Venture Global Inc (VG) 2007 Q4 法說會逐字稿

Good day everyone. Welcome to Vonage Holdings Corporation fourth quarter and year end 2007 earnings conference call. Today's conference is being recorded.

At this time I would like to turn the call over to Leslie Arena, Vice President of Investor Relations. Ms. Arena, please go ahead.

Thank you, operator. Good morning and welcome to our year-end 2007 conference call.

Speaking o on the call will be Jeffrey Citron and John. Rego, CFO. Jeffrey will begin by reviewing our accomplishments over the year and John will review our financial statements. Please note the presentation slides are available on Vonage's investor relations web site. At the conclusion of our prepared remarks, Jeffrey and John will be happy to take your questions.

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 belief and expectations and necessarily depend on assumptions data that may be incorrect or imprecise. Such forward-looking statements are subject to risks and uncertainties that can 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.

During this call we will be referring to non-GAAP financial measures. These non-GAAP measures are not prepared in accordance with Generally Accepted Accounting Principles. A reconciliation of the non-GAAP financial measures to the most directly comparable GAAP measures is available in our earnings release which is posted in the investor relations section of our web site.

Now I will turn the call over to Jeffrey.

Thank you, Leslie. Good morning everyone. Thank you for joining us on the call.

Before we go through the detailed results for the quarter, I would like to step back for a moment and talk about the year. Without a doubt 2007 was an extremely challenging year. Litigation took center stage and it monopolized much of the company's time and resources. Before what was tantamount to a threat to our survival and maintained our focus on improving the business.

If I can refer you to slide 3, you will improve at double digit and 1 million gross subscriber lines bringing total lines in service to 2.6 million. We improved our marketing efficiency, reduced our cost structures and ultimately for the first time in our history, generated positive adjusted operating income in the fourth quarter. This is a significant milestone for the company and surpasses our internal target of reaching this goal in the first quarter of 2008. This achievement was a direct result of our focus on turning our business around and demonstrates we are executing against our strategy to one, fix the fundamentals, two, strengthen the core business and three, ultimately grow from the core.

Last year, we made a number of critical decisions and operational changes that led to a marked improvement in our business. We dramatically changed our marketing message and campaigns to focus on customer acquisition, while we reduced marketing expenditures for the year. These changes led to a much more efficient subscriber line acquisition cost, which came in at $223 for the fourth quarter, better than our targeted range of $225 to $250, and down 27% from $306 reported in the year ago quarter.

Our financial results in the quarter were solid. Total revenue for the quarter grew to 216 million, a 19% year-over-year increase. This marks the 20th consecutive quarter of double digit year-over-year revenue growth and the 23rd consecutive quarter of sequential revenue growth.

On slide 4, you will see with an improving cost structure and the benefits of scale, our pre-marketing operating income including certain charges, which reflects the cash generated from existing customers, increased to a record level of $10.52 per line up $2.88 from $7.64 a year ago. Excluding charges, adjusted operating income was $6 million, up significantly from a loss of $53 million a year ago. In the fourth quarter, we narrowed our net loss and for the past two quarters, we generated cash from operations.

Turning your attention to slide 5, and while we are making measured progress in turning the company around, there are operational challenges in customer care we must address. We know that a majority of the churn is self inflicted and driven by poor user experiences such as problems with customer on boarding, service quality or customer care. While we have laid much of the ground work to deliver a better customer experience, customer service continues to be a complicated, inter-related set of issues, and there's no single step to solve it overnight.

In order to resolve these issues, we have focused on people, process and technology and I will begin with people. Although we have been working on improving our service levels for several quarters, we have been lacking strong leadership in care. I am pleased to announce that effective February 5, Mike Sears has joined our team to lead customer care efforts. Mike is a veteran in this field with more than 20 years experience turning around large care organizations including those at DHL and American Express.

In addition to people, we knee the right processing technology in place to support our personnel. To that end, we are implementing fundamental changes and processing technology to make customer care successful. We are seeing improvement in our underlying metrics including quality assurance, first call resolution and customer satisfaction. But the changes have not come fast enough nor been large enough. Churn in the fourth quarter remain flat at the unacceptable rate of 3%. We will continue to invest in workforce management, CRM, core routing systems and agent training to improve customer care, but it will take several more quarters before we realize the full benefit of these investments.

Churn is one of the company's two top priorities; high levels of churn cause a company to expend resources replacing customers, thus diverting dollars that can be used to add new ones. This leads to a drag on profitability and growth. But as we continue to put the people, process and technology in place, we should see the pace of improvement accelerate.

The strategy we have set for the company has three stages: we made strong progress in the first stage, which is to fix the fundamentals. Our cost structure improved, we have revamped marketing, dramatically lowered the cost of customer acquisition and crossed into positive adjusted operating profitability. And although customer care remains an issue, we believe we are making the appropriate investments to improve the user experience.

On to slide 6, I would like to talk about what we are doing to strengthen our core business and grow. As we complete much of our work in phase one we have begun shifting resources to the second phase of our strategy. We will strengthen the core and build on the relationships we have with our customers to increase loyalty and to gain greater share of wallet. Customers are attracted to several new Vonage products and offers, such as Vonage visual voice mail and international savings plans which together have approximately 70,000 subscribers. These produces and features show strong traction market and are incremental to service revenue.

Additionally, we just launched a V-portal, a Vonage-branded router, which is meeting with early (inaudible) from our customers. The V-portal, which has an LCD display, will assist customers with troubleshooting and ultimately have a positive impact on the user experience. We will continue to add value to our customers by offering these products and features and expect that this will improve retention on our overall economics. Overall I am pleased with the progress we have made throughout the year, our business fundamentals are solid and improving and we are executing against our strategy.

And now I will pass the call to John to review financial results for the quarter.

Thank you, Jeffrey.

I would like to begin with slide 7. On the top line, total revenue for the quarter grew to $216 million, a 19% year-over-year increase and up 3% sequentially from $211 million. During the quarter, we recorded certain charges to litigation and severance totaled $2.2 million. IP litigation associated with the AT&T settlement was $1.3 million, and severance charges in the quarter totaled $900,000. We will exclude these changes, charges on certain results to better assess the business on a comparable basis.

Net loss for the fourth quarter excluding certain charges narrowed to $9 million or $0.06 per share. GAAP net loss was $11 million or $0.07 per snare the fourth quarter of 2007.

In the fourth quarter, we settled with Verizon, Sprint, AT&T and Nortel. The cash impact of these settlements will be $240 million, $202 million of which was paid for in the fourth quarter, the AT&T settlement for $39 million will be paid out over five years. As part of this settlement, we took a charge to SG&A of $29 million in the third quarter and $1 million in the fourth quarter. The remaining $9 million will be charged to interest expense over five years. After these payments we will resolve all major outstanding IP litigation.

Moving ton slide 8, total revenue grew to $216 million, driven by continued net subscriber line additions. Telephony services revenue grew to $210 million, a 19% improvement from 4Q '06. Average revenue was $28.19 down slightly from $28.25 in 4Q '06 and $28.24 sequentially. Average monthly telephony services revenue per line which is the ongoing monthly revenue we collect from our customers was $27.42 in line with the $27.41 reported in the year ago quarter and up $0.10 sequentially. We expect these ARPU levels to remain stable.

On slide 9, you will see in the fourth quarter of 2007, direct costs of telephony services was $54 million, up from $52 million a year ago and roughly flat sequentially. Per line, this number was $7.11 down from $8.13 in the fourth quarter of 2006 and $7.30 sequentially as the company continues to benefit from call routing efficiency and scale. Cost of goods sold was in line sequentially at $17 million and direct margin for quarter increased to 67%.

On slide 10, you will see that SG&A, excluding certain charges was down $4 million sequentially to $77 million, and down $5 million from the year ago quarter. Included in the $77 million is $2 million dollars in noncash stock compensation expense. SG&A is at the lowest level in five quarters. Excluding certain charges, SG&A fell to a record low 36% of revenue.

Moving to slide 11, PMOI per line continues to increase, as subscriber additions cover a cost structure which is primarily fixed. For the fourth quarter, PMOI per line excluding certain charges reached a record level of $10.52 up from $7.64 in the fourth quarter of 2006. Incremental PMOI remains strong as well, increasing to $16.31 in the fourth quarter of 2007 which is up from $14.88 a year ago.

Moving to slide 12 now, marketing expense for the fourth quarter was $63 million, down significantly from $96 million in Q4 '06 and up from $62 million sequentially. Marketing expense as a percentage of revenue remains at a record low 29% for the second consecutive quarter down from 53% a year ago. Marketing costs per gross subscriber line edition of SLAC came in at $223, slightly better than our targeted range of $225 to $250. SLAC was down 27% from $306 in the fourth quarter 2006. The fundamental changes we have made in marketing have led to two quarters of improved efficiency in our cost of acquisition when compared to the first half of the year. While the cost of acquisition may fluctuate from quarter to quarter, for a variety of reasons, we believe SLAC is sustainable at these levels and expect full-year acquisition costs to remain within the $225 to $250 range for 2008.

On slide 13, we are very pleased to report that for the first time in the company's history, we generated adjusted operating profit. Excluding the impact, adjusted operating income was $6 million versus a loss of $53 million in the year ago quarter. Including charges, the number was a positive $3 million in Q4 '07. This was a significant accomplishment for the company and it reflects our ability to grow while effectively managing our costs. It is important to note that we achieved this one quarter ahead of plan and did so in a very turbulent year.

The company added 56,000 net subscribers down from 78,000 sequentially. Vonage ended with nearly 2.6 million lines in service and despite the improvements we have made in marketing efficiency, we will not accelerate our marketing spend until we see meaningful improvements in churn.

Turning to the balance sheet, slide 14, shows current cash and marketing securities and restricted cash at quarter end was $190 million, which includes $39 million in restricted cash used for routine business operations. The change in cash from the prior quarter was driven by settlement payments of $202 million, CapEx of $9 million, cash provided from operations of $15 million, and an $8 million increase in restricted cash. Excluding certain charges, this is the second consecutive quarter that the company has generated positive cash from operations.

Quickly summarizing our results for the year on slide 15, total revenues increased 36% to $828 million. Net loss excluding certain charges in 2007 was $90 million. GAAP net loss per share was $1.70 for 2007. PMOI, excluding charges, for the full year was $272 million up from $164 million in 2006. Adjusted loss from operations, excluding charges, was $46 million down from $238 million.

Vonage has $253 million in convertible debt which can be put to the company in December 2008. The company, with its financial advisors, is currently in discussions with several parties regarding a refinancing of the debt. While the result of such discussions cannot be predicted with certainty, Vonage believes it will be able to resolve its financial issues and meet its obligations. There can be no assurance, however, that Vonage will be table resolve these issues in the near term. Assuming we have no resolution by the time we file the annual report on form 10-K, we expect our that Auditor's Report will include a paragraph regarding the company's ability to continue as a going concern.

Vonage also announced today we determined it was necessary to restate the company's financial statements for the second and third quarters of 2007 in order to correct the amount of noncash stock compensation expenses recorded by the company for those periods. Accordingly the company's financial statements for such periods should not be relied on. Due to the departure of the former Chief Executive Officer, certain senior executives, and personnel impacted by the company's reduction in force during the second and third quarters of to 2007 there was a corresponding forfeiture of a large number of stock awards, and the company determined that the actual forfeitures as a result of these actions exceeded previous estimates. As a result, noncash stock compensation expense should have been reduced concurrent with the resignation of these employees and an adjustment of stock-based compensation as required under FAS 123R should have been recorded at that time. This restatement will not result in a change in the company's previously reported revenues, cash flows from operations or total cash and cash equivalents in the second and third quarter 2007 financial statements. Instead, the resulting reduction in noncash stock compensation expense will effect a decrease in SG&A of approximately $10 million in the second quarter and approximately $4 million in the third quarter of 20607.

Now, operator, lets open up the line for some questions

Thank you. (OPERATOR INSTRUCTIONS)

Our fist question today will come from Clay Moran with Stanford Group

Good morning. I have four questions. Let me just lay them out for you.

Can you comment as to whether you have seen any impact from the slowing economy, whether positive or negative? Could you also sort of explain where the capital expenditures went in the fourth quarter and is the current rate of CapEx about right going forward? On SG&A, will that continue to go lower? Can you give us any guidance there? And then lastly, can you give us any sense of a timetable for the refinancing of the debt? Thanks.

Okay. This is Jeff, and I think that John and I we will sort of share in getting those answers to you.

On your first question, the slowing economy, we have been watching very closely the impact that the slowing economy has had on a variety of businesses, including ours. As previously discussed, we currently have not had any impact or seen any direct impact from that. While still pretty early in the slowing, it is still unclear what might occur although the company does view that fact that in the future if this economy continues to slow or went into recession, it could bode more favorably for the company as more consumers look to save money. Since Vonage's primary message in the marketplace is around saving approximately $300 a year on your phone bill by switching to Vonage from standard operator, that might actually be beneficial to us. But at this time, we have not seen positive or negative effect from the slow down.

With regard to capital expenditure, I will let John take that one.

Sure, Clay.

CapEx is coming in around $44 million, breaks down around $23 million in hard assets and about $21 million in software solutions. At this time, trying to look into next year, I don't see that changing terribly much in terms of the dollars we will spend. I know you also asked about the fourth quarter CapEx, I don't have that break down in front of me but I will certainly follow up with you on it.

With regard to SG&A guidance, we are not yet prepared to give guidance involving SG&A, although as part of the company's strategy to fix fundamentals we have been very careful to continue to focus on streamlining our operations. While SG&A expenses will eventually go up in absolute dollars, we hope to expect to continue to reduce on this percentage of revenue through operating efficiencies.

On the last question, the refinancing timetable, I think as John has discussed, and John might want to weigh in here. As you know, we are discussing this item with not only our financial advisors, existing bondholders and potential new bondholders, and while we feel confident we will be able to get a transaction done to meet our obligations, we cannot assess an exact timing of the transaction, given the current debt markets.

Fair enough. We are working on it.

Okay. Thank you.

You're welcome.

(OPERATING INSTRUCTIONS)

Next, we'll hear from Michael Rollins with Citi Investment Research.

Hi, good morning.

Morning, Mike, how are you doing?

Good. I was wondering if you can talk about, a little bit more of the marketing and where the sales are predominantly coming from in terms of the internet channels, retail channel, how your retail kiosk program is doing and as you look to try to I think you want to stabilize churn first, but how do you perceive the distribution of this company evolving on a one to two year view with respect to where the majority of customers are going to come from?

Sure. Mike That's a good question.

Marketing has been really well; we've been revamping our programs the last two quarters. We will continue to look for gaining efficiency. We have moderated our expenditures across TV and online and have sort of brought that more into balance and continue to be supportive of our retail and kiosk channels along with our, the last channel which is our direct mail or alternative media.

Right now, surely, we do get a lot of general benefit from the TV campaign but as a direct attributed driver of subscribers, it is not the largest channel. The largest channel would be predominantly be in the area of online and alternative media but TV acts as an overall umbrella that really drives strong performance.

In the area of kiosk, we have completed the roll out of 50 kiosks across a number of markets. We have evaluating approximate performance of those. Like any new program, we are seeing very good success in certain markets and okay success in others. I expect if you look one to two years out we will will continue to invest in the kiosk program where we see that program working well in critical markets. And I expect that you will see us continue to be very supportive of retail as we continue to experience good subscriber adds from that channel.

In particular, in detail we have made some changes in the retail channel but putting additional products into that market. We talked about these products not too long ago but in regards to our whole house solutions which is the Vonage product bundled with either phone system or additional equipment that helps wire up the home, these are getting very strong traction in the retail space. You should continue to see us invest in putting revamped whole house solution into those channels which will now include the Vonage V-portal and Vonage-branded cordless phone system packaged as a single whole house solution.

I hope that gives you a good sort of a good high level and if you have any additional questions I will be glad to take them in this area.

Thank you very much.

Next is Pali Capital's Rich Greenfield.

Morning, rich.

Good morning, a couple of questions.

One you rolled out at least in the beta or an alpha stage, a number of new products related to online contact book, online VOIP access for someone who is traveling away from home. I am just wondering how much all of this investment is costing you, how you look at it being, is this just a churn reducer? Is there really a are revenue opportunity over time? It looks like you are give thing stuff away to current users today. I just wanted to think about what the the product strategy in terms of all these new innovations you have been rolling out.

And then, two, looking at the change in the competitive landscape if you think about a year ago versus today. SunRocket, obviously, has disappeared. It seems like you have fewer over the top VOIP providers such as yourself, on the other end, the cable operators seem to be more and more focused on their voice business even giving up part of their video business. I was just hoping you could comment on that competitive dynamic -- what you have seen changing and what are the negatives or positives that creates. Thanks.

Let's start with a couple of things there. One, you are correct, the company in the last few months actually in January, launched a formal alpha program we start showing off some new potential technology that someday may make its way into the mainstream product offering. Two that you had mentioned -- one is the Vonage contact book which is really much more than a contact book. The product strategy is your ability to really be -- attend to, I guess the iTune for Vonage. It allows customers to load up contact information into the systems, and be able to use a bunch of online capabilities to really control the communication experience. Today the contact book supports a bunch of features including the ability to set up 900 different speed dial numbers. We have a voice activated dialing program where you can talk to a system that can make phone calls for you. That's currently configurable from your Vonage line; we'll be expanding that to be configurable from your cellphone as well, as we continue to gain traction in that feature. There are things like click-to-call, there are things like the ability to set up conference calls and call blasts which allows you to record a message and send it out simultaneously to lots of players.

We think that during the alpha and beta trials, the reason why we run these states is to assess the customer demand for them to understand the user experience and then to decide what we might do in terms of revenue generation. I believe that the capabilities will generate upside in service level also as we move them from alpha to beta to production. Not everything will make production, but we suspect that a lot of the things you see in contact book will eventually make its way into general availability to all of our customers.

This strategy, it is not, it is not the first time we are doing this strategy. We did do this with Vonage visual voice mail, which we launched into an early alpha and then moved into general availability. That's picking up good traction in the marketplace.

There is one other feature that you didn't make mention of, and I do want to spend a moment talking about it. And that is the Vonage talk application which is an early alpha prototype what we might do with regard to allowing people to be able to make phone calls from their PC by leveraging the service they have with the company. That program is also yielding good traction and feedback. You are likely to see that program advance out of alpha and into beta and general availability sometime later this year. I suspect the combination of these capabilities again will ultimately drive incremental ARPU levels for our services.

That strategy of investment will continue as we continue to strengthen the core of our business as part of the critical strategy of being able to one, deliver new and exciting features that will help retain our customers as well as give us the ability to make those customers more profitable.

Just shifting gears to competitive landscape for a moment.

There's no doubt that the competitive landscape while dramatically altered the last two years. Two years ago, some people were quoting thousands of competitors in the over the top space of voice over IP. Today there's just Vonage. There's are a couple of others out there, but in reality, many of the other players who have either entered the space have exited the space; the largest well-known one that had a relatively large subscriber base was SunRocket, which did indeed exit, But quite frankly, others like AOL who has also entered and exited the space as a representative example.

Having fewer competitors going out and try to go compete on price or to put noise into the marketplace has had a positive effect on Vonage because they're no longer there and Vonage is now seen as the go-to company as a alternative to (inaudible) services and an alternative to cable services, to the extent that a) you don't want the Triple Play, or b) you may be a satellite customer, in which case the Triple Play is really not viable option for you.

With regard to overall competition with the cable industry, the cable competition has increased dramatically in the past two years, I think that the company got caught behind the gun a little with that a year ago, as we saw that our marketing campaigns weren't effectively communicating to the customers we were seeking and over the last really two plus quarters we have changed those campaigns and they're much more effective. They highlight the difference between us and cable and we have much more sophisticated at targeting the appropriate customers both cable and video customers and non-cable video customers which are two very different demographics and provide two very different customer profiles but both are successful targets for us in terms of going through global market segmentation and attracting customers to us. And the best measurement of that activity is really been in the SLAC number as you know, SLAC for the third quarter came in at 206 and 223 last quarter; both numbers below our typical target of 225 to 250.

And what is the actual pitch now, you know, when you are, from a marketing message, how do you want to be positioned of why somebody takes video and data from a cable operator, why should they be taking Vonage versus just simply the triple play offer they're seeing advertised?

Sure. They're, about the nice thing about local market segmentation is you don't have one generic pitch but you have lots of pitches in the marketplace. You really need to talk to right customer.

Vonage has at least a MyVonage strategy which really talks to users in different types of families. If you are in south Florida and you are an international user we will talk to you about international unlimited long distance plans to South America and that's a very important pitch to you. It is a savings money, it's a lifestyle pitch and we get that customer. Increasingly if you are a pro-sumer, one focused on optimizing your time, busy mom, you've got kids, you don't have time to track down voice mail messages and dial in to see if someone left you a message. We target you with a not only do you save a lot of money but hey you can come out and get Vonage visual voice mail and have your messages not just emailed to you, not just listen to them, but you can now also go out and read them. I think those are two good examples of how to take the futures set that we offer and then make it competitive. That ties back nicely to your original question about Vonage alpha site about the contact book product and some things we are working on with the Vonage talk client. Those will be able to target customers who are on the go, small businesses, where they have a need to communicate both from their home phone and also want to communicate on the road when they're traveling both for leisure or for business, or quite frankly, could just be at the office and just want to use the PC-native clients. These are pretty exciting capabilities.

Thanks.

You are welcome.

(OPERATOR INSTRUCTIONS)

We will pause for just a moment.

Operator, if there are no more questions I would like to wrap up at this point.

Please go ahead.

Great. Excellent.

I want to thank everyone for, first for joining us today and of course for the questions you gave us. I want to close with my thoughts on our progress over the course of 2007 and my expectations for 2008. It has been ten months since I returned as interim CEO and I am pleased with the progress that we have made. When I came back in April we announced the broad restructuring of our business, and we put priorities and initiatives if place to grow and achieve profitability. At that time, we believed the initiatives we laid out would strengthen the financial position and bring us to positive operating adjusted income and we made it happen.

Over the course of the year, we made many changes; the team is stronger than ever, we brought in a new Chief Marketing Officer, Jamie Haenggi, and recently added Mike Sears to lead customer care. We've brought in (inaudible) just to name a few. We are rolling out a new string of products and features which we discussed today that will increase loyalty, increase ARPU, and differentiate us from our competitors. I am confident in the business, and our ability to grow profitably.

There are clearly challenges ahead. We need to tackle churn and bring it back down to historical acceptable levels and we need to refinance the debt. These two issues take top priority for our team. Consistent with our progress in 2007, I believe we will get it done. It is about performance and execution, and I look forward to providing you with an update as we progress throughout the year.

And thank you for joining us today on our call.

Once again, thank you all very much for joining us today. That does conclude the presentation. Have a great afternoon.