Venture Global Inc (VG) 2007 Q2 法說會逐字稿

Good day and welcome to the Vonage Holdings Corporation second quarter 2007 conference call. Just a reminder, today's call is being recorded. At this time for opening remarks and introductions, I'll turn the conference over to Leslie Arena, Vice President of Investor Relations. Ms. Arena, please go ahead.

Thank you, operator. Good morning and welcome to our second quarter 2007 conference call. Speaking on our call this morning will be Jeffrey Citron, Chairman, and John Rego, CFO. Jeffrey will begin by reviewing our accomplishments over the quarter and will discuss the Company's strategic direction and John will review our financial results. At the conclusion of our prepared remarks, Jeffrey, John, and Sharon O'Leary, our Chief Legal Officer will be happy to take your questions.

I would like to remind everyone, that statements made during this call 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 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. For 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 I will turn the call over to Jeffrey.

Good morning, everyone, and thank you for joining us on the call. I've been back as interim CEO for four months now, and I'm pleased to report on the progress that we've made in bringing the business closer to profitability. I'm very excited about our accomplishments this quarter and am confident we are taking the appropriate steps to turn our business around. The second quarter is one of transition for us and I believe that we are turning the corner on one of the most difficult periods in Vonage's history. There are a number of reasons why I believe this to be the case, so let me start by briefly reviewing the financial highlights for the quarter, John will go through these results in more detail.

Financially, it was a very strong quarter. We made significant progress in many areas of our business. Revenue grew to 206 million and our adjusted loss from operations fell dramatically to 18 million in the second quarter. Excluding certain charges associated with the Verizon royalty and employee severance, adjusted loss from operations was 3 million. That number includes 6 million in IP litigation costs, which we expect to decline over time. Given today's results, we are close to achieving positive adjusted operating profit and I'm pleased to say we are ahead of our internal schedule in achieving that milestone. GAAP net loss for the quarter, excluding certain items, was 18 million or $0.12 per share.

The bottom line improvements was driven by significant reduction in the SG&A and marketing expenses. SG&A as a percentage of revenue fell to 43% from 46% in the prior year and sequential quarter as a result of lower head counts and other expenses, resulting in an annual run rate reduction of 30 million. Marketing dropped more dramatically to 33% of revenue from 62% in the second quarter of 2006, and 46% sequentially, as the Company reduced marketing by 110 million on an annual run rate basis, and delivered a pullback on spending while assessing and revamping our [marketing] programs. These decisions have resulted in dramatic, positive improvements in our business and are the foundation for a substantiative and structural changes that we believe will position the Company for the long-term.

Reducing costs as a percentage of revenue is just one step in the right direction, so while we're very encouraged with our progress, there is more work to be done. Before I discuss some of the broader changes that I'm referring to, I would like to provide an update on the Verizon litigation and the deployment of our workarounds.

I'm very happy to report that we've substantially completed the deployment of our workarounds for the 7/11 and 574 patents, and we've completed the development of the workaround for our 880, the wireless patent. The impact of the deployment is transparent to our customers. Let me take a moment to say that I'm extremely proud of our team for this accomplishment. This is truly a testament to our company and its continued success.

The Company has taken steps to ensure that the workarounds do not infringe on the Verizon patents as construed by the Court. This includes working with respected authorities in the field to develop the workarounds themselves. The deployment of the workarounds is a significant step towards moving ahead with our business in the wake of the Verizon litigation, and while having the workarounds in place mitigates the impact of a potential negative verdict from the Court, we look forward to the Court's ultimate decision and remain confident in the strength of our appeal.

Now since returning to the CEO role, I have spent a significant portion of my time assessing the strength of the Company as well as the areas that require change. Early on I set a number of near-term goals that I wanted to accomplish. We needed to better analyze the market, the competitive dynamics, and improve our marketing efficiency, improve the customer experience across all touch points, and reduce our back office, nonrevenue-generating costs. We have made meaningful progress towards achieving these goals.

As I mentioned, we deliberately cut marking spending to better analyze our effectiveness, while at the same time redeploy capital in a more efficient manner. In the past, we focused our efforts on building the Vonage brands, and we accomplished that, but the Company failed to successfully transition from brand building to acquisition-based marketing. As such, our campaigns were less effective in their ability to add subscribers. We are now transitioning to a cost-per-acquisition model, while maintaining an emphasis on brand and the early results are positive. We have already introduced a new television and media campaign, which uses efficient placement of our ads and daily optimization of our spending, as well as new creative.

In July we launched our new TV spot, called the Shell Game, which highlights Vonage's advantages versus the bundle and competition. We are also looking to optimize online advertising by only investing in the highest-performing properties. These changes have already resulted in a reduction in the cost per acquisition. Based on our early estimates, we expect marketing costs per gross subscriber line add or SLAC in the third quarter to be lower than the first quarter or second quarters. While these early results are encouraging, there's more we can do.

Let me now talk about the Company's strategy to bring the business to profitability. First and foremost, we need to fix the fundamentals. We conducted a comprehensive review of our customers, why they chose Vonage, why they left, and their overall experience with the Company. We found that customers choose Vonage for a lot of reasons, great rates on long distance, international pricing, features and they don't like the bundle. Customers leave us in large part due to push factors, such as an inconsistent user experience, rather than pull factor such as offers from our competitors trying to lure our customers to them. Said differently, more often the reason customers leave us had to do with factors well within our control, such as problems with customer on-boarding process, service quality, or care, rather than from other factors such as competition or price.

Now the good news here is that by improving the quality of our customer experience, which includes everything from turning on your phone to getting problems resolved quickly, we continually to impact customer satisfaction and customer life. To address this problem, we've developed a comprehensive plan that will first focus on the entire user experience, from purchase through installation and use, and second, improve the support and services customers get from our care centers around the globe. We are looking to simplify and automate the care process through investments in technology, such as call routing, plan CRM system enhancements. Additionally, we will continue to improve the quality of our interactions with care representatives to enhance this training.

We have made some progress in handle times and speed of answer, but beyond answering the phone, our goal is to create a truly world-class customer experience, one that instills loyalty to our service and makes our customer eager to recommend Vonage to family and friends. As you've heard today, we've laid out a comprehensive plan to resolve the existing issues within our company. Once resolved, our next step is to strengthen our core. We know from analysis that a number of customer segments highly value the Vonage value proposition, such as high international minute users or people who purchase satellite TV.

We look to improve overall customer economics by (inaudible) our messages and campaigns to target these key valuable customers set customers and customer segments. We will then grow from the core by entering into the most attractive segments and adjacent markets, such as mobility, to accelerate our revenue growth. And we will expand our offerings with products and features, such as Vonage Visual Voice Mail, international savings plans, and advanced devices due out later this year. We will offer this over our existing platform, enabling us to capture a greater share of our customer's overall communication spend while growing and increasing our levels of profitability.

This plan is a priority for the Company and will require an overhaul of our systems end tools. The first wave will be deployed in the latter part of this quarter and will take about six to nine months before it is complete. We are excited about the opportunity to improve the business, as well as our customer's experience with Vonage. Lastly, we will continue to improve our cost structure. We've removed over $30 million of annual run rate nonmarketing expenses and expect to continue to optimize back end costs without any additional layoffs.

Overall, I am encouraged by the progress we have made over the past several months and I look forward to continuing to improve the business and reach profitability. While we focus on our business, the dynamics of the voice over IP industry continue to involve. On one hand, voice over IP growth remains robust, with expectations for strong growth, and on the other hand the demise of some markets suggest that some of the issue plays will be challenged to survive. From our perspective, we see opportunities on both fronts. The demand for digital voice services has never been greater and our business model, when executed well, remains a compelling one. We believe there will be a long-term market growth for our services and look forward to meeting the opportunity.

I would now like to pass the call to John Rego, our Chief Financial Officer. John?

Thank you, Jeffrey. As Jeffrey mentioned, we made significant progress this quarter in reducing our losses and in optimizing our cost structure. The changes we have implemented combined with increasing benefits of scale put us on track to achieve adjusted operating profitability. Revenue for the second quarter 2007 grew to $206 million, that's a 43% improvement over 144 million in the second quarter 2006 and up 5% sequentially from 196 million. The Company's net loss for the second quarter 2007 was $34 million versus $74 million in the year-ago quarter. The loss narrowed dramatically on a sequential basis as well falling from $72 million in the first quarter 2007.

EPS in 2Q '07 was $0.22. Excluding certain charges, net loss narrowed to $18 million. EPS excluding certain charges was $0.12 in the second quarter of '07. Adjusted loss from operations narrowed significantly to $18 million from 60 million in the second quarter 2006 and 58 million sequentially. Excluding certain charges, adjusted loss from operations was $3 million. That number includes $6 million in IP litigation costs, which we do expect to decline over time. This is the lowest level that adjusted loss from operations had been since the fourth quarter of 2002.

Average revenue per user remains strong in Q2 '07 at $28.38. That's up $0.49 from $27.89 in the second quarter of '06 and roughly in line with $28.31 reported in 1Q '07. Average monthly telephony services revenue per line for the quarter grew to $27.63, that's up 4% from $26.59 in the year-ago quarter. While there's been an increase in the level of competitive activity, we have not experienced any downward pressure on price. Our pricing has remained constant now for almost three years. We continue to expect stability in our pricing environment.

In the second quarter 2007, the direct cost of telephony services was $52 million, up from 40 million a year ago and down from 56 million sequentially. As a percent of revenue, costs fell to 26% from 29% of revenue in the year ago and sequential quarters. On a per-line basis, cost of telephony services fell to $7.21, down from $7.72 in the second quarter 2006 and $8.03 sequentially, principally as a result of one-time quarterly benefits associated with USF refunds of approximately $2 million. Total direct costs of telephony services was $63 million, which included an $11 million Verizon royalty. The USF refund was a definite win in the courts for Vonage. On June 1, 2007, the District of Columbia Court of Appeals vacated the portion of the FCC's USF order, which required interconnected VoIP providers to make double USF payments. This was clearly a positive outcome for us.

In 2Q '07 SG&A was $88 million, up from 66 million in the year-ago quarter, but lower as a percentage of revenue, falling to 43% from 46% in the year ago and prior quarters. If you exclude $4 million in severance charges, SG&A as a percent of revenue fell an additional 2 percentage points to 41%. IP litigation costs in the second quarter were $6 million, a decline from $10 million last quarter. We have taken the steps necessary to bring SG&A back in line to its historical levels to continue to achieve the benefits of scale and ultimately to lower our fixed costs.

Marketing costs were reduced significantly in the quarter to $68 million or 33% of revenue from 90 million or 62% a year ago. Sequentially, marketing expenses were reduced from $91 million or 46% of revenue. We believe there is additional opportunity to reduce marketing acquisition costs by exiting certain contracts in the second half of 2007 that could not be canceled in the second quarter. Marketing costing per [growth] subscriber line addition, or SLAC, was $287 in the second quarter of 2007, an increase of $14 from 273 last quarter and up $48 from 239 a year ago. The Company deliberately pulled back on marketing expenditures while it retools its marketing campaigns.

Results, however, were negatively impacted by press associated with the Verizon litigation, as well as the difficulty we faced effectively transitioning from brand spending to acquisition. We have begun investing more effectively for acquisition through TV and online channels. We're already seeing improvements in our cost of acquisition. For the months of June and July, SLAC was approximately $250 and we expect third quarter to be lower than first quarter SLAC. Lower marketing and negative coverage associated with the patent litigation had a negative impact on subscriber line additions.

The company added 57,000 net lines in the quarter, which is lower than prior quarters, but would still generate an annual revenue growth of 20%. Vonage ended the quarter with 2.45 million lines in service. That said, as the negative press from Verizon lessens and new marketing initiatives take hold, we expect to see net ads increase above second quarter levels.

Premarketing operating income per line of $7.69 for the second quarter 2007 were stable with the same period a year ago. Excluding certain charges, PMOI per line grew to $9.73. This is significant as it reflects the true income generated per line from our existing customer base. We expect this metric to continue to expand as the business continues to scale and we become more efficient in our operations. While we have made strong progress, we expect to continue to face challenges internally and in the marketplace.

Churn rose to 2.5% this quarter, up from 2.4% last quarter. Incrementally, that increase cost us approximately 7,000 customers. As part of our effort to improve customer satisfaction and increase retention, in the second quarter of 2007, we further extended our customer grace period for nonpayment and ordered a better resolved customer accounts that may be past due. This extension had a one-time positive impact of 20 basis points on our average monthly customer churn in the second quarter. We have not seen a reduction in churn yet, and as the continued litigation with Verizon and bad press appears to be offsetting any progress that we've made, we expect this to take several quarters to address, but the outcome of our efforts should be a significantly better customer experience and a lower cost to serve.

Turning to the balance sheet, current cash and marketable securities at quarter end were $344 million, which includes 66 million of restricted cash used as collateral for the Verizon bond. Including restricted cash, our cash used from operations in the quarter was $53 million, which includes 36 million of working capital. Additionally, capital expenditures of $8 million and other restricted cash items of $6 million make up the change from the prior period. We expect our cash requirements in the third quarter to decline as our cash loss decreases and the working capital changes fluctuate less. In order to provide increased visibility into the operational cash requirement, we've calculated cash net loss, excluding working capital and certain items, which equates to a $1 million use of cash for the quarter. Please prefer to table 6 of our press release for further details.

Now, operator, let's open the line for questions.

Thank you, Mr. Rego. (OPERATOR INSTRUCTIONS) We will take our first question today from John Hodulik at UBS.

Okay. Thanks. Good morning, guys.

Good morning, John. How you doing?

Good. Can you hear me okay?

Absolutely.

A couple questions. First, could you just go over sort of next steps in the Verizon litigation? And related to that, given the workaround, what's the outlook for -- or what needs to happen for you guys not to have to pay the royalties going forward? When are we going to get some more information there? And then, as it relates to churn, do you guys see churn continuing to increase as you put in these new systems and enhance the product? And how confident are you about when and how much of an affect that those changes are going to have?

Okay, John, you've got three questions, basically three questions there. Let me start with the next steps on the Verizon case. We're waiting. We did have a court case on June 25th where we presented oral arguments. We did, at the time, expect to have a decision within 90 days. That sort of puts us sometime in this quarter. Our best guess is that we will hear --well, we could hear any day, but more likely to hear now sometime during the month of September. We expect that, based on that ruling, that will resolve the underlying items, and will also provide guidance as to whether or not we need to make another royalty payment. If the Court rules before October 5th, we don't anticipate having to make another royalty payment, but if they don't rule before October 5th, then in order to keep the stay going, we may have to make a royalty payment based on the Court's order.

As it relates to churn, which I guess is the last question, the churn, as John had mentioned, was up a little bit between the second quarter and the first quarter and we know that the negative press that came out in April and in May surrounding the initial Verizon decisions had really two big impacts on the business. One, it slowed down customer growth immediately, because the number of customers were concerned around whether the Company could add new customers at the time, or what the existing state would be for existing customers. And, as it relates to churn, surely, in that case, we would see uptick in customer defections with regard to that issue had concerns around that ruling. Churn being a lagging indicator, it takes a couple months before you see that affect.

So on the last few calls, the last call and couple conferences, we talked about there being an impact. It's hard for us to assess the exact size of the impact, but there's no doubt we lost more than 7,000 customers, which would have accounted for a large portion of the uptick in our churn. We do expect that that's going to carry forward a little bit into the third quarter, once again, churn is a lagging indicator, but we expect after the third quarter to start seeing that improve as the negative press around this issue subsides, and as we start seeing the continued positive affects of improving the user experience. So I hope that answers all of your questions, but you have a follow-up, I'll take it now.

Just on the workaround, you said you got a workaround on two of the patents and sort of up and running at this point. Is that -- could that -- when do we find out -- how does that affect the royalty payments you have or how does that work?

Sure. Well, those workarounds were put online on or about July 1, and those two patents cover the majority of our users, the 880 patents for a much smaller subset. So to the extent that we're found that we're not to infringe, we won't have to make those royalty payments and we will get that on just the workaround issue and then, of course, the Court will still wage a ruling on the actual underlying patents themselves, which if any of those orders are vacated, we'll of course get the money back for the non-infringe activity.

So the September ruling, is that focused on the non-infringe, or is it whether the workaround is compliant?

The September ruling will be the appeal of the underlying three patents. So that will be the first opportunity for the judges to reverse the lower courts' decisions. And to the extent they do, than actually that portion of the royalty payment and the award will be vacated and therefore the money would come back to us out of escrow. Then to the extent there were patents that were affirmed, those patents, of course, where we have the workarounds for, and that would be handled separately post that decision. It will be up to Verizon to decide with a action to take with regards to the workarounds that was deployed, not our decision.

Got you. All right. Thanks.

(OPERATOR INSTRUCTIONS) At this time we'll go to Clay Moran with Stanford Group.

Thank you. You talked about the factors contributing to churn, I guess quality of service, primarily. What about gross adds? We've seen a slowdown there. What have you learned from talking to subscribers and through your marketing experience, are subscribers looking for and how do we get growth going again? Thanks.

Sure, Clay. It's a great question. We've learned a lot from talking to our customers and what they've told us essentially is why they're buying our products, and also to the extent they're leaving, why they're actually leaving. As it relates to adding gross subscribers, the first thing is we need to be more targeted in our messaging. And we've actually started rolling that out already and we're starting to segment the marketplace, focusing on the segments that are most likely to go ahead and buy our services. What that has resulted in is a pretty dramatic drop in the subscriber line acquisition costs from what was the whole quarter in the $280 range down to 250 over the prior two months. That would be the June and July time periods. And we expect over time that to get better as we get more focused in on those segments. Obviously, as the cost to acquire customers goes down, the number of gross adds will go up.

On the same token, the churn on the number of customers we lose, we hope will start to come down, probably not the next quarter, but the quarter after that and that will also help accelerate growth, as we solve the user experience problems. The biggest problem there is not so much the service quality, although there are going to be some service quality problems that we can fix, but really the inconsistency in the user experience. Sometimes you call for help and get a great experience, sometimes you don't get a great experience. It doesn't take a lot of bad experiences out there in that form of inconsistency to cause a few thousand more customers to leave you, which of course directly reduces the number of net adds you're able to get. So in terms of expectations, we expect some modest improvements next quarter as we do expect action costs to come down, although we'll still be dealing with some issues around churn, and then if you go-forward from there, we expect that to continue to improve steadily, as we make additional improvements in our ability to target and service our customers.

Can you give us working capital at June 30?

Yes.

Working -- this is John Rego. Working capital at June 30th was $191 million.

Thank you.

You're welcome, Clay.

Our next question comes from the Michael Rollins with Citi.

Hi, good morning.

Good morning, Mike.

Good morning, Mike.

Just a couple questions. So first you talked about the need to make some investments in things that you can control to improve the customer experience. If you have to think about that investment on an annualized basis, how much do you think you're looking at in OpEx? And are you looking at anything in CapEx?

Sure, Mike. So the investment in tools and systems for us, we'll have both operational and capital costs, but both of those costs are not on top of our normal operations. What we're doing is prioritizing our development staff to focus much of its efforts on going out and enhancing or rebuild existing systems to serve customers better. And then in terms of capital, the CapEx expenditures for the equipment associated with that or for software that we might purchase from third parties, or our [field press] from third parties are all within our standard capital budgets. So you shouldn't see any extraordinary charges with regards to getting these systems online.

Great. Thank you.

(OPERATOR INSTRUCTIONS) We'll go now to Jeff [Risel], JMB Capital.

Hi, guys, good morning, can you hear me?

Yes, good morning.

I had a question regarding SG&A. SG&A looks up to me, but yet you talk about how post the 3.7 to severance you got the 30 million of run rate. Can you just walk me through how you're kind of looking at that?

Sure. John and I will tag team this question together. Fist just starting on the actual SG&A number at [80] million, it was down from 91 in the prior period, so that's in that reduction if you actually add in the extra 4 million hit in the quarter that had to do with severance charges, you'd actually see a reduction closer to 7 million. If you annualize that, you get roughly $30 million. I hope that covers your question.

Okay. I know this is a second question here, but can you talk just briefly about Sun Rocket and how many subscribers you picked up from those guys? And kind of what the process was there? Like did you know they were going into business? Could you have directly marketed to these guys to get them to come over? I saw the one press release that came out on it, but curious about how that process went about? Seems like that would be a very attractive way to add [up]. That's all I have, thanks.

Sure. Well, obviously, no one wants to see a competitor in the industry go out of business. Sun Rocket had a very different business model than Vonage's. It's model was predicated in signing people up for an annual path plan and getting those customers to prepay and using those prepayment funds as a method of funding their business operation. That's a pretty risky business, because if growth slows down, or doesn't even grow that [compentionally], you could ride to a funding gap, and that's what happened with Sun Rocket.

Now we only became aware of the -- of how difficult that company was, really, right before it shut down. And quite frankly, was somewhat shocked at how fast the company went from being well to having some capital troubles to basically stop taking customers and closing their doors. There's no doubt we tried to get as many of those customers as we could and to work with Sun Rocket, as many in [shoe] players did, but unfortunately their demise was just too fast for anyone to be able to really action it. I'm sure we've got a few thousand customers from the marketing programs that we've put out there, but I don't have an exact figure.

We'll take our next question from Qaisar Hasan with Buckingham Research.

Hi, guys. I was hoping to maybe just get a couple of clarifications. One, on the churn of 2.5% in the quarter, this seems like maybe the second time in three quarters that you have loosened some of the definitions around churn by extending the grace periods. Can you talk about why you felt the need to expand the grace period again and how your current policy compares to perhaps some of your peers in terms of how much grace period is provided to customers before they count it as churned out?

Sure, Qaisar. The difference between, the change we made in this past quarter was really to extend the gracing extend periods by about 14 days or two weeks each, taking it from a total of 60 days to 90 days. The reason why we did that is we made this change once before taking it from 40 days to 50 days in the fourth quarter of '06 and we saw actually an improvement in the rate in which customers were able to chore their nonpayment condition. Based on the data that we saw from that change, we decided to take a look at what the industry does as a whole, and then compare that to what we were doing to see if there was a further ability to improve that chore rate. The ultimate analysis led us to believe that moving from a 60-day total cycle to a 90-day total cycle would be more consistent with the industry, and also would be able to improve the chore rate and be in the best interest of the Company's performance in financials, ultimately our shareholders.

That's the rationale behind the change. I believe it's pretty consistent with what's inside the industry in general terms, although I will admit there's some pretty broad viability in how quickly [people/users] from the moment a customer becomes lately on paying his bill. In our case, remember, our customers also prepay a month in advance, so when you enter the grace period, you're in grace for the first 30 days in your prepayments, so it's really almost like only 60 days post that period. So even though we're a 90-day cycle, we're a prepay and 90-day cycle as opposed to a post pay and 90-day cycle.

So just to clarify this issue, if there was no improvement deterioration in your churn from between 2Q and 3Q, would the starting point for 3Q be 2.7% then or would it be 2.5%?

Actually, I can't give you a starting point at all, because during this quarter we know we've seen quite a bit of pressure with regards to the Verizon litigation, both in a subscriber growth acquisition lines, and in our retention numbers. It's very hard for us to quantify how much of that impact has been there but sure that impact has to be more than 10,000 customers leaving us during the quarter, which makes up -- can make up as much as 10 basis points. I'm sorry I can't give you any guidance as to the base line, but I can tell you that that problem will persist at least, we think, through a portion, if not the whole third quarter, as, again, churn does lag usually a couple months of any primary event. And that primary event with the Verizon negative publicity was in the April/May timeframe, so we're going to be experiencing this for both June, July, and August. Obviously, it's very hard to forecast what might happen going forward from there.

Right. Okay. And then, if I can, just real quick, can you give us an update on the Sprint lawsuit? I think you have a dispute with them as well similar to Verizon. Where does that stand? Is that about to go to court as well?

Sure. With regards to Sprint, Sprint has initially asserted seven patents against Vonage some time ago, and we do expect to go to trial at the end of this quarter. On Monday, August 7th, the Kansas City Federal Court issued a 103 page opinion on Vonage's Motion For Summary Judgement, that's us asking, basically, these patents to be dismissed before there's actually a court case, noninfringement on the seven patents, and we got some rulings on this. It's important to understand, first, that when the Court considers any of Vonage's motions for summary judgment that we have to -- the Court looks at it assuming that Sprint's facts are the facts, and obviously that's not necessarily the case when you go to trial, but it is the fact or the case when you're actually looking at it on summary. So there's a much higher burden of proof to get something dismissed during summary judgment.

And we got some really good rulings that we think are very favorable for us. The first one is that Vonage's VoIP architecture does not literally infringe on the three patents in the 301 family, those are patents 294, 429 and 064. That's great news for us as a company. And then on the other big major win for us, the Court also found that Vonage's VoIP architecture for inbound call scenarios do not infringe on three out of the four patents that would be at issue at that. And on the fourth patent, we don't infringe on many of the claims, but not necessarily all the claims, just on summary judgments.

Now, obviously, this has nothing to do with the fact that that the judge issued these rules in summary judgment, is very positive for Vonage, but the fact they did rule on summary for our other claims has no bearing on the case. It's just that, in those cases, it's adopting all of Sprint's facts, it wasn't clear and those facts need to be resolved by the jury. So we will now proceed to the court case, and for Sprint's infringement allegations, Vonage is confident that the jury will find that the remainder of the Vonage VoIP over IP architecture does not infringe and of Sprint's assorted patents. So, we're eager to get this one resolved. The Court did give us some good rulings on Monday.

Great. That's helpful. Thank you.

(OPERATOR INSTRUCTIONS) We'll now take a follow-up from Clay Moran, Stanford Group.

Thank you. Can you give us your thoughts on partnering, or in some way providing more than voice -- potentially partnering with a broadband service provider to offer two services? And beyond the Wi-Fi initiative, can you talk about what your thoughts are on that now?

Sure, Clay, absolutely. Obviously Vonage wants to go out to it's marketing sides and get a greater share of our customer's communication dollars. And in doing so, we're going to look to sort of two different or three different areas. One, clearly, is to bring about new features and products with inside our domain expertise, that would be the things like Vonage Visual Voicemail, or some other stuff we're bringing to market, international calling plans, etc. But also with regards to broadband in particular, Vonage is already starting to partner with third parties to offer a broadband solution to our customer base. We've been doing some initial test trials with a couple of partners. They're yielding some very positive results for us, and so we're very excited about that. And, while the tests are very small, we think there's [accessibility] to expand this to a much greater degree and our goal would be to start expanding it to a larger footprint. This is something I think we can provide more clarity on, in terms of our progress, on our next earnings call.

Okay. Thank you.

Okay. I think at this time, Clay, you'll be the last question for the day. First, I want to thank everyone for listening to us on the call and thank you for your questions.

On behalf of the entire management team, I would like to say that we are optimistic about the opportunity ahead of us and our ability to keep the Company on track. The results this quarter are a step in the right direction, and we look forward to updating you on our progress. I expect that when we speak next quarter, I hope the Verizon litigation will be behind us and we'll be free to focus on the business. Thank you very much for your time and good day.

Ladies and gentlemen, thank you so much for your participation. This does conclude the conference and you may now disconnect your phone line.