Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Executives

Leslie Arena – VP, IR

Marc Lefar – CEO

Barry Rowan – CFO and Chief Administrative Officer.

Analysts

Yehuda Miller – Cedarview Capital.

Mike Latimore – Northland Securities.

Michael Rollins – Citi Investment.

Presentation:

Vonage Holdings Corporation (VG) Q2 2011 Earnings Call August 3, 2011 10:00 AM ET

Operator

Good day everyone and welcome to the Vonage Holding’s Corporation Second Quarter 2011 earnings conference call. Just as a reminder, today’s call is being recorded. At this time, for opening remarks and introductions 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 second quarter 2011 earnings 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 progress, new product enhancements and growth initiatives. Barry will discuss our debt refinancing in detail and review 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 two, 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 slides and contained in Vonage’s SEC filings. We caution listeners not to rely unduly on forward-looking statements and disclaim any intent or obligation to update them.

During this call, we will be referring to non-GAAP financial measures. A reconciliation to comparable GAAP measures is available on the IR website. And now, I will turn the call over to Marc.

Marc Lefar

Thank you Leslie and good morning everyone. In addition to posting another quarter of record high earnings, Vonage achieved several major milestones in the past week including the introduction of two new products, the announcement of significant new distribution partners and the refinancing of our debt at an interest rate below 4%.

Let me start with the product headlines. In the early morning hours, we launched our second new product in as many weeks. Time to Call, a stand-alone mobile application for iPhone was released in 87 countries. Time to Call, allows customers to purchase a call and talk for up to 15 minutes to landlines and mobile phones in 100 countries for $0.99 or $1.99 billed instantly through iTunes, it is absolutely the easiest way to make low cost international calls on the go.

And to promote this introduction around the globe, we are providing a free international call to everyone that downloads the application. This introduction follows last week’s launch of Vonage extensions, which allows U.S. customers to extend their existing calling plan to any phone including cell phones.

In addition to these new product launches, we have also expanded the availability of our core service for distribution agreements with TracFone, Best Buy, Kmart and Sears. I will provide more details on our new products and our distribution expansion in a few moments. But first, let me spend some time reviewing our debt refinancing and second quarter results.

During the course of the year, we successfully executed on our two-part strategy to first prepay and then refinance our debt. By the end of June, we have reduced our debt balance to $130 million. And today, we announced that for the second time in eight months, we have refinanced our debt at substantially improved rates and terms.

Our new debt includes an $85 million three-year term loan and a $35 million revolver with interest at less than 4%. The combination of less debt and a significantly reduced interest rate lowers our annual interest expense to approximately $6 million. The cumulative effect of our two refinancing is dramatic, resulting in approximately $43 million in annual interest expense savings or $0.19 per share.

As a point of reference, it was less than a year ago that we were paying 16% and 20% interest rates on debt that we put in place during the credit crisis. Today, our new rates are less than one-fourth of those levels. This refinancing is clear evidence of the transformation of Vonage.

Our financial results for the second quarter were strong. We achieved record net income of $22 million or $0.10 per share, a record high EBITDA of $44 million and positive free cash flow of $37 million. This marks the 14th quarter out of the last 15 in which the company posted record high EBITDA and it is our sixth consecutive quarter of positive free cash flow.

On relatively flat revenue, we achieved the EBITDA gains through operational improvements in most categories with the largest gains coming from SG&A and cost of telephony services. SG&A declined 4% in the prior year driven largely by a double digit reduction in customer care cost per line.

Importantly, we continue to reduce customer care costs while improving service levels as measured by first call resolution, average handle time and customer satisfaction. In addition, we reduced cost of telephony services by 8% over the prior year, more than offsetting the costs from our increasing base of Vonage World subscribers.

The reduction in costs was driven by lower termination rates, both internationally and domestically and through vendor consolidation of the E911 services. Although we increased our marketing investment by $3 million or 6% sequentially, the increase was not enough to offset nearly 20% increase in market place pricing for television media, which was accompanied by very limited inventory availability.

While the second quarter is an historically expensive quarter, the number of advertisers coming back into the market place along with audience ratings made goods led to an even tighter market than we anticipated. As a result, our media rates were lower than planned which negatively affected gross line additions. GLAs of 158,000, coupled with flat sequential churn resulted in the loss of 11,000 lines for the period.

Although media price remains higher than in the first quarter, we have seen more reasonable pricing and inventory availability in the third quarter thus far. While second quarter net additions were below our expectations, we are encouraged by our continued progress attracting international callers to Vonage World, our unlimited flat rate calling plan. Vonage World subscribers now represent 45% of our base and have driven the 8% increase in gross line additions for the first half of the year.

With the improved value proposition of extensions, the impact of new advertising airing in the next few days and expanded distribution, we expect GLAs to increase from the second quarter level. For the full year 2011, we expect GLAs to be higher than 2010.

As I mentioned, we are expanding our reach by significantly increasing our retail presence and through selective distribution agreements. We have recently signed new distribution agreements with Best Buy, Kmart and Sears. These agreements build on our existing distribution with Wal-Mart, Fry’s and Micro Center. Over the next few months, we will double of retail footprint to 6,000 locations with our focus on international calling segments and the Latino market; we believe these partners are a great strategic fit.

We also announced yesterday morning that we have entered into a distribution agreement with TracFone as the largest provider of prepaid cellular services in the country with 18 million subscribers including the TracFone, Straight Talk, Net10 brands, TracFone will further add to our marketing presence by promoting a unique Vonage home phone service offer through cobranded fulfillment channels directly to its user base. Working jointly with TracFone, we will test different marketing vehicles and messaging in the coming weeks.

In addition to our partnership and retail agreements, during the past six months we have increased the number of community based sales teams who sell Vonage services directly to consumers from 4 to 30. Although they currently contribute a small portion of total gross line additions, these teams have delivered strong results in ethnic calling segments and now sell in 18 markets in 10 states.

Our expanded distribution is direct evidence of the first plank of our three-part growth strategy to drive market share in the U.S. for international long distance. The second plank of our strategy is to meet the emerging needs of mobile and connected device users, and the third as we have talked in the past is geographic expansion. The launch of extensions which is now a core element of our service improves our value proposition by extending Vonage service beyond the walls of the home to any other phone including mobile for no additional cost.

Extensions is clear evidence of our strategy to meet emerging mobile needs and to improve our share of the U.S. international long distance market. Now when you sign up for Vonage service, you can use your international calling plan virtually anywhere. We believe that this will be a loyalty builder for our base and we expect the prospects who simply couldn’t get over the hurdle of spending $25 each month for a home only service, will reconsider.

Although only one week into the release of this new service 75,000 customers have already registered to use extensions. Advertising, direct mail and digital marketing efforts are just beginning this week to prospects. In several weeks, we will announce the availability of additional extensions for a monthly recurring fee as well as iPhone and Android applications that enable one-touch calling.

Time to Call, which some members of the press are already referring to as an international pay phone that you can carry with you launched in 87 countries early this morning. Supporting our strategies for both mobile and international expansion, Time to Call is the first downloadable app that allows pay per call international dialing. It’s by far the easiest international calling application available.

Unlike other apps, there are no requests for usernames, passwords or any personal information. We don’t change the price if you call to a mobile phone and there are no hidden charges or recurring commitments or subscriptions. This combined with direct billing in iTunes makes the service truly frictionless and the value is exceptional. To support the launch of Time to Call, everyone that downloads the app in all 87 countries will receive a free international call so they can try it out.

The service is available on WiFi globally and on 3G in the U.S. and Canada. Global expansion of 3G will be on a country-by-country basis and an Android application is in the works. In the coming months and throughout 2012, you can expect additional enhancements, these products and new service launches that continue to support our growth strategies.

In summary, we are pleased to report another quarter of solid progress at Vonage. We refinanced our debt at very attractive terms. We achieved a record high net income and EBITDA. We executed on our mobile and international growth strategies with the introduction of two exciting new products. And while it may take some time to build momentum in our new distribution outlets, they will, combined with our improved value proposition, help to drive customer additions going forward.

As we look to the balance of the year, we are on track to deliver higher gross line additions in 2011 than in 2010 and continue to expect churn to be relatively stable in the mid 2% range. We continue to focus on driving operational and cost improvements and we reiterate our guidance of achieving EBITDA of at least $165 million in 2011 with our growth initiatives beginning to contribute meaningfully to revenue by the end of the year.

And now, I will hand the call off to Barry.

Barry Rowan

Thank you Marc and let me add my thanks to each of you for joining our call this morning. I am pleased to review the terms of our refinancing and second quarter results with you. First, we are thrilled to have closed on our second debt refinancing in 8 months at extremely attractive pricing and terms. The new $120 million credit facility carries a current interest rate of LIBOR plus 3.5% that is pre-payable at no cost and provides ample flexibility to operate the business.

As Marc mentioned, through a combination of these two refinancing, we will have reduced our interest expense from $49 million in 2010 to $6 million annually from this point forward, which equates to roughly $0.19 in earnings per share. This is a significant achievement made possible by the strong performance of our underlying business. We also reported another quarter of strong financial results. We achieved a record-high net income including adjustments more than doubling it over the prior year and generated record high EBITDA.

We accomplished these results even as we increased our marketing spend to offset seasonally higher advertising cost, preparing for the launch of two new products and absorbed the higher international termination cost associated with an increase in Vonage World subscribers. We also benefited from sharply lower interest expense following last December’s debt refinancing. The strong financial performance of our core business provides a solid foundation on which we can build our future.

Beginning on slide 3, let me now run through the details of the refinancing. As most of you know, fixing the balance sheet has been a top priority over the past year. The process began in 2010 with a focus on replacing our high cost restructuring debt put in place back in 2008. Bad debt carried interest rates of 16% and 20% contained highly restricted financial and operating covenants and was highly complex including three liens and a convertible feature.

In 2010, we paid out $41 million of bad debt (Inaudible) negotiated the release of more than $40 million in cash from vendors and just this past December announced a comprehensive refinancing. December’s refinancing resulted in a $200 million pre-payable term loan with interest rates at 9.75%. While this was an enormous improvement, we were committed to driving further interest rate savings through our two part strategy of paying down the existing debt ahead of schedule and seeking improved financing terms based on our sustained financial performance.

In March of this year, we began aggressively pre-paying the $200 million loan. And by June, have paid off $70 million including $10 million of scheduled amortization. This reduced our term loan balance to $130 million, a level we have targeted to achieve by the end of this year.

Our sustained operating performance combined with this lower level of aggregate debt, enabled us to access the commercial bank market in the second refinancing. The new $120 million facility includes an $85 million three-year term loan and a $35 million revolver. The prior $130 million debt was retired by using $30 million of cash from our balance sheet, plus the $85 million in proceeds from the term loan and $15 million drawn from the revolver.

The interest rate on our new debt is LIBOR plus 350 basis points initially, dropping to LIBOR plus 325 basis points. The total leverage is less than 0.75 times, which we expect to be at when we report third quarter results. At current liable rates, this reflects a decline of more than 600 basis points from the 9.75% rate in the previous debt. Through this combination of lower debt and significant reduced interest rates, our annual interest expense is now projected to be $6 million at constant LIBOR rates. Importantly, the loan also provides us with the flexibility to pursue a range of financial strategies in the future. Let me highlight just two of these areas.

First, the facility provides access to additional debt with a $35 million revolver, a permitted basket of up to $60 million of credit facility debt and an accordion feature that increases the credit facility debt basket dollar-for-dollar as we pay down the new term loan.

Second, unlimited stock buybacks are permitted and the facility provided a total leverage less than 1.25 times. We are pleased with this financing provided by high quality group of banks, led by JPMorgan. Let's now move to the discussion of the financial results for the quarter.

Turning to slide 4, net income excluding adjustments more than doubled up a 114% from the year ago quarter drawing from $12 million to $25 million. This significant improvement was driven by a 28% increase in income from operation up $7 million and more than 50% reduction in interest expense, as we saved $7 million over the prior year.

Slide 5 indicates that our record EBITDA of $44 million was up 8% from the prior year and 1% sequentially. As Marc mentioned, we have now reported record high EBITDA in 14 of the last 15 quarters.

Moving to slide 6, revenue declined to an amount of $2 million or 1% sequentially than $7 million from the prior year due to a $3 million reduction in deferred acquisition costs and the accounting for legacy activation fees, which did not impact EBITDA.

In addition, customer equipment and shipping revenues declined $3 million reflecting the company's decision to no longer charge these fees to customers. Service ARPU declined sequentially from $30.14 from $30.23 as gains from our improved customer mix were offset by the decline in non-operating revenues including activation fees and slightly lower USF. Service ARPU declined from $30.71 in the prior year primarily to the previously mentioned accounting impact associated with the elimination of activation fees and lower USF.

Turning to slide 7, we are ahead of plans and reducing cost of telephony services or COTS, one of the largest components of our cost structure. Domestic COTS declined by 42% from the year ago quarter and the consolidation of our E911 vendors, which we referred to on prior calls resulted in more than a $1 million reduction from the second quarter of last year.

These declines coupled with continued reductions in international long distance termination rates more than offset the anticipated growth in ILD minutes. As a result, we reduced total cost to $58 million from $63 million in the year ago quarter. On a per line basis, COTS declined to 8% to $8.03 from $8.72 a year ago and $8.34 sequentially.

Looking towards the back end of the year, we expect COTS to increase due to the impact of higher international calling related to Vonage extensions. As Marc mentioned, this new product substantially is increasing the value proposition to all customers as they would be able to make international calls from either their landline or their mobile phones. We expect a portion of these COTS increases to be offset as we continue to implement structural cost reduction resulting from my investment in next generation call routing infrastructure and peering.

Cost of goods sold declined $4 million from the prior year due to lower device cost and activation fees. We have reduced device costs to under $30 from $40 in less than two years and expect a reduced cost by another 10% by year end. These savings along with lower costs improved direct margin to 69% up from 66% a year ago and 68% sequentially.

Moving to slide 8, our focus on driving efficiency led to further reductions in SG&A, which declined to $58 million. This was down 4% from the second quarter of 2010, largely driven by improvements in customer care, which were reduced by 10% per line over the prior year.

Please turn to slide 9. As we discussed on our last quarter's earnings call, the second quarter is a seasonally high cost quarter for advertising. Although we increased margin expenses by 6% or $3 million, our media rates were still below those of the prior quarter as our higher spend did not really offset the increased cost of advertising.

Gross line additions increased 2% from the second quarter of last year reflecting our progress in inquiring customers in international calling segments. While we made sequential progress penetrating certain ethnic calling segments, we were unable to fully offset the impacts of higher advertising costs and as a result, we reported a decline in sequential gross line additions to 158,000 from 175,000.

While we anticipated pressure on GLAs, we were disappointed that we were unable to maintain the sequential growth in GLAs that we have delivered in the three preceding quarters. The resulting comp of customer acquisition was $330 up from $318 a year ago and $282 sequentially.

While, the residual impacts from higher second quarter advertising costs and a generally tight advertising market will have some impact on acquisitions in the third quarter, we still expect higher gross line additions for the full year 2011 versus 2010, as the impact from new products and expanded distribution take hold.

Moving to slide 10, as expected churn was flat sequentially at 2.5%, but is influenced by a combination of positive and negative factors. On the positive side, we continue to benefit from the impact of the lower churn of certain international calling segments and high customer satisfaction. On the other hand, there is upward pressure on churn from the transition to new contract offers and higher early life churn in certain international calling segments.

Taking these factors into consideration, we continue to expect churn to be relatively stable at the mid 2% level for the second half of 2011. This combination of growth and lower gross line addition and stable churn resulted in a net line loss of 11,000 lines in the quarter.

On slide 11, let’s now move to a discussion of our CapEx and cash flow. As we discussed on prior calls, our strong cash flow is enhanced by a low CapEx requirement, which then held to less than 5% of revenue. The majority of our capital expenditures are for investments in information technology and systems infrastructure and not for ongoing maintenance.

This investment contributes meaningfully to our ongoing structural cost reduction in COTS and customer care as well as enhancing the overall experience for our customers. For the quarter, CapEx was $9 million, up from $5 million in the first quarter of the year. For the full year, we expect CapEx to be below $40 million.

Vonage’s business model is now delivering on its promise to generate substantial free cash flow. We are achieving 20% EBITDA margin, a dramatically reduced interest expense, maintain low CapEx and had $885 million from net operating loss carry forwards that can be used to offset future income.

Based on the $165 million in EBITDA we have guided to for 2011, we expect to generate over a $100 million in free cash flow for the year. We also have ample liquidity to operate the business. As of June 30th, cash and cash equivalents including restricted cash was $70 million with $7 million restricted cash associated with the lease on our building.

We used $30 million in cash from the balance sheet to retire our previous debt as part of the refinancing leaving us with approximately $40 million of cash on the balance sheet and $20 million in end ramp revolver at closing. We believe that this level of cash combined with the anticipated cash flow generation and the unused portion of our revolver provide us with sufficient liquidity to meet our needs.

In summary, this marked another quarter of solid progress both strategically and financially for Vonage. We introduced two exciting new products extending our value proposition by extending Vonage’s strong international calling capability to mobile phones. We more than doubled net income excluding adjustments from a year ago. While we would have liked to have continued our straying of increasing customer additions, we expanded our distribution reach doubling our number of retail phones to presence to 6,000.

We have a pristine balance sheet after concluding our second refinancing in eight months. Taken together, these two refinancing have reduced our annual interest expense by more than $40 million, adding 5 percentage points to our bottom line margin. We are pleased with our continued strong financial performance.

Thank you again for your interest in Vonage. And now, I'll turn the call back over to Leslie to initiate the Q&A session.

Leslie Arena

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

Question-and-Answer session

Operator

Certainly. (Operator Instructions). Our first question comes from the line of Yehuda Miller from Cedarview Capital. Your line is open.

Yehuda Miller – Cedarview Capital

Good morning and thanks for taking my questions. Just first, just trying to bridge the gap to the CapEx guidance, it seems like it's been trending lower over the year. Can you just kind of help us understand where that possible $26 million in additional spending will come from and does that include acquisition and development of software assets? And my second question is, even at roughly $40 million of CapEx, it seems like on run rate you guys can generate in excess of $0.50 per share in cash. Is there any direction in what’s that going to go to now that you are at some sustainable debt service cost per year?

Barry Rowan

Thanks for your question. Let me take those in order. First regarding the CapEx guidance, as you may recall, coming into the year we offered guidance of $40 million to $45 million for the full year 2011. On the last call, we said that we expected to be in the low end of that range at $40 million and now we have modified that guidance modestly to (Inaudible). So, we certainly keep close tabs on CapEx. About three-fourths of our CapEx spend is for investment, about 25% for maintenance.

So the investments we are making in CapEx are important to driving the business. They do help in the structural cost reduction as I mentioned. So, kind of the call routing the rate to deal with that, we expect to drive meaningful improvements in the comp telephony service in the back end of this year 2012. For example, we have comprehended in the CapEx the Amdocs implementation; a new billing system is also included in that. So, we are certainly mindful of CapEx, have strived to bring that down during the course of the year, which we are able to do, but we do expect it to ramp modestly during the back half of the year that would bring it in lower than $40 million.

There still is some as we continue to see in the CapEx for other things that we will see how that plays out for the backend of the year. Regarding the cash flow for the year, certainly this refinancing is going to help that, if you look at the 9.75% interest rate that we were paying on $130 million debt level, but we had brought the debt down to by the end of last quarter that translates into roughly $30 million in expense going forward. We see the interest expense as we mentioned about $6 million on a go-forward basis, so when we talked about over $100 million in cash flow that does comprehend the impact of the refinancing and we have also said that we expect working capital to be basically neutral during the course of the year, it was negative in the first quarter due to anticipated seasonality, it was positive in the second quarter, so that’s how you arrive at that net cash flow for the year.

Yehuda Miller – Cedarview Capital

Thank you. I think although we are going to see the direction going forward on a run rate basis the use of that cash being generated. And I’m sorry, just a follow up from before. Could you also give like a nominal dollar value in terms of the maintenance CapEx going forward?

Barry Rowan

Yes, the nominal dollar value is in the $10 million to $15 million level, that’s about a fourth of the overall CapEx. And the use of cash going forward, certainly previously it was to pay down debt at the higher interest rates of 10%, now that we have interest rates that are effectively at 3% and 3.75% stepping down to 3.5% with LIBOR at 25 basis points, the three-month LIBOR, there is less arbitrage on the interest, so we have flexibility now for the usage of cash going forward that we could do acquisition as they become appropriate. We could do share repurchases if that becomes appropriate as I mentioned, but we have the ability to stop repurchasing as long as the total leverage is less than 1.25 times. So, we have those options available to us now that are provided for I think well within the current credit facility.

Leslie Arena

Next question operator.

Operator

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

Mike Latimore – Northland Securities

Thanks. Great quarter and congratulations on the debt refinancing. Marc, you mentioned about a 20% increase in market place pricing in the quarter, you still got to maybe more reasonable pricing in the third quarter, I mean, are we going to see that down 20% again or is it down a couple of percentage points, what kind of pricing change do you think you will see in this quarter?

Marc Lefar

Hey Mike. Good to hear from you. Yes, the second quarter as folks who follow the markets know is historically a high price market place, but usually in that 8% to 10% range. We at least believe that at that point in time there is a recovery, I’m not sure how people are viewing it today, that a lot of advertisers came back into the market place that was compounded by viewership, which continues to be fragmented by other media, so you have a lot of people who bought in a fixed market place who are getting under delivered weight based upon the original buy, so obviously all that media weight goes to make goods and for folks like us who spend a fair bit of our money in the direct response market, which is kind of a week-by-week, month-by-month market, things got very tight very quickly.

Seasonable pricing went up; availability of good media was sketchy. The 20% I referred to tends to be more in the general media market. Hispanic was up in the mid teens, not quite that high. What we are seeing in the third quarter is about as forecast, about half of those rates, so about a 10% higher cost than what was in the first quarter, which is consistent with what our expectations were coming in. So in terms of market in the expense profile, you could expect two things, one that we will probably spend a little bit more than we did in the first quarter. I don’t expect that we will spend as much as we did in the second and you should expect meaningfully better gross add yield for the dollars we do spend in the third quarter.

Mike Latimore – Northland Securities

Great, thanks. And then as it relates to churn, you talked about some few segments of an early life churn in certain segments occurring, what segments would those be in?

Marc Lefar

So there are really two things and I want to make sure that we clarify this; it’s the biggest driver of kind of that stabilized churn. You got the benefit of international customers that have lower churn profile than our domestic and that can be used to grow as a percentage of our base. The bigger offset is the move to no contracts, which obviously the longer we are in that, we have more and more customers in that base, those folks age, and they are still within that first 12-month period where you are going to have higher churns. The first cohorts will in a couple of months pass that 12-month mark and we expect those curves to start to inverse, you would expect that, you won’t not see that month 13 and 14 spike that generally comes with contract customers, but we are still kind of weathering that headwind of no-contract customers relative to the international segments that have some higher churn profile.

Recall that when we got into the international business, the Asian-Indian market was the one that we penetrated most quickly and they have the lowest absolute churn. We tend to attribute that to their technology savviness, the penetration of high quality broadband in their homes and on average a strong economic profile. As we get deeper into the Hispanic market, we see that although there is still significantly lower churn than domestic only customers, the Hispanic segment tends to churn higher than the Asian-Indian segment and while it’s certainly lower than our domestic churn and our churn rates, a couple of years ago we were in the mid 3% range, there is some upward pressure in the mix of international as a result of some of those Hispanic segments.

Mike Latimore – Northland Securities

That makes sense, thanks. And then last question, can you talk just a little bit about ARPU or perhaps maybe some directional comment on ARPU or if not maybe the influence that you see in ARPU over the next couple of quarters?

Marc Lefar

Yes. As we mentioned Mike on the call that ARPU is influenced by a couple of factors where that led to decline, some of it was nonoperational. For example, the USF actually declined from the previous quarter and over the prior year, USF was $2.39 for example versus $2.47 in the first quarter of this year. So we saw that impact, it was down from a year ago of $2.50 for example, so we saw some of the nonoperational impact from that as well as the accounting treatment for legacy activation fees that goes well. As we look at it going forward, we expect relatively stable ARPU. We did (Inaudible) price increases for our lower level plans and we increased the number of minutes, so that will have a modest benefit in the back half of the year, but I think we would look relatively stable ARPU going forward.

Mike Latimore – Northland Securities

Alright, thanks a lot.

Leslie Arena

Next question operator.

Operator

(Operator Instructions). Our next question comes from the line of Michael Rollins from Citi Investment. Your line is open.

Michael Rollins – Citi Investment

Hi. Good morning and thanks for taking the questions. Just to start off, could you give me something, I am not sure I heard the percent of ILD or Vonage World in terms of your subscriber base. Second, just curious if there are any stats that you could share with us on the mobile side on how your preexisting applications are going or maybe just any early indications for what you might expect from some of the new products that you have rolled out and then after that maybe I will just come back with a higher level question at the end/

Marc Lefar

Sure Mike. Good to hear from you. On the ILD question, I will clarify first though. The percentage of our customer base that is now on Vonage World is 45% of total subscribers and then the percentage of total subscribers that makes ILD calls with some regularity is 33%. In terms of the stats on applications, there is nothing much changed since we last talked in terms of mobile and other enhanced services; we’ve talked about that being in the sub $10 million range in terms of revenues. There has not been material additional uptake or losses in those businesses that is material to our overall revenue trajectory.

In terms of the new applications, obviously Time to Call just launched in the early morning hours, so it’s very difficult to put a number on that. We are optimistic that the press as well as over the next couple of weeks we have some very interesting approaches to digital and social network use, we’ve got hitting over a 150 global bloggers with programs that are designed to build awareness of the application.

So, we are hopeful that that will get us meaningful uptake and of course, the news which we expect that everybody on this call will help us to get out of making a free international call and being able to experience the quality and the true seamless ease of use of the Time to Call product, it will help you over the habit of usage. It really is incredibly easy to use and tremendous value.

As you know, everybody is dazzled in this space including us in the past, but it feels just too gosh darn hard to use in terms of understanding what the rates are, which country, wire line to mobile calls, personal information, setting up billing relationships, it is very complex and at the end of the day, the vast majority of international long distance calls are still being made shockingly at prices that are three to four times more expensive than alternates and they are going through the traditional wire line and wireless carriers and that’s going to change, it has to change.

There is no reason why people need to pay that level for that pricing. So, we think that we have got a big opportunity here and obviously yet the global scale provides some big top spin for us. And then the extensions product is completely different. The extensions product is really a restatement or repositioning of the entire Vonage offering. Frankly, it doesn’t matter to us whether folks even plug in their home box. This is basically about choice, it’s when you buy Vonage service for a rate, you get phenomenal pricing for medium to heavy users of international calling, domestic calling or InterLATA calling for those folks who still are paying long distance charges. You get a phenomenal rate, using whatever line you want and you can have two of them. It can be your home phone, it can be you office phone, it can be a home phone, it can be a mobile phone, it doesn’t matter to us.

So, we think adoption of the mobile download, actually we know the adoption of mobile download is going to happen fast, we have already in the first week just primarily from our base had over 75,000 people have already registered, taken access numbers to use the extensions application and registered their mobile phones. And we believe that once we are able to get the news out on extensions it will help us from a prospect standpoint as well. We got a lot of people who are spending $25that gets great value, but the people I call are not at home, when I’m not in my home when I want to call them and then your time is up. We still see a lot of people that do have our product that still use mobile and pay carriers to supplement their service, so we think there is a real opportunity here to improve our value proposition for prospects as well and you will see that in traditional revenues, although I think you can think about that as part of mobile. It’s going to be hard to separate mobile and traditional, these things merge, what we are trying to say is we don’t care where you are, what device you are using, we provide a service of value and you can use it on any device from any number.

So, we are optimistic about the potential for this product and I would go on to say by the end of the year and into early next year, there is a whole host of enhancements many of which are telegraphed in prior calls, international roaming opportunities where inbound calls can be completed as well seamlessly. We have talked about on-net community and messaging; many of these things if you think about the applications we just launched can be integrated as enhancements and built into these cornerstone products.

So, more news coming in the coming months on those fronts. I should also mention, we do have plans in several weeks to add two extensions. I mentioned it in my script, but it’s worth pointing out here. We will do flat rate additional extension lines for sale into the base as well as our prospects, so you can get the one line plus your mobile and then you can add a line, that model as you are well aware works extremely in a wireless industry.

Michael Rollins – Citi Investment

And then just Marc taking some of your comments and going back over the last couple of quarters, I feel like you have had conviction at the back half of the year, which shows significantly better revenue performance than the front half. Probably the front half for some of the reasons you articulated earlier on the call, whether it’s counting or maybe just losing a few thousands subs, maybe it’s fair to say that the first half revenue might have been a little bit lighter? Not sure what your internal budgets were. How do you look at the conviction for the back half revenue growth and are there some bogies that you want to set from an expectations perspective of how to think about the recovery towards revenue growth over time? Thanks.

Marc Lefar

What we have said in the past is that the growth initiatives that we are putting in place through the beginning of the year, mid-year will begin to meaningfully contribute to revenues before year-end; we still believe that’s the case. The impact on the total 2011 year, obviously when you start to see that ramp, it’s not going to be phenomenal. We really expect longer term that you will see the annualized and quarterly impact in a material way as a percentage of our total revenues grow and that’s what we have been saying and that continues to be the case.

You are right, our first half revenue was a little bit lighter than we would have liked and the product that we are launching would have liked to get out a little bit earlier in the quarter, but we are who we are and we want to make sure we have got the products right, we feel good about the product mix we have got out there, we feel good about the functionality and the sales and marketing programs that are out there, we feel good about the distribution that we are expanding and we take all those elements together give us cause to be optimistic about how the year will finish up.

Michael Rollins – Citi Investment

And just one other question for Barry. There is this proposal out there with the FCC from a bunch of larger telcos about USF and Intercarrier Comp Reform. One of the bullet points in the proposal, which is just out at this point is to qualify VoIP as traffic that counts to take terminating switched access fees any of which started either over SIP comp or interstate rate and reform over five years to a very low $0.0007 rate five years down the road. Initially, if that were to happen in your and I am not sure how you pay termination today, but you said a proposal actually became an FCC order and went into implementation. In the near-term or 2012 or 2013 are there any cost implications that we should be aware of on that?

Barry Rowan

So, for those that are not aware, let me recap Mike what you are talking about. Last Friday, a group of six large and mid-size telcos including AT&T and Verizon calling themselves America’s Broadband Coalition submitted an FCC proposal for reform and access charges and some of the other Intercarrier Compensation paid by carriers to terminate calls to PSTN customers, that happened last week. As you know Mike, as you mentioned, we already paid substantial amounts of money to telecom carrier to terminate our off-net calls for both U.S. landline and mobile telephone numbers.

In our own comments on FCC Intercarrier Compensation Reform, we have advocated that the FCC avoid imposing any legacy access charges on VoIP traffic altogether. The proposal made last Friday did not go as far and wouldn’t provide us with the greatest possible cost savings, but to be clear, the proposal that we made last Friday out there to be enacted would be savings for us. Well, I don’t we are prepared to give you the specific dollars right now, because of the uncertainty of where that proposal will ultimately end up. It is meaningful dollars in terms of savings and at the $0.0007 it is substantial savings to cost for us. So, we stand to benefit from the proposal. However, we still believe and maintain in our comments via FCC that it is not going far enough, we support a bill-and-keep approach.

Michael Rollins – Citi Investment

And so Marc just to clarify. So, it starts off at I think at either Intercarrier over SIP comp rates just I think kind of like a $0.01 something like that right or I think $0.0007 somewhere between there right now. So, initially is it kind of neutral, because you paid today and then over time it is the savings or even initially is it savings for you?

Marc Lefar

Mike, I will have to follow-up and get back to you with this, once I get the details of the proposal, but as we assessed it initially, it looked it was a long-term clearly favorable and even in the short-term, I don’t think there was any material impact to us relative to our current rates, but you are referring to numbers that sound higher than what my recollection was. So, let me go back and maybe we can talk offline about the specifics.

Michael Rollins – Citi Investment

That’s great, really helpful. Thank you so much for taking my questions.

Leslie Arena

Next question operator.

Operator

Thank you. (Operator Instructions).

Leslie Arena

If there are no further questions operator, we will conclude the call. Thank you for joining us today.

Operator

Well, ladies and gentlemen thank you for participation in today’s conference. This does conclude the program and you may all disconnect at this time.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Vonage Holdings CEO Discusses Q2 2011 Results - Earnings Call Transcript
This Transcript
All Transcripts