magicJack VocalTec Limited (NASDAQ:CALL)
Q4 2013 Earnings Conference Call
March 12, 2014 5:00 PM ET
Jose Gordo - CFO
Gerry Vento - President and CEO
Tim McDonald - COO
Tim Horan - Oppenheimer
Greg Miller - Canaccord
Whitney Tilson - Kase Capital
Good day ladies and gentleman and welcome to the magicJack VocalTec’s Fourth Quarter and Full Year of 2013 Financial Results Conference Call. Today’s conference is being recorded. Joining us today on the call is Gerald Vento, President and CEO; Timothy McDonald, Chief Operating Officer 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.
Thank you, operator. Good afternoon and welcome to the magicJack fourth quarter 2013 earnings call. I’m Jose Gordo, CFO. With me on the call today is Gerry Vento, President and CEO, and Tim McDonald, COO.
During the call, we will 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 today on March 12, 2014. Also during the course of today’s call we will refer to certain non-GAAP financial measures. There is a reconciliation table 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.
Great. Thanks Jose. Good afternoon. There is a lot to cover today, but let me start by welcoming the new investors who have joined the call. We are encouraged with the growing market interest in magicJack and appreciate the opportunity to update you on our progress with the transition to the new magicJack. Q4 marks the beginning of a fundamental transformation of the Company. We are implementing a top to bottom restructuring with a goal of re-energizing the magicJack brand and capitalizing on what we see as the next wave of disruption in the mobile markets, which is the growth in over the top communication.
In the fourth quarter, as well as into the first quarter, we began a series of strategic initiatives that will pay dividends throughout 2014. In a moment I’ll review these initiatives in more detail. But let me quickly recap what we have delivered in the first three months on repositioning. We expanded our distribution channel by adding 10,000 new doors. We partnered with a prepay card provider to enable cash-based renewals as well as providing an incremental card-only distribution channel. We refreshed our website and updated our TV ads with a simplified value-based campaign entitled “Do The Math.” We expanded our management team through the addition of our Chief Operating Officer, Tim McDonald who is here today and is also going to be participating on this call, and we recruited an EVP of marketing and VP of Sales & Distribution, and we have worked to communicate our new strategy and have begun the pivot from a single device product company to a recurring revenue business with a strong and growing mobile opportunity. But there’s more to do, and over the first half of 2014, you’ll see us continue to execute against our strategy and deliver on our plans. So let’s turn to some of the key financial and operating metrics that highlight our Q4 and fiscal year 2013 results.
We delivered our highest revenue quarter through all of 2013 generating 38.2 million in revenue, an increase of 8% from the third quarter. We exceeded our revised forecast with revenues of 143.5 million for fiscal year 2013. We delivered on our promise to grow our renewals business. For the quarter we grew renewals which are categorized as access rights revenue to 14.8 million, the highest quarter in the Company’s history. This represents a 23% increase on a year-over-year basis. For the year the new access rights revenue, 30%, a 57 million on a year-over-year basis demonstrating the value that our customers derive from using the magicJack and growth of our recurring revenue business.
Renewals now represent 40% of our revenue base, up from 28% in 2012. For the year we had pro forma across for gross subscriber ad of $4.61, a 43% decrease on a year-over-year basis excluding one-time ad spends of 2.7 million for the quarter. We currently calculate CPTA as marketing spend divided by total units and renewal sales.
We continued to grow our strong balance sheet with 54.8 million in cash and cash equivalents, and no debt. We had 3.2 million active device users, a slight decline from 3.3 million active users in the prior quarter. And we define active users as subscribers of our magicJack devices that are under an active subscription contract. And we ended the quarter with 6.9 million registered app users, an increase of 23% from our last call. We’re pleased with the performance in the quarter, particularly with the growth in renewals business which reflects the increased importance of this reoccurring revenue business. And we are encouraged by the significant growth in our app user base which points to future growth opportunities for the Company.
We deliver on early stages of our repositioning, with our new ads, website refresh providing a glimpse into where we intend to take the brand and service in 2014. But these steps are just the beginning. There is additional work underway to enhance our capabilities to acquire, retain and expand on the acquisition of quality customers and to grow revenues. These initiatives are currently underway and will become visible in Q2.
We are simplifying our value-based messaging and highlighting the benefits of our app as a key feature of the device. You’ll see more of this in April. We’re updating our packing with a crisp simplified message enhancing our product design and more tightly integrating our mobile features highlighting the importance of mobility. We will be re-launching the magicJack brands and updated product in May. We are enhancing our positioning and improving our merchandising in our retail locations. These initiatives will be deployed over Q2 in line with planned ramp updates of our retail partners.
We are expanding our retail footprint particularly in value segment. And the rollout of our new channels beginnings immediately as can be seen from this afternoon's announcement. We will release an update of our iOS and Android app providing linkage with the device an easier up sell for other value-added mobile features. And this update we’ll rollout in April. We are deploying and improving our shopping card experience to make it easier and more seamless for customers to purchase our service. This rollout will take place later in Q2.
We are providing ongoing improvements with our customer care experience through improvements with both our customer sales help and upgrading our chat experience. And we are continuing to hire additional talent to enhance our team to support our ongoing retail expansion and the continued development of our multiplatform app. These initiatives will be executed over the first half of 2013. So, as a result of these initiatives as well as others currently underway we are reaffirming our guidance of double-digit top-line growth and currently forecast 2014 revenues of 158 million to 163 million. We anticipate that our revenue growth will begin in the second half of Q2 and will progressively ramp over the remainder of the year.
Now let me take a minute to define the business and how we make money. We have a surprisingly simple model. We sell prepaid voice services under annual service contract. We deliver our over the top voice services over both fixed and mobile broadband networks. Our customers are principally consumers in the U.S. and Canada, though many small business owners also subscribe to our service. And we are seeing growing evidence of the adoption of our mobile app across the globe.
Going forward, we see an expanding addressable market for our OTT voice services. We operate our own Cilek Network which provides us with a cost structure similar to an incumbent carrier. As a network operator, our marginal costs are quite low. We pass along our low costs to consumers and provide a no frills over the top voice service with $30 a year. Historically our customers access our subscription services through our proprietary device the magicJack. We sell the device both through retail partners as well as directly through magicJack.com site. While we make a margin on the sale of the device, this is a one-time margin and not reoccurring revenue stream. This device can be viewed as a customer acquisition channel for our subscription services similar to Amazon selling Kindle.
Increasingly, we make our money on recurring subscription service. In fact, as we’ll discuss shortly, our renewals business grew 30% year-over-year in 2013. Renewals revenue represents 40% of 2013 revenues, up from 28% in 2012. And our shareholder value increased as we demonstrated growth in our recurring revenue business. So our business is simple. We sell low cost prepaid voice services. Consumers access our services through both our proprietary magicJack device as well as through smartphone apps. Our revenue model today is too legged, one-time device sales and subscription renewals tied to the device.
In the coming months, you’ll see us broaden our revenue model through the introduction of app-only and related voice services. Some simply look at device sales as a sole proxy for demand. This is not how this management team measures demand. Again, we sell over the top voice services, accessible ad home and on the go, accessible both over fixed and mobile broadband networks. We measure demand for these services based on the growth of the users irrespective of whether they access our service via a device or via an app. What the numbers tell us is that the underlying demand for our service is growing at an accelerating rate. In fact we now have more users per month accessing our service over an app than we ever had accessing the service via the device, including during the peak periods of the Company’s growth in 2012.
In Q4 app users accounted for 31% of total traffic across our network, up from 23% in Q2. Simply put, this is growing demand for our no frills service. It is management’s job now to capitalize on this demand and make no mistake demand for our service is increasing. In 2007 VOIP over fixed line broadband was the disrupter and magicJack was the market leader in that category. Over the top communications over ubiquitous data networks is the next major disruptive force in mobility.
As recognized brand and a low cost voice platform like ours, we have the key assets to win customers in the OTG space. As we have said consumers are increasingly accessing our voice services through our smartphone via our iOS’ and Android’s apps. Today we’re stimulating the growth of our customer acquisition channel by providing free access to unlimited calling in the U.S. and Canada while not providing free customers with access to a dedicated number or certain other value-added calling features.
We’re investing in the growth of this channel by choosing to leverage our low cost operating platform, to cost effectively acquire our customers onto the magicJack network. We’re growing our user base by providing a service that Skype currently charges a customer 299 a month to access. We’re able to pursue this strategy as our cost to support an incremental mobile user is quite low. And this strategy has been successful, I should note that over the last five years or so the Company spent close to $100 million to acquire device customers, while we have spent virtually no marketing dollars to-date to acquire our app user base.
Again our app user base is larger than our device user base. The markets have certainly taken note of the recent acquisition of WhatsApp and Viber both of which were acquired for their growing base of subscribers. WhatsApp was reported to have approximately 20 million of revenues, while Viber had approximately 1.5 million of revenue, and the market is clearly valuing scale over demonetization as one follows the other.
Viber is a voice service today and WhatsApp announced that they intend to provide voice in the future. Line another messaging service out of Japan has also recently announced, they intend to provide voice service. So we firmly believe that voice will play an increasing role in the social ecosystem. Our strategy recognizes this trend, and we believe that magicJack has a role to play in this evolving market for over the top communications services. We’re clearly excited about the growth prospects for our business.
On our last call we promised investors that in 2014 we’re going to expand our distribution channels. Today we delivered on that promise and announced agreements with key master agents that service the prepay market. These partnerships will provide us distribution through 10,000 new doors across the country in 2014.
This represents close to a doubling of the doors in which we currently sell the 2014 magicJack. This new indirect channel caters to prepaid and cash centric value seekers as well as urban-based international callers who we see as representing a significant growth segment for our Company, we’ll launch these doors in the coming week and intend to expand the reach into these channels in 2014.
Our new distribution partners are excited to be selling the magicJack as their retailers are already familiar with our brand and service and see strong demand for our offer. Again let me underscore that our new channel partners see strong demand for our product in their doors. We intend to continue to invest in the expansion of our distribution channels, in 2014 particularly in the value segment.
We’re also pleased with our long-term partnerships that we have had in place with many of the major retailers including Best Buy, RadioShack and Wal-Mart. As these retailers focused on improving their overall business, we’re partnering with them to align with their strategies and improve the business overall for magicJack and these retailers. As many of you have seen overall results of many retailers have not been where they’d like them to be, from a year-over-year basis perspective we did see sales impacted most in those retailers who reported higher year-over-year decline.
The good news for us is that we continue to perform well in the value channels where we face direct competition from a well funded new market entrant. We believe that the value channels will continue to perform well for us and we are taking steps to expand our reach, through establishing new distribution partnerships in the value segment.
We recognized that there is some degree of displacement occurring between potential device users and Apple-only user and we recognized that the early adopters of the Apple-only model are likely to be the type of buyers who frequent to consumer electronics retailers. Our strategy is to leverage our brand and low cost mobile platform to retain those customers on the magicJack service. We are working with our partners and the consumer electronics channel to better position magicJack as the value-add offer in the mobile category and expect these efforts to bear fruit in 2014.
Renewals remain a growth engine for our business. On our last call, we indicated that we would be introducing prepaid cards in 2014. We have entered into a partnership with the leading national prepaid platform and will deploy our cards in Q2 in one or more major big box retailers. We see this card platform as valuable to support renewals as well as in providing a mechanism to sell incremental prepaid voice services. Additionally, this partnership will enable us to provide our card services to thousands of incremental doors in which we currently do not have distribution today.
Turning to international, we continue to work with distribution partners to add significant opportunity for international distribution of both the device and the app. Interest remains strong in Latin America and elsewhere where our brand is well recognized and where our services are already being actively used to provide low cost calling back into the U.S.
We are currently in discussions with certain mobile operators and other over the top voice and messaging providers that are interested in providing alternative or low cost calling into the U.S. and Canada. We are encouraged by the interest we have received and the recognition of the value our ultra low cost voice platform provides.
And with that I will turn the call over to Tim McDonald, our Chief Operating Officer who will discuss our brand repositioning, app development and advertising strategy.
Thank you, Jerry and good afternoon everyone. As investors know we are in the process of repositioning our brand in the marketplace. As Gerry said, our business is simple, we provide value priced prepaid voice services at home and on the go for $30 a year and you can keep your own number. Customers access our voice services either through the magicJack device or via the magicJack App. We are simplifying the messaging of this compelling value proposition by stripping away the complexity in the noise. Today, we are midway through our repositioning and certain elements of this transition have been implemented such as a new ad campaign and top level site redesign. However there is more work to be done before we will be able to operate on all cylinders and fully drive revenue growth.
In Q2, we will reintroduce the magicJack brand to consumers with a top to bottom redesign of our offer, which includes a new device design, updated packaging, enhanced merchandising and a tighter integration between the device and the app. We have shared our plans with our retail partners and they are excited about our new approach. In fact as a result of our reinvigorating the brand, we are significantly expanding our footprint and merchandising within one of our leading retail partners and we are currently in discussions with other retailers for similar expansions. The central element of this repositioning is creating a tighter linkage between the device and the app. The app is actually a key feature of our device in fact it’s one of the most compelling features of our device. However, we could improve on how we message the future to our users. This is changing as consumers increasingly choose their mobile phones as the primary means of communicating our mobile feature provides an additional value to our magicJack device users. The app feature enables our customers to use their magicJack service anytime, anywhere and on any device.
Now let’s turn to our app which we believe points to both the underlying demand for our offer and provides a window into our growth potential. So, let’s begin with some stats. We ended Q4 with approximately 6.9 million registered users and 3.3 million monthly active unique app users. This is a number of unique users who have used the app within the last 30 days. In the fourth quarter, the increase in our monthly active unique app users exceeded the churn on our device. The net effect is that growth in our app base is serving to offset device churn in key users on the magicJack network. The challenge is that when a customer turns off the device we’re losing a customer with a renewal ARPU of 250 a month and adding an app user with a current ARPU of 0.
One way to address churn is to sell more devices and we intend to do so supported by our Q2 re-launch of the product. The app provides an important part of our device strategy as it makes our service more relevant to our customers and increases our utility. The second way to increase growth is to replace the churning device driver with two or more app customers who may end up paying a lower ARPU.
In April, we will launch a refresh of our app. This refresh will provide a series of enhancements over the current version including an updated design improving the user experience, tighter integration with our site to enable the purchase of low cost international minute and additional value-add service such as dedicated U.S. numbers for inbound calling. App-to-app calling anywhere in the world and improvements to enhance the battery life of our rapidly growing base of android users, this app refresh will be followed by incremental updates to enable in-app purchasing and additional value-add features.
We also view the app as an important incremental distribution channel for our device business and see an opportunity to offer the device as an attractive accessory to an app-only user. Now many have asked about our plans to monetize our app, well the first step is to more effectively leverage the app to sell more devices which after all is our cash engine. When we talk about device features, the app is simply the most compelling feature we have today yet we need to improve how we highlight this feature and we need to make our device offer more relevant to users by providing a tight linkage with mobile and enhancing the value and utility of our service.
Second with the redesign, we’re making it easier for app-only users to buy a broader suite of voice services including low cost international calling, dedicated numbers and other value-added services. We will begin by selling low cost international calling via the app in April. We currently have highly competitive international calling rate yet in the past we have not effectively marketed these services in any significant way to our customers. Today of our device users who purchased international calling services, these customers generate an ARPU of $9 per month. We believe that international calling via the app provides an attractive and highly scalable revenue growth opportunity.
Now we recognize that the app-only user may generate a lower average ARPU per user than the 250 in renewal ARPU on our device users. However, the app provides a series of advantages that we believe will materially improve the value of this potentially lower ARPU customer. First, we’re working off of higher base of users than the device has ever had. Second, we currently have more app users than we had in device users at the peak of the Company’s growth in 2012. Third, we have a low cost structure to support customer acquisition by providing a limited amount of inbound and outbound calling. Fourth, the customer acquisition costs for app users are materially lower than for device users. Fifth, our free calling provides an acquisition channel to up sell our services in the same way our devices provide an up sell opportunity for renewal and the app provides opportunity to seamlessly up sell value-added services for our customers.
The app also avoids certain costs and other operational requirements of the physical device. Now these advantages would include the fact that there is no device cost we have substantially reduced care cost. There is product returns, refunds or replacements and there is no physical distribution required. Many of investors have asked us when we intend to deploy texting. Well, the simple answer is we’ll announce texting when it’s ready for deployment. We see a significant growth opportunity in the voice market. There is plenty of room for innovation in voice providing value-add voice service through the app, innovations such as enhanced conference calling, push to talk, voice messaging are about a few example of value-add voice features that might be incorporated in a voice-add.
As voice shifts to over the top mobile apps, one can expect to see a wave of feature innovation and we intend to capitalize on this innovation. Now let me take a minute to discuss churn and churn can be thought of in two ways, one is as monthly churn and two is as renewal recapture rate. Either way the focus is extending the lifetime value of customer by increasing the number of renewal years we can sell. We are implementing a four part plan to review churn. First, we’re making our service more relevant to customers though a tighter integration with our On the Go app feature enhancing the value and utility of our offer. Second, we’re providing cash renewal cards that will be in stores in the May-June timeframe coinciding with the planogram update of our retail partners. Third, we’re dedicating a specific resource through a sole job is to reduce churn and increase renewal recapture. And fourth we are providing regular email communications with our customers in advance of their renewal date.
Now we have received a number of questions from investors regarding our advertising spend and strategy into 2014. At first, we agree that we have a very attractive return on our ad spend. Based on our current 49-95 direct offer with six months of service, and an average churn rate of 3.5%, a direct customer generates approximately $100 in lifetime revenue.
In the prepaid mobile market, carriers spend between 20% and 30% of lifetime revenues to acquire a customer. For the illustrative example above that would equate to between $20 and $30 per customer. So we believe there is room to invest in our customer acquisition. So the obvious question is why don’t you increase your ad spend to acquire more customers today? Well the simple answer is we intend to ramp our ad spend in Q2 coinciding with the re-launch of our product, update to our app, and expansion of our distribution channels. We believe we are better off putting our marketing horsepower behind a fully revamped offer.
We believe this updated offer will increase sales and reduce churn and we intend to support it with a significant marketing spend. Again we are only part way into the repositioning of our brand and offer. And while we have updated the ads and have delivered surface level update besides to generate the full benefit of our repositioning, and expand our addressable markets we need to execute on the full repositioning through our updated app, updated device design, fresh new updated packaging, improvement to the online purchase experience, and upgrading our in-store merchandising.
We also think about our marketing spend by customer acquisition channel. We currently have three channels for customer acquisition; retail, direct, and mobile. Today approximately 30% of our sales have come through the direct channel. We believe there is significant upside in the direct channel. Our revenues on the initial sale are greater in direct than through our retailers. And direct provides us an opportunity to bundle low-cost benefit that have a higher perceived customer value, which is bundling in a pool of international minutes in a direct offer.
Now, digital is the most effective marketing channel for direct. And we are allocating an increased amount of our spend to digital and are currently implementing several strategies for direct customer acquisition. And in retail we believe that allocating our marketing spend on tactics that are closer to the point of sale will provide a good return on investment. Thus we are increasing our spend on in-store merchandising and other in-market support. We also intend to increase the promotion and visibility of our app both as the feature of the device as well as a standalone offer. These initiatives will be executed over the course of the first half of 2012 and we will scale our marketing spend accordingly.
With that I will turn the call over to Jose.
Thank you, Tim. Good afternoon everyone. Our fourth quarter financial performance was highlighted by strong revenues and profitability as we launched our branding refresh initiatives that will continue throughout 2014, continued growth in access rights renewal revenue and the fact that we exceeded our previously issued revenue and adjusted EBITDA guidance for the year.
Starting with the P&L for the quarter, we had our highest revenue quarter of the year generating total GAAP net revenues of 38.2 million, an increase of 7% compared to the third quarter. The quarter-over-quarter increase was primarily due to revenues from the launch of the new magicJack PLUS, late in the second quarter. Revenues from magicJack sales for the quarter were 15.1 million, up from 13.2 million last quarter. Access rights renewal revenue was 14.8 million, an increase of 23% year-over-year and up sequentially from the 14.6 million in the third quarter. As a percentage of total revenues, access rights renewal accounted for 39% of revenue, up from 29% for the same period last year.
We are pleased that access rights renewal revenue which represents a recurring portion of our business has continued to growth and become a stronger component of our overall revenue. As Gerry highlighted we will be making a conservative effort to increase our renewal rates including making cash renewals easily purchasable and proactively communicating with our customers prior to contract expiration. We believe the cash renewal program and customer outreach initiatives will also favorably impact our churn starting in the second half of 2014.
Network expense for the quarter was 5.6 million, up 7% from the prior quarter, as we reached an agreement with two carriers over minor billing disputes in Q4 and had a favorable non-recurring item in Q3. Without these items, network expense would have been consistent for both quarters at approximately 5.4 million. Total operating expenses for the quarter increased 26% quarter-over-quarter to 14.5 million, primarily due to a $3 million increase in advertising spend and a $1 million increase in R&D which was partially offset by a decrease of 300,000 in G&A expenses.
Let me discuss our increase in advertising spend. Going into the quarter we had committed to a legacy media spend of approximately $2.7 million with our prior television ad spots. Most of these spots ran in October and early November. When we re-launched our brand refresh in November. We chose to invest another 3.2 million in media spend, production cost and market research to reinforce our new message. While these combined costs caused a spike in total fourth quarter ad spend, it was important for our customers and retail partners to see our new direction heading into 2014. We have received very positive feedback on our new rebranding initiatives and intend to build on this momentum throughout the year.
Turning to profitability, GAAP operating income was 9.9 million a decrease of 28% compared to the third quarter. For the quarter we had a significant income tax benefit of 35.4 million as compared to a 3.7 million tax expense for last quarter. GAAP net income for the quarter was 45.3 million after taking into account the Q4 tax spend that I mentioned as compared to GAAP net income of 8.9 million for the third quarter.
GAAP diluted earnings per share for the quarter was $2.50 based on 18.1 million weighted average diluted shares outstanding as compared to $0.48 based on 18.6 million weighted average diluted shares outstanding for the third quarter. GAAP diluted earnings per share would have been $0.26 without the one-time tax benefit we had in the quarter.
Operating cash flow for the quarter was 6.4 million as compared to 10.4 million for last quarter, with the decrease being primarily attributable to the increase in advertising spend.
Now turning to our results on a non-GAAP basis. For the quarter we reported adjusted EBITDA of 14 million a decrease of 6% over last quarter. Non-GAAP net income decreased 9% to 12.6 million, non-GAAP net income per diluted share was $0.69 based on 18.1 million weighted average diluted shares outstanding as compared to $0.75 per share based on 18.6 million weighted average diluted shares outstanding for the third 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 Web site.
Turning to a summary of our results for the full year. We reported 2013 GAAP net revenues of 143.5 million as compared to 2012 GAAP net revenues of 158.4 million. Revenues from the sale of magicJack devices were 54.5 million as compared to 73.8 million in 2012. Access rates renewal revenues were 57 million up 30% as compared to 43.9 million for the same period last year. GAAP operating income increased to 47.4 million a 9% increase over last year. GAAP net income for the year increased to 70.3 million from 55.9 million last year.
Our 2013 net income reflects the $40.5 million release in valuation allowance that we had this quarter. This release which I will discuss further in a few moments resulted in a $23.2 million net tax benefit for the year. GAAP net income for the year would have been 29.8 million without the release in valuation allowance this quarter. That compares to GAAP net income in 2012 of 44.9 million excluding the $10.9 million release in valuation allowance we also had in the fourth quarter of 2012.
GAAP diluted earnings per share for fiscal 2013 was $3.81 based on 18.5 million weighted average diluted shares outstanding as compared to earnings per share of $2.73 based on 20 million weighted average diluted shares outstanding for the same period last year.
Fiscal 2013 operating cash flow was 35.3 million as compared to 65.3 million last year. The $30 million decrease was primarily attributable to less magicJack devices sold and cash used to make estimated tax payments in 2013.
Taking a look at our full year results on a non-GAAP basis adjusted EBITDA increased to 58.2 million from 47.1 million in 2012. The significant increase was driven primarily by higher renewal revenues, a decrease in advertising expense and a reduction in network and carrier charges as we continue to negotiate better rate and groom our network to drive increased cost efficiencies.
As a percentage of total revenue fiscal 2013 adjusted EBITDA was 41% of revenue unchanged from our 42% margin last year. Non-GAAP net income per diluted share for fiscal 2013 was $2.89 based on 18.5 million weighted average diluted shares outstanding as compared to $2.15 per share based on $20 million -- 20 million weighted average diluted shares outstanding for the same period last year.
Total deferred revenues were 114.5 million at year-end as compared to 122.9 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 launch of the new magicJack PLUS late in the second quarter. Our long-term deferred revenue balance increased both sequentially and year-over-year primarily due to the growth of access rights renewals.
Taking a look at our results versus guidance, we have previously issued 2013 revenue guidance in the range of 140 million to 142 million and adjusted EBITDA guidance in the range of 52 million to 55 million respectively. With actual revenues for the year of 143.4 million and adjusted EBITDA of 58.2 million, we’re pleased to report that we were able to exceed the high end of both ranges of our guidance.
Turing to noteworthy fourth quarter items, as I mentioned we had a net significant income tax benefit of 23.2 million for the year. A large portion of the tax benefit came from evaluation allowance release of $40.5 million and was comprised of 11.7 million related to various book and tax timing differences in the U.S. and 28.8 million primarily due to Israeli net operating loss. Those two combined items became deferred tax assets on our balance sheet totaling 11.3 million current and 29.7 million non-current, for a total deferred tax asset balance at the end of 2013 of 39.9 million. We were able to release this valuation allowance because our historical pre-tax income and positive evidence of ongoing profitability indicate we will be able to use these deferred tax assets to offset cash taxes payable on income going forward.
Also in the quarter, we used approximately $13 million in cash to purchase 1.06 million shares of common stock at a price per share of $12.24. As previously disclosed, these shares were purchased from independent trustees of two irrevocable trusts previously created by the Company's Founder. Lastly during the 2012 audit, a material weakness was identified in the Company’s internal over financial reporting relating to reviewing and monitoring the accuracy of our income tax provision and calculation. We are pleased to report and in connection with the completion of our 2013 financial audit, the Company has remediated this material weakness and received a clean opinion on its 2013 audit and internal controls report from BDO our independent auditor.
Turning to our balance sheet, at December 31, we had cash, cash equivalents and investment of 54.8 million, an increase of 16.4 million over last year and no debt. We continue to generate significant cash flow and believe we have one of the strongest balance sheets in our industry. Our ability to consistently generate cash provides us with substantial flexibility to enhance shareholder value. In 2014, you will see us invest our cash heavily in our business across the board. You will see advertising spend, R&D and G&A expenses increase as we rollout the various initiatives we have outlined. We will continue to place a particular emphasis on using our cash to continue to grow our customer base. We continue to have a favorable cost per gross ad relative to our competitors. At our customer lifetime value levels which Tim discussed in detail, spending on the addition of new customers clearly continues to be a very good investment for our shareholders.
As Gerry said, we intend to allocate meaningful cash to promote our new product launch starting in May. We expect to see the favorable revenue impact of that increased spend in the second half of 2014. As I mentioned in the fourth quarter, we repurchased 1.06 million shares at a price of $12.24 per share. We will continue to opportunistically evaluate additional share repurchases in the future.
Turning to our financial outlook for the full year 2014, we are projecting 2014 revenues in the range of $158 million to $163 million. And we are projecting 2014 adjusted EBITDA in the range of $48 million to $52 million. We project our top-line growth to be driven by growth in our existing core device and renewal business, our app monetization initiatives and the increased sale of international minute. As Gerry said, we anticipate that our revenue growth will begin in the second half of the year and progressively ramp going into 2015 as our various initiatives take hold.
We expect Q1 and Q2 2014 revenues to be softer than our Q4 2013 revenues as we maintained a reduced level of advertising spend in advance of our May product launch. We expect our effective 2014 tax rate to be approximately 30% to 31%. We continue to work on tax planning strategies that will further reduce our effective tax rate going forward.
With that I would like to turn the call back to Gerry.
Great, thanks Jose. So, just to recap, we see a demand for our no frill voice service is growing rapidly. We have seen mobile clearly as an interesting source of demand and will remain an important part of our strategy in ’14. We are really excited about the expanded distribution channels that we announced today adding 10,000 new doors for consumers to find and buy our service and we are excited to re-launch the magicJack brand and update the product in May.
So, with that operator, could we open it up to questions please?
Certainly. (Operator Instructions) We will take our first question from Tim Horan with Oppenheimer.
Tim Horan - Oppenheimer
Thanks guys and thanks for all the color on the quarter. Tim, maybe can you talk a little bit more about what the new device looks like and what is the functionality you have on it? And then maybe on, I know you talked about the app wins kind of ready but can you give us some expectations of will that app kind of hit this year do you think in third or fourth quarter? And any kind of color will be great there. And then also on the device, do you have any kind of new major upgrades or is this kind of a minor upgrade here in April, May at least just timeframe of when we might hear some future updates there?
Yes, thanks, Tim. Let’s just start with the device, we have a sort of a cognated disconnect today when you look at the simplicity of our new ad to do the math and the simplicity of our sort of new side at least on the top level. And then you go into the store and you see the same old packaging. So, what we are doing with this new device which will be out in May and again we have been very disciplined in talking about what we are delivering relative to the timelines that we can deliver it. So, we don’t want to hold the promise.
The new device has a simplified design. It’s got a smoother and more current looking feel. It looks and feels something like it would be more attune to a mobile category. The packaging is far simpler, far more elegant and includes a much simpler way of educating people on sort of the quick start, how do they start to use that device. So the device is simplified it’s made more current, it looks and feels like something that is more closely akin to mobile. The packaging is simplified and elegant and through this launch, we will now have completed the full redesign of the magicJack offer from [indiscernible].
Now with respect to features again, we believe that the most important feature of this device and possibly our services going forward is the app side of the offer. So you’ll see in the device and in the packaging a much tighter linkage between the device and the app and in fact you people may view the device as a secondary feature to what they are ultimately buying which is a number and voice services. Remember people aren’t obsessed about picking that wall-phone in their kitchen but they want that dedicated number, right. And what we’re selling them is that number, right. So we’re focused more on the delivery against that value proposition which is making it easier for people to buy dedicated numbers, accessible however they want it and increasingly that's in a mobile context.
So what you’re going to see in the redesign is a current simplified device, simplified packaging, much more closer integration across the board with the device and the packaging with the mobile app and a much more simplified approach. And I just want to say that our retail partners are thrilled with the direction that we’re taking this product. Now there has been lots of talk over time about incremental hard features to the hard device. We are looking at those, Wi-Fi is something that’s been talked about but quite frankly we look at a competitor who offers a Wi-Fi enabled product and we know the unit volume that it moves or doesn’t move in retailers and we don’t see sufficient demand to justify that investment at this time.
So, our focus really is going to be integration on the mobile side and the integration of the incremental soft features. And when we talk about the app then I mean we’re talking about the next couple of weeks. This is not months or quarters, we’re talking about it because it’s real. So by the beginning of April, you’ll see our updated app with a much closer linkage with our site and the ability to readily monetize that app user through the purchase of international minutes, through the purchase of a number, and through the purchase of other value add services over time. You’ll see improvements to that app that will roll out over the coming quarters but this is not something that we’re going to deliver in the second half of this year, this is something that we’re going to deliver over the coming weeks.
Tim Horan - Oppenheimer
And the texting, you think we can see it in the third quarter, fourth quarter any best guess at this point?
Tim, I appreciate the question and I understand where it comes from. And as we’ve said consistently, we will promise a date when we can deliver a date. So like we’re doing with the new device, like we’re doing with the upgrade to the app, expect that same candor and conservatism with any incremental feature.
Tim Horan - Oppenheimer
Great, and then may be just one last one for Jose. Jose, how much in cash tax may be just questions, what is your NOLs in total now and how much in cash taxes did you actually pay in 2013 and may be some expectations to actual taxes to 2015? Thanks.
Sure Tim. So right now we had actually prepaid about 9.5 million in U.S. tax and because we were not able to release the valuation allowance until the end of the year, that really is an amount we didn’t need to pay. So that will stand as a prepaid tax asset and really for U.S. right now we wouldn’t have cash taxes payable certainly not for ’14 based on the deferred tax assets we’ve been able to bring on to the books and possibly for a large portion of ’15. So that’s on the U.S. side.
On the Israel side we’ve got 117 plus million of runway, so we’ve got two to three years before paying cash taxes in Israel. Now obviously there is a difference between those figures and our effective tax rate which is sort of handled on in accordance with GAAP just giving you cash taxes.
Tim Horan - Oppenheimer
Great. Sorry, just one last one, I just heard that RadioShack is planning on [indiscernible] 25% of their stores on [indiscernible] there is I guess some think they are going to end up bankrupt, can you talk about how you can protect yourself for that and be material to the (sales) [ph] ?
Yes. Tim, this is Tim. We obviously follow it really closely because it’s been historically the number one retail channel for us. I was down in Fort Worth two weeks ago with Seth Cummings, our VP of Marketing and Scott Venuti, our VP of Sales and Distribution meeting with the senior team at RadioShack and talking about our repositioning, talking about what’s going on but there is clearly some major challenges that they have.
We look at RadioShack and our exposure at RadioShack on a store-by-store basis. We have the majority of our revenues come out of the top 25% of retailer units, which are not the sort of the back of the heard that’s going to be called here, we believe. So, we think that the impact of those underperforming store closures, will likely impact us but we don’t -- we haven’t sort of gauged how material it is yet, but we’re watching it very closely. I would just sort of point out the fact that we just announced today through partnerships with Master Agent that we said that we would execute in the third quarter call, we executed today the [indiscernible] the number of stores that RadioShack potentially will close. So, we have taken steps to mitigate any risk of exposure to RadioShack and we’re watching it like a hawk.
Thanks a lot guys.
We’ll take our next question from Greg Miller with Canaccord. Please go ahead.
Greg Miller - Canaccord
Thanks and thanks for taking my questions guys, I appreciate it. Nice numbers, nice quarter and great detailed guidance. Thank you very much for that. Lot of progress you talked about the app itself and I know we’ve been to your offices couple of times over the course of the past year and we’ve talked about various scenarios whereby you monetize it above and beyond what you are currently, that is full stream brand awareness et cetera, et cetera. Is there a chance that we ultimately see some sort of price charge to this there at some point down the road at least normally or are you going to continue pushing for quarters to the user base?
Second question I had was if you would update us on the -- or refresh on the number of users that are still on the original app, I know that has been declining over past several months and on my desk probably there is also 3.3 million to 3.2 million active users and then finally may be an update on the impact of Vonage and BasicTalk, what you’ve been seeing here in the past 90 days or so?
Yes. Let me just start with the last point there Greg, which is Vonage and BasicTalk. And we have tremendous respect for Vonage and BasicTalk. They are present in one of our value oriented retail partners and our performance has been strong in that -- with that retail partner and it’s been steadily improving. And the relationship continues to improve and expand.
So, I think the net of that is we’re not seeing a significant impact. We do however know that they’ve been aggressive with promotion spending money to give the product away and have in store support for product sales. I don’t know what that bodes for their unit sales. But what we see is in our unit sales strength and we see in our relationship strength. So, we don’t see an impact there.
With respect to the app, we do not envision a straight charge for the app out of the box, we view it as more of a premium model. Remember, we have a very low cost structure for supporting an app user, right I mean because of our [indiscernible] platform.
So, what we’re doing is we’re growing our base of users and then now as we announced today, we’ll begin up selling those users service, so up selling them to start international minutes. Now, as I said we sell international minutes but we market it terribly aggressively with our device today. Those device owners who purchase international are spending roughly $9 a month with that.
Now, will that translate into the app environment? I don’t know. Our focus is to grow the addressable market of the app users and then begin to upsell them with services that we can start generating, $0.50 above, 2 bucks, 3 bucks, a month ARPU from and we’re beginning that in April. And I don’t have in front of me right now the -- I think the second question was what percent of your device users are on the original magicJack device relative to the 49% that was announced in the third quarter call.
Greg Miller - Canaccord
Yes, if you bear with us I give you that.
Greg Miller - Canaccord
That number in one second. So, I’m just trying to get it on a percentage base. Yes, give me give me just second I’ll get you the answer Greg. Anything else?
Greg Miller - Canaccord
Okay. No, that was it for me. Thank you. That was very helpful.
(Operator Instructions) We’ll go next to Whitney Tilson with Kase Capital.
Whitney Tilson - Kase Capital
I have got a bunch of questions, I don't know if we are on a time limit here, maybe I can get back into the queue with other folks in the queue after that first couple. Thank you by the way for giving us some of the data on the lifetime revenue of customer, that’s pretty consistent with what I had estimated, and so for very incremental customer using your gross margin in the mid-60s range, revenue of $100 for new customers, say you're coming, call it somewhere around 60 to 70. I had initially estimated 80. So, let’s call it $70 lifetime value of incremental customer pre-tax profit, and you CPGA is under $5. So that’s phenomenal.
So my question is, as I think about this is, you talked about investing heavily in growth this year, which I applaud. I assume that’s the reason your guidance calls for revenues to be up 12%, EBITDA to be down from 58 million to approximately 50 million; the midpoint of your guidance. I assume that reflects the marketing spend, that reflects what you’re seeing in terms of the lifetime value of a customer being multiples of the acquisition cost for that customer. I guess the question is just why not even more aggressive? I think your investors, I know many of them. I am an investor myself, would say hey, spend an extra $10 million or $20 million and who cares if you have lost 30 million bucks this year if you can continue to generate that kind of return on the marketing spend.
So Whitney, this is Jose. I will try to answer that. I think you’re right on with how we are thinking. We try to strike a balance in this guidance. And we already I think signaled a much heavier outspent by as you said, arriving at a midpoint of 50 million of EBITDA. If you think about it we generated 58 million of EBITDA on the 15 million to 18 million less of revenue in ’13. So that would signal a much heavier ad spend. I think it’s clear to us that once we are able to get our new messaging out there on our new product launch and get the app rolling the way we want to, if we continue to see the same kind of CPGA metrics and certainly there’s even much more room to increase from where we are today, because we're still meaningfully below where our competitors are. We have all the flexibility. We have no debt, we have plenty of cash on the balance sheet, to plow it back in. I think we gave you a guidance that was where we are today.
Whitney Tilson - Kase Capital
I’m glad we're thinking along the same lines, and look, I trust you will not hesitate if you’re seeing great return on the new marketing, the new packaging, the new product et cetera to ramp up that investment. I just want to encourage you to not get locked into whatever guidance you’re giving us today. Be flexible, and look if it's not working, scale it back obviously but assuming it is working and I think we all think it will, put the pedal to the metal.
Whitney, we are anxious to do that. The interconnection between the customer experience, we’re working on care, we’re working on packaging, we’re working on brand refresh, we are working on a more elegant shopping cart experience, we’re working on a planogram that allows for prepaid card, working on these distribution channels. And it won’t be long before investors see us really throttle this thing.
And Whitney, this is Tim. I just want to sort of underline one point. We believe the new offer, particularly with encouraging the app use of the device, is going to make that device have more utility thus impact churn in a positive way. So what we're driving to and what we are signaling in this call is that we want to put those significant marketing dollars behind acquiring a customer who is buying into a value proposition in a service that will ultimately result in lower churn which will ultimately result in higher lifetime revenue. That's sort of the strategic decision you’re hearing from us. And it’s because of that compelling incremental value proposition which we believe again will reduce churn. Because, if you look at it, there is one bit of utility by using our service over a device, but if you are buying it because you can use it anywhere, the frequency with which you'll use our service will go up. If you’re using our service more frequently, its utility grows and the likelihood of you to turn it off diminishes. So again we want to put our wood behind acquiring customers who we believe will have a longer lifetime revenue, higher lifetime revenue.
Whitney Tilson - Kase Capital
My second question relates back to the app growth. 23% sequential growth, you added a 1.3 million app users in three months. So you’re adding a 100,000 people using the app every week right now. And I was really pleasantly surprised to see that because as best I can tell, it’s not really what you are focused on right now. Your new app with the new interface and all isn't going to be out for another a month, like you said April, so probably another month. Is this just being driven by word of mouth? It's obviously it’s a very value proposition, it’s free, someone can sign up so, it makes me pretty excited about what kind of growth might be achieved if you do start marketing it, if you do come up with a better cleaner version of it and if you start I mean I heard on your remarks you’re trying to take people who are buying the physical magicJack and make sure they’re also signing up for the app simultaneously, so that would be a growth drive, but you’re also trying to do the reverse, get the people who are signing up for the app for free and get them to buy magicJack, right and get that virtuous cycle billing.
So I know I probably asked about three questions in here but is there anything you can point that’s driving this enormous growth and I guess the second more specific question is, like right now someone can download your app and start making free phone calls and they don’t even have to enter their email address, in other words you can’t market to them but you don’t know who they are, I assume that's one of many things that will be fixed with the new app coming out so that you can better drive people to become paying customers and buy the magicJack device going forward.
Yes, so great questions all and yes to the last one yes of course, it's part of one of many things that we’re improving. What’s driving app adoption today Whitney, one simple way of looking at it is we are the direct beneficiary of almost $100 million in ad spend over the last five years and when you think about it, some would argue that VoIP apps are relatively undifferentiated product, okay I get it, we can talk little bit on the face about what we’ve got, but what happens in markets where there is undifferentiated products, you can migrate to brands you know, what’s the brands you know magicJack. Okay, so we’re getting uptick that’s organic but clearly beneficiary of the significant marketing spend that this company has made over the last five years. Now with that said, we have put zero, and I said zero marketing effort behind marketing the current app, why? Because it’s not worth marketing, okay it’s got functionality that’s relevant, but it doesn’t have an user experience that is on par with where we want to take this company.
So when you see that new user experience and the new features and functionality coming out, you will see this company puts full weight of marketing muscle behind this and you will see a much more aggressive campaign in digital and social and you will also over time incremental social looks through the app and through registration process that will create somewhat more viral adoption for this. So yes we’re executing against all that and the app is getting adoption just on its own. We’re not pushing it but when you see us with that new app, you will see us move more aggressively promote it. And look we’re going to let the numbers speak for themselves, either we can execute against the app growth and execute against the app monetization or not, but we’re putting the numbers out there so people can see it. I mean we're just providing as much transparency as we can, let`s you measure us on real numbers.
Whitney Tilson - Kase Capital
Great, last question and then I’ll get back in the queue because believe it or not, I have more. There is a high short interest in your stock. I do some short selling myself, this is obviously stock am long, but I always look through things through a lens of a short seller and I want to give you guys the chance to address what a short seller skeptic would say looking at this earnings release, might as well get it out there up front. The first thing they would say is your revenue growth is up but your EBITDA guidance is down year-over-year and I think you’ve addressed that, that’s because you’re investing in the business and so forth.
So let me ask you to address the other two things that would that I think a skeptic would point to. Number one, gross margin at 64.0% was down about 230 bps year-over-year and sequentially and if you could address that this cost are rising or was it were you just being more aggressive in a promotional environment selling the magicJack unit, was that driving you to keep address that?
And the secondly the new activations were 215,000 quarter down from 274 sequentially the previous quarter, so advertising spend jumped in the quarter, so obviously over time we want to see that -- we would assume that an increasing advertising spend would be leading to an increase in new activations, so if you could address both of those please?
Whitney, I'll start with the gross margins. We ended the year with 65.8% gross margins and last year we had 61.3%. So I just want to make sure we’re first working on the same market.
Whitney Tilson - Kase Capital
Okay that’s the annual number, I was just referring to Q4 number.
Okay Q4 had 64%.
Whitney Tilson - Kase Capital
Correct which is down 2 percentage points from Q4 the previous year and from Q3 of 2013.
Yes, we tend to look at gross margins more on an annualized basis, because we have price promotions, we had a launch in Q3 at a discounted price point of the magicJack PLUS that bled into Q4. We had an aggressive price promotion during the holidays to sell units and so it’s certainly fair to look at it on a quarterly and an annual basis, but looking at on an annual basis if you look at ’12, we were at 61.3% and then for '13, we were at 65.8%. I think what that speaks to is the renewal revenue increase really.
Whitney Tilson - Kase Capital
Okay, and just to be clear, you are not seeing any increase in your network or something like that but would pressure your margins going forward?
We are not, as a matter of fact, we continue to improve and groom our network pricing and as I said, there were two items, one in Q3 and one in Q4 which really if you normalize them, which is the right way to look at it is just there was just timing differences as to when they hit. We would had a smoothed out $5.4 million expense for Q3 and Q4, you wouldn’t have seen that uptick which appeared that way on the financial statement but more really was 5.4 million a quarter.
Right, and then on the ads, you mentioned the ad spend Whitney.
Whitney Tilson - Kase Capital
The ad spend and not translating into an increase in new activations, I guess was the question.
Yes. I think we communicated in our Q3 call what we thought the trend would be. Jose I think touched on some of the reasons for the increased spend, one was the commitment to the previous ad agency on a buy that was already in place and frankly we were really looking at two audiences, our retail partners being one of them and the consumers being another. So we wanted to send a strong message to the market regarding the repositioning of our brand. I think we’ve been successful in that endeavor, while it didn’t translate into unit sales, our retail partners especially in the value channels as opposed to the consumer electronic channels, our value channel partners are expanding our footprint and enhancing the merchandising that we are able to reflect at the point of sale. And if you look at what we’ve announced today, the distribution partners that represent 10,000 additional incremental doors those are a reflection of the management decision in the fourth quarter to really tick up the ad spend and you guys can add.
Yes Whitney, this is Tim I think the only other thing I'd add to what Gerry said is look Q3 benefited from significant number of units sold direct and those units were sold direct under fairly aggressive promotional offers off of the launch of that 2014 device. So we have limited promotional offers in the holiday period. We did offer some Black Friday like promotions but our promotions in November and December were different than our promotions in the third quarter in that they were bounded by both time in terms of when you could execute the promotion and bounded by number of units you could buy. We found for example in the summer promotion people were buying a lot of units [indiscernible] into distribution channels that we wouldn’t want them to be. So we purposefully were a little bit more diligent on our direct promotion in the fourth quarter.
So when you look through those numbers what does it say, that’s direct with softer retailers basically in line. So again we look very closely at those numbers, we look at what the best proxy for an underlying unit demand, we look at sell through in the retail and so that’s the reason quite frankly why we’re optimistic, because we’re seeing things that are beyond the Q4 activation visit as a proxy for demand. I mean we’ve talked about the expansion in the retailers, they see incremental demand for what we have here new distribution partners, we see incremental demand for our offer and by the way, they’re putting their money where their mouth is because they’re putting in POs to buy unit and how do these guys make money, because they sell the units to the doors they distribute to.
So we’re encouraged by that. We’re obviously encouraged by the ongoing growth in our app user base and the minutes across our network. And the fact that our app users grew at a rate that exceeded the total quarterly churn on our devices users. So yes I mean look that’s -- it’s a little bit of a door shack guys you can see in it what you will, the reality is we're seeing a lot of positive data there and it’s not because we’re being naïve but we’re looking at a very granular analysis today and we know what’s driving unifying and what's not.
And with respect to the ad spend, look we had strategic spend in that fourth quarter and it’s paying dividend, I mean 10,000 new doors, I mean that’s pretty impressive expansion in our retail partners that’s all good stuff. And so we made a concerted effort to get out there and market our new brand to fear in people’s minds that this is a different business and we’ve been effective today.
Whitney Tilson - Kase Capital
So new activations are a metric that we shareholders should follow over time and it’s something you care about a lot over time, but there were some sort of some unusual things in the Q3 and Q4 comparison and is that a fair statement?
Yes, look we put activations out there, company never issued activations before, we put it out there and we basically called on it said, hey look, look at this number because it indicates the health of the business and we stand by that. So yes that’s why we provided, that’s why we follow it, that’s why we look at it in a way we look at it. So yes, it’s a proxy for demand absolutely. It’s an important metric to look at for sure, but we have to go a little bit deeper particularly when you look at Q4 versus Q3 when there was a product launch albeit somewhat weak in the third quarter. There was a lot of promotion around that product launch and so it gave a little lift to it but again we're not seeing the softness in activations coming through the retail channels and we see where this can go. So, yes, we think it’s a really important metric to look at. I means that’s ultimately people coming on to our network, that’s how we make money.
Whitney Tilson - Kase Capital
Absolutely. And the last two questions, I'll throw it out there and by the way I apologize if there is a long queue of other folks and I am hogging the call, but anytime you take a product that sort of been marketed and the whole packaging how it’s advertised et cetera et cetera and you really make big changes, there is always some risk in there that rather than improving thing, you screw things up, every investor can tell horror story of companies where they bought into a new plan and it all sounded great and it ended in tears. I assume you guys are, obviously you guys are aware of that and can you just sort of talk about the -- how you test a new website, a new design for the product, new packaging et cetera, give us, that can increase the confidence that we shareholders have that this is going to end wonderfully, not the other way around.
Yes, well maybe I will start and then you can add to it. We are probably one of the more profitable SKUs in retail until without getting into comparisons with competitors, we're moving more product in the value channels than others in the category. We've got 10,000 new doors today, a significant increase in the reach in frequency of where this product can be sold and it’s in well packaging and messaging and a closer tie with the app and the device is keenly important. At the end of the day this is value proposition. It’s not frills, it’s $30 a year and it works and it really works and that won’t change. I think what we're trying to do is enhance the lifetime value of the customer and closely tie that device to the app because we know at the end of the day when it’s jump all time, when it’s time to decide whether you want to re-up or not, if it’s a nomadic device that sits in your briefcase or sits at your summer house or sits wherever you are going to be, compared to a device and a mobile app which you can access at home and on the go on your phone, on your mobile device, it’s a pretty compelling offer.
So, I think there is a lot of reasons to believe that we thought through the elements of change and everything we see from retail partner reaction to the research that we did in designing the new TV ad campaign with focus type groups to the new essentially validation from people that are putting purchase orders in for retailers that they sell to, to at least 10,000 new doors really confirms to us that we're very much on the right track. So if you guys want to?
Yes, I mean Whitney I'll just add to that, like as Gerry said look, we started up with bottoms up market research in terms of who’s our customers and who’s our prospects and we did a lot of testing on our commercial and hence why we came up with the female spokesperson because we have a value proposition that speaks to women. We spent a lot of time with our retailers talking about our strategy and our approach and our branding and they are in touch [indiscernible] Walmart and elsewhere those guys are in touch with the buy of the consumer and who is buying what in this channel what’s going on. So, those guys have been part and parcel of what we're doing. I suggest you just go street-by-street research just ask your friend and say hey, look if you can buy for $30 a year, keep your home phone number and have unlimited calling in the U.S. and Canada via your home phone or via your mobile phone, is that a compelling value proposition to you? I think most people would say yes.
And most people and a lot of moms look at that and say it’s really valuable, it’s a mobile approximately. I may or may not use it from a physical device, they love the mobile app, you're saying I can get my home phone number on my mobile device. So, when you take that and you translate it into, you look back at the packaging and we're acutely focused on, hey look are we making a mistake here with the shift in the packaging. But you look at the packaging that we have today and it doesn’t speak to that mom who says I want to save money for my family and I want to drop my home phone line and I want something that’s on a mobile device. You look at thing like I don’t get it, like it’s hard to understand and it scares me and it’s a little techie and it’s confusing. So again and yes we've done lot of work, we've done a lot of research and we have done everything from the market research up through the partnership with the retailers and you know as I said just, we have been marketing into an echo chamber with a strategy that’s implemented in 2007 that was ridiculously successful, absolutely successful, but we’re in 2014 it’s a different market.
Whitney Tilson - Kase Capital
By the way what it’s worth, I pulled out my latest Verizon bill, I just have a plain old phone service from Verizon that I have had for 20 years here. And they marketed it to me as $40 a month and I never really paid much attention to it, it’s an extra $80 a months for the unlimited long distance, that’s just the U.S. Then there were like 12 different taxes and fees, the total bill was $80 double, what I thought I was paying. And my magicJack and I paid the extra $0.50 or $0.70 a month for 911 service as a comparison direct comparison. So my savings are 96%, $80 versus $3.20 a month. So, pretty compelling.
Last question you guys, is Jerry you have been the CEO for just over a year, Tim you have only been there a few months and I think you have a lot of new shareholders. Firstly I have been very impressed with the background of both of you and the size of businesses that you run and the money you have made for our shareholders in prior ventures. So here’s an opportunity to you a little bit. I can’t imagine guys like you are to company at 160 million revenues thinking that it’s going to be 160 million or thereabouts revenues.
So could you each of you just give sort of quick summary your background and sort of -- and your previous experience and the results for your shareholders or owners?
Well first of all let not miss an opportunity to offer to port that phone over to magicJack, we could use the additional $30 subscription if you want. If you want another...
Whitney Tilson - Kase Capital
I have magicJack as a second line right now and I am working on my wife, I mean she’s just a create of habit, but what happens if the power goes out or whatever to convert my main line over.
So it will keep the propaganda down because I think we really want to try to stimulate some more questions, if that’s okay. My background is a strong mobile background, my last public company experience was with a company that I started in 1996, it was in the mobile space [seven] competitor marketplace. We built, owned, operated, purchased spectrum from the government, formed that company in the latter part of ‘96, by 2000 we had over a $1,100 million of revenue with over 75 market spanning from the Great Lakes to the Gulf of Mexico, we competed as I said, in a highly competitive environment and probably won about 25% of all new mobile decisions in that marketplace, and subsequently sold that company for $5.7 billion to AT&T in 2002. So you’re absolutely right. This management team is clearly aiming for the type of value creation that comes when a company of our size and our management team, and our management team spans operations, network, care, the mobile D&A that comes with new management, the new finance team, the marketing folks, our efforts are really to double up as a leader in this category and if we do just that, the returns that we believe are achievable are extraordinary. So that’s how I put it. Tim, I'm happy to have you.
Yes, I mean look, I think we want to let some other guys ask questions, I’ll just give you like why I am here. We think this is a tremendous growth opportunity. We think it’s probably one of the most exciting opportunities in mobile, why, because we see over the top communications as being a major disruptive force. When you look at that WhatsApp acquisition by Facebook and you look at these guys want to go into voice. And then you look at the hundreds of billions of dollars of market cap that are play and the tens of billions of dollars of revenue that are play, that’s a significant opportunity, then you look at magicJack and say look at what magicJack has. We have a nationally recognized brand, 53% brand awareness, lots of money that’s gone behind creating that brand.
We’ve got three plus million device users and a larger number of app users; we’ve got tremendous physical distribution which has relevance in both of those environments, both physical and the app environment. We have a business model that generates positive cash flow, for every one of those units we sell, positive cash flow renewal, positive cash flow. And we got a balance sheet that’s clean, $50 million plus of cash on the balance sheet, no debt.
And you look at that and you say, that set of assets and our low cost network infrastructure which by the way, the founder of this company was a genius about understanding the cost structure of carriers. And we would not have the cost structure that we have, if it wasn’t for his knowledge and expertise around managing that cost structure. So we have an incredible cost structure and we're the beneficiary of that genius and when you look at where this is going, where over the top communications are going and you look at that set of assets and you look at the hundreds of billions of dollars of market cap that are at play, you have to say, this is one hack of an opportunity now if we as a management team, if we can pull this together which there is just a lot heavy lifting right, because there is a restructuring of this business and there is a lot of resources that are needed here and we’ve got a phenomenal team that’s in place and coming to place. But we believe we’ve got a seat at the table with the giants, I mean, it's competitive for sure. And we’ve got guys like Facebook and got guys like Google et cetera, but we got a seat at the table and if we get this right, we got a big opportunity and that’s what we’re planning for. But maybe if we can kind of let some others if there is anyone else.
Whitney Tilson - Kase Capital
Yes, I’m done and thank you for your openness and unresponsiveness and your patience.
We have no further questions in the queue at this time. I would like to turn the conference over to management for any additional or closing remarks.
Thank you all for joining today. We look forward to talking you in the very near future. Thanks.
Ladies and gentleman this does conclude today’s conference. We appreciate your participation.
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