trend that’s been a little last year too?

Jose Gordo

Yes. First and foremost this is first time I think you’ve heard the company discuss the issue of churn and we want to be as transparent as we can be to the investment community. Churn is a key component of the business top line revenue key component profitability, key component. We got two types of churn. We got churn with respect to the customer base on the original magicJack device the 2007 device and then we have churn on the magicJack PLUS device. The churn on the older device is a higher churn the churn on the magicJack PLUS device is lower we’ve given you the blended rate today for the first time. And in the future we’re going to do a deeper diver we’ll be one on ones with investors clearly going back to the market.

We’ve even discussed potentially having on investor day sometime in December preview some of the marketing things we’re doing talking greater detail with respect to the churn metrics and how we think quite frankly we are in a position to really affect lower churn going forward given what we know about the operating performance of each of these two customer segments.

Tim Horan – Oppenheimer

Great and just two more, sorry. On the tax rate is this some good rate going forward you think for next year and thereafter and I guess part of that have you kind of decided how much the profitability can run through Israel at this point?

Gerald Vento

Tim we’re working hard on it and I know we’ve said that to you before. I think it’s too early to say still and we’re probably not really far away from being able to kind of set the base line here but we are, we’ve got a number of deferred tax assets still on the books. We’re starting to show, we now have a trend line of profitability and we may have obviously we believe we’ll have more in the fourth quarter which would allow us to utilize some of those deferred tax assets and potentially improve upon the rate in the short term but like sort of where to settle down I think is still a little bit premature. We’re employing a lot of strategies to balance the revenue probably between the U.S. and Israel. And I think we’ll be able to give you more visibility on where all that stands hopefully by next quarter’s call.

Tim Horan – Oppenheimer

And then lastly…

Jose Gordo

Hey Tim just one additional point I was thinking about. The voice quality obviously reduces churn the new product has way better voice quality than the original product does. And so we’re working on that but we’re also making it easier for cash customers to renew that improves the churn. So, there is a number of initiatives that we believe will drive to lower churn metrics going forward.

Tim Horan – Oppenheimer

Great. And last, your fourth quarter guidance seems a touch of logical. I mean you kind of quoted a point on EBITDA if you got the higher end of your EBITDA you’re something about a 40% sequential decline I think if you’re looking for a sequential declines in revenue that are pretty substantial also? Is there, could you give us a little bit more color on what’s going on with the revenue maybe and I know you’ve been increasing the advertising spending but I guess you’re talking to hit the higher end you got to see spending increase in the quarter by $4 or $5 million at least?

Jose Gordo

Sure, so what do you have as that for Q4 I mean for top line?

Tim Horan – Oppenheimer

Well I think that hits the midpoint of your guidance you’re down about $2 million sequential – I think to hit the top line on EBITDA you have to be down about $4 million sequential. I don’t have it in front of me, sorry.

Jose Gordo

Yes, yes, I mean I think the revenue what we put out is 140 to 142 right and we’re at 105 now. But I think that would tell you that we’d be 35-ish in the fourth quarter which is kind of where we are.

Tim Horan – Oppenheimer

Okay. I, sorry must I must have miscalculated the first two quarters okay. So you’re basically going for flat revenue and EBITDA down $4 million?

Jose Gordo

No, EBITDA shouldn’t be down $4 million. I’m not sure what you’re looking for.

Tim Horan – Oppenheimer

Well I think I was just adding up the three quarters of EBITDA.

Jose Gordo

Okay. I almost do that, I’ll just give you that numbers in a second. So, we’re at 44.2 right.

Tim Horan – Oppenheimer

So, to hit the high end of the guidance would be about $10 to $11 million for the fourth quarter?

Jose Gordo

It would be about 11.

Tim Horan – Oppenheimer

And this quarter you’re 14?

Jose Gordo

14 in change so may be its three but as I said we’re in the higher end of the range its guidance for now obviously we’ll firm that number up.

Tim Horan – Oppenheimer

But I mean do you think well – I guess I’m asking did you think EBITDA can decline $3 million in the fourth quarter or do you think it would be flat or how much spending do you plan on increasing, if the revenues are flat I mean just can you…

Jose Gordo

We don’t want to update more than saying that we’ll be at the higher end of the range and I’ll just be transparent just because we want to retain flexibility over what we do on our ad spend.

Tim Horan – Oppenheimer

Got you. And the gross margins are up really nicely. Is there more room for improvement there on the fourth quarter or is this kind of a decent run rate going forward and – it sounds like it should be up more in the fourth quarter if you’re going to sell less devices also?

Jose Gordo

Yes. I mean definitely that’s a lot of that margin improvement is on the renewals. So, I think what you said is right.

Tim Horan – Oppenheimer

Okay. Great well thanks a lot guys.

Jose Gordo

Thank you.

Gerald Vento

Thanks.

Operator

At this time we have no further questions in the queue. I would like to turn the conference back to the speakers for any additional or closing remarks.

Gerald Vento

Thank you all for participating and we look forward to you in the near term. Thanks.

Operator

Ladies and gentleman this concludes today’s conference. We appreciate your participation.

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