Venture Global Inc (VG) 2006 Q4 法說會逐字稿

Good day, and welcome to the Vonage Holdings Corporation fourth quarter and year end 2006 earnings conference call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Craig Streem, Senior Vice President of Investor Relations. Mr. Streem, please go ahead.

Thank you, Deanna. Good morning, and welcome to our year-end 2006 conference call. Speaking on our call this morning will be John Rego, CFO, and Mike Snyder, CEO. John will begin by reviewing our fourth quarter and year-end 2006 results and Mike will provide an update on a number of key growth initiatives. At the conclusion of our prepared remarks, Mike, John and Jeff Citron will be happy to take your questions.

I'd like to remind everyone this morning that statements made during this call that are not historical factors 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 necessarily depend on assumptions, data or methods 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 contained in Vonage's SEC filings. We caution listeners not to rely unduly on forward-looking statements and we disclaim any intent or obligation to update them.

Now it's my pleasure to turn the call over to John Rego.

Thank you, Craig, and good morning, everyone. As we look back on 2006, I'm proud to say that we accomplished a great deal during the year. We more than doubled our revenue, increasing annual revenue 126% to $607 million, from $269 million in 2005. We added nearly 1.5 million gross subscriber lines, a 34% increase from last year's gross adds of 1.1 million. And we've reached a point where the business is enjoying significant benefits from scale, a critical milestone on the road to profitability.

Through scale and cost management, we improved direct gross margin by 760 basis points for the full year, and are well on our way to generating positive adjusted operating income, which is GAAP income from operations, less depreciation, amortization and non-cash stock compensation expense as early as the first quarter of 2008.

Cumulative calls completed over the Vonage network have expanded exponentially from over 2 billion at year end 2005 to more than 7.5 billion at the end of 2006. During the course of the year, we added over 400 employees and now have more than 1,700 employees worldwide. We completed the move into our new Holmdel headquarters, closed our IPO, raising a net $493 million to fund our business and we've built a business capable of delivering sustainable growth and profitability.

Net loss for the full year 2006 was $286 million, versus $261 million in 2005. If we exclude the impact of $27 million in non-cash compensation expense in 2006, the company's net loss narrowed year-over-year. This was the first time in the company's history that this has occurred.

Looking at the fourth quarter, the net loss was $65 million, a 10% improvement over last year's $72 million loss. Adjusted loss from operations was $53 million in the quarter, a 21% improvement from $68 million in the year-ago quarter. Net loss per share for the quarter was $0.42. Revenue in the fourth quarter increased to $181 million, up 91% year-over-year and 12% sequentially. This is our 19th consecutive quarter of sequential double-digit revenue growth as we continue to increase our subscriber base while maintaining stable ARPUs.

Our expectations for 2007 are for a stable pricing environment, and we expect to see ARPU levels remain steady throughout the year. Vonage ended 2006 with over 2.2 million subscriber lines, a 75% increase from 1.3 million lines at the end of 2005. In the fourth quarter, the company ended 166,000 net lines. Average monthly revenue per line was $28.25, an increase of $1.03 from $27.22 in the year-ago quarter.

Average monthly telephony services revenue per line for the quarter was $27.41, an increase of $1.41 from the fourth quarter 2005. These results were primarily driven by regulatory recovery fees and the impact of the Universal Service Fund, which became effective October 1, 2006. Looking now to the cost side, we've devoted significant time and energy towards managing our cost structure. Minutes over the network grew to a cumulative 29 billion in 2006, up from 11 billion in 2005.

This growth requires continued focus on call routing efficiency and network improvements to effectively manage costs. On a per line basis, cost of telephony services, which included Universal Service Fund fees of $1.24 in the fourth quarter fell to $8.13 from $8.50 a year ago. Cost of goods sold was $12 million, up from $10 million in last year's fourth quarter, reflecting a higher level of gross adds.

Overall, reductions in the cost of telephony service and scale led to record direct margins of 65% this quarter, an improvement of 620 basis points over the 58% a year ago. Our ability to control SG&A expense is a key driver of reaching profitability. Well over half of our SG&A is essentially fixed in nature, even more so if we exclude certain IP-related litigation costs, which represented approximately $6 million this quarter. Total SG&A was $82 million in the quarter, which includes $7 million in FAS 123R expense.

SG&A as a percentage of revenue declined to 45% from 59% in the year-ago quarter. Adjusted SG&A, which excludes non-cash stock compensation expense, remains roughly flat sequentially at 41% of revenue in 4Q '06. The installed customer base continues to generate significant and increasing cash flow. This is a critical factor in our ability to invest in marketing for customer acquisition and growth as we move towards profitability.

In the fourth quarter, the installed base generated pre-marketing operating income, which is the cash flow from existing customers, of $7.64 per line, or $49 million, up from $1.51, or $5 million, a year ago. Pre-marketing operating income per line for the fourth quarter rose to $7.64, which included $0.92 in IP-related litigation costs. This increase of $6.13 from last year's quarter reflects the benefits of scale and the increasing marginal contribution from the existing base.

On an incremental basis, we have now reached the point where pre-marketing operating income for every incremental line that we add is over $16, as more than half of our G&A is fixed. Total marketing cost as a percent of revenue declined to 53%, or $96 million in the fourth quarter, versus 71% of revenues, or $67 million in the year-ago quarter.

Marketing cost per gross add in 2006 was $249, versus $221 in 2005. For the fourth quarter of 2006, marketing cost per gross add, or SLAC, was $306, compared to $244 in the year-ago quarter. Now, while SLAC in the fourth quarter typically is higher than in other quarters, $306 is certainly beyond what we expected and it is not an acceptable level of acquisition spending. This increase reflects the impact of transitioning to our new marketing approach and is not reflective of any systemic issue.

As such, we expect the first quarter and full year 2007 to be below the fourth quarter level. While we expect a reduction in SLAC, we plan to continue to invest for growth. As we look ahead, the ability to offer more products to our customers will enable us to add revenue, improve margins, reduce churn and spread the cost of customer acquisition over a greater number of revenue-generating units.

Turning to our balance sheet, our cash and marketable securities as of December 31, 2006, were $500 million. During the year, we utilized $189 million to fund our operations, and $49 million to fund CapEx. In terms of guidance for 2007, ending subscriber lines, 2.9 to 3.1 million, total revenue, 850 to $900 million, marketing expense, $400 million to $425 million, adjusted operating loss, $170 million to $150 million.

Our financial position continues to improve as we manage cost and improve our margins. We are focused on achieving profitability. The business remains on track to delivering positive adjusted operating income as early as the first quarter 2008. And now I'm going to pass it over to Mike Snyder to provide an update on a number of key growth initiatives.

Thanks John. I'd like to take this time to discuss the key initiatives we have underway. Our first and most important is the implementation of our multi-product strategy. This approach, which builds on today's existing voice product will enable us to grow our customer base while improving efficiency. In this phase, we're focusing on bundling opportunities such as the one we recently announced with EarthLink, as well as future opportunities to offer prepaid and cellular products.

And the EarthLink relationship enables us to purchase Internet access on a wholesale basis and sell WiFi Internet service under the Vonage brand. We're also developing opportunities with access and communications service providers and others to expand our product offerings and grow our business through the bundling of customer-valued services. In addition, we continue to look for ways to improve the customer experience through professional installation.

Demand for this service continues to grow. Now we're running at about 1,300 installations per week. As an enhancement of the professional installation service, we've begun offering free installation to customers who sign up for a two-year service contract. Early results indicate this program should lead to an increase in customer satisfaction and ultimately to improvements in the early life retention and longer-term churn.

A second customer-focused enhancement is electronic check processing. Previously, credit card and debit card payments were the only options available to our customers, so electronic check processing, or ECP, represents an important feature. Just since its introduction in December, our customers have shown high interest. Thus far, 10% of customer additions now select ECP. In terms of retail, we continue to explore strategies for broader and more productive retail presence.

A key element of that is in-store activation, which is now available in Best Buy and Circuit City and we expect to roll out in-store activation in Wal-Mart and other retailers later this year. Also at retail is the continuation of the Vonage kiosk program. At year end, we had five kiosks up and running and expect that number to reach 50 by year-end 2007. We're excited with our results thus far. The kiosks not only serve to expand our presence, but will provide the platform we need, allowing us to sell more products, including wireless and broadband.

Additionally, we are expanding our authorized reseller programs and affinity marketing relationships to give us broader reach in the marketplace. Lastly, I want to comment on an important management change in our customer care organization. Much of the progress that has been made over the past several quarters has been under the direct leadership of Ed Lamb, who joined us last year from Nextel, following an extensive career in customer service and operations.

Ed, who previously ran our call center, put in place the programs that have led to positive results in all of our care metrics, including average speed of answer, call abandonment and customer save rates. In recognition of Ed's outstanding performance, we are very pleased to announce that he will lead our overall customer care operation.

In closing, we're optimistic about the opportunity ahead. The VOIP marketplace has grown tremendously, and the demand for digital voice services has never been greater. We will continue to focus all of our efforts on a balance of profitable new customer growth, investment and exciting new customer-centered features and products, and doing those things that produce both cost efficiency and scale as the primary drivers of our business. And now we'll open the line up for questions.

[OPERATOR INSTRUCTIONS]

And we'll go first to Michael Rollins with Citigroup.

Hi, good morning.

Good morning, Mike.

I was curious if you could talk a little bit about maybe some of the competitive pressures that are out there. It seems like the gross adds have fallen off a little bit in the fourth quarter from the third quarter, and then wondering if you're seeing competitive challenge of getting customers to do the install, and what are the steps that you're taking to try to stimulate that? It also I guess relates in some respect to your subscriber guidance for 2007, which seems to not be at an accelerating pace versus 2006. Thanks.

Well, I think that since this company was founded just four years ago or so, we've experienced pressure from cable and others every step of the way, so we feel and sense pressure in the marketplace from competitors. We don't see it to a degree that's significantly higher than we've experienced in the past.

What you have seen is through those competitive pressures, or through competition, the needs to start to concentrate more on customer experience and those things that enhance the value of Vonage services to both our prospective customers and our existing customers.

And that's why we've concentrated on things like ECP, professional installation, certainly a ramp up there is a feature that customers demand. We look at features that we've added that provide information services. Like just yesterday you may have known that we offered a Valentine's greeting via Vonage Voice Services to our customers that had adoption of over 20,000 customers.

So it's those things that we believe add to the customer experience that we've kind of learned from this environment and help us, I think, be prominent in the marketplace.

Thank you. We'll go next to Daniel Berninger Tier One Research.

Thanks. Sticking with the customer acquisition theme, in the past you've talked about the need to change the marketing strategy to hit more of a mass-market type customer. Can you talk a little bit more about what are your lessons learned so far and how that process is going?

Yes, I think one of the things that we saw, if you looked at -- and that impacted our efficiency in the fourth quarter were the new campaigns that were released in the fall that centered around brand building, kind of eye-catching, attention-getting Vonage advertisements. And they frankly didn't pull too well. We immediately got on that, as we had spoken in the last conference call, and came out with a new campaign of more informational, infomercial-based advertisements and ad campaigns, and we've seen, frankly, considerable improvement in terms of their efficiency in actually activating customers.

Now that's all part of the mainstream of America. We realized that just attention getting doesn't tell the whole story to mainstream America, that in fact you've got to be more descriptive and more informational and more educational. And so we'll continue along those lines across all media as we move into the more mainstream market.

Sure. This is Jeffrey, and I'd like to add a data point or two. Our recent surveys on the new commercials in the marketplace, which there are about five different personas currently running, targeting five different segments of the market, many of them are pulling in the top five for us now, in terms of getting people to indicate their interest to purchase the service.

I think that gives us optimism for 2007, and I believe that's why John Rego in his earlier comments mentioned that we expect acquisition costs to fall below the fourth quarter levels both in the first quarter and for the full year.

Okay, thanks a lot.

Thank you. We'll go next to Munjal Shaw of Piper Jaffray.

Hey, guys. A couple of questions. One on the cost of telephony service. It was up due to the fee. Going forward, how should we model that? Do you think it would remain at that level, or was it a one-time fee?

This is John Rego speaking. The Universal Service Fund, we're required to start collecting that on October 1st. That's a pass through, so we pay it, but we get remitted by our customers. So that worked out to be $1.24 per line in Q4, and I would probably hold with that number.

Okay, and so your ARPU probably would stay higher because you were able to pass it on to customers?

But the other side of that is reflected in the ARPU as we pass that onto our customer, that's correct.

Okay, okay. And do you have -- I don't know if there is a way for you to track, but your churn, does it go to cable companies? In terms of competition, what do you see there with respect to people who leave? For what reasons, if there's any way to track those, or you have an idea?

Sure. I mean, we look at our churn quite frankly on a daily basis and people churn for many reasons. Number one reason for churn is still involuntary churn, where people don't pay their bill, pretty standard in most service-type industries to have that be a big part of your churn. And we track all the various different reasons why people churn, competition being one of them.

And do you see an increase in terms of cable companies, or has it been the same?

In terms of the competition side, we've seen some increase from competition, but not anything sectored around the cable operator versus others. We do see some competition from cellular. I think you see that across all the wireline operators. We see some competition from other VOIP providers. Surely cable fits into that bucket.

And we do see some issues where customers had difficulty in porting their phone number over in certain parts of the country, which results in ultimately cancellation. Unfortunately, that cancellation occurs typically many months after the customer started with us, and you'll see that mainly in rural territories where the rules for LMP are not as strong for the main carriers.

Great, thanks a lot, guys.

You're welcome.

Thank you. We'll go next to Clay Moran of Stanford Group.

Good morning. Your cost per net subscriber addition has been going up, and it looks like your guidance implies about $500 in '07. Can you talk about sort of how you view the value of a subscriber, and I guess what I'm trying to get at and whatever you can give us on what's the operating income per subscriber? And given that you're willing to pay $500, I would assume that value is significantly higher. So can you talk us through how you value a sub? Thanks.

Sure. This is John Rego speaking. What we've historically done and what we still do today is we look at that subscriber line acquisition cost that we spoke about earlier in the comments, so that was $306 for this quarter, and we measure that against the life of a customer, which our data would suggest to us that the life of a customer exceeds five years at this point. And we also factor in what the pre-marketing operating income is that that customer can generate on average.

And using those three variables, we can actually attempt to calculate an IRR on that customer, and we have done that from day one and we still do that today. And I look at it in two different ways. One of the things I spoke about on the call is what is the pre-marketing operating income generated from the incremental customer? And that's actually quite higher than the $7.64 that we posted for this quarter. It's actually about $16.

So when I look at the subscriber line acquisition cost, although we're not ecstatic about $306, at that level we still feel we can get an effective return on that investment. That's the way we've looked at it from day one, that's the way we look at it today.

Can you be more specific about what you assume for the life of a sub?

Sure, on average now, we believe our subs are with us for about five years. Some folks have heard me speak about this waterfall thing that we do many, many times before, but what we do find, and we have found with great consistency from almost day one is that most of the churn that occurs in our customer experience will happen in the first 90 days of the customer's life with us. The next amount of churn happens at the next 90 days and then we see pretty steep drop-offs in the churn level.

So one way to look at that, if I were to just take a static analysis, let's say, and go back to every single customer that joined us in the year 2004 and watched how those customers churned off over time, you would see this waterfall effect. So highest churn in the first 90 days, et cetera, et cetera. But if I looked back at those customers in February 2007 to see how many of them I actually have left at this point, our churn level is well below the 2.3% for that particular crop of customers.

And, in fact, if one looks at how many customers you have left, one can easily support a customer life that exceeds five years. So have to do a little bit of math to get there, but what we do find is that like many new types of services, you do have an element of early-life churn, and that doesn't always come through when you just look at a number. You have to look at all the numbers, and we look at churn and have looked at churn on a daily basis since 2004.

Okay, thank you. One other question. Since scale seems to be part of the strategy, would you consider acquiring customers by acquiring other companies, or is it simply just through marketing your own service? Thanks.

If an opportunity presented itself to acquire a customer on terms that we believe are good for our business, of course we would look at it. We haven't done it yet, but that's not to say that we will never do it.

Okay, thank you.

Thank you. We'll go next to [William Mansfield] of Millennium.

Hi, gentlemen, thank you. A couple of questions. I think you quoted a number of $6 million on the IP litigation in the fourth quarter.

That's correct.

What was the total amount for the full year on that?

The IP litigation expense really started to come together in the third quarter. So in the third quarter, I believe our number was roughly about $1 million, so $6 million was the number in Q4.

And is that an ongoing expense going forward, do you think, or is that --

Well, we hope to see the expense go down to zero after the case is over.

Okay, but you had no idea when -- but is it $6 million a quarter until the case goes over?

No, no, I think what you're going to find in that particular case that we're referencing here is the Verizon case. The Verizon case is being heard in Virginia, which is sometimes known as the rocket docket, so it is on a very accelerated timeline. So what you're seeing here, I think, is when folks get involved in IP litigation or any litigation, the cases tend to drag on for years.

You see what would normally dragged on for years being compressed in a period of about four or five months, so that's why you have that spike in costs. We're going to Virginia to go to court pretty soon.

Okay, and then secondly, historically you've had, and I think you've commented on this, a lot of seasonality that positively affects your first quarter subscriber adds. Is that something that might be muted this year because of the way the marketing is being switched over?

No, I think that we'll benefit from seasonality and we'll also benefit from some increased efficiency from the marketing, because we have effected that transition late in 2006. So we'll benefit from both those things.

And, Bill, this is Jeff Citron. The other thing I would say is I think that benefit doesn't end in the first quarter. I think you see the first wave of it. I think as we continue to segment the marketplace a bit further that you'll see it continue to benefit throughout the year. It won't come smooth, but there is a lot more efficiency that can be gained through the next few quarters in terms of how the market gets segmented and how those commercials roll through the marketplace.

I know John Rego also made one other comment just earlier in his remarks, which I'd like to also emphasize, that as we move towards the latter half of the year and bring about additional products and particularly in selling our broadband services through some of the partnerships that we announced or the sale of additional products through some of the mobile offerings we're looking into, that that will also spread the acquisition cost out over and of course bring it down through that mechanism, as well.

Okay, and then my last question was I noticed -- I don't know whether you call it a promotion or a new marketing campaign around it looks like you're doing like a prepay service for a 12-month contract. Could you comment a little bit about why you're doing that and the genesis or the thought behind that marketing campaign?

It's really along the same lines as before. I think as we really start to concentrate on our customers and customer experience, there's just we thought enough demand for prepaid services that it ought to be an offering that we put out to our customer base.

But maybe it's a discount versus your pay by month customer?

Sure, Bill, this is Jeffrey again. So let me talk about a little of the bigger strategy for a moment on what's going on, and I'll talk more about that program. What the company is finding is that we have the ability to put people on contracts and return different value propositions to them. We're testing a number of them in the marketplace.

So, for example, one of the ones that we're running right now for new customers, which we like the early results on, is the ability of the customers to get a free professional installation, which is about a $75 cost to us, about a $99 value to them. In return, they sign a two-year agreement. Now, in this promotional program, we don't give away a free month, so obviously the impact to us is much more favorable.

When looking at the contract on the prepay, we've seen some customers demanding a prepay arrangement, and here we target both new customers and existing customers. In the new customer arrangement, we already give the first month away for free. So if you look at the real impact, we only collect typically $275 in year one, now we're collecting roughly I think $240 on the prepay.

But when you look at the churn reduction effect of a customer, A, not being able to cancel in their first year, and of course the default risk, where some people will just not pay their bill, which is a large portion of our churn, you find it actually being neutral to ahead of the game, depending on whether it's an existing customer or new customer or whether they're re-upping for it.

Now, on the long haul, more customers are put on contracts, whether it be prepays, one years and two years, we think the more stable the revenue stream is and the more stable the customer base is, we think it yields a better IRR for us overall. I hope that answers all of your questions on that area.

Thank you, so it's sort of like you're giving up revenue to benefit in the churn.

Absolutely. And, quite frankly, also giving up benefit -- we're also giving away a free month already on a new customer, so we really are in a sense not giving up as it might look on the face of the promotion.

Okay, great. Thank you.

Thank you.

Thank you. We'll go next to Qaisar Hasan of Buckingham Research.

Hi, good morning. Thanks. Just a couple of questions, one on churn. I think you guys indicated that you've seen about a ten basis point improvement in your churn sequentially because of a change that you made in the way I guess that you accounted for customers leaving your service and I guess you're giving them a one-month grace period now that you didn't before.

Maybe if you could just speak to the need for that change in churn calculations and also perhaps your outlook for churn going forward, I guess even adjusted for this, clearly you guys did show some improvement sequentially. How sustainable is that on a going-forward basis? Thanks.

This is Jeffrey Citron. So your raise a good question. First, I want to just correct something. The actual thing that occurred in the fourth quarter was an increase in the grace period of ten days. And the reason why that was done was a strategic move by the company, because the company found that by providing just a little bit more time for customers, that some portion of those customers would be able to pay their bill, because we had difficulty contacting them all and getting them off of the grace period before the service was suspended, which of course becomes much more difficult to recover the customer.

And our grace period has historically been very short, typically not much more than 30 days. So this extra ten days really made a big improvement, and is actually starting to reap some benefit to us.

Now, as for the ten basis points, that's really a timing issue. All that happened was that some of the customers that went into grace in the fourth quarter actually ended up terminating at a later point in time, so it pushed things out just a little bit, so we disclosed that so you guys had a very clear understanding.

For the full year outlook, I think we've been very clear. Our goal is to drive churn back down to its historic levels. I think the primary strategy behind that is going to be quality improvement in customer care by improving the first call resolution of customers' needs, as well as bringing new products and capabilities to market, whether it be contracts that we've already discussed, which is one level of demand, professional installation services.

We see when we do those we see a more higher satisfied customer, one that has a lower churn rate, and also as we start putting multiple products into the marketplace, just a reduction of churn through the bundling of services. All of those gives us reason to be optimistic that we'll be able to bring that number back down again, or continue to bring it back down.

When did you implement the new churn calculation policy on the 10-day grace period.

It started in November.

Okay, so is there going to be trickle through benefit that you see from that in the first quarter, as well?

Not due to the timing issue, although we hope that we'll see just permanent benefit forever, because we'll be able to recover more people during the grace period because we'll be giving ourselves a little more opportunity to communicate with them.

I see, all right. And can you also give us a sense of how many of your customers right now -- I know it's still early days, but how many of them are under one year or two-year contracts?

I think right now it's a little early to give that data out. I just don't have it handy in front of me, but we'll look into it for you and get back to you with an answer.

Operator Thank you. We'll return to Munjal Shaw of Piper Jaffray.

Yes, hi, this is Munjal again. Just wondering if you could give us a little bit more color on the WiFi service that you announced with EarthLink, how that is tracking and what do you expect from there?

Sure. So, as people know, EarthLink is this country's premier building of municipal WiFi networks and they're currently in early phases of their construction plan, so some of those networks are just starting to come online, but many more contracts have been awarded to EarthLink and they will be building out their service through '07.

For Vonage, it gives us an opportunity to go and sell that service to our customers in a number of formats. The two formats that I think that we're currently most excited about, one is bundling that service with our WiFi phones and then bundling it ultimately with dual-mode cellular phones, and that way we can give our customers an experience of unlimited data and calling through the WiFi experience.

Also, it's a much faster experience in terms of accessing the Web on portable devices. There's also an opportunity to use these city-wide networks to deliver broadband into the home, and in doing so it gives us a strategy of bundling the WiFi service with our primary home phone service, and then ultimately a triple play strategy where WiFi or dual-mode phones coupled with home phone service coupled with broadband could be very exciting.

Now, EarthLink is not the only deal we have currently with broadband. We also have another relationship. This is more in the terms of comarketing as opposed to rebranding with Charter Communications, where customers in Charter territory, we can sign them up for Charter Broadband, and that's a program that we've just started to activate.

And when do you think that the EarthLink, will you start to offer the services in the areas where EarthLink is building out. I mean, what's the timeframe?

Well, to a certain extent, we're a little bit waiting on EarthLink to get their networks up a sufficient level that it makes sense for us to start rolling it out, but I suspect in the latter half of '07.

Thank you.

[OPERATOR INSTRUCTIONS]

And we'll go to John Hodulik of UBS.

Hi, this is actually Batya for John. Just wanted to return back to customer acquisition costs. You've mentioned that it should trend lower in the first quarter and for the full year. Do you think we could get back to the average that we saw in 2006, which was roughly $250? What would be a good run rate for customer acquisition costs? And similarly, I think back in November you had mentioned that you're going to open up retail stores and kiosks. Have you started doing those, and should we expect that to increase the acquisition costs going forward?

Yes, first of all, I think we've had five kiosks open since probably early fall, and we will continue to expand on that program throughout 2007 as we see it not only viable as not only a place to educate the public on our normal digital voice products, but also a great retail outlet to sell them through. But that's just part of it.

The big deal with the kiosks is as we start to introduce more products and more services, these become great outlets in malls to actually, again, educate and sell more things through very concentrated retail environments. And that's what we see the value of the kiosk program as it relates to Vonage.

This is Jeff Citron again and just taking a step back and talking about the strategy for a moment, when you have those multiple products in the kiosk, the kiosks become, of course, incredibly efficient, because the kiosk cots are primarily a fixed cost, so the more product you can move through that distribution point, the better off you are.

As it relates to the acquisition cost question you asked overall, you are correct. We did say earlier that we believe that acquisition costs would fall in the first quarter and that they would be below the fourth quarter for the entire year. I think it's a little premature to give actual guidance on exactly how low that number will go, but for us the more important metric is really around the IRR. What is the rate of return that we are going to receive based on that investment? Because that drives ultimate decisioning for us.

And for us, when you look at every incremental sub coming on the network throwing off $16 per month in cash flow, over the course of a five-year estimated life, you have an enormous amount of cash and that generates really fantastic IRRs, whether you're at the $250 range or the $300 range.

Our goal is not so much to peg a number as it is to drive that SLAC cost down as low as possible and so be more efficient in the primary channels and then ultimately spread the acquisition cost out over additional products. Together we think it's going to have a very positive effect, but it will take time to execute against it.

Okay, thanks. Just one more question. Looking at your 2007 guidance, it looks like profitability over the basis is sort of more important than accelerating growth in subscribers. If you see a new marketing message ramping up, or you see more traction, do you feel like you would go back to growth and forego profitability for a couple of more quarters? Which one's more important at this point?

Well, I think at this point we're incredibly focused on getting profitable by 1Q '08. Of course, if we see great movement into new marketing campaigns, our growth will naturally accelerate, because our marketing spend for this year we've guided to between $400 million and $425 million. So that naturally will accelerate the business. If there are any changes beyond that, of course we'll communicate that to you guys.

Okay, thanks.

Thank you. And with no further questions, I'll turn the conference back over to Mr. Jeff Citron for any additional or closing remarks.

Well, I want to thank everyone for participating in today's call, and of course, again, we look forward to communicating with you in the future as we continue to build out an exciting business, and I want to thank you again.

Thank you for your participation. That does conclude today's conference. You may disconnect at this time.