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Executives

Leslie Arena – VP, IR

Marc Lefar – CEO

Barry Rowan – CFO and Chief Administrative Officer.

Analysts

Mike Latimore – Northland Capital

Robert Routh – Phoenix Partners Group

William Focal – Maryland

Vonage Holdings Corporation (VG) Q3 2011 Earnings Conference Call November 2, 2011 10:00 AM ET

Operator

Good day everyone and welcome to the Vonage Holdings Corporation third 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, operator. Good morning and welcome to our third 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 and strategy and Barry will 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 our 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 Investor Relations website. And now, I will turn the call over to Marc.

Marc Lefar

Thank you, Leslie and good morning everyone. This quarter we took another step forward in transforming our business beyond traditional home phone service. The two new mobile products we launched during the quarter are striking a chord with consumers seeking easy to use low cost mobile solutions for their international communication needs. Approximately 400,000 customers have either registered their mobile phone as an extension to their Vonage World plan or downloaded our time to call app since we launched these products just three months ago.

We are delivering on our promise to enable communications from any broadband connected device as we integrate the landline and mobile experience for our customers. We will build on this progress as we launch new products in the coming year. At the same time we are strengthening our core business. We increased gross line additions 8% in the second quarter and improved our efficiency in acquiring new customers lowering acquisition cost 9% from the seasonally higher cost second quarter.

We continue to add customers on Vonage World enabling, enabled by our growing success whether outsourced paid for performance even teams and broader retail distribution. 50% of our customer base is now on the Vonage World plan. A testament to our core business financial results for the quarter were strong we tripled net income excluding adjustments from a year ago and for the fourth consecutive quarter EBITDA exceeded $40 million. Revenues grew a modest 1% in the prior year while we generated free cash flow of $34 million fueled by strong operating results, low CapEx and dramatically lower interest expense.

I would now like to review our results in more detail and the, I will provide a recap of our strategy and our outlook. We reported another strong quarter with year-over-year gains in net income and EBITDA. As I mentioned net income excluding adjustments tripled from $8 million in the third quarter last year to $24 million. This is our 10th consecutive quarter of positive net income excluding adjustments.

Net income has been driven in large part by the two debt refinancing we completed in the past year building on our strong sustained operational and financial performance. Through these refinancing we reduced interest rates from highs of 20% a year ago to less than 4% today. We’ve saved $22 million in interest expense year-to-date and we will save $30 million by year end. This represents a 59% reduction in interest expense over 2010 and the full year savings in 2012 will be roughly $43 million.

We generated EBITDA of $40 million during the quarter and are on track to achieve our guidance of at least $165 million in EBTIDA for the year. This will mark our fourth consecutive year of record high positive EBITDA. Gross line additions were also strong this quarter increasing 8% sequentially to 170,000 and GLAs were up 7% for the first three quarters of the year compared to 2010.

We also improved the efficiency of our marketing spend from historically high cost second quarter as subscriber line acquisition cost or SLAC was down 9% sequentially to $300. Our expanded distribution is beginning to have an impact as we’ve doubled the number of distribution outlets with the recent addition of Best Buy, Kmart and Sears combined with our existing partners we now have distribution agreements to sell our services in 6000 stores across the country.

In store merchandizing and training continued throughout the quarter and we are seeing solid growth in the stores that have fully executed our programs. We have expanded our feet on the street event teams which now operate in 16 states with high ethnic concentrations including California, Texas, Florida and New York. As reflected by our expanded distribution network third party retail is becoming an increasingly important component of our customer acquisition strategy. Including our even team’s retail is now driving 15% of gross line additions this is up from 8% in the beginning of the year and we expect that to increase to 20% in coming quarters. Importantly retail is also a highly efficient acquisition channel with direct SLAC in the low $200 range. Although the numbers are not yet material we also launched our initial marketing trials of track phone as planned.

Although gross line additions increased churn of 2.7% was slightly higher than expected due to the full year impact and no contract policy along with higher churn in our Spanish speaking segments. This higher churn offset most of the gains in GLAs resulting in net line losses of 9000 for the quarter, a slight improvement from the 11000 lines lost in the second quarter. Looking to the fourth quarter we expect churn to be stable to lower sequentially. Over the longer term we expect stable churn in the mid 2% range.

As many of you will recall we eliminated contracts just over a year ago based on the significant churn reductions we had achieved during the prior year and with the belief that the service agreements were a barrier to acquisition. Although this lead to slightly higher churn for no contract customers during the first 12 months we expect to see improvements in churn in months 13 to 15 as we will no longer experience the churn spike customarily associated with the expiration of contracts.

After assessing the trade offs of our no contract policy over the past year we are planning to re-implement contracts in a more sophisticated way rather than implement contracts across the board we will provide customers with a consistent low flat monthly rate when they purchase without a contract and a better rate and or promotional offer in exchange for signing and annual agreement. We expect to implement these changes in the coming months.

Now let me shift to a discussion of our strategy and our plans for continuing to execute against our key growth initiatives. While our strategy direction has not changed we’ve done considerable work in recent months to refine and operationalize our strategy it’s built on three primary planks as we’ve outlined on previous calls. One, solidifying our core business, two, meeting the emerging needs of mobile and other connected device users and three, geographic expansion beyond the U.S., Canada and UK. Let me briefly describe each of these strategies and our plans to execute on them.

We’ve stabilized our core business and its generating significant cash flow. The major strategic shift in our core business began two years ago with the introduction of Vonage World and an emphasize on international long distance callers. With the introduction of extensions this quarter we have greatly enhanced our value proportion once again as our customers can now use our existing Vonage World plan to call from their home, office or mobile phones. As I mentioned, we also began aggressively expanding our retail presence in the second half of 2011. To further take advantage of our value proportion we will also extend our product line opportunistically into adjacent areas such as small office, home office marketplace. These customers’ needs are very similar to those of our core consumers and they will buy through many of the same channels. We expect to increase our focus on these customers in the first half of 2012.

As the second plank in our growth strategy mobile is a clear priority consumers globally are shifting their communications to mobile devices and we are meeting their needs through Extensions and Time to Call. Extensions meets the emerging needs of mobile users and provides value and convenient to international long distance callers. Early response to Extensions has been strong 100s of 1000s of customers in our ILD caller base have registered an Extension and 97% of these Extensions have been added through mobile phones. More than 70% of those registered are active callers.

We are clearly striking the chord with customers who increasingly prefer to dial internationally on mobile. Approximately 30% of users minutes have shifted to Extensions in the first three months since introduction and overall usage is up only modestly. Customers clearly value the ability to use Vonage service on mobile devices. We believe Extensions will ultimately lower churn in our high value ILD customer segments. Building on this early success we recently launched Extensions apps for Android and iPhones that greatly simplify ease of use.

Time to Call and its future evolutions support our strategies for both mobile and international expansion. Time to Call has been downloaded in 85 different countries and provides calling to 190 countries highlighting the appeal of this product far beyond the U.S. Time to Call has recently be named a finalist for the 2011 Mobile Excellence Awards for Best Mobile Application for Utility or Business. The Mobile Excellence Awards honor excellence in mobile technology and celebrate business innovation. We are pleased that Time to Call was considered among the best.

Looking ahead, our international mobile product plans included additional Extension capabilities, mobile stand alone products and a variety of calling plans targeting country specific callers. In 2012, we plan to bring these services together to provide an integrated communications experience that will include free apps to have calling and messaging along with traditional off net international long distance services and new roaming solutions.

The third plank of our growth strategy is geographic expansion. This represents a significant opportunity the global consumer communication market outside of North America is estimated at $320 billion and it’s growing at nearly 7% annually. Shift in technologies economic development and changing government regulation are opening the door for new entrants to disrupt existing markets that are characterized by high price voice and messaging services. Over the next year we expect to offer a range of mobile and international voice and messaging services outside of the U.S. We expect most of this growth to occur through partnerships and we are active in discussions with several prospective partners.

Let me describe three examples of the kinds of products we may offer. First is something we might call International Friends and Family through agreements with partners who also provide consumer services we could mutually extend free or highly discounted international calling to our combined customer bases. Think of it as a virtual on net calling plan. Second other companies have expressed interest in having us provide voice services that they can add to their bundle of video and internet access and third we believe there are opportunities to partner with local companies to develop communication key ups placed in high traffic locations for people to make inexpensive calls in developing markets. This is not the similar from the wide array of internet cut key ups that are emerging all over the globe. We are pursuing a range of options in partners and hope to be in a position to announce our first partnership agreements in the next several months.

Let me now address our outlook for the year. With a stable core business, strong cash flow and a pristine balance sheet we believe we are well positioned to address the significant market opportunities we’ve targeted. We are pleased to report strong net income, EBITDA and cash flow performance this quarter. And looking ahead we continue to expect achieve adjusted EBITDA of at least $165 million and we are on track to deliver to a higher growth line additions in 2011 than in 2010. We continue to believe in the attractiveness of the strategic markets we’ve identified as the foundation of our growth initiatives including international long distance, mobile and international expansion opportunities. And we will continue to invest in these areas.

While we are encouraged by early results from product launches, distribution gains and international business development activities our revenues are ramping more slowly than originally anticipated. The revenue ramp from these initiatives are delayed by several months and is expected to more favorably impact results in 2012. We expect churn to be stable to lower than the third quarter levels and expect full year churn or 2.6%. Although we anticipate additional progress in the fourth quarter it’s unlikely to be sufficient to offset year-to-date net line results consequently 2011 net line additions are likely to be slightly negative. We expect that capital expenditures will now exceed $40 million and we are on track to generate at least $105 million at free cash flow for the full year.

We look forward to sharing greater detail on our 2012 plans during our next quarterly call and now I will turn the call over to Barry and thank you again for your interest in Vonage.

Barry Rowan

Thanks Marc and good morning everyone. I’m pleased to review our third quarter results with you. We reported another quarter of strong financial results and are on track to deliver record high net income and EBTIDA for the year. Our free cash flow continues to grow enhanced by our recent refinancing with significant savings in interest expense. We are on track to generate more than $105 million or $0.47 per share in free cash flow during 2011. Our expanded retail distribution channels including event teams are driving higher and more efficient customer acquisitions. Importantly, we have begun to shift our business beyond the home phone to mobile with a brief introduction of new mobile products and applications. And as Marc discussed we are taking meaningful steps to grow our business outside of North America.

Let’s now move to a discussion of the financial results for the quarter. Turning to slide three, net income excluding adjustment tripled to $24 million or $0.11 per share from $8 million or $0.04 per share in the prior year. This improvement was driven by a 38% increase in income from operations to $27 million and a 75% or $9 million reduction in interest expense reflecting the positive impact of our debt refinancing.

Net income excluding adjustments was essentially flat from $25 million or $0.11 per share sequentially. We reported GAAP net income of $16 million or $0.07 per share up from a loss of $55 million or $0.26 in the year ago quarter, which included $60 million in one-time charges. GAAP net income was down from $22 million or $0.10 sequentially. The sequential decline was due to an $8 million charge related to the early extinguishment of debt associated with our July refinancing. This charge represents the final accounting adjustment related to our previous refinancing.

Effective cost management and operating efficiencies led to our fourth consecutive quarter of EBITDA at or above $40 million. EBTIDA increased 15% from the prior year to $40 million on modestly higher revenue and lower direct cost. EBITDA declined sequentially from $44 million reflecting the impact of higher international calling related to Vonage World and Vonage Extensions and increased cost associated with acquiring more customers during the quarter. We continue to expect to generate at least $165 million in EBITDA for the full year.

Moving to slide five, revenue increased $2 million or 1% from the prior year to $217 million from improvements in customer mix as we added more customers on our Vonage World plan and higher Universal Service Fees. These positive impacts more than offset nearly $3 million revenue decrease associated with the decline in legacy activation fees which do not impact EBITDA. Revenue declined slightly from $218 million sequentially primarily due to an increase in service credits and rebates as we added more customers through our lower cost retail channels.

Average revenue per user or ARPU for telephony services increased to $30.06 from $29.45 in the prior year primarily due to improved customer mix and lower bad debt. Service ARPU declined less than 1% sequentially from $30.14 on modestly higher credits and rebates.

Turning to slide six, we continue to focus aggressively on reducing Cost of Telephony Services or COTS one of our largest expense items. In spite of higher international call volume we were able to modestly reduce COTS to $59 million from $60 million in the year ago quarter. This cost management was led by a 41% decline in domestic termination costs aided in part by lower usage and the consolidation of our E911 vendors.

These improvements coupled with continued reductions in international long distance termination rates more than offset the costs associated with the growth in ILD minutes. As a result, cost declined to $8.25 from $8.36 a year ago on a per line basis. Sequentially COTS per line increased 3% from $8.03 due to higher international termination costs associated with Vonage World callers.

In the fourth quarter we expect COTS to increase modestly due to the impact of higher international calling related to Vonage Extension. These increases will be partially offset by savings from structural cost reductions as we implement our next generation call routing infrastructure and puring agreements. We expect to see meaningful cost benefits from these efforts in 2012, which will offset anticipated continuing growth in ILD minutes next year.

We reduced cost of goods sold by $2 million in the prior year to lower device costs and activation fees. As mentioned on prior calls we have reduced the cost of our devices to less than $30 a more than 25% reduction from the $40 we were paying two years ago. These lower device costs along with lower costs improved direct margins to 68% up from 66% a year ago. Direct margins declined from 69% sequentially as a result of a cost increase we discussed.

Moving to slide seven, SG&A of $59 million was flat year-over-year and up $1 million sequentially from the expansion of our third party retailer channels. These efforts are yielding positive early results that Marc outlined. New distribution channels and continued effectiveness of our event teams contributed to an 8% sequential increase in gross line additions to 170,000 year-to-date GLAs are up 7% compared to the same period a year ago.

As anticipated we saw some moderation in advertising costs from seasonally higher second quarter prices. This benefit combined with increased sales from our low cost acquisition channels reduced subscriber line acquisition costs by 9% sequentially to $300 SLAC also improved modestly from the $302 level of a year ago.

Moving to slide nine, we experienced upward pressure on churn from a no contract offer increasing churns to 2.7% from 2.5% sequentially. While churn in some customer segments increased it’s important to note that churn for international long distance callers in most segments remained well below that of domestic callers. The value proportion provided by Vonage World was a key contributor to this lower international churn.

As Marc discussed, after assessing the trade offs of our no contract policy we plan to offer customers the option of taking a contract. Customers who sign up for a contract will receive a discount from the pricing they would receive without signing a contract. The combination of higher gross line additions and increased churn resulted in a net line loss of 9000 lines in the quarter a modest improvement of 2000 lines from the second quarter.

We will now move to a discussion of our CapEx and cash flow on slide 10. As discussed on prior calls our strong cash flow is helped by our low CapEx, which we continued to manage to less than 5% of revenue. Approximately three quarters of our capital expenditures are for investments in information technology and systems infrastructure with the balance dedicated to maintenance capital.

For the quarter, CapEx was $12 million up from $9 million sequentially year-to-date CapEx is $25 million and we continue to expect CapEx to be below $40 million for the year. This is not only stable and generate substantial free cash flow aided by low CapEx and interest expense and substantial NOLs of $885 million. Free cash flow for the quarter totaled $34 million and is expected to be more than $105 million in 2011, up from our previous expectations of $100 million.

As of September 30, cash and cash equivalents was $63 million including restricted cash of $7 million. We ended the quarter with a strong balance sheet with total leverage to EBITDA of 0.7 times and net debt of $55 million. Our strong balance sheet and continued cash generation provided us with substantial flexibility to invest for future growth.

In summary, it was a solid financial quarter. We tripled net income excluding adjustments from the prior year and are on track to deliver record financial results for the full year 2011. We strengthened our customer base and are enhancing our distribution channels to drive customer additions. We believe we are taking appropriate steps to stabilize customer churn. We have also begun the strategic shift to mobile and international expansion and are encouraged by the early response from our customers. Thank you again for your interest in Vonage.

I will now 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

Thank you (Operator Instructions) and our first question comes from Mike Latimore with Northland Capital.

Mike Latimore – Northland Capital

Alright, thanks a lot. Good morning. In terms of I just have a question on churn you know you’ve had a number, you’ve had subscribers coming up annual contracts pretty much every quarter over the course of the year. What did you see that was maybe a little different this quarter around that dynamic?

Marc Lefar

Mike, this is Marc. So this was the quarter in which we actually completed a full 12 months of contracts. For the entire customer base this point is no longer under a service agreement so what you’ve seen in terms of the tick here is that the cumulative impact of customers from the prior nine months as well as customers now coming up on their 12th month that layers into the cumulative impact on churn. It was slightly higher than we expected and that was combined with what we saw as a tick up in churn among some of our Spanish speaking segments as we’ve talked in prior calls.

We’ve been actually pleased over the last year that our Spanish speaking efforts have not only brought international long distance callers but a fair number of domestic users in the Spanish speaking segment but it basically not talk to by any telco’s in the past. In addition, having a higher than the ILD level of churn we are seeing higher churn among that Spanish domestic customer sub segment we hypothesize some of that might be socio economic issues and current economy issues that may also be a function of understanding of the core offering and what that delivers.

As we look forward to the fourth quarter, we feel quite good about stable to lower churn we’ve actually seen evidence now that we are entering the 13th to 15th month of customers being outside of contract, reduction in churn has folks on the call are probably well aware the cycle of contract is one that basically builds up a spike after the initial contracts expires. And we were no different than that historically because we’ve had customers who have been moving out more steadily throughout the course of the year that pins up contract expiry churn no longer exist and we will get the benefit of that gradually over the next couple of quarters as new cohorts enter their 13th to 15th month. So that’s kind of what’s, what the churn dynamics are.

Mike Latimore – Northland Capital

How about October, has October you’ve seen some evidence on that in the month of October improvement.

Marc Lefar

In the couple of weeks we actually have seen some evidence of that 13 through 15 month reduction in churn.

Mike Latimore – Northland Capital

And then with regard to the Extensions and Time to Call is that, it sounds like that is there revenue associated with that maybe pushed down a little bit and what do you think is the reason for that and what gives you confidence that you might see that improve next year?

Marc Lefar

So the revenue is on both Time to Call and Extensions also relates to the growth we have expected to come a little bit faster from some of the new distribution channels. The bottom line on Extensions and Time to Call is you’ve got Time to Call free calls that were part of people’s initial promotional offer to get them in so it’s very difficult to think about what that recurring rate will be you got to understand and see what the ongoing habits are that you formed. And on Extensions we are still pretty early days of this we call that the first Extension is added for free we had significant uptick on that.

We were actually delighted to see a huge amount of shift of usage roughly 30% of people’s total usage moved to mobile very quickly with very modest increase in total minutes actually far less than what we expected in our business case and we are seeing some pay per use revenues that come from that customer base as well. But we didn’t start doing the third line sales at 499 until late in the quarter. So it’s still difficult to understand what the safest point will be on that product. And as it’s true with most new products until you understand the novelty impact it’s difficult to fully appreciate what the long-term revenue impact will be.

And then candidly as we look at some of the other new products and services as well as expansion into international markets we are looking at the timeframe of those and some of those just taken longer than we expected. New distribution partners including track phone while things are on plan and we are executing it’s just taken longer to get them into marketplace and longer to get the customer response that we expected.

Mike Latimore – Northland Capital

And just last question it sounds like you are spending a little more on SG&A for the successful retail channel does SG&A keep trending up little up as you focus on retail or is this kind of a run rate?

Barry Rowan

Well as you see Mike we have increased marketing at selling modestly couple of million dollars from the first quarter of this year. So we see that, see it being relatively stable in this only that we may increase it modestly but we didn’t have a couple of million dollar increase there in the second or third quarters. And we are very pleased with the success that we are seeing there so as you know we continually manage the mix of marketing and selling spend and with the success in some of the retail channels that we are describing we will continue to emphasize that but we will them also curve back in some other areas as required. So we think it’s relatively stable.

Mike Latimore – Northland Capital

Thank you.

Leslie Arena

Next question operator.

Operator

Thank you. Our next question comes from Robert Routh with Phoenix Partners Group.

Robert Routh – Phoenix Partners Group

Yeah, good morning guys a good quarter. Two quick questions. In your balance sheet how low the debt is in given your cost it’s below 4% from where it was and $105 million of free cash flow expected from $110. I’m just curious as why the company hasn’t put in place a stock buyback plan as intended for shares. The equity and leverage that would create given how solid your EBITDA is suppose to be going forward the opportunities that you are talking about.

It just seems like it would make a lot of sense because your cost of equity is off the charts and your cost of debt it’s very low. So and you are not going to be paying taxes you don’t get a shield from the interest. Anyway, I’m sure it’s just is that something the management would consider or is considering you could do to show the public markets that you feel the shares are undervalued.

Marc Lefar

Robert thanks for the question. As we talk in prior quarters we will continuously assess the wisdom and timing of any kind of stock buyback. But again consistent with our prior comments our objective is primarily growth and as we look at our growth trajectory we are primarily focused on use of cash for potential acquisitions done smartly so those are the things we will be requiring technology, people or communities that have a head start in a consumer market that’s consistent with our mobile international growth areas.

So keep in mind that this phenomenon of cash in the balance sheet and the rapid pay down the cash flow potential is relatively new phenomenon for us. It’s only been several months and we would like to have the opportunity to appropriately evaluate the acquisition opportunity that exists before us. We think that’s a better approach for shareholder value and sustained growth if we are going to find the right opportunities then at this point in time returning cash directly to shareholders. But it’s something we continue to assess and we continue to as we get through our evaluation of potential acquisitions.

Robert Routh – Phoenix Partners Group

Great, I totally get that I understand just given where your stock is today its down 15% I mean the acquisition would have to have quite a return on capital compared to an investment in your own stock at this level I mean your stock is just 5 or 6 bucks I would get it. But anybody here that seems like that could be at least a little bit one of the best use of your cash and but I hear you saying I mean I guess the real question if I’m getting is there anything that would prohibit you from buying that stock now if you wanted to, is there a need to covenants restricted covenants with your debt or could you put in place a buyback and do that if you decided there was nothing else worth buying in the stockers the best use of your cash.

Marc Lefar

We do not have any covenants or barriers that prevents from doing that if we decide that was the, that’s the way to invest that cash.

Robert Routh – Phoenix Partners Group

Okay, great. And then one follow up on what you said for that acquisition I noticed reading the financials that looks like you had your acquisition of software during the quarter it was like $8.2 million, which was at double what it’s been historically just what you guys bought and how that’s going to help you guys going forward. And then when it comes to the partnerships do you expect to announce I know obviously Canada and the U.S. and the UK are big markets for now. Can you give us any senses to what other areas that you take a big growth opportunity for the company that maybe investors are missing where you can really leverage the infrastructure you built?

Barry Rowan

Let me take the first part of that question and Robert then I will turn it over to Marc to handle the other growth opportunities. On the software side we as you know are in the process we are investing in IT infrastructure as we go along including investing in Amdocs, which will be operationalized this year. So that’s what you saw during this quarter. As a reminder about a fourth of our CapEx is for maintenance the balance is for infrastructure and IT investment so that get’s reflected in the things we are pointing out.

Marc Lefar

Okay and in terms of areas of growth to leverage the infrastructure there is really three one of those is international expansion. So our ability to conduct business outside the U.S. with partners and others requires that we have different types of building support infrastructures as well as operational support infrastructures that it allows us to conduct business outside of the U.S. efficiently and be able to do that on a revenue bearing basis.

Many folks who get to these businesses with free models don’t need to actually track what’s happening you actually have to have the OSS, BSS to support a revenue bearing model that requires infrastructure so that’s piece one. Piece two is the ability for us to have flexibility to have very different pricing models including that for mobile as you know we currently have a traditional home phone service business that’s what the original architecture was built for that allows you to with the shipping of an adapter tied to the issuance of the phone number track and manage customers.

We envision a different kind of model where you might have user IDs you might have customers per ID, you might have very different billing models and all that being tracked through software. So the infrastructure to allow us complete flexibility for individual or integrated offerings for mobile is another area that the infrastructure investments will help us. And third is that which manages our cost structure. So the ability to provide highly efficient customer service much of which becomes online customer self service as well as simply efficiency for our live representatives to be able to better serve customers to cross sell to up sell and to anticipate what their issues are so we can meet their needs and reduce churn are all areas where we think we can leverage the infrastructure investments we are making.

Robert Routh – Phoenix Partners Group

Okay, great. And just one last question and I will (Inaudible). Obviously during the quarter I mean you managed to reduce your bad debts your reserve for that. It seems I just want to know how you managed to do that are you really I know you mentioned a little bit in terms of the contracts at lower price points and with the credit quality I mean how are you successfully be able to do that and do you think that you can squeeze a little bit more out of that going forward as you kind of look at the credit quality of the Vonage consumer.

Barry Rowan

Robert, I made a comment on that. Just to be clear on the bad debt virtually all of our customers are pay in advance so we don’t encourage the usual kind of bad debt exposure that is characteristic of some customers. The way it shows up is in the quality of the customers and as that has improved relative to where we were a year ago we have seen some benefit of that that I mentioned on the call.

So how do we continue to manage it we it’s in the acquisition process of the kinds of customer’s that we bring in and monitoring that and monitoring the early life results of those customers as we know we have focused on the static segment over the last year. So I have been pleased with the opportunity there it’s something that we have to continue to look at particularly for people who are domestic callers as Marc pointed out within that segment. So it’s something that we actively manage we have a revenue assurance group here that is very capable of that and but we’ve seen that improve relative to where it was a year ago.

Leslie Arena

Next question operator.

Robert Routh – Phoenix Partners Group

Thank you.

Operator

Thank you. Our next question comes from William Focal of Maryland.

William Focal – Maryland

Good morning. I was wondering if you could give us an update on the progress with getting the Time to Call software on the Android platform and then separately I was wondering if you could talk a little bit about give a little more detail on your network grooming activity and how it phases in, in fourth quarter and into next year from the standpoint of does it come in small chunks, is it lumpy, does it start big and then taper it would be just helpful to understand what your expectations are in terms of that offset to the other cost increases that you had outlined.

Marc Lefar

Let me take the Time to Call question the Android application was actually launched into the market earlier this quarter and the iPhone app launched several weeks ago. We’ve had 10s of 1000s of downloads between those two I think we are now in excess of 35000 on iPhone alone just in a couple of weeks to recognize that the Extension service I’m sorry the, I’m sorry excuse me just mixed up Extensions with Time to Call. The Extensions applications have been in both of those stores for Android and iPhone and the results I was just speaking to was for Extensions. For Time to Call, the those products are now available as well where we did have a point in time where we needed to pull those back, there was an issue related to Apple and the iPhone store which is riposted addressed and development that is now been addressed.

William Focal – Maryland

So you are saying that you have Time to Call on both Apple and on Android now?

Marc Lefar

Android is forth coming.

William Focal – Maryland

Okay, so that’s my question is do you have a date is that going to be yearend is it going to be next year can you give us a sense when you add the Android capability.

Marc Lefar

I don’t think we’ve got a firm date on that yet let me check on that and get back with you.

William Focal – Maryland

Okay and then network grooming.

Barry Rowan

Yes, let me take that one Bill. As you know we are continue to make investments in IT infrastructure and that is particularly the case on the domestic side where you saw the domestic cost reduction of 40% this year or termination costs, some of that was usage but the lion’s share of that was driving down the domestic costs we see. That benefit continuing into 2012 and really gaining the lion’s share of that benefit in 2012 so as we are able to move to more of a (Inaudible) type of arrangement up hearing kind of arrangement with our carriers that will enable us continue to drive cost out of the system. So as we do that the objective is to have the benefit of that infrastructure investment offset substantial portion of the lion’s share of the cost associated with the continuing growth in ILD minutes, which as you know is the center piece of our strategy to target our international long distance callers.

William Focal – Maryland

Okay, and then lastly you mentioned Amdocs can you just sort of generally discuss the key benefits that you feel Amdocs will provide you with. I think that it entered in a little bit in the bad debt discussion. But if you could just elaborate a little bit on what you think Amdocs is going to do for you once it gets fired up that would be helpful.

Marc Lefar

Sure, I will take that. Amdocs really is a complete infrastructure lift from what we had before the original Vonage legacy billing system was based on one macro database upon which most of our applications in production including customer services as well as real time queries and virtually anywhere in the business are banging against that very large database fundamentally built on Oracle technologies.

Amdocs basically provides a completely new approach to billing support services it will change how our customer service and sales activities in the front end, pool information for use by front line representatives and it gives us a flexible what we call product catalogue, which allow us the ability for new products and services to be implemented much more quickly in a legacy system, which required completely new code every time we wanted to enhance the service.

William Focal – Maryland

Okay and when do you anticipate having the Amdocs up and running?

Marc Lefar

We expect to stand it up before the end of this year and then really the primary benefits of it won’t encourage until 2012.

William Focal – Maryland

Okay, thank you very much.

Marc Lefar

Let me follow up on the Android discussion I apologize for the confusion because we’ve done so much in the Extensions area in the last few weeks. So we are not going to deploy the current version of Time to Call on Android I alluded to some enhanced services that we expect very early in the next year, which is a new evolution of Time to Call that will have enhanced services and features and that’s when we will deploy on the Android platform and again we expect that after the New Year.

William Focal – Maryland

Can you give us a sense of what the enhanced features might be?

Marc Lefar

I alluded to some of those I’m not going to go specific for what the launch in January but remember the kinds of things that we are looking to include going forward. We will have no net free calling communities as well as enhanced international long distance services that are integrated into a sleek application as we look further into the year we also will have messaging services and expect solutions for international roaming.

William Focal – Maryland

Great, thank you very much.

Leslie Arena

Operator.

Operator

Thank you (Operator Instructions).

Leslie Arena

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

Operator

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

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