Venture Global Inc (VG) 2008 Q2 法說會逐字稿

Good day, everyone, and welcome to the Vonage Holdings Corporation second quarter 2008 earnings conference call. Today's conference is being recorded. At this time, for opening remarks and introductions, I would like to turn the conference over to Ms. Leslie Arena, Vice President of Investor Relations. Please go ahead, ma'am.

Thank you operator. Good morning and welcome to our second quarter 2008 conference call.

Speaking on our call this morning will be Jeffrey Citron, Chairman, Marc Lefar, Chief Executive Officer, and Jerry Moloney, Senior Vice President of Finance. Our CFO, John Rego, is unable to be here today due to personal reasons. Jeffrey will provide opening remarks, Marc will review the company's accomplishments for the quarter and Jerry will review our financial results. The slides that accompany this discussion are available on the Investor Relations website. At the conclusion of our prepared remarks, we will be happy to take your questions. As referenced on slide two, I would like to remind everyone that statements made during this call that are not historical facts or information may be forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These and all forward-looking statements are based on management's current beliefs and expectations and 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.

During this call, we will be referring to non-GAAP financial measures. A reconciliation of the non-GAAP measures to most directly comparable GAAP measures is available in our earnings release which is posted on the site. And now, I will turn the call over to Jeffrey.

Thank you, Leslie. Good morning everyone, and thank you for joining us on our second quarter earnings call. Let me begin by saying that I'm very pleased to have Marc Lefar on the call with us today. Just last week we announced that Marc joined Vonage at Chief Executive Officer, stepping into the role that I have been serving on in an international rim basis since April 2007. At that time, more than a year ago, the company was in the midst of a crisis. The company's prior CEO had stepped down, we lost a major litigation with Verizon and were partially enjoined. The business had become less efficient and we were burning cash at a high rate. Since that time, we have settled all of our material IP litigation including the cases with Verizon, AT&T, Sprint and Nortel. We reduced our cost structure, bringing SG&A as a percentage of revenue down from 46% in Q1 '07, to 34% today, and we built what I believe to be a stronger, more effective team to operate the business.

The financial performance of the company's operations have improved and we're now generating positive adjusted operating income and cash from operations. So now, with the announcement of signing the commitment letter to refinance the convertible debt, the timing is right to bring in a permanent CEO to take the business to the next level of growth and performance. I believe there is no better person than Marc to step into the business and lead Vonage at this time. He possesses a wealth of experience in the telecom industry and a track record of delivering results. Marc has held senior positions at Cingular Wireless, Cable and Wireless, Verizon Wireless and Proctor & Gamble. During his tenure at Cingular, the company's customer base more than tripled and subscriber turn declined by nearly 50%. I feel confident that his industry expertise, coupled with deep level of marketing experience and executive management skills will help the company realize future growth and profitability. He has my full support along with that of the board of directors and the team here at Vonage. I have assumed the role as non-Executive Chairman and will serve in a consultative role to Vonage to assist Marc in defining the company's long-term vision and strategy. I am very confident that Marc's focus as Chief Executive Officer and my increased attention on my role as Chairman will best serve our customers and shareholders. Now I'd like to pass the call to Marc.

Thank you, Jeffrey. Good morning everyone. I'm delighted to be here and I'm thrilled to be joining at a time of such exciting change and tremendous opportunity for the company and the industry.

Since the company's inception, the Vonage team has changed the way people think about communications. This is a company of energetic, hard working men and women. They have welcomed me warmly. I'm looking forward to helping this talented team realize the full potential of our business. Although it's been just over one week since I joined Vonage, the senior team is already helping me see opportunities to improve the competitiveness and performance of the business. In the past several days, I've been meeting with front line employees, listening to customer calls, and engaging in a series of deep dive discussions on the key drivers of our business. These sessions are part of a comprehensive effort to assess our business plans, core operations, and customer health. I will report back to you on the next quarterly call with my perspective on the company's existing plans and strategies. I expect that this will include improvements in the clarity of our message, the yield from our marketing investments and satisfaction with the end-to-end Vonage experience. Before I go into a discussion on the quarter, I'd like to thank Jeffrey and the team for what they've done during Jeffrey's tenure as interim CEO. Clearly, the last year and-a-half has been challenging for the company. As a result of Jeffrey's leadership, the business' core operations are stronger. I'm looking forward to working with the team to further our progress. Jeffrey, thank you.

Now, let's move to the results of the quarter. Beginning on slide three. The quarter was one of both progress and challenge. We saw meaningful progress in the financial performance of our core operations. The company reported solid performance in a number of key financial metrics. We delivered double-digit year-over-year top line growth and generated positive adjusted operating profit of $12 million. Premarketing operating income in the quarter reached a record high of $87 million. The company continued to effectively manage its expenses, with SG&A declining in absolute dollars and as a percentage of revenue. These declines are on both a sequential and year-over-year basis. Net loss for the quarter narrowed significantly to $7 million or $0.04 per share, down from a loss of $23 million or $0.15 per share a year ago. Solid progress.

Moving to slide four, churn, a top priority for the company, declined sequentially to 3% in the second quarter, from 3.3% in the first quarter. And while our actions have led to improvements, we realize there is still a great deal more to be done. Some of the initiatives implemented in customer care over the past several quarters have contributed to the recent churn improvements and I'd like to highlight some of these specific programs. The recent implementation of a new customer relationship management system has already led to higher customer satisfaction and improvements in first call resolution, or FCR. Customer satisfaction increased to 84% in the second quarter, up from 79% in the first quarter. At FCR, which is the percentage of customers -- customer issues we resolve on the first contact, is nearly 72%, up from 64% sequentially. In addition, we implemented new call routing software that allowed us to optimize staffing levels in our call centers. As a result, average speed of answer is now less than 30 seconds.

Beyond these initiatives, we're investing more heavily in the training of agents and supervisors. On average, during the past 90 days, our front line representatives received an extra 2.5 hours per week in training. The training focused on the use of new desktop technology aimed at improving call handling time as well as extra coaching time for our representatives. Beyond this, we improved our hiring criteria so that new representatives can be more effective, faster. I'm encouraged by the directional improvement in churn during the second quarter. The leading indicators so show promise. But we must remain laser-focused on further improvements. We will continue investing resources to drive these reductions. There is much to be done. The growth in premarketing operating income and operating cash flow, as well as the improvements in churn suggest solid progress. There are, however, areas of the business where we have not performed as well. Despite improvements in churn, customer net additions were below our expectations, coming in just above flat for the quarter.

Moving to slide five, let me talk a bit about the gross line additions. As the company discussed on last quarter's call, we are focused on improving the quality of the customer base. Specifically, this means adding customers with higher average revenue and a lower propensity to churn. In an effort to accomplish this goal, the company made changes in the level of marketing spend and the mix of media across vehicles. While those efforts have resulted in sequential improvements of 30% in early life churn and more than 10% improvement in return rates, we underestimated the overall impact on gross line additions. We did expect some softening, but the impact was larger than anticipated. The team quickly identified the impact and made additional adjustments mid-quarter. And although gross line additions did bounce back, it was not enough to offset the early softness. As a result, in the seasonally slower second quarter, gross line adds indexed at only 98% versus the prior year and sequentially, our acquisition cost per subscriber line rose significantly. We simply must improve the yield on our marketing investments in order to maintain our competitiveness. Updating projections that we had given last quarter, we expect to invest approximately 28% to 30% of revenues on marketing in the third quarter. I will personally be working closely with the marketing organization and our agencies in the coming weeks and months with the goal of further enhancing our messaging and driving efficiency.

So to sum up the quarter on slide six, our financial results were solid. We continue to grow cash from operations, delivered record premarketing operating income and continued to show declining SG&A as a percent of revenue. Additionally, we made progress on improving the customer experience and reducing churn. We have a great opportunity to generate a higher return for every marketing dollar we spend and of course, churn reduction will remain the company's primary focus. Before I hand it over to Jerry to go through the detailed numbers, I'd like to take a moment to mention last week's launch of Vonage Pro. Vonage Pro is a unique digital voice offering which includes a soft phone that allows users to use their home number from any desktop or laptop PC. Additionally, it includes unlimited residential voice, Visual Voicemail and a wide array of features. Over time, the company expects to continue to bring innovative products and features to the market in order to further our competitive differentiation and address the needs of key segments. Let me also make a brief comment about our refinancing efforts. Jerry will talk about the transaction in more detail.

As everyone is affair, the difficulties in the credit markets have made it extremely challenging for companies to gain access to capital. Vonage, however, thanks to the tremendous efforts of John Rego and his team, has taken a major step toward completing the debt refinancing two weeks ago. With the announcement that we signed a commitment letter with Silver Point, establishing the terms for up to $215 million in private debt financing. We believe the first close will take place shortly after the special meeting of stockholders in the third quarter. In closing, let me say that we do have our share of challenges, but I am truly excited and optimistic about the opportunities for a bright future. I'm looking forward to providing you with updates as we progress throughout the year. Now I'll pass it to Jerry to review the financial results for the quarter. Jerry?

Thanks, Mark.

Beginning with slide seven, on the top line, total revenue for the quarter grew to $228 million, an 11% year-over-year increase and a 1% sequential increase from $225 million. Year-over-year growth was driven by subscriber line additions. Net loss for the second quarter of 2008 narrowed significantly to $7 million, or $0.04 per share, down from $23 million or $0.15 per share a year ago. Breaking out the components of revenue on slide eight, you'll see that telephony services revenue grew to $219 million, a 9% improvement in Q2 '07. Average revenue per line was $29.04, up from $28.38 in Q2 '07 and $28.85 sequentially. Average monthly telephony services revenue per line, which is the ongoing monthly revenue we collect interest our customers, was $27.92, up from $27.63 reported in the year-ago quarter reflecting a benefit from the reduction in the period over which activation fees are amortized. On a sequential basis, average monthly service revenue per line rose $0.05 from $27.87. We continue to expect ARPUs to remain steady. Over time, as we launch new and enhanced services such as Vonage Pro, we anticipate ARPU will increase.

Moving to slide nine. In the second quarter of 2008, direct cost of collecting services was $57 million, up from $52 million a year ago. The Q2 '07 number was abnormally low due to a US tax refund. Sequentially, direct cost of telephony services was flat. On a per line basis, direct cost of telephony services was $7.22, up $0.01 from $7.21 in the second quarter of 2007 and down from $7.26 sequentially. Cost of goods sold fell to $19 million, from $22 million in the prior quarter as a result of lower gross line additions. Direct margins were 67% in the second quarter, up from 65% sequentially.

Moving to slide 10. SG&A as a percent of revenue continues to fall. Dropping to a record low of 34% from 38% a year ago and 35% last quarter. SG&A of $78 million fell $1 million sequentially and was flat year-over-year. Slide 11 highlights our premarketing operating income which reflects cash generated from our existing customer base. PMI increased to a record high $87 million or $11.15 per line this second quarter, up from $56 million or $7.69 in the year-ago quarter. Incremental PMI per line was $16.43 in the second quarter of 2008, up 9% from $15.08 the prior quarter.

On slide 12, marketing expense for the second quarter came in slightly higher than forecast at $65 million. This was down from $68 million in Q2 '07 and up from $61 million sequentially. Marketing expenses as a percentage of revenue fell to 29% in the second quarter from 33% a year ago and up from 27% in the first quarter of 2008. Cost of acquisition increased to $283 in the second quarter, up from $216 in the first quarter of 2008. As we discussed last quarter, we anticipate an increase in second quarter cost of acquisition, due in part to seasonality. In addition, the timing and mix of new investments further drove drove up acquisition costs. Gross line additions for the quarter were 231,000, down from 237,000 year-over-year. Net line additions were 2,000. The company ended the quarter with more than 2.6 million lines in service. On slide 13, for the third quarter in a row, we generated adjusted operating profit. Adjusted operating income was $12 million versus a loss of $18 million in the year ago quarter. Turning to the balance sheet on slide 14, cash, marketable securities and restricted cash at quarter end was $192 million, which includes $42 million in restricted cash used for routine business operations. The increase of $2 million in cash in the prior quarter was driven by cash provided from operations of $14 million, partially offset by capital expenditures of $12 million.

Moving to slide 15. Now I'd like to spend some time discussing the commitment letter that the company filed with Silver Point related to the refinancing of our convertible debt. This is a significant step along the way to complete the refinancing and we are pleased with our progress, particularly in this difficult credit environment. Intend to use the net proceeds from the financing plus cash on hand to repurchase our existing convertible notes which can can be put to us on December 16, 2008, out of principal amount outstanding of approximately $253 million. Let me walk through the details of the deal.

The commitment letter establishes the terms and conditions for an initial $185 million private debt financing. Silver Point has committed to allocate $125 million of this amount and is conditioned to closing of the initial private debt financing that we identified other lenders that will commit to provide up to $60 million. Silver Point has also agreed subject to certain conditions to use commercially reasonable efforts to assemble a syndicate of lenders to provide up to $30 million of incremental private debt financing. The company and Silver Point are currently negotiating definitive documentation for the financing, while we are concurrently working diligently toward satisfying all the expected closing conditions. In addition to obtaining commitments from lenders for $60 million of the private debt financing, those conditions include holding a stockholders meeting to obtain stockholder approval of all matters related to the financing in accordance with New York Stock Exchange rules. The stockholder meeting is scheduled for August 20, 2008. As required by the financing documentation, on July 30, 2008, launched a tender offer for the company's outstanding convertible notes, which include payment of accrued interest would require approximately $257 million in the aggregate, assuming tender of all convertible notes.

If the closing conditions of financing are met, we anticipate proceeds of $185 million under the initial private debt financing less expenses related to the financing of $21 million to $24 million, approximately $3 million of which was paid prior to June 30, 2008, to be used to repurchase convertible notes. Accordingly, we'll need to satisfy up to $93 million from cash on hand to satisfy obligations to repurchase existing convertible notes that may be tendered. At June 30, 2008, we had approximately $150 million of unrestricted cash. For the full quarter, after the closing of the private debt financing, assuming no material increase in the interest rate environment, assuming no material increase in the interest rate environment, we expect that our quarterly interest will be slightly higher than the second quarter of 2008 and total interest expense will more than double. At present, we anticipate satisfying all closing conditions in closing our private debt financing in the third quarter of 2008. We look forward to successfully completing this funding.

Now, operator, please open the line for questions.

Thank you. The question-and-answer session will be conducted electronically. (OPERATOR INSTRUCTIONS). We'll take our first question with Michael Rollins with Citi Investment Research. Please go ahead.

Hi, good morning. Just wanted to ask a quick question. In terms of the marketing strategy, as you look at your competition with cable and even the incumbents to some extent, one of the advantages they have is that they send people out to install your telephone service for the customer. Can you talk about how that's impacting the competitive environment for you and how you're going to structure the product to continue to make it easier for customers to install or alternatively, would you reconsider getting more aggressive with the professional installation option? Thanks.

Thanks, Mike. It's Mark. So let me talk about competition more broadly, first off and then talk more specifically about the opportunity for professional install. As I've talked in calls last week with a number of you, it is extremely attractive overall for multiple competitors to grow in the market as it is today. With roughly 60 million Broadband users, only 25% of them using digital voice, there's an incredible upside market potential in which we expect three or more competitors to be able to grow very profitably over time. You're certainly going to have the cable folks, you're going to have the telcos and we believe Vonage will be a strong third. Customers want choice, they want flexibility, and we provide feature sets as well as choice that the bigger guys simply don't provide. Relative to professional installation, it is something that we have done and continue to evaluate in order to optimize and we are evaluating partnerships to consider whether it's something we can expand and should expand. Of course, we have to balance that against the cost of doing that and the customer's willingness to pay. More specifically, though, I think the solution lies in improving our overall end-to-end customer experience and delivering products that are much more intuitive and seamless in terms of their ability to purchase and then install in an individual's home on their own. So we're pursuing both paths.

What I'll also tell you is we do not believe that this is something that has been an impediment to growth in any significant way, although it's only one week that I've been in the job, I've spent a tremendous amount of time on the phones with our call center representatives and front line employees, and while competition is certainly nothing to be underestimated what I hear more frequently is that we have opportunities to improve our overall experience, and when we lose people to competition, it is generally a function of having disappointed them some other way in terms of our ease of doing business them. And again, we've made improvements in the recent quarter and I continue to believe that we can invest driving churn lower.

So Marc, just to quickly follow up. What do you think as you do is-- as you do the call to action and the promotions and I'm sure you've seen a lot of what Vonage has done over the last few years. In your mind, what is the biggest barrier for the customer picking up the phone or going on to the internet and ordering the product? Is it education? Is it some facet of the product that they don't understand? Where do you think the biggest hurdle is in terms of why more customers don't pick up the phone to activate the service?

Great question, Mike. Over the next 60 days, I'll be spending a bit more time to make sure I've got facts and data to support what might be my initial belief. My initial belief and hypothesis speaks to -- I think there's an awful lot of people who simply don't really understand what the product delivers and what those benefits happen to be and how they can use it. I don't think they understand the flexibility of having a number that can work any place across multiple different vehicles, from your PC to your phone, and we need to be able to deliver that story in the context of competitiveness so people understand both the feature sets we provide that don't exist when you buy it from an MSO, and also the true value proposition that exists. I think people are confused about the true value that's provided in our stand-alone offers versus what is perceived as benefit in some of the bundles which is, frankly, many hidden fees and costs and promotions that when all things are considered on an apples-to-apples basis, really provide a premium price product without significant value. So I think we're going to have to attack all of those in our messaging. When I report back next quarter, I'll give you much more specificity in terms of those things that I've got facts to back up and what I think we're going to do about it.

Thank you.

Next question, operator, please.

(OPERATOR INSTRUCTIONS). We'll take our next question with Chris Cook with Zazove Associates. Please go ahead.

Yes, I'm sorry, I missed the -- what are the costs of financing, this financing again? I think you said $24 million?

Yes, it includes the fees that are paid to Silver Point for arranging the deal as well as all of the legal professional and other fees that will be incurred to complete the closing.

Okay. So none of that is non-cash, it's all cash?

Yes.

Alright. Thanks.

Next question, please.

(OPERATOR INSTRUCTIONS). There are no further questions. I would like to turn the conference back over to Marc Lefar for any additional or closing remarks.

Well, thank you. So to wrap up, I would really like to express my enthusiasm for the opportunity ahead. We do have tremendous, tremendous growth potential. I want to thank Jeffrey for the significant contributions that he's made during this time as interim CEO, and I look forward to his insight and counsel going forward and I'll report back to you the next quarter after I've had a chance to complete my evaluation of the business, our priorities and strategies going forward. Thank you and have a great day.

Thank you.

Once again, ladies and gentlemen this will conclude today's conference. We thank you for your participation. You may now disconnect.