Venture Global Inc (VG) 2011 Q2 法說會逐字稿

Good day everyone, and welcome to the Vonage Holdings Corporation second quarter 2011 earnings conference call. Just as a reminder, today's call is being recorded.

At this time for opening remarks and introductions, I would like to turn the call over to Ms. Leslie Arena, Vice President of Investor Relations. Please go ahead Ms. Arena.

Thank you. Good morning and welcome to our second quarter 2011 earnings conference call. Speaking on the call will be Mark Lefar, Chief Executive Officer, and Barry Rowan, CFO and Chief Administrative Officer. Mark will discuss the Company's progress, new product announcements, and growth initiatives. Barry will discuss our debt refinancing in detail, and review our financial results. Slides that accompany Barry's discussion are available in the Investor Relations website. At the conclusion of our prepared remarks we will be happy to take your questions.

As referenced on slide two I would like to remind everyone that statements made during this call that are not historical facts or information may be forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These and all forward-looking statements are based on management's current beliefs and expectations and depend on assumptions or data that may be incorrect or imprecise.

Such forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially. More information about those risks and uncertainties is highlighted on the second page of the slide, and contained in Vonage's SEC filings. We caution listeners not to rely unduly on forward-looking statements and disclaim any intent or obligation to update them.

During this call we will be referring to non-GAAP financial measures. A reconciliation to comparable GAAP measures is available on the IR website. Now I will turn the call over to Mark.

Thank you Leslie, and good morning everyone. In addition to posting another quarter of record high earnings, Vonage achieved several major milestones in the past week, including the introduction of two new products, the announcement of significant new distribution partners, and the refinancing of our debt at an interest rate below 4%.

Let me start with the product headlines. In the early morning hours, we launched our second new product in as many weeks. Time to Call, a standalone mobile application for the iPhone was released in 87 countries. Time to Call allows customers to purchase a call and talk for up to 15 minutes to landlines and mobile phones in 100 countries for $0.99 or $1.99, billed instantly through iTunes. It is absolutely the easiest way to make low cost international calls on the go. And to promote this introduction around the globe, we are providing a free international call to everyone that downloads the application.

This introduction follows last week's launch of Vonage Extensions, which allows US customers to extend their existing calling plan to any phone, including cell phones. In addition to these new product launches, we have also expanded the availability of our core service, through distribution agreements with TracFone, Best Buy, Kmart, and Sears. I will provide more details on our new products and our distribution expansion in a few moments.

First, let me spend some time reviewing our debt refinancing and second quarter results. During the course of the year, we have successfully executed on our two-part strategy to first prepay and then refinance our debt. By the end of June, we had reduced our debt balance to $130 million, and today we announced that for the second time in eight months, we have refinanced our debt at substantially improved rates and terms. Our new debt includes an $85 million three year term loan, and a $35 million revolver with interest at less than 4%. The combination of less debt and a significantly reduced interest rate lowers our annual interest expense to approximately $6 million.

The cumulative effect of our two refinancings is dramatic, resulting in approximately $43 million in annual interest expense savings, or $0.19 per share. As a point of reference, it was less than a year ago that we were paying 16% and 20% interest rates on debt, that we put in place during the credit crisis. Today our new rates are less than one-fourth of those levels. This refinancing is clear evidence of the transformation of Vonage.

Our financial results for the second quarter were strong, we achieved record net income of $22 million, or $0.10 per share. Record high EBITDA of $44 million, and positive free cash flow of $37 million. This marks the 14th quarter out of the last 15 in which the Company posted record high EBITDA, and it is our sixth consecutive quarter of positive free cash flow. On relatively flat revenue, we achieved the EBITDA gains through operational improvements in most categories, with the largest gains coming from SG&A and cost of telephony services. SG&A declined 4% from the prior year, driven largely by a double-digit reduction in customer care cost per line. Importantly we continue to reduce customer care costs while improving service levels, as measured by first call resolution, average handle time, and customer satisfaction.

In addition, we reduced cost of telephony services by 8% over the prior year, more than offsetting the costs from our increasing base of Vonage world subscribers. The reduction in costs was driven by lower termination rates, both internationally and domestically, and through vendor consolidation of E911 services. Although we increased our marketing investment by $3 million, or 6% sequentially, the increase was not enough to offset the nearly 20% increase in marketplace pricing for television media, which was accompanied by very limited inventory availability. While the second quarter is an historically expensive quarter, the number of advertisers coming back into the marketplace, along with audience ratings make goods, led to an even tighter market than we anticipated. As a result, our media rates were lower than planned, which negatively affected gross line additions.

GLAs of 158,000 coupled with flat sequential churn, resulted in the loss of 11,000 lines for the period. Although media pricing remains higher than in the first quarter, we have seen more reasonable pricing and inventory availability in the third quarter thus far. While second quarter net additions were below our expectations, we are encouraged by our continued progress attracting international callers to Vonage World, our unlimited flat rate calling plan. Vonage World subscribers now represent 45% of our base, and have driven the 8% increase in gross line additions for the first half of the year. With the improved value proposition of extensions, the impact of new advertising airing in the next few days, and expanded distribution we expect GLAs to increase from the second quarter level. For the full year 2011 we expect GLAs to be higher than 2010.

As I mentioned, we are expanding our reach by significantly increasing our retail presence and through selective distribution agreements. We have recently signed new distribution agreements with Best Buy, Kmart, and Sears. These agreements build on our existing distribution with WalMart, Frey's, and Microcenter. Over the next few months we will double our retail footprint to 6,000 locations, with our focus on international calling segments, and the Latino market, we believe that these partners are a great strategic fit. We also announced yesterday morning that we have entered into a distribution agreement with TracFone, as the largest provider of prepaid cellular services in the country, with 18 million subscribers, including the TracFone, Straight Talk, and NET10 brands, TracFone will further add to our marketing presence by promoting a unique Vonage home service offer through co-branded fulfillment channels directly to its user base. Working jointly with TracFone, we will test different marketing vehicles and messaging in the coming weeks.

In addition to our partnership and retail agreements, during the past six months we have increased the number of community-based sales teams who sell Vonage services directly to consumers from four to 30. Although they currently contribute a small portion of total gross line additions, these teams have delivered strong results in ethnic calling segments, and now sell in 18 markets in ten states. Our expanded distribution is direct evidence of the first plank of our three-part growth strategy to drive market share in the US for international long distance.

The second plank of our strategy is to meet the emerging needs of mobile and connected device users, and the third as we have talked in the past is geographic expansion. The launch of extensions which is now a core element of our service improves our value proposition by extending Vonage service beyond the walls of the home to any other phone, including mobile for no additional cost. Extensions is clear evidence of our strategy to meet emerging mobile needs and to improve our share of the US international long distance market, now when you sign up for Vonage service you can use your international calling plan virtually anywhere.

We believe that this will be a loyalty builder for our base, and we expect the prospects who couldn't get over the hurdle of spending $25 each month for a home-only service will reconsider. Although we are only one week into the release of this new service, 75,000 customers have already registered to use Extensions. Advertising, direct mail, and digital marketing efforts are just beginning this week to prospects. In several weeks we will announce the availability of additional Extensions for a monthly recurring fee, as well as iPhone and Android applications that enable one touch calling.

Time to Call which some members of the press are already referring to as an international pay phone that you can carry with you, launched in 87 countries early this morning. Supporting our strategies for both mobile and international expansion Time to Call is the first downloadable app that allows pay per call international dialing. It is by far the easiest international application available. Unlike other apps, there are no requests for usernames, passwords, or any personal information. We don't change the price if you call to a mobile phone, and there are no hidden charges or recurring commitments or subscriptions. This combined with direct billing on iTunes, makes the services truly frictionless, and the value is exceptional.

To support the launch of Time to Call, everyone that downloads the apps in all 87 countries will receive a free international call so that they can try it out. The service is available on Wi-Fi globally, and on 3G in the US and Canada. Global expansion of 3G will be on a country-by-country basis, and an Android application is in the works. In the coming months and throughout 2012, you can expect additional enhancements to these products, and new service launches that continue to support our growth strategies.

In summary, we are pleased to report another quarter of solid progress at Vonage. We refinanced our debt at very attractive terms. We achieved record high net income and EBITDA. We executed on our mobile and international growth strategies with the introduction of two exciting new products, and while it may take some time to build momentum in our new distribution outlets, they will combined with our improved value proposition, help to drive customer additions going forward.

As we look to the balance of the year, we are on track to deliver higher gross line addictions in 2011 than in 2010, and continue to expect churn to be relatively stable in the mid-2% range. We continue to focus on driving operational and cost improvements, and we reiterate our guidance of achieving EBITDA at least $165 million in 2011, with our growth initiatives beginning to contribute meaningfully to revenue by the end of the year. Now I will hand the call off to Barry.

Thank you, Mark. Let me add my thanks to each of you for joining our call this morning. I am pleased to review the terms of our refinancing and second quarter results with you. First, we are thrilled to have closed on our second debt refinancing in eight months at extremely attractive pricing and terms. The new $120 million credit facility carries a current interest rate of LIBOR plus 3.5%, it is prepayable at no cost, and provides ample flexibility to operate the business.

As Mark mentioned through a combination of these two refinancings, we will have reduced our interest expense from $49 million in 2010, to $6 million annually from this point forward, which equates to roughly $0.19 in earnings per share. This is a significant achievement made possible by the strong performance of our underlying business.

We also reported another quarter of strong financial results. We achieved record high net income excluding adjustments, more than doubling it over the prior year, and generated record high EBITDA. We accomplished these results even as we increased our marketing spend to offset seasonally higher advertising costs, prepared for the launch of two new products, and absorbed the higher international termination costs associated with an increase in Vonage World subscribers. We also benefited from sharply lower interest expense following last December's debt refinancing. The strong financial performance of our core business provides a solid foundation on which we can build our future.

Beginning on slide three, let me now walk through the details of the refinancing. As most of you know, fixing the balance sheet the has been a top priority over the past year. The process began in 2010 with a focus on replacing our high cost restructuring debt put in place back in 2008. That debt carried interest rates of 16% and 20%, contained highly restrictive financial and operating covenants, and was highly complex, including three liens and a convertible feature. In 2010 we paid off $41 million of that debt at par, negotiated the release of more than $40 million in cash from vendors, and just this past December announced a comprehensive refinancing.

December's refinancing resulted in a $200 million prepayable term loan with interest rates at 9 .75%. While this was an enormous improvement, we were committed to driving further interest rate savings through our two part strategy of paying down the existing debt ahead of schedule, and seeking improved financing terms based on our sustained financial performance. In March of this year we began aggressively prepaying the $200 million loan, and by June had paid off $70 million, including $10 million of scheduled amortization. This reduced our term loan balance to $130 million, the level we had targeted to achieve by the end of this year.

Our sustained operating performance combined with this lower level of aggregate debt, enabled us to access the commercial bank market in the second refinancing. The new $120 million facility includes an $85 million three year term loan and a $35 million revolver. The prior $130 million debt was retired by using $30 million of cash from our balance sheet, plus the $85 million in proceeds from the term loan, and $15 million drawn from the revolver. The interest rate on our new debt is LIBOR plus 350 basis points initially, dropping to LIBOR plus 325 basis points if total leverage is less than 0.75 times, which we expect to be at when we report third quarter results.

At current LIBOR rates, this reflects a decline of more than 600 basis points from the 9.75% rate in the previous debt. Through this combination of lower debt and a significantly reduced interest rate, our annual ex-pence is now expected to be $6 million at constant LIBOR rates. Importantly, the loan also provides us with the flexibility to pursue a range of financial strategies in the future. Let me highlight just two of these areas.

First the facility provides access to additional debt through the $35 million revolver,a permitted basket up to $60 million of [periperci] debt, and an accordion feature that increases the periperci debt basket dollar for dollar, as we pay down the new term loan. Second, unlimited stock buybacks are permitted under the facility provided that total leverage is less than 1.25 times. We are pleased to have this financing provided by a high quality group of banks led by JPMorgan.

Let's now move to a discussion of the financial results for the quarter. Turning to slide four, net income excluding adjustments more than doubled, up 114% from the year-ago quarter, growing from $12 million to $25 million. This significant improvement was driven by a 28% increase in income from operations up $7 million, and a more than 50% reduction in interest expense,as we saved $7 million over the prior year. Slide five indicates that our record EBITDA of $44 million was up 8% from the prior year, and 1% sequentially. As Mark mentioned, we have now reported record high EBITDA in 14 of the last 15 quarters.

Moving to slide six. Revenue declined a modest $2 million, or 1% sequentially, and $7 million from the prior year, due to a $3 million reduction in deferred acquisition costs, and the accounting for legacy activation fees which do not impact EBITDA. In addition, customer equipment and shipping revenues declined $3 million, reflecting the Company's decision to no longer charge these fees to customers. Service ARPU declined sequentially from $30.14 from $30.23, as gains from our improved customer mix were offset by the decline in nonoperating revenues, including activation fees and slightly lower USFs. Service ARPU declined from $30.71 in the prior year, due primarily to the previously mentioned accounting impact associated with the elimination of activation fees and lower USFs.

Turning to slide seven, we are ahead of plan in reducing costs of telephony services, or COTS, one of the largest components of our cost structure. Domestic COTS declined by 42% from the year-ago quarter, and the consolidation of our E911 vendors, which we referred to on prior calls, resulted in a more than $1 million reduction from the second quarter of last year. These declines coupled with continued reductions in international long distance termination rates, more than offset the anticipated growth in ILD minutes. As a result, we reduced total COTS to $58 million from $63 million in the year ago quarter. On a per line basis, COTS declined 8% to $8.03 from $8.72 a year ago, and $8.34 sequentially.

Looking toward the back end of the year we expect COTS to increase due to the impact of higher international calling related to Vonage Extensions. As Mark mentioned, this new product substantially increasing the value proposition to world customers, as they will be able to make international calls from either their landline or mobile phones. We expect a portion of these cost increases to be offset, as we continue to implement structural cost reductions resulting from our investment in next generation call routing infrastructure and peering. Cost of goods sold declined $4 million from the prior year, due to lower device costs and activation fees. We have reduced device costs to under $30 from $40 in less than two years, and expect to reduce costs by nearly another 10% by year end. This savings along with lower COTS improved direct margins to 69%, up from 66% a year ago, and 68% sequentially.

Moving to slide eight. Our focus on driving efficiency led to further reductions in SG&A which declined to $58 million. This was down 4% from the second quarter of 2010, largely driven by improvements in customer care, which we reduced by 10% per line over the prior year.

Please turn to slide nine. As we discussed on last quarter's earnings call, the second quarter is a seasonally high cost quarter for advertising. Although we increased marketing expenses by 6%, or $3 million, our media weights were still below those of the prior quarter as our higher spend did not fully offset the increased cost of advertising. Gross line additions increased 2% from the second quarter of last year, reflecting our progress in acquiring customers in international calling segments. While we made sequential progress penetrating certain ethnic calling segments, we were unable to fully offset the impacts of higher advertising costs, and as a result we reported a decline in sequential gross line additions to 158,000 from 175,000.

While we anticipated pressure on GLAs we were disappointed that we were unable to maintain the potential growth in GLAs that we had delivered in the three preceding quarters. The resulting cost of customer acquisition was $330 up from $318 a year ago, and $282 sequentially. While the residual impacts from higher second quarter advertising costs and a generally tight advertising market will have some impact on acquisitions in the third quarter, we still expect higher gross line additions for the full year 2011 versus 2010. As the impact from new products and expanded distribution take hold.

Moving to slide ten. As expected, churn was flat sequentially at 2.5%, but is influenced by a combination of positive and negative factors. On the positive side, we continue to benefit from the impact of the lower churn profile of certain international calling segments and high customer satisfaction. On the other hand there is upward pressure on churn from the transition to no contract offers, and higher early life churn in certain international calling segments. Taking these factors into consideration we continue to expand churn to be relatively stable at the mid-2% level for the second half of 2011. This combination of lower gross line additions and stable churn resulted in a net line loss of 11,000 lines in the quarter.

On slide 11 let's now move to a discussion of our CapEx and cash flow. As we discussed on prior calls, our strong cash flow is enhanced by our low CapEx requirements which we have held to less than 5% of revenue. The majority of our capital expenditures are for investments, the information technology and systems infrastructures, and not for ongoing maintenance. This investment contributes meaningfully to our ongoing structural cost reduction in COTS and customer care, as well as enhancing the overall experience for our customers. For the quarter, CapEx was $9 million, up from $5 million in the first quarter of the year. For the full year we expect CapEx to be below $40 million.

Vonage's business model is now delivering on its promise to generate substantial free cash flow. We are achieving 20% EBITDA margins that dramatically reduced interest expense, maintained low ,CapEx and have $885 million in net operating loss carry forwards that can be used to offset future income. Based on the $165 million in EBITDA, we have guidance here for 2011. We expect to generate over $100 million in free cash flow for the year. We also have ample liquidity to operate the business.

As of June 30, cash and cash equivalents including restricted cash was $70 million,with $7 million in restricted cash associated with the lease on our building. We used $30 million in cash from the balance sheet to retire our previous debt as part of the refinancing, leaving us with approximately $40 million of cash on the balance sheet, and $20 million of end drawn revolver at closing. We believe that this level of cash combined with the anticipated cash flow generation and the unused portion of our revolver, provides us with sufficient liquidity to meet our needs.

In Summary, this marked another quarter of solid progress both strategically and financially for Vonage. We introduced two exciting new products, expanding the value proposition by extending Vonage's strong international calling capability to mobile phones. We more than doubled net income excluding adjustments from a year ago. While we would have liked to have continued our string of increasing customer additions, we expanded our distribution reach, doubling our number of retail points of presence to 6,000.

We have a pristine balance sheet after completing our second refinancing in eight months. Taken together these two refinancings have reduced our annual interest expense by more than $40 million, adding 5 percentage points to our bottom line margin. We are pleased with our continued strong financial performance. Thank you again for your interest in Vonage, and now I will turn the call back over to Leslie to initiate the question and answer session.

Thank you, Barry. Operator, please open the line for questions.

Certainly. (Operator Instructions). Our first question comes from the line of [Jahuta] Miller, Cedarview Capital. Your line is open.

Good morning, thanks for taking my questions. Just first, trying to bridge the gap to the CapEx guidance. Seems like it has been trending lower over the year. If you can kind of help us understand where that possible $26 million in additional spending will come from, and does that include acquisition and development of software assets?

And my second question is even at a roughly $40 million of CapEx, it seems like on a run rate you guys can generate in excess of $0.50 per share in cash. Is there any direction in what that is going go to, now that you are at some sustainable debt service cost per year?

Thank you for are your question. Let me take those in order. First regarding the CapEx guidance as you may recall coming into the year we offered guidance of $40 million to $45 million for the full year 2011. On the last call we said that we expect it to be the low end of that range at $40 million, and now we have modified that guidance modestly to not to exceed $40 million. We certainly keep close tabs on CapEx. About three-fourths of our CapEx went is for investment, about 25% for maintenance. So the investments that we are making in CapEx are important to driving the business.

They do help in the structural cost reductions as I mentioned. Kind of the call routing that we are able to do, that we expect to drive meaningful improvements in the cost of telephony service in the back end of this year, in 2012 for example, is comprehended in the CapEx, the Amdocs implementation, the new billing system, is also included in that. So we are certainly mindful of CapEx, have strived to bring that down during the course of the year, which we are able to do, but we do expect it to ramp modestly during the back half of year, that would bring it in at lower than $40 million. There is still is some contingency in the CapEx for other things that we will see how that plays out for the back end of the year.

Regarding the cash flow for the year, certainly this refinancing is going help that. If you look at the 9.75% interest rate that we were paying on $130 million debt level that we had brought the debt down to by the end of the last quarter, that translates into approximately $13 million in expense. Going forward we see the interest expense as we mentioned about $6 million on a go-forward basis. So when we talk about the over $100 million in cash flow, that does comprehend the impact of the refinancing, and we have also said that we expect working capital to be basically neutral during the course of the year, with negative in the first quarter, Q2 anticipated seasonality it was positive in the second quarter. So that is how you would arrive at that net cash flow for the year.

Thank you. I think I am able to see the direction going forward on a run rate basis the use of that cash being generated. And I am sorry, just a follow-up from before. Can you also give like a nominal dollar value in terms of the maintenance CapEx going forward?

Yes, the nominal dollar value is in the $10 million to $15 million level. About a fourth of the overall CapEx. And the use of cash going forward, previously it was to pay down debt at the higher interest rates of 10%. Now that we have interest rates that are effectively at 3.75% stepping down to 3.5% with LIBOR at 25 basis points for three months LIBOR, there is less arbitrage on the interest. So we have flexibility now for the use of cash going forward, that we could do acquisitions as they become appropriate. We could do share repurchases if that becomes appropriate, as I mentioned that we have the ability to stock repurchases, unlimited repurchases, as long as the total leverage is less than 1.25 times. So we have those options available to us now that are provided for well within the current flexibility.

Next question, operator.

Thank you.

Thank you. Our next question from the line of Mike Latimore from Northland Capital. Your line is open.

Thanks. Great quarter and congratulations on the debt refinancing. In terms of the, Mark, you mentioned about a 20% increase in marketplace pricing in the quarter. You suggested maybe more reasonable pricing in the third quarter. Are we going to see that down 20% again, or is it down a couple of percentage points? What kind of pricing change do you think you will see in this quarter?

Mike, good to hear from you. The second quarter as folks who follow the markets know, is historically a high priced marketplace, but usually in that 8% to 10% range. We saw with, at least believe that at that point in time there is a recovery, I am not sure how people are viewing it today, that a lot of advertisers came back into the marketplace. That was compounded by viewership which continues to be fragmented by other media, so you had a lot of people who bought in the fixed marketplace, who are getting underdelivered weight based upon the original buy, so obviously all that media weight goes to make goods, and for folks like us who spend a fair bit of our money in the direct response market, which is kind of a week-by-week and month-by-month market. Things got very tight very quickly. So even when pricing went up, availability of good media was sketchy. The 20% I referred to tends to be more in the general media market. Hispanic up in the mid-teens, not quite that high.

What we are seeing in the third quarter is about as forecast at about half of those rates. So about a 10% higher cost than what was in the first quarter, which is consistent with what our expectations were coming in. So in terms of marketing and expense profile, you could expect two things. One, that we will probably spend a little bit more than we did in the first quarter. I don't expect that we will spend as much as we did in the second, and you should expect meaningfully better gross add yield for the dollars we do spend in the third quarter.

Great, great. And then as it relates to churn you talked about some segments of early life churn in certain segments occurring. What segments would those be in?

So there are really two things, and I want to make sure that we clarify this. The biggest driver of kind of that stabilized churn, you have got the benefit of international customers that have lower churn profile than our domestic, and that continues to grow as a percentage of our base. The bigger offset is the move to no contracts, which obviously the longer we are in that, we have more and more customers in that base, those folks age and they are still within that first 12 month period where you going to have higher churn. The first cohorts will in a couple of months pass that 12 month mark, and we expect those curves to start to inverse. You would expect that you won't see that month 13 and 14 spike that generally comes with contract customers, but we are still kind of weathering that headwind of no contract customers.

Relative to the international segments that have some higher churn profile, recall that when we got into the international business, the Asian Indian market was the one that we penetrated most quickly, and they have the lowest absolute churn. We tend to attribute that to their technology savviness, the penetration of high quality broadband in their homes, and on average strong economic profile. As we get deeper into the Hispanic market, we see that although there is still significantly lower churn than domestic-only customers, the Hispanic segment tends to churn higher than the Asian Indian segment, and while certainly lower than our domestic churn, and our churn rates a couple of years ago we were in the mid-3% range, there is some upward pressure in the mix of international, as a result of some of those Hispanic segments.

That makes sense. Thanks. Last question. Can you talk just a little bit about ARPU?Perhaps maybe give some directional comments on ARPU, or if not maybe the influence you see on ARPU over the next couple of quarters?

Yes, as we mentioned on the call that ARPU was influenced by a couple of factors that led to a decline. Some of it was nonoperational. For example, the USF pass through actually declined from the previous quarter, and over the prior year. USF was $2.39 for example versus $2.47 in the first quarter of this year. So we saw that impact. It was down from a year ago at $2.60 for example. We saw some of the nonoperational impacts from that, as well as the accounting treatment for legacy activation fees, as those roll off. As we look at it going forward, we expect relatively stable ARPU. We did get pass through some price increases for our lower level plan that will increase the number of minutes, so that will have a modest benefit in the back half of the year. But I think that we would look for relatively stable ARPU going forward.

Great. Thanks a lot.

Next question, Operator.

Thank you. (Operator Instructions). Our next question comes from the line of Michael Rollins from Citi Investment. Your line is open.

Thanks for taking the questions. Just to start off, could you give us, I am not sure I heard the percent of ILD or Vonage World, in terms of your subscriber base?Second, curious if there are any stats you share on the mobile side on how your preexisting applications are going, or maybe just any early indications on what you might expect for some of the new products that you have rolled out, and then after that, maybe I just will come back with a higher level question at the end?

Sure Mike. Good to hear from you. On the ILD question, clarify first, so percentage of our customer base that is now on Vonage World is 45% of total subscribers. And then the percentage of total subscribers that makes ILD calls with some regularity is 33%. In terms of the stats on applications, there has not been much change since we last talked in terms of mobile and other enhanced services. We talked about that being in the sub-$10 million range in terms of revenues. There has not been material uptake or losses in those businesses that is material to our overall revenue trajectory.

In terms of the new applications, obviously Time to Call just launched in the early morning hours, so it is very difficult to put a number on that. We are optimistic that the press as well as over the next couple of weeks we have some very interesting approaches to digital and social network use, hitting over 150 global bloggers with programs that are designed to build awareness of the application. So we are hopeful that will get us meaningful uptake, and of course, the news which we expect that everybody on this call will help us to get out, again at making a free international call, and being able to experience the quality and the true seamless ease of use of the Time to Call product, will help build a habit of usage. It really is incredibly easy to use and tremendous value.

As you know, everybody has dabbled in this space including us in the past, but it is still just too gosh darn hard to use, in terms of understanding what the rates are, which country, wireline to mobile calls, personal information, setting up billing relationships. It was very complex. At the end of the day the vast majority of international long distance calls are still being make shockingly at prices that are three to four times more expensive than alternates, and they are going through the traditional wireline and wireless carriers, and that is going to change. It has to change. There is no reason why people have to pay that level for that pricing. We believe we have a bit opportunity here, and obviously on a global scale, provides some big top spin for us.

The Extensions product is really different. The Extensions product is really a restatement or a repositioning of the entire Vonage offering. Frankly, it doesn't matter to us whether folks even plug in their home box. This is basically about choice. When you buy Vonage service for a rate, you get phenomenal pricing for medium to heavy users of international calling, or domestic calling, or interlata calling for those folks who are still playing long distance charges. You get a phenomenal rate, use it on whatever line you want. You can have two of them. It can be your home phone and your office phone, it can be your home phone and it can be mobile phone. It doesn't matter to us.

We think adoption, we know the adoption of the mobile download is going to happen fast. We have already in the first week just from our base, or primarily from our base had over 75,000 people have already registered, taken access numbers to use the Extensions application,and registered their mobile phones. And we believe that once we are able to get the news out on Extensions, it will help us from a prospect standpoint as well. We have got a lot of people who are spending $25, yes a great value, but the people I call I am not at home when, I am not in my home when I want to call them in their time zone. We still see a lot of people that do have our product that still use mobile, and pay carriers to supplement their service.

We think there is a real opportunity here to improve our value proposition for prospects as well, and you will see that in traditional revenues, although you can think about that as part of mobile. It is going to be hard to separate mobile and traditional, these things merge. What we are trying to say is we don't care where you are, what device you are using, we provide a service of value, and you can use it on any device from any number. So we are optimistic about the potential for this product.

And I would go on to say by the end of the year and into early next year, there are a whole host of enhancements many of which I telegraphed in prior calls. International roaming opportunities where inbound calls can be completed as well seamlessly. We have talked about on net community and messaging. Many of these things that you think about the applications we just launched, can be integrated as enhancements and built into these cornerstone products. So more news coming in the coming months on those fronts.

I should also mention we do have plans in several weeks to add to Extensions. I mentioned it in my script, but it is worth pointing out here. We will do flat rate additional Extension lines for sale into the base, as well as our prospects. So you can get the one line plus your mobile, and then you can add a line. That model as you are well aware works extremely well in the wireless industry.

And then just, Mark, taking some of your comments, and going back over the last couple of quarters. I feel like you had conviction that the back half of the year, which shows significantly better revenue performance than the front half, probably the front half for some of the reasons that you articulated earlier on the call, whether it was accounting or maybe just losing a few thousand subs, maybe it is fair to say that the first half revenue might have been a little lighter, not sure where your internal budgets were. How do you look at the conviction for the back half revenue growth, and are there some bogeys that you want to set of how to think about the recovery towards revenue growth over time? Thanks.

What we have said in the past is that the growth initiatives we are putting in place through the beginning of the year, mid year, would begin to meaningfully contribute to revenues before year end. We still believe that is the case. The impact on the total 2011 year obviously you have got, when do you start to see that ramp is not going to be phenomenal. We expect it is longer term that you will see the annualized and quarterly impact in a material way, as the percentage of our total revenues grow, and that is what we have been saying, and that continues to be the case.

You are right our first half revenue is a little bit lighter than we would have liked, and the products that we are launching, would have liked to get them out a little bit earlier in the quarter. But we are where we are, and we wanted to make sure we got the products right. We feel good about the product mix out there, we feel good about the functionality, and the sales and marketing programs that are out there. We feel good about the distribution that we are expanding, and we think all of those elements together give us cause to be optimistic about how the year will finish up.

One other question for Barry. There is this proposal out there with the FCC from a bunch of the larger telcos about USF and intercarrier comp reform. One of the bullet points in the proposal, which is just that as this point, is to qualify VoIP as traffic that counts to pay terminating switched access fees, and it would start at either a recip comp or interstate rate, and then reform over five years to a very low 0007 rate five years down the road. Initially if that were to happen, and I am not sure how you pay termination today, but if that proposal actually became an FCC order and went into implementation, in the near term, call it 2012, 2013 are there any cost implications that we should be aware of that?

For those that are not aware, let me recap Mike what you are talking about. Last Friday a group of six large and mid sized telcos, including AT&T and Verizon, calling themselves the American Broadband Coalition, submitted an FCC proposal for reform of access charges and some of the intercarrier compensation paid by carriers to terminate calls to PSTN customers, that happened last week.

As you know, Mike, as you mentioned, we already pay substantial amounts of money to telecom carriers to terminate our offnet calls, for both US landline and mobile telephone numbers. In our own comments on the FCC intercare compensation reform, we have advocated that the FCC avoid imposing any legacy access charges on VoIP traffic all together. The proposal that was made last Friday does not go as far, and wouldn't provide us with the greatest possible cost savings, but to be clear the proposal that we made last Friday if they were to be enacted would be savings for us.

I don't think we are prepared to give you the specific dollars right now, because of the uncertainty of where that proposal will ultimately end up. It is meaningful dollars in terms of savings. And at the 0007 it is substantial savings to COTS for us. We stand to benefit from the proposal. However, we still believe and maintain in our comments to the FCC that it is not going far enough. We support a bill and keep approach.

So Mark, just to clarify. It starts off I think at intercarrier recip comp rates, which is like a penny, something like that right now, or 0.7 of a cent, somewhere between there right now. Initially is it kind of neutral because you pay today, and then over time it is the savings, or even initially is it savings for you?

I will have to follow-up and get back to you once I get into the details of the proposal. As we assessed it initially, it looked like it was a long-term clearly favorable, and even in the short-term, I don't think there was any material impact to us, relative to our current rates, but you are referring to numbers that sound higher than what my recollection was. Let me go back and maybe we can talk offline about the specifics.

That is really helpful. Thank you so much for taking my questions.

Next question, operator.

Thank you. (Operator Instructions).

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

Ladies and gentlemen, thank you for your participation in today's conference, this does conclude the program, and you may all disconnect at this time.