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magicJack VocalTec Ltd. (NASDAQ:CALL)

Q2 2014 Earnings Conference Call

August 11, 2014 5:00 PM ET

Executives

Jose Gordo – IR

Gerald Vento – CEO and President

Timothy McDonald – COO

Analysts

Tim Horan – Oppenheimer

Greg Miller – Canaccord

Operator

Good day and welcome to the magicJack VocalTec’s Second Quarter 2014 Financial Results Conference Call. Today’s conference is being recorded. Joining us on today’s call are Gerald Vento, President and CEO; Jose Gordo, Chief Financial Officer and Timothy McDonald, Chief Operating Officer. At this time, I would like to turn the call over to Mr. Gordo. You may begin sir.

Jose Gordo

Thank you, operator. Good afternoon and welcome to the magicJack’s second quarter 2014 earnings call. I’m Jose Gordo, CFO. With me on the call today is Gerry Vento, President and CEO, and Timothy McDonald, Chief Operating Officer. 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 schedule showing GAAP versus non-GAAP results currently available in our press release issued after the close of the market today, which is available on our website at www.vocaltec.com.

With that, I will turn the call over to Gerry.

Gerald Vento

Good afternoon, thanks Jose. Before getting into the review of the quarter, I’d like to begin by remembering the legacy of our founder Dan Borislow, tragically Dan passed away last month. He was a true telecom pioneer whose vision, creativity and passion where the driving force behind this company magicJack. This company would not exist where it not for a single minded focus. He was truly one of a kind. Our sincere condolences go out to Dan’s family.

Turning to the financial results and significant events for the quarter. Our revenue for the quarter was $29.5 million, we grew renewals which would categorize this access rights for renewal revenue to $16.1 million, this represents a 14% increase on a year-over-year basis. Renewals now represent 55% of our revenue base up 43% in last quarter. We generated $5.9 million in operating cash flow for the quarter, and we continue to grow our strong balance sheet with $72 million in cash and no debt.

We ended the quarter with 2.95 million active device users. We defined active users as subscribers of our magicJack device that are under an active subscription contract. And we reduced average monthly churn to 3.1% from 3.3% from the prior quarter and we ended the quarter with 3.4 million monthly active unique app users, which is substantially flat to the 3.5 million monthly active unique users last quarter.

Turning to operational initiatives, on our last call we outlined an aggressive series of steps that we believe will return revenue growth to our company. As you know the company has experienced steady subscriber decline beginning in Q1 of 2012, over the first half of this year we launched four primary initiatives to turnaround the decline and reposition the business for revenue growth.

First, broaden the appeal of our service through a comprehensive repositioning. Second, extend the light value of our customers by improving renewal rates, care and voice quality. Third, we plan to leverage the mobile app to enhance our core device offering, generate new revenue. Finally, we promised to expand sales beyond the U.S. and Canada.

While we began to see the first signs of progress in our turnaround strategy, there is much more to do. As promised in our last call, in Q2 we launched the magicJackGO to a new set of customers with strong in-store merchandising and prominent positioning in retail at no incremental cost to the company.

The GO provides the same core value priced offer for a less than $3 per month while, updating our compelling offer to consumers in integrating our mobile feature providing an unique differentiator in the marketplace. The launch of the GO is just the beginning of a top to bottom repositioning of our services.

Tim will give you greater detail on the sell-through numbers for the GO and update you on other initiatives momentarily. Much work remains before we can return this company to growth that we promised to our investors. Make no mistake that management is firmly committed to executing on the initiatives as you will hear throughout our presentation today.

Turning to renewals and churn. Renewal revenues increased 5% versus the first quarter. We improved targeted and timely renewal offerings. In-store cash renewal cards were launched at Wal-Mart and we introduced one month and six month renewal plans on magicJack.com.

In the second half of the year, we will begin generating new revenues through the release of international calling features on our app. We also intend to release a prepaid integrated voice and text offering. We have outlined an aggressive turnaround strategy for the company and have made progress on several fronts with respect to our core device business.

We now believe that in order to fully capitalize on the growth opportunities we have outlined in our business plan; we require additional investments to enhance the capabilities of our existing platform. To drive revenue growth going forward, we have begun this development and we’ll work over time to provide these enhancements. Although we’ve made progress on a broad range of operational matters, certain of our revenue growth initiatives have taken longer to deliver into this marketplace than we had initially anticipated.

While our review over the market potential for these growth drivers remain strong. The revenue contribution from these initiatives will not begin to be realized until later in the second half of the year, thus impacting the timing of our return to revenue growth. As a result we will revise guidance to reflect postponement of launching new revenue growth generating services.

Management believes the steps we have taken starting at the beginning of 2014 are a precondition to turning around the decline in device subscribers and repositioning the business for revenue growth.

Now turning to international market expansion and our relationship with Telefónica. On our last call we announced that we had entered into a strategic commercial agreement with Telefónica SA to sell magicJackGO and services in 14 Latin American countries. Initially, our agreement call for a pilot trial, but based on market research over the last six weeks, we and Telefónica now plan to move forward with device sales in Mexico as the first target market in the second half of the year.

Telefónica will purchase devices from us branded as magicJackGO and sell into 4,000 proprietary Movistar mobile retail stores. It’s also anticipated that Telefónica will act as our distribution partner selling the magicJackGO to an incremental 5,000 third-party retail doors such as Wal-Mart and Copal in Mexico. We expect our pricing to Telefónica to be substantially similar to our pricing at retail in the U.S.

Our combined country market research indicates a compelling demand for unlimited calling into the U.S. from Mexico with a U.S. phone number at a ultra-low price point which we plan to offer. As many of our investors are aware, we have never previously formally sold product outside the U.S. So this is an important new area of focus and potential growth for us.

And with that, let me turn the call over to Tim McDonald, our Chief Operating Officer.

Timothy McDonald

Thanks Gerry and good afternoon everyone. In the first quarter we began implementing a turnaround strategy to address the steady subscriber decline that began in the first quarter of 2012. Our goal is to stabilize subscriber declines and return to growth. This turnaround strategy has three components, number one broaden the appeal of our service through as comprehensive brand repositioning. Number two, extend the lifetime value of our customers by improving renewal rates. And number three, leverage mobile app to enhance our core magicJack service and generate new revenue streams.

In the beginning of the year, we committed to a top to bottom redesign of the magicJack product to more broadly position our service to a new and expanding set of potential customers. The objective of this redesign is to enhance and extend the life of the core service and associated cash flows. Our device business is our cash count and without a fundamental repositioning our engine was on a trajectory to continue decline in both subscribers and cash flow. We simply needed to refresh our offering to make it more competitively position and attractive to consumers.

As Gerry noted, this work touched on every dimension of our business and involved every operating division of the company, specifically this magicJack redesign including the following updated elements. Industrial design of the device, product packaging in both English and Spanish with an intuitive quick start user guide, enhancements to in-store merchandising in Wal-Mart, Best Buy, RadioShack, Fry’s and Target streamlined online purchase experience, simplified online activation experience updated desktop software for both the Windows and Mac, updated mobile app interface for both Android and iOS.

Cash-based renewal cards at Wal-Mart new six months and one month renewal plans on magicJack.com new digital and television creative and updating of dozens of separate types of customer communications. So our team has been quite busy and as made great progress over the first half of the year much as been accomplished.

We’ve now set the table for the stabilization and potential return to growth for our core cash flow engine the magicJack. The most important measure of success for the new magicJackGO is whether we are able to improve the declining subscriber trends. The launch of the GO is the result of six months of work in collaboration with our long standing retail partners, Wal-Mart, RadioShack, Best Buy, Target and Fry’s to design an updated offering that capitalizes on our premier market position.

These retailers accounted for over 90% of retail sales volume in 2012 and 2013, so we feel confident in the breadth of our retail reach. In addition to these retail partners mentioned Amazon.com, Best Buy Canada, future shops, The Source and select Walgreens and Meyers locations have all began to offer the GO. We are merely a few short weeks into the launch of the new offer and it’s still too early to determine the market impact.

For reference RadioShack began offering to go in early June, Wal-Mart in late June and Best Buy in late July. As part of the GO rollout Wal-Mart increased the space and messaging dedicated to magicJack, while also introducing the magicJack six month and 12 month renewal cards enabling magicJack customers to renew with cash at any Wal-Mart location.

In Best Buy, we now have an eye catching dedicated magicJack shelf display and in Fry’s in the coming weeks, we’ll be introducing a 4/6 foot high magicJackGO display. With each of these retailers it takes time for the product to fully penetrate all store locations as well as for the store managers to update all the related merchandising for the new product.

We estimate that we are now in nearly all of the stores of our major retail partners. Our major retail partners report that the GO has been sent to all locations and we should see near 100% in stock. We’re just a few weeks into the fully stocked updated GO product; performance over the remainder of the year will be the measure of whether we are successful in stemming the decline in our subscriber base.

However, we are seeing steady week-over-week growth in unit sales with several retails nominally exceeding Q2 average weekly sales even in the traditionally slow summer months. Second part of our strategy to increase renewals on our core device business, we have also made great progress in this area. We now have a designated renewals manager in place and have executed a series of operational improvements, which include targeted promotional renewal offers, revamped renewal email communications in-store cash renewal cards and a new one month and six month renewal terms on magicJack.com.

Now turning to the third element of our strategy leveraging the app. Our goal with our app is two-fold, integrate the app with the magicJackGO to drive unit sales of the core cash business and generate revenues directly from app-only subscribers. App integration is a core to the repositioning of the magicJackGO and it is fully integrated with the packaging and promotions.

In parallel to the redesign of the magicJack, we have been developing capabilities to generate revenues on our strong base of mobile subscribers. In Q2 as part of our app refresh, we eliminated the option for users to utilize our service without registering. This elimination modestly impacted our active subscribers, but we believe is an important step to moving from a free service generating revenues.

In Q2, our monthly active users declined slightly to approximately 3.4 million subscribers. However, 100% of our monthly active users are now registered subscribers. As noted on previous calls, we believe monthly active users are better measure of subscriber value and is more consistent with the industry standard metrics.

Registered user data as a lot of noise and we do not believe it is reflective of the ability to monetize our subscribers. Simply put our most attractive market for monetization is the base of users who utilize our service monthly. Our success will be defined by the number of revenue generating units on our mobile platform.

Over the second half of the year, we’ll begin to drive users to fee-based services through restricting certain of the free aspects of our current app, which may include reduction and available free inbound or outbound minutes. We believe that voice quality, the voice quality on our network is an important element of selling services over our app.

Further we believe that voice quality plays a significant role in subscriber churn on our core business. In Q2, we began a regimented voice quality improvement initiative designed to measure our voice quality relative to the competition and identify and implement enhancements to improve voice quality.

This cross discipline team includes engineers from our development teams in Israel and Russia as well as network and switching teams here in the States. This is a new initiative of the company, and one we believe provides an important foundation for our app monetization initiatives.

This team has already identified several specific voice enhancements that we will; we believe will begin to deliver demonstrable improvement in call quality particularly over unstable wireless network connections. Further we recently hired a Vice President of Network Operations from a major carrier to oversee our growing network operations.

So improving the quality of our network has also become an important part of our turnaround plan. We intend to be discipline in the release of our revenue generating features on our app to ensure that we deliver a quality experience to our customers. Simply put, we do not want to launch a bad product which is one reason it’s taken us longer than expected to launch certain of our revenue generating services.

In the long run, we believe that our efforts will be rewarded if we deliver a solid customer experience to our paying customers. We expect to sell both international calling as well as an integrated voice and app to carrier texting service on our app in the second half of the year. We will also provide desktop to carrier testing.

I should note that we do not require changes to our existing platform to begin to generate app-related revenues. We will be releasing features on our existing platform over the coming months. Now let me briefly turn to marketing.

In Q2, we incurred approximately $3.1 million on media spend and generated 165,000 activations resulting in $18.75 per activation. We remained focused on generating strong return on our customer acquisition cost. Now many investors have asked about the current competitive landscape, which is clearly become more intense over the last 12 months, with new companies such as Ooma and Vonage’s new brand BasicTalk joining the major wireless carriers and MVNO such as Straight Talk and selling low cost unlimited domestic voice service in the home phone replacement market.

At $3 a month, we remain by far the lowest cost provider in the space. In mid-2013, one of our competitors introduced a value offer under a flanker brand as an extension to their core national brand. This competitor is significantly outspending magicJack in the market today and recently reported a blending marketing CPGA of over $340 per ads for the second quarter on over $59 million of spend.

A growing percent of gross adds may be coming from 95 monthly pays you GO offer. We expect to see continued aggressive marketing spend by this competitor as they seek to stem the subscriber loss in their higher priced annual subscription service, by replacing these higher ARPU annual subscribers with lower priced payers you GO subscribers.

As noted above, magicJack activated some 165,000 subscribers on a media spend of approximately $3.1 million. In terms of customer acquisition, we continue to benefit from our nationally recognized brand as well as the years of experience our retail partners have in selling the magicJack.

Now let me briefly touch on our growth opportunities. We have nearly 6.3 million combined subscribers on our mobile and device platforms. We provide valuable communication services to our users and at channels of regular and ongoing communication with each one of our subscribers.

And we are recognized as a trusted partner for providing value priced communication services. Once we have a sufficiently robust operating platform there are literally dozens of services we can provide to our value comps of subscribers. International calling and unlimited voice and texting are certainly strong initial offers, but do not by any means limit the potential of our valuable platform.

We remain confident of our growth potential and committed to increasing value for our investors. With that, let me hand off the call to Jose.

Jose Gordo

Thank you, Tim. Good afternoon everyone. Our second quarter financial performance was highlighted by the launch of the new magicJackGO solid renewal revenue, reduction in customer churn and our balance sheet with no debt. Starting with the P&L for the quarter, we generated total GAAP net revenues of $29.5 million, a decrease of 17% compared to the first quarter of 2014.

The quarter-over-quarter decrease was primarily due to a decrease in device and ancillary revenues as we round down sales of the new magicJack Plus and experience the delay on the magicJackGO launch. Revenues for magicJack sales for the quarter were $6.5 million, a 46% decrease from $12 million last quarter. Access rights renewal revenue was $16.1 million, an increase of 5% quarter-over-quarter and up sequentially from the $15.4 million we had in the first quarter.

As a percentage of total revenues access rights renewals accounted for 55% of revenue up from 43% quarter-over-quarter. We are pleased that access rights renewal revenue which represents the recurring portion of our business has continued to grow and become a stronger component of our overall revenue stream.

We will continue to make a conservative effort to increase our renewal recapture rate including making cash renewals easily purchasable and proactively communicating with our customers prior to contract expiration as Tim described. We believe the cash renewal program and customer outreach initiatives will continue to favorably impact our churn going forward.

Network expense for the quarter was $5 million, a 9% decrease from the prior quarter as we continue to negotiate better rates and groom our network to drive increased cost efficiencies. Total operating expenses remain flat for the quarter at $14.7 million, primarily due to $394,000 increase in marketing expense, which is partially offset by a $369 decrease in R&D.

G&A for the quarter was approximately $8.7 million and remain flat as we manage our operating cost and continued investment areas such chat support and making impactful additions to the magicJack team. The increase in advertising spend is largely attributable to a $700,000 increase in media spend compared to last quarter. As we started an aggressive media campaign to support the new device launch.

For the quarter, we had cost per activation of $18.75, a 53% increase over last quarter. This increase was driven primarily by the media spend increase I just described. We currently calculate CPGA as media spend, which includes TV and digital advertising divided by device activations.

We formally calculated CPGA as total advertising spend which includes media spend, marketing related SG&A and marketing investments such as web, mobile and other activities, all divided by total unit and renewal sales. This method of CPGA resulted in $8.30 cost per gross add for the quarter, an increase of 45% quarter-over-quarter driven primarily by $1.1 million increase in total advertising expense.

Turning to profitability, GAAP operating income was $3.4 million for the quarter. Our income tax expense was $1.1 million compared to $2.3 million for the last quarter. GAAP net income for the quarter was $2.3 million as compared to GAAP net income of $5.3 million for the first quarter.

GAAP diluted earnings per share for the quarter was $0.13 based on $17.8 million weighted average diluted shares outstanding, as compared to $0.31 based on $17.8 million weighted average diluted shares outstanding for the first quarter. Operating cash flow for the quarter was $5.9 million as compared to $14.2 million for last quarter, with the decrease being primarily attributable to a decrease in total sales.

Now turning to our results on a non-GAAP basis. For the quarter, we reported adjusted EBITDA of $7 million, a decrease of 41% from last quarter. A reconciliation of GAAP to non-GAAP financial measures as been provided in the financial statement tables included in our earnings press release from earlier today and is available on our website.

Turning to our balance sheet, as of June 30th, we had cash and cash equivalents of $72 million, an increase of $13.2 million over last quarter and no debt. Our deferred revenues remain relatively flat quarter-over-quarter at a $114.6 million from $114.9 million at the end of Q1. During the quarter, we liquidated $9 million in third-party investments. We sold these investments for par value and as a result did not record a gain or loss on the sale.

We continue to generate solid operating 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 the second half of the year, you will see us continue to invest our cash in all areas of our business, including enhancing our operating platform supporting our partnership with Telefónica and other revenue generating initiatives.

We will also continue to place a particular emphasis on using on cash to continue to grow our customer base. We have a favorable CPGA and add our customer lifetime value levels spending on the addition of new customers clearly continues to be a very good investment for our shareholders.

Turning to our financial outlook for 2014, given the delay in the launch of app monetization initiatives, as well as the delay in launching the magicJackGO we are providing revised updates financial guidance. For the full year, we are now projecting revenues of approximately $120 million and adjusted EBITDA of approximately $28 million to $30 million.

This updated guidance reflects no revenues from three key initiatives, number one any meaningful uptick in sales of the magicJackGO. Number two, any app monetization initiatives. And number three, any international sales through our partnership with Telefónica.

We expect revenues and adjusted EBITDA for the third quarter to be slightly below our second quarter performance. We expect revenues and adjusted EBITDA for the fourth quarter to be higher than they are in third quarter as the magicJackGO as a full several months of contribution.

None of our underlying views on consumer demand or the market opportunities for app monetization have changed. However, we want to provide investors with guidance on our projections for the core business, while these key initiatives take hold. We expect our effective 2014 tax rate to be approximately 28% to 29%.

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

Gerald Vento

Thanks Jose. What we’ve outlined today is a rebranding of our service through a comprehensive repositioning. We’ve begun to extend the lifetime value of our customer revenue, we’ve been – we’re improving our voice quality and enhancing our platform to leverage mobile services and finally we’ve begun the expansion of the magicJackGO beyond the U.S. and Canada.

So in summary while certain of our growth initiatives have been pushed back this company as significant value. We have over $4 per share in cash, a nationally recognized brand, a broad national retail distribution channel, a proprietary CLEC network and a solid plan for growth and over 6.3 million loyal customers on our network.

And finally a Tier 1 international telephony partner to assist us in our international expansion. While navigating a turnaround such as this there are always bumps in the road. But we are committed to enhancing shareholder value going forward.

So with that, I’d turn it back to the moderator and we can open up the call to questions.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions]. And we will go to our first question from Tim Horan with Oppenheimer.

Tim Horan – Oppenheimer

Thanks a lot guys and thanks for the guidance. Jose, just if I understand you right, you’re saying a third quarter little bit below the second quarter I think on revenue in fourth quarter just a little that should be the bottom fourth quarter should improve a little bit. Are you talking maybe like in the $20.5 million range about a million below the second quarter and a slight tick up in the fourth quarter is that line you are thinking?

Jose Gordo

I might say $27 million to $28 million for Q3.

Tim Horan – Oppenheimer

Got you, great. And on the spending fund, is this kind of a good run rate on spending or do you kind of have other initiatives or some of the expense line item should kind of pick up from here?

Jose Gordo

I think you’re probably seeing near the top we can certainly spend, there are certainly other areas of spend, but I think there are also other areas where we probably we’ll see expenditures come down and I can give more detail on next quarter’s call. But, I don’t, I wouldn’t expect spend levels to materially increase and that’s a site from sort of one time spends, which we may make that they get capitalized.

Tim Horan – Oppenheimer

Great. And Tim you were touching on the voice quality there, have you start to measure it and have you started to see any improvements yet and maybe you can talk about if you don’t mind some of the other reasons for the delay on launching the or maybe little bit more detail on the international voice products and the texting and maybe the timing at this point when you kind of expect those two to hit? Thanks.

Timothy McDonald

Yes Tim all good. We are measuring it. We actually have a sort of a swap team that gets together every week and are diligently measuring the voice quality over a series of different network connection. We’re principally focused on wireless connectivity. And there are very specific improvements both with respect to codecs as well as with respect to other software implementations that we believe will improve call quality materially. They have not been implemented yet, they will be implemented shortly.

So we’re measuring it and we expect to be able to see quantifiable improvement once those changes are made. Over time we’d be happy to share that with investors for sure. As you know that sort of correlated with the quality of our service in international market. So we want to ensure that we have strong call quality over our app as we move into the international calling space. There is two elements of international calling that require development and quite frankly, we’re behind schedule on both of them. So no excuses we’re just late.

But the two elements are one, some calling features enable you to see account balance and more easily make international calls, we have a release that’s forthcoming in very short order that will provide that capability into the app. Also as part of that release unrelated to international calling is a social sharing feature, which has been sorely lacking from the app which will enable app users to share their use of the app in the numbers et cetera with their friends, the standard social sharing mechanisms.

So that’s – that sort voice quality and the initial international, the other element of that Tim is the in-app purchase which is in process, again like I said we’re late on both of those features. With respect to texting that is in development, I can tell you that it is in internal beta testing and we’re working through that, I think on our last call we said third quarter, but take that with the grants given that we’re – we’re little off run on international and in-app.

So whether it’s, the end of Q3 or early Q4 we expect to see that in the market for sure in the first, in the second half of this year if not within the Q3 timeline that we laid out in the last call.

Tim Horan – Oppenheimer

Thanks. And then just lastly, did you give the number of app downloads maybe or two last months, did you give the number of app downloads?

Timothy McDonald

We did not, no what we’re trying to focus in on Tim is, this is not a game of getting to a 100 million app downloads; this is a game of getting to app, revenue generating units on your subscriber base. So as you look at transactions in the space, transactions are always measured by monthly active users, right monthly active uniques. Because if you are using that monthly you can monetize, if you aim using it monthly doesn’t have a lot of value. So we’ve been orienting over the last couple of quarters people around monthly active users, because we think that’s the best measure of what we can monetize. So we haven’t reported downloads, we haven’t reported registered, which we think as a lot of noise in there.

Tim Horan – Oppenheimer

Great. And lastly Jose I know you are not giving guidance on it, but do you think the magicJack customers can stabilize at this point given what you are seeing on the churn trends and the increase in sales do you think it can be stable in the third quarter or is that kind of over fourth quarter, first quarter event?

Jose Gordo

It’s probably a little bit later than that, but I will say that the trends on churn are encouraging and as Tim said, we’re putting a lot of candle [ph] power in that area. So I think it’s early Tim and we’re really getting to the root of, how to retain these customers and focusing on alternative big, big way but I would look at it a little bit later than Q3.

Tim Horan – Oppenheimer

Great, thanks guys.

Operator

[Operator Instructions]. And we go now to Greg Miller with Canaccord.

Greg Miller – Canaccord

Thanks good evening guys, as Tim got the vast majority of them there, but I still had a few follow-ups. What sort of cash requirements are we going to need for this – for the Telefónica arrangement, I would expect. I want to put some dollars behind that launch given the size of the market? And then secondly was on the access rights renewals, which you’re pretty strong with that, more function of price cycle or a larger number of customers renewing as well? The third one maybe Tim if you can elaborate just on the international side, talking about it being a little bit behind track, is there any specific hurdle we should be looking for – for you to overcome here to get the international side of monetization of the app back on track? And then the last one is really just on guidance, I missed the tax rate and I don’t want to wait for transcripts, so if it’s Jose if you could just let me know where you expect the tax rate was it, I’d appreciate it? Thanks.

Jose Gordo

Okay, let’s now go out in order. On the cash requirements for Telefónica, we are talking about some numbers in pretty significant detail right now, Greg we’re not up with numbers out just yet, but what I can tell you is where we’re expressed Telefónica as we’ve expressed our shareholders willingness to put the capital it’s needed and as you can see from our balance sheet, we have, it’s well within what we have to spend to obviously ignite this and launch it in the right way. So we’re developing the marketing budget and finalizing it, I expect to be talking it about that with more specificity on the next call.

The access rights renewals, you asked if there was anything unusual, no actually there is – there was one campaign we ran which was particularly effective in Q2, but I think by enlarge we’re tracking through our budgeted recapture rate on renewals pretty nicely. And it’s been pretty steady, so we’re going to obviously continue to watch it and hope that it improves. There wasn’t any major out layer other than one campaign that was – there was nice shot in the arm, but we’re already doing well in the quarter.

Timothy McDonald

I would just add to that Jose, Greg, the company is never focused on renewals and this is the first full quarter where we focused on renewals. Actually I would argue, it’s not the first full quarter, we probably have about half of a quarter of real focus on renewals and that uptick around a very purposeful renewal campaign was meaningful. So, we can repeat it every quarter, don’t know, but we’re certainly reaping the benefits of putting, real management and marketing resources behind driving renewals. Again it’s an important product of element.

Greg on international like grow box hurdles that’s not what it is really, it’s series of issues that have kind of laid out, but look we’ve laid out on aggressive turnaround plan. We have had an very aggressive implementation schedule. And to a certain extend on some of the stuff we simply tried too many things at the same time. In my remarks I think I laid out a dozen or so different meaningful development or initiatives that we accomplished in the – in the first half of this year non-trivial, I’ve seen it’s first in their home. And we’ve been working [indiscernible] but some of the stuff has been happening more sequentially than in parallel. So, I wouldn’t characterize this as hurdle, I would not underestimate the importance of the voice quality relative to any app monetization initiative and we’re getting our arms around that, but as I said that’s a new initiative both for this management team and for the company and is relatively reason, and we think it ties into when and how we monetize that app.

Jose Gordo

Greg on your last question, we are – our current projected effective tax rate for 2014 is 28% to 29%.

Greg Miller – Canaccord

Thanks.

Jose Gordo

Thank you.

Operator

And at this time, there are no further questions in queue. I would like to turn the call back over to management.

Gerald Vento

Great, thank you very much for your time. And we will update you on our next call.

Operator

And this does conclude our conference. Thank you for your participation.

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