Vonage Holdings CEO Discusses Q3 2010 Results – Earnings Call Transcript

| About: Vonage Holdings (VG)

Vonage Holdings Corporation (NYSE:VG)

Q3 2010 Earnings Conference Call

November 3, 2010 10:00 AM ET


Leslie Arena – VP, IR

Marc Lefar – CEO

Barry Rowan – EVP, CFO & CAO


Michael Rollins – Citigroup Inc.

Mike Latimore – Northland Securities, Inc.

Jonathan Shukral – EVA Corp

Uri Miller – CWCapital


Good day, everyone and welcome to the Vonage Holdings Corporation Third Quarter 2010 Earnings Conference Call. Just as a reminder, today’s call is being recorded.

At this time, for opening remarks and introduction, I would like to turn the conference over to Ms. Leslie Arena, Vice President of Investor Relations. Please go ahead, Ms. Arena.

Leslie Arena

Thank you. Good morning and welcome to our third quarter 2010 conference call. Speaking on our call this morning will be Marc Lefar, Chief Executive Officer; and Barry Rowan, CFO and Chief Administrative Officer. Marc will discuss the company’s planned refinancing and progress in the quarter. Barry will discuss the details our refinancing and our financial results. Slides that accompany Barry’s discussion are available on the Investor Relations website. At the conclusion of our prepared remarks, we will be happy to take your questions.

As referenced on slide 2, I would like to remind everyone that statements made during this call that are not historical facts or information 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 current beliefs and expectations and depend on assumptions or data that may be 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 contained in Vonage’s SEC filings. We caution listeners not to rely unduly on forward-looking statements, and we disclaim any intent or obligation to update them.

During this call, we will be referring to non-GAAP financial measures. A reconciliation of these measures to comparable GAAP measures is available on the Investor Relations website.

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

Marc Lefar

Thank you, Leslie and thank you all for joining our call today. This morning, we announced the plan for refinancing the company. This marks a major milestone in our continued transformation. In many ways, it’s the combination of the significant and sustained progress we’ve achieved on our operating performance over the past two years. It’s the realization of our strategy to the [inaudible] company, unencumbered by inefficient capital structure and restrictive governance.

Yesterday, we entered into an agreement with our debt holders to retire 100% of our outstanding debt. And today, we announce plans to issue approximately $200 million of new debt essentially restructuring our balance sheet. We expect this transaction will lead to earnings accretion of at least 40% due to dramatically lower interest rates along with the added benefit of far less restrictive governance. We’ll have much greater flexibility and to grow the business.

This is exciting news for Vonage, for our employees and our shareholders. It was just two years ago, during my first full quarter at Vonage, we were forced to refinance our debt during the toughest credit market in recent history. Our business operations were not efficient and customer loyalty was weak. Churn was well over 3%, EBITDA was a third of what it is today and free cash flow was negative $35 million.

Over the past two years, we dramatically improved our core operations and significantly improved loyalty while improving the quality of our customer base. We’ve enhanced our cost structure and driven churn to its lowest level in many years. We’ve battle through threats of stock delisting and we’ve resolved all the major litigation issues facing us.

We launched new products including Vonage World and entered the mobile market with the international calling application and Vonage Mobile for Facebook. Today, trailing fourth quarter EBITDA and free cash flow are roughly a $150 million each and $185 million in cash. Although we have much more to do, we have made tremendous progress.

Let’s move on to our current results. Our financial progress has been strong. Year-to-date, we generated a $115 million in EBITDA, nearly as much as we generated in all of 2009. Our third quarter results were solid. Our core business continues to generate substantial cash driven by an aggressive focus on cost management and process improvements throughout our operations and in our call centers. We stabilized our customer base and reduce churn to the lowest third quarter level in five years.

We generated nearly $40 million of EBITDA excluding non-operational litigation cost and reduce expenses in virtually every category.

Year-over-year, we reduced SG&A by 7% and drove customer care cost per line, down by 24% while increasing customer satisfaction ratings, and we continue to reduce international termination rates, which declined meaningfully since the third quarter of last year.

Consistent with our prior guidance, revenue declined sequentially to $214 million. It’s important to note that more than half of the decline was driven by non-operational items. The first was a decline in universal service fund fees, which did not impact earnings. These revenues are direct pass-through. The second item affecting the quarter is reserve for refunds paid to customers as part of our Consumer Class Action Settlement. This was recorded against revenue.

From an operations perspective, we continue to make fundamental improvements in the customer experience. Network call quality continues to improve as the percent of impaired calls decline by more than 20% over the past year and the number of customers experiencing one or more impaired calls drops more than 40% in the last quarter alone. Platform reliability is also improving as we deliver a 26% decrease in incidence from a year ago and reduce our average time to restore by 20% sequentially.

These improvements and the attractive value proposition of Vonage World drove a 100-basis point decline in churn from year ago. More than 900,000 customers are now in Vonage World and more than half of those are international callers, who churn at a rate of less than half that of domestic callers.

Gross line ad increased by 5% sequentially to 163,000 as we gained late quarter traction behind our Hispanic marketing efforts and our no contract offer. However, as a result of the slight seasonal increase in churn from 2.3 to 2.4 sequentially, net ads were flat at negative 5,000.

We’re making progress. We must accelerate our penetration in the international long distance segments with their significant additional market opportunity.

The targeted rollouts of our ethnic marketing campaigns are providing us with a valuable earnings. In the Hispanic market, research, copy testing and call center agent focused groups have provided insight and data enabling us to optimize our marketing strategy. With an addressable to Hispanic population of 26 million households, we consider this segment along with the Asian-Indian market to be very large growth opportunities for us, and our early results are very encouraging.

In September, we launched national Hispanic television advertising, which along with our end to end Spanish sales and support is helping to attract new customers. Hispanic callers now make over 25% of sales call volume and Hispanic orders have quadrupled.

Recently launched television and direct mail campaigns better addressing the Asian-Indian market are also expected to drive additional call volume into our sales centers.

In September, we also brought Vonage World North by launching Vonage world into Canada. This product offers unlimited calling to more than 60 countries, including the U.S., U.K., France, Germany, India and China. Early results are positive and although the base is small, gross line additions have doubled in Canada since launch.

Increasing confidence in the value of our customer offer as well as evolving industry trends precipitated our No Contract Offer launch in September. Although early, we’re already seeing lower return rates and importantly, churn for the no-contract customers is the same or better than per customers under contract.

While we’ve seen some improvements in international, which strengthens our base, we’re adding domestic customers at a lower rate. We’re focusing on identifying the appropriate balance of investment between these markets to drive long-term value.

In the fourth quarter, we plan a deeper focus on Hispanic and Indian markets while continuing to target the domestic callers and leverage promotions where necessary. Our active search for an exceptional chief marketing officer is continuing. I will continue to personally manage the company’s marketing efforts until we announce this individual and we’ll of course remain closely involve thereafter.

Let me talk now about some of the market dynamics and our future direction. At the same time that we’ve driving our call business, we’ve also been laying the foundation to deliver next generation products. As we have discussed on prior calls, the market for next generation services is very attractive and built on strong fundamentals.

Smartphone sales continue to grow and media tablets such as iPads have exploded in popularity. To date, there are more than 500 million portable devices worldwide, with expectation for this market to grow to more than a billion by 2014.

International calling revenue exceeds $80 billion and U.S. text messaging revenue is roughly $25 billion. Our development team has made significant progress preparing for the rollout of next generation products. We’re strengthening our R&D team and building out the infrastructure to support messaging and to open our platform to multiple social communities.

Our August launch of Vonage Mobile for Facebook was another step in our global strategy. Vonage Mobile for Facebook demonstrated how is a single digital identity; a person can initiate and receive calls and messages over our network using their existing social networks and existing contact list. This concept can be extended to any broadband connected device, so there’s a PC, a gaming console, television, e-reader or mobile phones.

This application garnered significant attention and many visits to our Vonage Talk Free site. We’re directly focused on expanding the number of downloads and users. This concept is not limited to just a single community and we expect to announce applications for other social communities in upcoming quarters.

In the future, we anticipate a full range of services, many of which we monetize including international calling plans, text messaging, premium services like readable voicemail and custom communities as well as an integrated address book leveraging the existing mobile device. We’ll also expand these services to additional platforms such as the PC and Mac in the near future.

We will continue to leverage our innovative and flexible IP platform to deliver new products, which we expect we’ll begin to contribute meaningfully to topline growth in the second half of 2011. We’ll provide guidance on the impact of next generation products when we report our fourth quarter results for the year end.

In summary, today’s announcement of our plans debt refinancing provides the clean slate for the company. With destabilization of our customer base, our strong cash flow and a transformed capital structure, we now have a solid platform on which to grow. We look forward to providing you with continued updates on our progress in the quarters ahead.

And now, I’ll turn the call over to Barry.

Barry Rowan

Thanks, Marc. I am pleased to review today’s debt announcement and our third quarter results with you. Let me begin by reiterating how pleased we are to be able to announce this refinancing. This is a transforming even for Vonage and represents the combination of strong operating performance over many quarters combined with very strong credit market.

As refinancing will replace approximately $194 million of restructuring debt at interest rates ranging from 16 to 20%, with a comparably size $200 million pre-payable term loan facility carrying interest rates anticipated to be less than half the blended rate that were currently paying. As the thirdly notes are also expected to be converted in this transaction, Vonage will exit the planned refinancing with a completely restructured balance sheet.

We expect the refinancing to be highly accretive to earnings. In addition, the new term loan facility will be pre-payable and we are highly confident that it will contain far less stringent covenants than our existing debt. This will de-risk our business and substantially increase the financial and operating flexibility we desire to accelerate the performance of the business going forward.

Viewed in the aggregate, we believe the benefits of this comprehensive refinancing significantly outweigh the cost required to complete the transaction. In addition to the debt announcement, we reported a solid financial quarter as we generated strong EBITDA and cash flow based on ongoing operational improvements and expense management.

We reported the lowest third quarter churns in five years and made continued progress in improving customer care processes and network operations laying the foundation to deliver next generation products and services.

So, let’s review the details of the refinancing beginning on slide three. As Marc highlighted, this planned refinancing is made possible by the significant operational progress made over the past several years and in recent quarters substantial cash generation achieved through working capital management and the release of restricted cash from vendors based on the company’s solid financial performance.

Through this combination of strong cash flow generated from operations and cash management, we have grown our cash balance from $35 million to $166 million or $130 million just since the end of last year. This was a key component of our two-part strategy. First, prepaying as much debt as possibly at par through the excess cash flow provisioned by debt agreements, a total of $41 million during the past two quarters and now, affecting this global refinancing.

Let me explain this transaction in more detail breaking it into two components, the repayment and the new debt issue. Please turn to slide four.

Yesterday, we entered into definitive agreements to exercise our Make-hole right on our first lean and to pay a premium on the second lean discounted from the full Make-hole price thereby fully retiring the first and second lean debt. This $93 million premium is comprised of a 21% or $20.6 million premium to par on the first lean and then 81% or $72.8 million premium to par on the second lean and represents a more than 25% discount to the full Make-hole premium on the second lean.

In addition to the premium payments required to retire the debt, we agreed to pay administrative and consent fees to the lenders. Certain fees will be required to be paid to the lenders in the event that a refinancing is not consummated within the next four months.

In addition to this agreement with the first and second lean lenders, the third lean holders have also agreed to convert the remainder of their notes as part of these overall transactions. The third lean notes will be converted into 8.3 million shares of the company’s common stock. In addition, the third lean note holders will receive a cash payment of $2.2 million plus accrued interest of $1.1 million.

Through this retirement of the first, second, and third leans and based on the anticipated rates on the new debts, we expect to save over $20 million in interest cost per year.

Now, that we have reached agreement on repayment terms with our first, second and third lean holders, we’re proceeding aggressively to raise the approximately $200 million in term loans and have engaged Bank of America Merrill Lynch and Deutsche Bank to lead this effort. The combination of the proceeds from this new issuance plus our existing cash will retire all of our current pie cost restructuring debt that was put in place at a time when the company’s very survival was in question and in an environment of extraordinarily difficult capital market.

In contrast, we expect to exit this refinancing with a strong balance sheet characterized by low leverage, ample liquidity, significant operating flexibility and accretion to earnings during the first year of at least 40% based on the lower interest rate on the new debt. Our capital structure will be significantly enhanced through a conventional term loan allowing for prepayments at par. We anticipate pro forma total leverage to be at or below 1.5 times debt to EBITDA and net debt to be approximately 1.1 times leading us with ample liquidity of at least $55 million after the refinancing.

Importantly, we will also have eliminated the highly restrictive covenants containing existing debt agreements, including those associated with acquisitions and returning capital for shareholders. The new financing will include standard maintenance covenants, such as total leverage, interest cost and capital expenditures, but we believe this will be setup with more than adequate cushion to provide the financial and operating flexibility we seek.

While we’re confident of our ability to raise the new issue in accordance with the terms we’ve describe, there can be no assurance of the completion of this new debt issuance and of course, it is subject to market conditions. We are certainly very pleased to be in a position to announce this plan, the comprehensive refinancing transaction today.

Let’s now move to a review of our financial results beginning on slide five. In summary, we reported a solid financial quarter generally in line with expectations. EBITDA increased 5% from the year ago quarter to $35 million driven by higher service and overall operating efficiencies. As anticipated, EBITDA declined sequentially due to the continuing impact of short-term promotions, increased investments in new products and the $4 million non-recurring charge for settlements.

During this quarter, we settle the long pending Consumer Class Action Lawsuit and a state and local tax matter, which in aggregate negatively impacted EBITDA by $4 million this quarter. Excluding this non-operational impacts, EBITDA was $39 million down slightly from $40 million sequentially.

Turning to slide six. We reported net income of $8 million or $0.04 per share excluding adjustments, up from net income of $5 million or $0.03 per share excluding adjustments in the third quarter of 2009 and down from $12 million or $0.06 sequentially. The $55 million or $0.26 per share GAAP net loss for the quarter includes a $60 million charge related to the Make-hole provisions in the company’s debt, which is treated as an embedded derivative for accounting purposes.

This charge is based on accounting rules that requires that we value the Make-hole by estimating both the price at which the transaction might occur and the likelihood of it occurring. Taking into consideration the facts and circumstance as of September 30, 2010. Assuming that refinancing occurs during the fourth quarter of this year as planned, the balance of the Make-hole amount along with all of the other accounting charges associated with the transaction would be reflected during the fourth quarter.

Turning to slide seven. As we move to a discussion of revenue, let me begin by pointing out that total revenue in the quarter was reduced by two non-operational drivers that meaningfully impacted our reported numbers.

First in the third quarter, we reached an agreement in principle to settle the Consumer Class Action Lawsuit, which reduced revenue by $2 million due to refunds to customers which were classified as contra-revenue. Secondly, USFC’s a pass-through on the revenue line declined by roughly $4 million sequentially. Excluding these impacts, revenue would have been $220 million compared to the $214 million we reported representing a 2% decline sequentially and less than a 1% from the year ago quarter.

So, lastly, services revenue of $212 million was down from $216 million and from $222 million sequentially as expected due to short-term promotions combined with the U.S. [inaudible] rate, offset in part by improved customer services mix. The last [ph] any services ARPU increase to $29.45 to $29.16 in the year ago quarter, aided by customer mix and service fee increases implemented in the second quarter for unlimited 411 Directory Assistance as well as improvement in bad debt.

Sequentially, telephony services ARPU declined 4% from $30.71 driven by promotions.

Now, looking at slide eight, cost and telephony service or COTS declined to $60 million sequentially to $63 million driven by the $4 million USF benefit that I mentioned, offset by an expected increase in international termination cost from additional Vonage World customers.

On a per line basis, total COTS decline to $8.36 down from $8.32 sequentially. Excluding USF COTS increase sequentially driven by the anticipated Fire International Usage, but we continue to successfully offset these usage increases by aggressively focusing on reducing rates. We expect COTS to increase sequentially as we add Vonage World customers and have factored this into our business model.

We’ve continued to strengthen our customer base through our focus on international callers and approximately 900,000 customers or nearly 40% of our customers are now on Vonage World. Nearly 60% of these are ILD callers who churn at less than our overall churn rate. As we discuss the four, these ILD customers incur a higher COTS cost, but their net present value is actually higher than domestic callers because of their very low churn rates.

Now turning to slide nine, our focus on driving efficiency led to further reductions in SG&A which had $59 million was down 7% from the third quarter of 2009 and 3% sequentially.

Care expense per line was down 24% year-over-year as we have effectively manage staffing to support demand and continue to improve our online support capabilities. We carefully monitor care metrics including average handle time, first call resolution and customer satisfaction, which all remain strong even as we reduce cost. Customer satisfaction, which measures how satisfied customers are with their last interaction with our care organization, increased 100 basis points from last year, for example.

We are focused on achieving further improvements in SG&A overtime as we continue to emphasis online sales and support.

During the quarter, we added 163,000 gross lines up 5% from the previous two quarters. Our marketing yield improved modestly reflected in a 5% decline in slack as it began to make progress and further penetrating the targeted Hispanic market and with the introduction of the No Contract offer. As Marc mentioned we launched our No Contract offer in early September and we are pleased with the low return rates we are seeing so far.

Onto slide 10, we’ve reduced marketing expenses by 14% from the $57 million level a year ago and we’ve improved customer and prospect interactions with Vonage by delivering a complete end to end Spanish language experience. On slide 11, you can see that we continue to effectively manage churn, which is 2.4% this quarter down a 100 basis points from a year ago, and as we mentioned our best third quarter result in five years. This was up a modest 10 basis points from the 2.3% achieved last quarter.

Our churn success continues to be driven by the Nicks [ph] and Vonage World customers and improvements in the overall customer experience. Our customer base is stable as we maintain net line losses at last quarter’s 5,000 lines.

Now, please turn to slide 12. CapEx was $9 million for the quarter and stands at $25 million year-to-date. Base on expense control and timing of some projects, we are lowering our CapEx expectations for the year from the mid $40 million to below 40s.

Our $35 million in EBITDA resulted in $31 million in operating cash flow and $22 million of free cash flow during the quarter. While our cash balances grew quite substantially in earlier quarters due to working capital management and the release of cash from vendors. This quarter, we are approximately working capital neutral bringing cash flow from operations more close in line with EBITDA.

During this quarter, we were able to release an additional $5 million in restricted cash through negotiations with our vendors and based on the company’s sustained financial performance, bringing the total to $32 million of restricted cash released during the second and third quarter of this year. Total cash at quarter end stood at $185 million; unrestricted cash $136 million, up from $126 million in the second quarter; and restricted cash was reduced from $54 million to $49 million sequentially and includes the $30 million concentration count under our existing debt agreements.

In summary, we are pleased with the progress we have made this quarter. We announce plans for a transformational refinancing that will release us from the heavy interest cost and restricted covenants of our 2008 restructuring debt. This planned transaction meaningfully de-risks our business and is expected to provide us with the increase financial and operational flexibility we desire.

Operationally, the quarter was solid. With a freshly restructured balance sheet, our cost structure in order stabilize customer base and all major litigation behind us. We have a solid platform on which to build the future success of the company.

Looking forward, we expect fourth quarter EBITDA to increase year-over-year and sequentially. As Marc mentioned, we expect the growth initiatives we are undertaking to begin to meaningfully impact revenue by the second half of next year. We plan to provide more detail guidance on our expectations for these initiatives when we report our fourth quarter results.

Thank again for your interest in Vonage and now, I will turn the call back over to Leslie to initiate the Q&A session.

Leslie Arena

Thank you, Barry. And now operator, please open the line for questions.

Question-and-Answer Session


Thank you. (Operator Instructions) Michael Rollins with Citi Investments. Your line is open.

Michael Rollins – Citigroup Inc.

Hi, good morning. Thanks for taking my questions. A couple, just clarifications. First, on the EBITDA, I think it said in the release, if I’m not mistaken there were $4 million of litigation cost that was caught in this roughly $35 million. And on the call, you describe $2 million litigation revenue, $4 million in USF that was offset by cost of service, can you just help reconcile the differences to get back to that incremental $4 million cost.

The second question I had is when you’re guiding for EBITDA for next quarter, are you guiding sequentially higher on the reported number or the normalize number? And in the final clarification is as you do the debt refinancing, can you talk about the cash that you unlock in your restricted accounts that could partly offset some of the premiums that our paying for the make-hole provisions, thanks.

Barry Rowan

Yes, Mike. It’s Barry, let me address those. The $4 million is correct that that is a difference in the $35 million reported that would have been obviously the $39 million and that is reflective of the settlement of the Consumer Class Action Settlement as well as the tax matter that we alluded to in the release. So that is the total amount, it is split from an accounting standpoint between a revenue, as a contra-revenue entry and in the SG&A line. So, the total comp to revenue impact is $2.3 million and the balance goes to SG&A.

Regarding your question the cash and how that is release with this transaction, there are I think two ways to think about the cash that is currently restricted. There is a specific concentration account of $30 million that we are required to maintain that cannot be used for corporate purposes at all that would be of course release on the refinancing. The second dimension of cash that is tied up is that as you know the overall covenants in our existing debt agreements provide for some substantial restrictions on our ability to use that cash for a variety of purposes including an excess cash flow sweep that would be off [ph] overtime, but at par which as you know on the last quarter, not all of the offer was taken at par, which was the thing that prompted us to continue to look at the ways to effect the global refinancing.

So, as we look forward, that cash that has grown on the balance sheet would be restricted from being able to use it for overall corporate purposes. So, we are pleased to be able to build these cash balance up to operations and through the working capital management and the release from vendors that we described, which now enables us to use that, to go toward the debt refinancing. So, it will be – the debt refinancing will be a combination of the $200 million new term debt as well as cash from the balance sheet.

Leslie Arena

Next question, operator.


Thank you. Our next question comes is from Mike Latimore of Northland Capital. Your line is open.

Mike Latimore – Northland Securities, Inc.

Yes. I guess just to clarify on a prior question. In terms of the EBITDA guidance for the fourth quarter is that sequentially up from the $34 million or is the $39 million that you’re up on?

Marc Lefar

No, it’s up from the all in $34 million, Mike.

Mike Latimore – Northland Securities, Inc.

And how about – I think the last quarter, you gave some general guidance around revenues. Can you probably describe any sort of revenue outlook here for the fourth quarter?

Marc Lefar

We weren’t specific about that, but you know we see revenue basically kind of flattish. Maybe up slightly, but we haven’t provided a specific guidance on that, but that’s kind of the zone that we would look for.

Mike Latimore – Northland Securities, Inc.

And just – I maybe be able to pull this out of the slide, when the financing is done is it – correct that you’ll have $200 million in debt and $65 million in cash, is that what you said?

Barry Rowan

That’s correct, Mike.

Marc Lefar

For a net debt of about 1.1 times and total debt of 1.5 times or less.

Mike Latimore – Northland Securities, Inc.

Okay, great. Congratulations on that refinance. Hence, that’s great.

On the – just the – minor thing on revenue. The equipment revenues were $2 million, is that kind of a reasonable run rate now, equipment run rate, in terms of equipment revenue?

Marc Lefar

Yes, I think that pretty much a steady state sort of number.

Leslie Arena

And there was a slight offset on the equipment revenue due to the litigation impact that hit revenue. That was split between services revenue to a smaller degree and equipment revenue.

Mike Latimore – Northland Securities, Inc.

Okay. And in terms of the Vonage World, you mentioned these were the percent of base of Vonage World. What percent of growth subscribers are kind of coming in and [inaudible] noted?

Barry Rowan

It’s an excess of 80% now.

Mike Latimore – Northland Securities, Inc.

And in terms of – I know you reference seasonality affecting churn. What’s your view on – do you see sort of positive seasonality in the fourth quarter then on churn or how do you think about churn?

Marc Lefar

Third and fourth quarter are generally pretty flat. It’s usually the second quarter that is intended to be a little bit lower quarter.

Mike Latimore – Northland Securities, Inc.

Okay, great. Thank you.

Leslie Arena

Next question.


Thank you. Our next question is from Jonathan Shukral [ph] of EVA Corp [ph]. Your line is open.

Jonathan Shukral – EVA Corp

Thank you for taking the question. I just have a question on kind of product portfolio and vision. Obviously, you’ve had a lot of success with the Vonage World product and I noted a new app related to Facebook. Do you feel like you’ve got a portfolio of services that you need? What’s your vision for services going forward and is there any vision to include a video component in what you are doing? Thanks.

Marc Lefar

We do believe that continued expansion of the product portfolio is necessary for long-term growth. We believe that really comes in two pieces. Additional elements to focus on international calling segments which in addition to the Vonage World, flat rate calling plan was a simple for many – we are seeing increasing needs for countries specific calling plans potentially those that are unbundled for domestic calling plans.

Per minute rates are still very high margin for a lot of subscribers and with increasing penetration of smartphones, the ability to provide international long distance calling plans that are built for purpose or lots of segments we think are extremely profitable and is very large market for us. So, you’ll see more of that in the coming quarters.

In addition, you’ll see what I refer to as next generation services which include leveraging of suite of voice, messaging and video services across multiple devices for a single digital identifier for a person or a lot of these will be a little bit different than many other companies and that we believe the people’s digital contact list and communities already exist, whether it be in Facebook and LinkedIn or any other ad hoc digital community they’ve got and the ability to simply enable those digital communities to communicate for all forms of communication is what we would expect to deliver to the marketplace across multiple platforms, mobile, PC and other digitally broadband connected devices.

So, those are all part of the roadmap that we’ve talk in some detail in prior calls.

Jonathan Shukral – EVA Corp

All right. Thank you very much.


Our next question is from Uri Miller [ph] of CWCapital. Your line is open.

Uri Miller – CWCapital

Good morning. Thanks for taking my question. My first question was actually just answered in regards to new strategies and moving along to video calling. But in regards to the new credit facility that’s going to be taken out, are there plans to include an aggressive free cash flow sweep as there was on the existing first lean, is there kind of a leverage that you’re going to be comfortable with for the near-term or continue to de-lever over the next couple of years?

Marc Lefar

Yes. We do expect that there will be a cash flow sweep, but it will be tied to overall leverage and of course, we have to see where the terms for the new financing end up. But as we look at that, we are very confident at flexibility we will have on total leverage and very confident at the kind of Christian [ph] that will have or will give us the adequate flexibility.

We also expect that we will be able to – one of the advantages of using the term loan facility is that it’s pre-payable at par. So, when we look at the cash flow generation capability of the company, historically and going forward, the ability to prepay the loan is certainly an attractive feature to us and that is one of the reasons we have move to that kind of facility. So, we do have the ability to pre-pay it at par. We do expect there to be some kind of an excess cash flow sweep provision, but in no way do we think that that is going to be the onerous to us and enable us to effectuate kind of a prepayment that we would look to do in any case.

And then the amounts outside of the cash flow sweep would of course be available to the company for general corporate purposes in line with what we would need to use them for. So, I think the good news from this transaction is we plan to exit with leverage at 1.5 times or less which is very comparable to where it is now and we have the ability to de-lever overtime because of that prepayment facility as an aspect of any term loan.

Uri Miller – CWCapital

So, it’s a possibility that they’ll likely be a less aggressive pre-cash flow sweep in previous, but there’s the opportunity to increase that free cash flow sweep to pay down the first lean and decrease leverage. Okay, thank you.


Thank you. (Operator Instructions)

Leslie Arena

If there are no further questions, operator. We’ll conclude the call. Thank you for joining us today.


Ladies and gentlemen, thank you for your participation in today’s conference. This concludes the program. You may now disconnect. Have a wonderful day.

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