Vonage Holdings' CEO Discusses Q4 2013 Results - Earnings Call Transcript

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 |  About: Vonage Holdings Corp. (VG)
by: SA Transcripts

Vonage Holdings Corp. (NYSE:VG)

Q4 2013 Earnings Conference Call

February 12, 2014 10:00 AM ET

Executives

Leslie Arena – Investor Relations

Marc Lefar – Chief Executive Officer

David Pearson – Chief Financial Officer and Treasurer

Analysts

George Sutton – Craig-Hallum

Gregory Burns – Sidoti & Company

Michael Latimore – Northland Capital Markets

Michael Rollins – Citi Investment Research

Raghavan Sarathy – Dougherty & Company

Robert Routh – National Alliance Securities Capital Markets

Bill J. Dezellem – Tieton Capital Management LLC

Operator

Good day, everyone, and welcome to the Vonage Holdings Corporation Fourth 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 now 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 fourth quarter and full year 2013 earnings conference call. Speaking on our call this morning will be Marc Lefar, Chief Executive Officer; and Dave Pearson, CFO. Also joining on the call are Joe Redling and [indiscernible], Wain Kellum.

Marc will discuss the company’s strategy and progress and Dave will review our financial results. Slides are accompanied Dave’s discussion are available on the IR website. At the conclusion of our prepared remarks, we will be happy to take your questions.

As it referenced on Slide 2, 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 slide and 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 financial measures. The reconciliation to GAAP is available on the IR website.

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

Marc Lefar

Thank you, Leslie, and good morning, everyone. I’m pleased to review our results for the fourth quarter and full year 2013 with you. Let me start with some contexts for those of you joining us for the first time. In early 2012, after completing a multi-year operational and financial turnaround, we outlined a three-year strategy to drive substantial, additional revenue growth for 2015.

We established three areas of strategic focus. First, growth in our core U.S. and Canada markets by mean the needs of underserved segments including entry into the small and medium business market. Second, the development of our capabilities in mobile and third, international expansion.

In 2013, we made important progress against each of these growth priorities. We launched the BasicTalk brand nationally, providing compelling value to domestic callers. In the core Vonage branded business we continue to shift marketing investments from mass reach vehicles like television, the local sales teams focused on ethnic segments.

These moves and the inclusion of lines from Vocalocity in the last six weeks of the year resulted 9,000 net line additions for the year and an improvement of nearly 25,000 lines from 2012. This vehicle versus a several years of annual line losses. In addition, churn for the year improved by 10 basis points to 2.5%. We grew the adoption rate of mobile extensions, which extends our home phone service to mobile phones. And we improved our standalone mobile app with quality and feature enhancements including video calling, and a unique twist on video voicemail.

Early in the year, we announced the venture to launch service in Brazil and are on track with the upcoming launch. And most recently we acquired Vocalocity what we believe the transformative transaction for the company. Financially, we produced $110 million in adjusted EBITDA and $66 million in free cash flow.

Contributing to our financial performance, were material improvements in the cost of telephony services and customer care, with reductions of 8% and 16% respectively. Importantly, we delivered the customer care improvements for achieving gains satisfaction, handle time and first call resolution. We also executed on our balanced approach to capital allocation. Our strong balance sheet enabled both the funding of the Vocalocity acquisition and a continued execution of the share repurchase program we began in August of 2012.

During 2013, we repurchased $56 million or 19 million shares of Vonage stock. Since beginning the buyback in 2012, we repurchased 31 million shares or $84 million. Although we made significant progress in many fronts, revenue growth fell short of our expectations for the year. This is due primarily to two factors.

First, the gain is driven by Vonage World among key ethnic segments and BasicTalk among discount value shoppers, we’re not sufficient in 2013 to offset the impact of line losses in 2012, and a slowdown in sales of premium domestic service plans. Although the churn has been stable in this segment, we did experience net line declines. The second driver has been the timing of revenue contribution from new initiatives, which has been a bit slower than we expected. We’re aggressively addressing the challenges in our core business with the addition of Vocalocity we expect to grow the overall business in 2014.

Results for the fourth quarter was solid, revenue grew 4% sequentially to $200 million, $211 million including the impact of Vocalocity in the last six weeks of the year. Excluding Vocalocity, revenue was stable sequentially at $204 million.

Adjusted EBITDA increased $2 million sequentially to $25 million and gross line additions of 175,000 were flat sequentially and up 15% versus the prior year, reflecting customer additions of BasicTalk and Vocalocity. Churn decreased to 2.5%, improving modestly from the third quarter resulting a 9,000 net line additions. This is our third consecutive quarter of positive net line additions and both our consumer business and Vocalocity we’re net line positive in the quarter.

Dave will cover the quarterly results in greater detail in a few minutes. Let me now spend a few minutes covering the highlights of each of our major areas of focus. In our core North American business we see continued opportunity to grow both our international long distance and domestic customer base.

We’d successfully grown our international calling base in multiple ethnic market segments establishing strong brand presence and awareness, 36% of U.S. Indian households are now Vonage customers. Over the last year, we’ve grown our revenue from Filipino’s segment to more than $10 million annually and our Hispanic base has grown nearly 50% over the past three years with the great opportunity for additional share gains.

Although we worked to optimize our match reach media vehicle for ethnic audiences we see room for additional efficiency. We will continue to shift funds to more targeted approaches including the assisted sales model in retail stores and community-based sale teams. Sales for these channels which were virtually not existed in 2010, have grown 500% over the last three years and now comprised over 50% of gross line additions. We now provide a assisted selling in 700 stores.

We are also improving our digital platforms and tools. We’ve undertaken a complete redesign of our online experience to increase prospect flow, enhance the customer learning and buying experience and improved conversion. We’re also optimizing our platform to support all forms of traffic from desktops, mobiles and tablets.

BasicTalk is our 999 per month low-end domestic calling product launched nationally in the second quarter of 2013. BasicTalk is sold at all Wal-Mart’s stores nationwide and online. The product has performed well helping the company to deliver positive net line additions for three consecutive quarters, reversing the decline of the domestic segment and validating our retail-oriented distribution strategy.

Many buyers give BasicTalk as a compliment to their cell phone. 42% of BasicTalk buyers did not have home phone service at the time they signed up. BasicTalk is bringing back cord-cutters. Our data also shows that the strategy contributes BasicTalk as a separate brand to avoid cannibalization of the Vonage base has been largely successful.

Our delivery model for BasicTalk is lower cost than our premium brand in virtually every way, including devices, customer care and acquisition cost. Looking ahead, we see opportunity to grow BasicTalk through additional distribution opportunities and product enhancements. Ultra-value shoppers represent a market of more than 40 million households and we expect to continue to gain share as we expand distribution and improve our direct channel performance. To further drive execution of our strategy for our overall core consumer business we appointed Joe Redling as President of Consumer Services for the U.S. and Canada in December.

Joe was a highly engaged member of our Board as a former public company Chief Executive and Chief Marketing Officer, he brings more than 20 years of experience in consumer marketing and operations. Joe adds specific expertise in transforming and optimizing subscription-based businesses through the use of digital platforms and I’m confident he’ll have a positive impact on our business.

Now, let me turn our attention to internationals. Vonage has operated successfully for many years in Canada and UK. Now, Brazil is the principal area of focus in our international expansion strategy. Our Brazil business has the potential to be a substantial contributor to revenue over time. The Brazilian market at large and growing rapidly with more than $22 million of its 67 million households already broadband connected. Brazil was also home to more than a 1 million expats and has a vibrant small business community.

In addition, the government is committed to expanding broadband access in advance of the 2014 World Cup and 2016 Olympics. The customer appetite for alternatives to the existing telecom services providers is strong. Our research has found that incumbent providers are slowed to revision services and core costumer services was a major main point. Pricing is high and confusing, for domestic and international calling on both wireline and wireless networks. Our service addresses these issues and will be launched with mobile calling through our Extensions app and an integral element of the core offering.

We’ve completed development of the core components with the services and are now contacting integrated production testing, we have an experienced local management team and have established and trained our customer care teams. We are on track for a phased market launch stating early in the second quarter. We plan to launch our services first and select smaller markets and progress to largest market later in the year.

In addition to our focus on Brazil, we actively are pursuing potential opportunities in India and Mexico. Mobile is now an essential component of our core service for the extensions product and a global digital phone card. It’s also a standalone product as Vonage Mobile App. Approximately 87% of our home phone customers who call internationally in mobile extensions. 28% of the international calls made over the Vonage network are made for a mobile phone, representing nearly $200 million calls and almost $2 billion minutes of use in 2013.

And new features such as video calling and video voicemail have been received favorably, helping to attract new users in the standalone mobile app. In the fourth quarter nearly 25% of all Vonage mobile calls made on the Android devices and 10% of iPhone calls were video calls.

In 2014, new capabilities will bring carrier great features and improved quality to Vonage’s mobile platform. We recently implemented enhancements to our video services, audio call setup speed and in call quality that meet or exceed the experience customers have with their existing mobile carriers in many situations. Future enchantments will bring new benefits to both businesses and consumers. Business customers will be able to make and receive calls from the desktop number maintaining both their work identity and their personal identity on a single handset.

Our product roadmap includes the next-generation of mobile services that create true alternatives to traditional wireless carriers and will allow consumers to communicate seamlessly over any connected devices at low cost virtually anywhere in the world. The acquisition of Vocalocity positions Vonage as a leader in the small and medium business hosted Voice-over-IP market. For us and it’s all have been except this market which is in its very early stages with less than 15% penetration to grow at a rate of 28% over to each of next five years.

Vocalocity which were in the process of rebranding as Vonage Business Solutions serviced more than 25,000 businesses and it’s focused on company of 20 or fewer employees which comprised 60% of the SMB market are $9 billion in revenues. For the full year Vocalocity grow revenue 38% in the prior year to $62 million. That witnessed the rate of growth is nearly doubled that of Eight by Eight and comparable to that of RingCentral.

And during the fourth quarter Vocalocity added nearly 1500 more net new organic customers an Eight by Eight. Vocalocity continues to be lead by Wain Kellum, a highly experienced CEO, Wain has a deep background in the software industry having built five successful software companies that has partners including Microsoft and HP and he take equity stakes in several of these companies. Immediately following the closing in November, we implemented a program to quickly realize many of the cost synergies identified in our diligence activities. In addition, we are aggressively evaluating new level of opportunities to grow even more quickly and gain the full benefit of the Vonage brand.

On the cost front, we have already fully interconnected Vocalocity with the Vonage intelligent call routing platform to take advantage of domestic termination costs that are 65% lower. Vocalocity will also have the benefit of some of the lowest international long-distance rates in the world. We’ve also completed the migration of Vocalocity to Vonage’s E911 platform. As the year progresses, we expect to begin to combine portions of our infrastructure and take advantage of best practices in product developments in areas such as mobile.

Beyond this, we are in the process of implementing Vonage’s customer care technology, leveraging our workforce management tools, to improve costs, while increasing overall productivity.

On the revenue front, we’re quickly working to leverage the Vonage brand. Vonage’s aided awareness of 80% among small and medium business owners, more than eight times that of the other major VoIP competitors, providing us with the great opportunity to increase market share as awareness of cloud-based solutions where SMB increases.

We are already implementing or actively testing programs in five areas. First, we are improving our digital yield by redirecting all of our business prospect to web traffic and inbound calls from Vonage to Vocalocity, and by working to optimize our digital search programs. Second, we are testing an expansion of the Vocalocity referral program to include Vonage existing consumer customers. Third, we are evaluating impact of a broad range of promotional pricing options. Fourth, we’re testing the impact of targeted advertising and our ability to sell for the segment of SMB customers where international calling is an important part of their business. And fifth, we are improving distribution through expansion of our reseller and teller sales channels.

Beyond the programs already in progress, we see additional strategic opportunities which we are rapidly evaluating. These include one, improving our capabilities to serve the SoHo market where the Vonage brand resonates strongly. Two, licensing our cloud-based software, desktop tools and mobile VoIP products as white-label services, the mobile carriers and enterprises that sell to other businesses. Three, evaluating the proper timing and approach to expand up market to companies with more than 20 employees. And four, potentially using the Vocalocity platform to accelerate our international expansion outside of the United States.

Although it’s still early, we’re quite pleased with the early results of the enhanced marketing programs and the potential of the Vonage brand. Net customer additions for December and January are doubled that off the prior two months of October and November. We intend to build on this early momentum and we will keep you posted on our progress.

During the year, we also continued to make strong progress, developing and protecting the valuable intellectual property invented by our talented employees. In 2013, we more than doubled the size of our U.S. PAT portfolio, as the U.S. Patent and Trademark Office ordered Vonage 18 new patents, covering diverse technologies such as advanced call routing techniques, mobile VoIP handoffs, roaming and quick to call services. Including several applications by Vocalocity, we filed 99 patented applications in 2013 and now have more than 210 pending U.S. patented applications.

In summary, we made solid progress in 2013 well we still have much to do. With the addition of two highly experienced leaders in Wain and Joe, we have strengthened our team and sharpened our focus on executing our growth plan. Revenue growth remains our top priority for 2014, and we expect total company revenues to increase in the range of 1% to 2%. This is on a pro forma basis, treating Vocalocity as that we owned it for all of 2013.

On our reporting basis, including Vocalocity revenue only since acquisition we expect total company revenues in 2014 to increase in the range of 7% to 9%. These numbers taken to account the softness I discussed in our domestic premium business which we expect will be more than offset by the contributions from our growth initiatives. Strategically, we’ll continue to allocate capitals the area’s highest return and will assess additional M&A opportunities that build in our current asset base that’s happened into growing markets.

Thank you for joining us today. And now I’ll pass the call over to Dave.

David Pearson

Thanks, Marc, and good morning everyone. I am pleased to review our financial results and 2013 outlook. Before I begin, let me provide the context for the numbers we’ve reported this morning.

We’ve reported consolidated financial results for Vonage and Vocalocity combined as of November 15, closing date of the merger. As a result, the fourth quarter results included partial quarter of Vocalocity’s results. These results also reflects GAAP purchasing accounting GAAP purchase accounting rules regarding amortization for intangible assets, integration and acquisition expenses and the one-time exclusion of a portion of Vocalocity’s deferred revenue. This exclusive and resulted in a reduction to reported revenue coming from Vocalocity in the fourth quarter. In table 2, we showed consolidated result as reported in key Vocalocity operating statistics on a pro forma basis as the Vonage and Vocalocity where all periods presented and not including the effects of purchase accounting.

With that let’s get to on Slide 3. For the fourth quarter adjusted EBITDA was $25 million, up from $23 million sequentially reflecting improvements in cost of telephony services, customer care cost per line. Adjusted EBITDA just down from $34 million in the year ago quarter, reflecting our planned investments in strategic growth priorities. Full year adjusted EBITDA was $110 million, down from $135 million in the prior year due to investments in growth priorities including the national launch BasicTalk in the second quarter and lower revenue. Adjusted EBITDA excludes the overlaid expenses for Vocalocity, but I think the negative impact of the $800,000 purchasing accounting adjustment I noted above and just for the 30% of our Brazil venture that we did not own in the period.

Moving to Slide 4. Four quarter GAAP net income was $4 million or $0.02 per share flat sequentially. GAAP net income was down from $13 million or $0.06 per share in year ago quarter. Fourth quarter 2013 reflect the negative net effect of $2.5 million of amortization of acquired intangible assets associated with Vocalocity, for the six weeks in 2013 during which we owned Vocalocity.

Fourth quarter net income excluding adjustments, was $10 million or $0.05 per share, up sequentially from $9 million and $0.04 per share and down from $23 million or $0.10 per share prior in the year ago quarter. As with EBITDA, the reduction in net income reflects our planned investments and growth priorities. Full year net income excluding adjustments $52 million or $0.24 per share down from $84 million or $0.37 per share in 2012.

Moving to Slide 5, revenue for the fourth quarter was $211 million up from $204 million sequentially due to the inclusion of the partial quarter of Vocalocity revenues. Core Vonage revenues were flat sequentially and Vocalocity full quarter revenue prior to the purchase accounting adjustment of $17 million up 7% sequentially and up 40% over the year ago quarter.

Revenue declined from $214 million a year ago due to lower customer acquisitions on premium plans and a $2 million reduction in Universal Service Fund or USF fees which were our pass-through. For the full year revenue was $829 million down $20 million from the prior year primarily due to plan mix and in $8 million declined in the USF fees which accounted for 39% of the difference, partially offset by Vocalocity.

Fourth quarter average revenue per user was $28.72 down from $28.87 sequentially primarily due to lower customer acquisitions on premium plans. ARPU was down from $30.15 in the year ago quarter due to plan mix in USF.

Moving to Slide 6, we continue to drive efficiencies and key cost areas improving COTS and customer care. We reduced COTS to telephony services a $52 million and $57 million year ago primarily due to lower international termination rates per line was declined by 5% lower interconnect costs which declined 43% in lower USF. COTS declined from $53 million sequentially due to lower international termination and collocation cost. Continued reductions in this key line item have more than offset effective customer plan changes on ARPU, resulting in an increase in direct margin to 71% compared to 69% in the prior year. COTS per line was $7.09 down from $7.48 sequentially from $8.02 in the fourth quarter of last year.

Moving to Slide 7, selling, general and administrative expense for the fourth quarter was $73 million, up from $65 million in the third quarter driven by an increase in assisted selling expense, $2 million in Vocalocity acquisition related cost, and the absence of the $1 million insurance reimbursement that was reported in the third quarter.

SG&A increased from $62 million in the year ago quarter due to higher assisted selling expense as we more than doubled the number of stores with assisted selling, non-cash stock compensation and acquisition-related cost. Offsetting a portion of these increases were declined in customer care cost per line which were reduced by 7% on a sequential basis, 14% from the year ago quarter excluding Vocalocity.

For the full year we again delivered significant cost reductions in customer care and improvements across quality metrics which also contribute to improved customer retention. Per line costs declined 16% excluding Vocalocity reflecting continued service quality improvements, operating efficiencies and improvements in average handled time in contact rate which declined 7% and 8% respectively as well as improvements in first call resolution and customer satisfaction which we’re at best-in-class levels.

Moving to Slide 8, marketing expense for the fourth quarter was $58 million, down from $59 million sequentially, reflecting a shift in marketing spend, focused on in-person selling and BasicTalk marketing spend levels becoming more normalized post-launch. Marketing was up from $53 million a year ago.

Subscriber line acquisition cost or SLAC decreased to $331 from $339 sequentially due to increased efficiency in acquiring BasicTalk customers and the partial quarter addition of Vocalocity. SLAC declined from $347 in the year ago quarter, reflecting the impact of higher gross line additions from BasicTalk and Vocalocity.

For the year, marketing expense was $227 million up from $213 million in 2012, primarily due to brand building associated with the national launch of BasicTalk and Vocalocity. Resulting SLAC was $348 up from $326 a year ago.

Turning to Slide 9, gross line additions or GLAs were 175,000 flat sequentially reflecting the partial quarter of Vocalocity lines offset by lower customer line additions on consumer plans. GLAs increased from $152,000 in the prior year’s quarter due to BasicTalk, Vocalocity and UK line additions. We added 653,000 GLAs for the full year flat with 2012.

Regarding GLAs since closing on Vocalocity, we have directed prospective business customers that come to Vonage by inbound teller marketing to the web the Vocalocity’s website and inbound teller sales. Well this has meant fewer consumer GLAs the net effect has been positive. The same lead flow generating more total lines and higher ARPU and putting the Vocalocity product in customer’s hand which we believe is as great future up sell opportunity.

Customer churn for the fourth quarter was 2.5%, down from 2.6% sequentially and flat compared with the year ago quarter. Churn was also reduced to 2.5% for the full year the lowest level in three years, reflecting higher customer satisfaction and improvements in the customer experience. The addition of Vocalocity was immaterial to overall account churn. Vocalocity account churns for the fourth quarter was 1.8% and in the year with over 25,000 customer accounts.

We added 9,000 net lines in the quarter, a third consecutive quarter of positive net lines. Net lines for the year were also 9,000 positive, 25,000 lines swaying from 2012 our first year of positive net lines since 2008. Both the Vonage consumer business and Vocalocity were net line positive for the quarter and the year.

Moving to Slide 10. CapEx for the quarter including the acquisition and development of software assets at $6 million primarily for network infrastructure and systems improvements. This is up from $4 million sequentially down from $12 million in the year ago quarter. For the year, CapEx was $22 million, down from $27 million a year ago.

Free cash flow on the fourth quarter was $30 million, up from $20 million sequentially due to positive changes in working capital partially offset by higher CapEx. Free cash flow was down from $49 million in the year ago quarter primarily due to lower operating cash flow. Similarly, free cash flow for the year with $66 million down from $93 million from our operating cash flow. Before reviewing our balance sheet, I wanted to discuss change the ownership substructure of our joint venture in Brazil. Joint venture partner there Datora for the strong operating partner in preparation for launch.

Our agreements with Datora include provisions, which allow for dilution rates in the event either partner does not satisfy certain capital obligations. Datora was unable to fund certain 2013 capital obligations and as a result Vonage expects to increase its ownership with the venture to approximately 90%. Not excepted to increase risk to market entry and Datora continues to be Vonage’s operating partner and equity holder in the Brazil venture.

I’d be now discussing the mechanics of the Vocalocity acquisition and the impact to our balance sheet. Upon deal closing in the November, Vocalocity shareholders received $108 million in cash and $8 million shares in Vonage common stock. We financed cash portion of the transaction with $33 million cash from the balance sheet, $75 million from our revolving credit facility. Upon close, Vocalocity had $3 million of excess cash on its balance sheet.

Following the acquisitions and as of December 31, 2013, Vonage cash and cash equivalents of $89 million up including $4 million in restricted cash on the balance sheet. Even after funding the acquisition, our balance sheet remained strong. Our net leverage ratio was 0.5 times on net debt of $15 million given a significant, strategic and financial flexibility. With this flexibility we will consider additional M&A opportunities that set with our asset base including bolt-ons to Vocalocity.

During the fourth quarter, we continued to our balance approach to capital allocation repurchasing $3.5 million shares for $12 million. So slightly lower than the prior quarter as we’re out of the market twice during quarter due to the Vocalocity acquisition. During 2013, we repurchased $19 million shares for $56 million, we have repurchased $51 million with Vonage stock into our current $100 million authorization intend to continue to execute on this program.

As beginning the buyback in August of 2012, we’ve repurchased $31 million shares of Vonage stock $84 million at highly accretive average price $2.68. As Marc discussed, in 2014, we are targeting revenue growth in the range of 1% to 2% on pro forma basis.

We except EBITDA to be stable to its current quarterly run rate plus or minus $7 million as we will exercise discretion to modulate our investments based on the progress we are seeing across our portfolio, and some of the investments such as Brazil are lumpy and vary in timing of when they will be made.

Our EBITDA projection is based on stable cash flow from our core business and investments in the launch of Brazil, enhanced distribution of BasicTalk and accelerating the growth of Vocalocity. We expect CapEx to come in around $13 million level.

Thank you for your continued support at Vonage. I will now turn the call back over to Leslie, to initiate the Q&A session.

Leslie Arena

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

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) And our first question comes from George Sutton from Craig-Hallum. Please go ahead.

George Sutton – Craig-Hallum

Thank you very much. I’m not sure if this is best directed to Marc or Wain, but relative to the rebranding program and the impact that you saw in both December and January, I wondered if you could give us a little bit clarity as to was that sort of a one-time impact of the rebranding or can you give us the sense of the kind of velocity of demand that you’re seeing, that you would expect on an ongoing basis?

Marc Lefar

Hey George, it’s Marc. Thanks for the question. I’ll take the first answer and I’ll let Wain to provide some additional color. The December and January results relate a combination of both the Vonage brand and awareness as well as accelerated investment spending, which we talked about to make sure that we built awareness in the marketplace.

So, we did device promotions as well as targeted advertising announcing the merger. The sustainability of that given that it’s early it’s still difficult to know, but we do expect to have a aggressive spending profile during the course of the year. And we would expect to reapply some of those programs that worked in the December and January period.

I would mention that the net doubling of business actually was exclusive of direct traffic that we handed to Vocalocity that was really based upon market general interests in the brand, Vocalocity’s impressions in the marketplace as well as the overall marketing and sales activities. So, we think we’ve kind of normalized with the direct lead handoff that we pushed in and as a little bit of internal gymnastics to get that clear. But we feel very good about the progress.

I don’t think it would be fair at this point to take a straight line and go gee that’s going to be sustainable for the rest of the year. But is certainly quite encouraging and we’ve seen continuing strong leads and prospects coming in over the last several weeks. So, more to come on that to be candid a lot of the activities we put in place since closing have been testing to try to understand what gives us the best financial return.

And we’ll keep you posted as we go, but our objective here is to invest in those things that could accelerate the growth rate of Vocalocity and while we want to remain flexible on the investment profile, we’re looking more to reinvest the cash being generated out of business rather than using it as an EBITDA engine. We think there is a lot of opportunity to invest and then we think that, that investment will get us a long-term solid return in revenue growth. Wain, do you want to add anything to that?

Wain Kellum

As Marc said, it’s been a combination of accelerated stem and we’re early on in learning how to leverage the Vonage brand. But the Vonage brand applied to the Vocalocity business at a minimum has at least four benefits that we see. We get a lot more eyeballs now than we used to which create selling opportunities so web traffic is up. Marc described the Vonage referral program, which has enormous potential, when you look at the potential number of ours are pipeline per partnership development and recruitment appears like it’s going to benefit greatly. And even on the digital side, since we’ve rebranded, we’ve noticed the quantifiable increase in our form completion up almost 33%, which is indicates that we’ll see an additional improved efficiency in our online paper click spending.

Marc Lefar

Thanks Wain. For those who are not aware of the form completion is the key for step in qualifying a lead where we actually capture the business name and information. So, the ability to have that completed or interest in getting that form means we are getting more engage prospects. Thanks George. Next question.

George Sutton – Craig-Hallum

Just two other questions relative to the SMB part of the business if I could. Number one, every public competitor on their call has pretty blatantly said they’re trying to move up market outside of this 20 and below market. So, I’m curious if you have started to see any positive impacts from those moves. And secondly you had talked about a white labeling program, which is the first time I heard you discuss that I’m curious if you could just expand a little on that opportunity.

Marc Lefar

Sure. So, Vocalocity’s focus has been on the 20 and under employee customer base. That’s about $9 billion of the $15 billion market. The market we think is still very under-penetrated and we think that there is lots of running room acquiring those customers very efficiently. That’s our primary focus.

When we talk about competitional impact from other players, the truth is its relatively rate or the less frequent occurrence that we are competing with the other players in the marketplace for business. It tends to be whoever gets there first has a high probability of winning the business. It’s much more of the land grab phase in this marketplace than it is aggressive competitive market at least among the cloud based providers.

We’re going to continue to assess the right way to move our market. That can be efficient and if we can do that with cost effective distribution and there are some serious breakpoints in how do you distribute to the move up market were assessing that. They’re might be some bolt-on opportunities. They get us into verticals that would make that a natural fit.

Our platform is certainly extensible up market, but we think there is a lots of work that we can do particularly in leveraging the Vonage brand within the market space when. So, we’re assessing it. Had not seen significant impact from competition, but didn’t want to take that off the table as we partner with Wain and think about the long-term growth strategies.

On the White Label front, we really have a very unique asset in Vocalocity and they really built what is a complete cloud-based platform. Think about the movement into platform as a service and we’re think very strategically about what this platform can do for us whether it becomes the core platform for expansion rapidly into international markets. We even thought about how should be using this approach to our core business in the United States. We have had significant interest from multiple large companies that service small and medium businesses or have an incumbent base of customers with one set of products that have approached us and shown real interest. And basically leveraging our platform putting their brand on it and there is any number of different business structure that supported. And we think that’s a significant opportunity as people are trying to think about quick way to market to be able to drive more revenues in there and leverage our existing small and medium business markets. That’s something that Wain and his team are focused on right now.

Leslie Arena

Next question Operator?

Operator

And your next question comes from Greg Burns from Sidoti & Company. Please go ahead.

Gregory Burns – Sidoti & Company

Hi, good morning. I was just hoping to get a little more color on the gross line additions in the quarter. If you back out any contribution from Vocalocity they will be down sequentially. So, I was just wanted to get a feel for the slowdown and BasicTalk growth or are you seeing accelerated declines in your domestic calling Ohio high ARPU calling subscriber base.

Marc Lefar

Sure Greg it's Marc let me take that one as well. So, as I mentioned, both of our consumer and Vocalocity businesses were positive net lines for the quarter. That said, the core business was down sequentially slightly. There’s a couple of factors. One is, we are pouring some amount of bucket of customers from the core business into Vocalocity as we shift lead. That’s why these numbers become fairly blended over time. That was one driver.

The second driver was, we did see some continuous softness in domestic premium customers particularly in the October period, was a little bit of softness. We saw some shifts in media in an effort to become more efficient that frankly while there are less expensive broadcast networks than we thought would be achieving the same kind of regional frequency that was not the case and we had to pull back on that and reinstate our prior media approaches, which showed a bit of a bounce back. So October was soft.

The other contributor to that was, this is the first full-year December that we’ve had with BasicTalk. And as you are aware, this is a largely mass merchant retail-driven product. We didn’t know what to expect, but during the holiday season BasicTalk sales did slowdown. You might have intuitive this, but it’s not been the case our Vonage business, but BasicTalk is very much a shopping experience destination shop. We don’t do assisted store selling for BasicTalk and as a result during the Christmas holiday, we saw softness in BasicTalk which is since bounced back post holiday.

So those two factors gave a sequential softness. But again I reiterate that both the consumer total with net adds positive as with Vocalocity, which was only six weeks of the quarter.

Leslie Arena

Next question operator.

Operator

Thank you. And our next question comes from Michael Latimore from Northland Capital. Please go ahead.

Michael Latimore – Northland Capital Markets

Yeah, great thanks. I was just trying to think of a few things on Vocalocity here. I think you did about $16.5 million or $16.6 million in the third quarter, looks like you grew about 2% sequentially. Can you help I think there is a seasonality in the business there or can you think it looks like the number of businesses that grew a lot more than that and obviously year-over-year were strong sales. May be talk a little bit about that?

David Pearson

Yes, sure there really isn’t significant seasonality and Wain can comment further on that in the Vocalocity business. The sequential increase was 7% on revenue and without the purchase accounting and you may be looking at the purchase accounting adjusted number which took about $800,000 net of revenue for the fourth quarter. So, it really, it was a positive trend and the fourth quarter was 40% higher than the fourth quarter of 2012.

Michael Latimore – Northland Capital Markets

Great. And then on the traditional Vonage SoHo business let’s say, what percentage of revenue was that in the quarter?

Marc Lefar

We don’t track that usually on a segment-specific break out, but I would tell you that relative to our run rate we’ve talked about it being ballpark around 4.5% to 5% of total revenues and we’ve talked about it being roughly $40-ish million in revenue, that wouldn’t have changed based on the size of that base in the fourth quarter. I would reiterate the comment I made before which is, we have eliminated the proactive selling of small business plan under the Vonage brand. We are moving all of the traffic increase that relate to the business even if you go to the Vonage website, links you to fully branded Vonage business solutions pages that access the Vocalocity rate plans and sales teams.

So, while we will continue to have churn out of the Vonage core business you will not see replacements that’s hitting the consumer business all of that will move to Vocalocity which makes a tremendous amount of sense. And you’ll also see blended marketing efforts because you see a lot of small and medium business owners who take advantage of the same kind of consumer media that our consumers do. And that’s why we look at this really very much of a blended business and we now have to look at total revenues and total additions as a measure of progress.

Leslie Arena

Next question operator?

Operator

Thank you. And our next question comes from Michael Rollins from Citi Investment Research. Please go ahead.

Michael Rollins – Citi Investment Research

Good morning, thanks for taking my question. Just first off, I’m wondering if you could be just more specific on the impact to unit volume whether it was on the net add or on the gross add or is that frankly both in terms of what Vocalocity contributed during the six weeks roughly that you had it within the financial result? And then secondly, just taking a step back, I’m wondering if you could talk a little bit more about how investor should think about the acquisitions costs of a Vonage business customer from here either on the per customer basis or per line basis whichever you think would be more helpful to think about in that form? Thanks

Wain Kellum

Sure. I’ll take the second question first. IOR of a Vocalocity customer is quite high and based on the acquisition costs so it is much more oriented towards sales than your standard Vonage customer and the all-in acquisition costs is leading to an IOR that is, above anything we’re seeing the Vonage consumer business today. So, I’d call 50% on the current course of speed and that’s using some fairly conservative approaches to that calculation. So, we feel like there is a lot of runway to add customers and very high return to doing that.

And then specificity on net and gross add yes. What I can tell you is that so we reported 25,000 customer at Vocalocity for the fourth quarter we had set the accounts, we had set that we have 23,000 at the end of the third quarter. So you can do the net increase of roughly 2,000 we made some statements in the past about how to think about the size of these accounts. So I think you can, you can back into the net lines approximately net lines added and as Marc said, both the core business without the leads that we sent to Vocalocity and Vocalocity are net line positive.

Michael Rollins – Citi Investment Research

Okay, thanks Wain.

Operator

Thank you. And our next question comes from Raghavan Sarathy from Dougherty & Company. Please go ahead.

Raghavan Sarathy – Dougherty & Company

Good morning, thanks for taking my questions. Two questions from my end. Marc, when you talked about Vocalocity business you indicated that the business accelerated since the acquisition. Can you talk about the pricing environment of Vocalocity and also may be Dave if you can give us some sense from the ARPUs for that business that would be great? The second question is again Marc, in your prepared comments you talked about revenue coming a little bit below what you had expected for the years. So if you look at the core business maybe how should we think about maybe from a metrics perspective net growth about nets about? Thank you.

Marc Lefar

I’m sorry. Could you cut that gross sub ads, net sub ads. Okay, so let me try to – we try to take the – take those in sequence. So first, relative to the pricing environment and pricing structure on Vocalocity, as you’re probably aware in the small and medium business market, there will be headline pricing you will see in the website, and then on a sale-by-sale basis, customers will engage in that pricing discussion.

What we see is that, ARPU per line is actually not terribly dissimilar from what we see on core Vonage business. And it’s actually pretty consistent across the industry. We are not doing a lot if any kind of headline rate plan pricing promotions. The primary driver of variability in pricing tends to be device and device subsidy. And that’s the thing that we’ve done most of our experimentation with try to understand if we remove the out of pocket cost as we’ve seen in the wireless industry and we’ve seen in our Vonage core business.

What kind of additional elasticity of demand can I get for us? And we’re assessing those results from some of those tests in the December and January timeframe. In terms of – the revenue for the total business, as I mentioned in the prepared comments, the primary drivers, we came into the year with lower net line ads. And with the gross margin we have in a pre-marketing operating income in the $17 range that has a pretty profound implication on both revenues and EBITDA during the following year.

And while we did have positive gross net line ads – positive net line ads for the year and now we’ll continue to benefit from Vocalocity the next year. We just didn’t have enough growth in 2013 for that the partial year that you’ve acquired those customers to offset some of the hurts in the prior year. And, of course, some of that growth is also coming from BasicTalk as a percentage of the mix, which has the lower revenue level.

I think the thing which you want to look at or think about going forward is, what is the trajectory of total revenues for the asset base we’ve got right now. And as we talked about, you will see reported revenues we expect in the 7% to 9% range and if you take Vocalocity numbers as though we owned it for the entire year. We fully expect to be in a 1% to 2% range. If we achieve those, you should see exceptional growth as you move into 2015 and get full year benefit of those gross line additions that we’ve added in 2014.

Raghavan Sarathy – Dougherty & Company

Okay. Thank you.

Lisa Arena

Next question operator.

Operator

Thank you. And our next question comes from Robert Routh from National Alliance Capital Markets. Please go ahead.

Robert Routh – National Alliance Securities Capital Markets

Yes, good morning, and thanks for taking the questions. So quick one, a few years back your reversing tour NOLs that you realized that you had hundreds of millions of dollars worth of them and you could actually use them. But I know you didn’t reverse all of them, I was curious given Vocalocity acquisition and the growth you are seeing is there any chances in some of the NOLs that you didn’t reverse before could become again in tax asset to the company. And as a follow-up to that, I’m wondering you can still subject to the 382 limitations than you were before on which limited to buyback activity?

Marc Lefar

Yes, we are not anticipating a material shift in our NOL position or our tax, cash taxpaying status. Our NOLs will expire at different rates for federal and state, but that’s really the only change you are going see in that. But Vocalocity did come within NOL as well, and we’re in the process of working through exactly how to value that given our projected usage.

Robert Routh – National Alliance Securities Capital Markets

And the previous two limitations are you still subject to this?

Marc Lefar

Yes, it’s – we are, but it’s much lower than it was, and we’ve not seen in terms of executing on the buyback. We don’t see an issue executing on the rest of the $100 million authorization this year regarding that or any other issues.

Robert Routh – National Alliance Securities Capital Markets

Okay great. And then one other question, obviously you guys have a ton of patents that are worth a ton of money that are on your balance sheet as much as anything due to the accounting loss, around that. I’m just curious if you can give us any sense I know would be kind of hard to do is to what those could be worth, especially given recent announcements like the SEC having big carriers like Verizon and the AT&T to start working with voice-over-IP trials and considering you guys have been doing this for such a long time I would think some of your patents may be a tremendous value to these carriers as they do those trials. I’m wondering if you get a sense as to how to look at that in terms of the balance sheet value versus what they could be relative and also is there any opportunity for you given your, what you have that others may need in order to do what they are trying to do?

Marc Lefar

It’s a great question and astute observation, I don’t think that, perhaps it’s fully appreciated the strength and value of the patent portfolio that we built in the last few years, difficult for me to decide what that value might be and how to place that on the balance sheet. What you can look at is if you look at settlement costs for the company over last several years we’ve been extremely successful versus things in history. And a big piece of that as a result of being able to have something a patent détente if you will and that creates a kind of neutral playing field with some players and that has certainly come into negotiations, in conversations with, in between cross licensing types of agreements.

In terms of going forward from monetization, it’s not something I’m really able to comment on in terms of inquires we’ve had on folks wanting to license or offering of the opportunity for companies to license our patents, but we do review that on a regular basis and consider whether it’s appropriate to make those available or encourage other entities to take a license so that they are not in violation of our intellectual properties. So it is something we pursue, but as you might imagine, commenting on specific intellectual property negotiations would be highly inappropriate.

Robert Routh – National Alliance Securities Capital Markets

Yeah, absolutely. [Indiscernible] some of the patents for over billion some many people realize they had and no one gave it any value. For that it seems you guys have some things that some other entities are going to need, violating in the future. So its kind of looking for hidden value there. Thank you very much.

Lisa Arena

We have time for one more question, operator.

Operator

Thank you. And our next question comes from Bill Dezellem from Tieton Capital Management. Go ahead.

Bill J. Dezellem – Tieton Capital Management LLC

Bad play devils advocate for just a moment relative to your stock buyback and is very successful when the share prices was lower, but have you any thoughts relative to holding back and reducing the buyback or stopping it for now given that the share price is up? And then the second question is, relative to the net line additions doubling in December and January relative to October and November. I just wanted to confirm that was Vocalocity I think I missed it in your opening remarks? And then how did that fit relative to your expectations?

Marc Lefar

Well I will take the second question first and let Dave comment on the stock buyback. So it was Vocalocity and it was net customers not to be confused with lines, but their surrogates since we had pretty consistent level of the types of customers coming in. And relative to expectations it exceeded our expectations. We were frankly a little concerned about what the disruption could be, we’ve actually already moved to the point of having Vonage business solutions, branding on the website we’ve had at the last couple of weeks and we haven’t seen at this point any material negatives.

Perhaps there is some positives, but we are pleased to actually at the responsiveness of some of the marketing activities that Wain and his team put into the marketplace. And we think at least some of those are the kind of activities we want to continue with, because they seem to be good financial investments. So encouraged thus far, difficult to draw a trend from eight weeks, but we like the early progress.

David Pearson

Great, now regarding your questions on the buyback, I think, first of all we continue to believe our stock is a good value. And so we will plan as to continue to execute against the authorization which would average about $12 million a quarter is just the average of what we have left on that through the end of the year. We are constantly assessing our capital structure and the highest use of capital. Right now we’ve got the ability to execute the buyback and do the things we want to do on the growth side. Those two things start to becoming conflict or one opportunities arise where there’s clear accretion, we will direct capital that way.

I’d also note that if the situation changes, through M&A you have some market opportunity, we would make a change. We’d make that assessments and cross correct at the point. I think as with the other thing I noticed is as with most buyback programs we do modulate the buyback at higher prices. That’s why you may see some variability what we are buying back quarter-to-quarter. So to your point there is some of that built-in as well which is very standard.

Bill J. Dezellem – Tieton Capital Management LLC

Thank you both.

Leslie Arena

Thanks. With that operator we’ll conclude the call. Thank everyone for joining us today.

Operator

Ladies and gentlemen thank you for participating in today’s conference. This does conclude today’s program. You may all disconnect, everyone have a great day. Thank you.

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