Venture Global Inc (VG) 2011 Q3 法說會逐字稿

Good day, everyone and welcome to the Vonage Holdings Corporation third quarter 2011 earnings conference call. (Operator's Instructions).

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.

Thank you, operator. Good morning and welcome to our third quarter 2011 earnings conference call. Speaking on our call this morning will be Marc Lefar, Chief Executive Officer and Barry Rowan CFO and Chief Administrative Officer. Marc will discuss the company's progress and strategy and Barry will review our financial results. Slides that accompany Barry's 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 depend on assumptions or data that may be incorrect or improsize. 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 slides and contained in our 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. Reconciliation to comparable GAAP measures is available on the Investor Relations website. Now, I will turn the call over to Marc.

Thank you, Leslie and good morning, everyone. This quarter we took another step forward in transforming our business beyond traditional home phone service. The two new mobile products we launched during the quarter are striking a cord with consumers seeking easy to use low-cost mobile solutions for their international communications needs. Approximately 400,000 customers have either registered their mobile phone as an extension to their Vonage World plan or download our Time-to-Call app since we launched these products just three months ago.

We are delivering on the promise to enable communications from any broadband connected device as we integrate. the landline and mobile experience for our customers. We will build on this progress as we launch new products in the coming year. At the same time, we are strengthening our core business. We increased gross line additions 8% in the second quarter and improved our efficiency in acquiring new customers lowering acquisition costs 9% from the seasonally higher cost second quarter.

We continue to add customers on Vonage World enabling -- enabled by our growing success whether outsourced pay-for-performance event teams and broader retail distribution. 50% of our customer base is now on the Vonage World plan. A testament to our core business, financial results for the quarter were strong. We tripled net income excluding adjustments from a year-ago and for the fourth consecutive quarter EBITDA exceeded $40 million.

Revenues grew a modest 1% in the prior year while we generated free cash flow of $34 million fueled by strong operating results, low CapEx and dramatically lower interest expense. I would now like to review our results in more detail, and then I will provide a recap of our strategy and our outlook. We reported another strong quarter year-over-year gains in net income and EBITDA. As I mentioned net income excluding adjustments tripled from $8 million in the third quarter last year to $24 million. This is our 10th consecutive quarter of positive net income excluding adjustments.

Net income has been driven in large part by the two debt refinancings we completed in the past year building on our strong sustained operational and financial performance. Through these refinancings we reduced interest rates from highs of 20% a year-ago to less than 4% today. We saved $22 million in interest expense year-to-date and we will save $30 million by year end. This represents a 59% reduction in interest expense over 2010 and the full year savings in 2012 will be roughly $43 million.

We generated EBITDA of $40 million during the quarter and are on track to achieve our guidance of at least $165 million in EBITDA for the year. This will mark our fourth consecutive year of record high positive EBITDA. Gross line additions were also strong this quarter increasing 8% sequentially to 170,000. And GLAs are up 7% for the first three quarters of the year compared to 2010.

We also improved the efficiency of our marketing spend from historically high cost second quarter as subscriber line acquisition cost or SLAC was down 9% sequentially to $300. Our expanded distribution is beginning to have an impact as we double the number of distribution outlets with the recent addition of Best Buy, Kmart and Sears combined with our existing partners, we now have distribution agreements to sell our services in 6,000 stores across the country. In-store merchandising and training continued throughout the quarter, and we are seeing solid growth in the stores that have fully executed our programs.

We have expanded our feet on the street event teams which now operate in 16 states with high ethnic concentrations including California, Texas, Florida, and New York. As reflected by our expanded distribution network, third-party retail is becoming an increasingly important component of our customer acquisition strategy including our event teams, retail is now driving 15% percent of gross line additions. This is up from 8% in the beginning of the year, and we expect that to increase to 20% in coming quarters. Importantly, retail is also a highly efficient acquisition channel with direct SLAC in the low $200 range.

Although the numbers are not yet material, we also launched our initial marketing trials with Trac FONE as planned. Although growth line addition increased, churn of 2.7% was slightly higher then expecteddue to the full year impact of the No Contract policy along with higher churn in our Spanish speaking segments.

This higher churn offset most of the gains in GLAs resulting in net line losses of 9,000 for the quarter, a slight improvement from the 11,000 lines lost in the second quarter. Looking to the fourth quarter, we expect churn to be stable to lower sequentially. Over the longer term, we expect stable churn in the mid 2% range. As many of you will recall, we eliminated contracts just over a year ago based on the significant churn reductions we had achieved during the prior year and with the belief that service agreements were a barrier to acquisition.

Although this led to slightly higher churn for no contract customers during the first 12 months, we expect to see improvements in churn in months 13 to 15 as we will no longer experience the churn spike customarily associated with the expiration of contracts. After assessing the tradeoffs of our No Contract policy over the past year, we are planning to reimplement contracts in a more sophisticated way. Rather than implement contracts across the board, we will provide customers with a consistent low-flat monthly rate when they purchase without a contract and a better rate and or promotional offer in exchange for signing an annual agreement. We expect to implement these changes in the coming months. Now, let me shift to a discussion of our strategy and our plans for continuing to execute against our key growth initiatives.

While our strategic direction has not changed we have done considerable work in recent months to refine and operationallize our strategy. It is built on three primary planks. As we have outlined and previous calls. One, solidifying our core business. Two, meeting the emerging needs of mobile and other connected device users. And three, geographic expansion beyond the US, Canada and UK.

Let me briefly describe each of these strategies and our plans to execute on them. We have stabilized our core business, and it is generating significant cash flow. The major strategic shift in our core business began two years ago with the introduction of Vonage World and an emphasis on international long distance callers. With the introduction of Extensions this quarter, we have greatly enhanced our value proposition, once again. As our customers can now use their existing Vonage World plan to call from their home, office or mobile phones.

As I mentioned, we also began aggressively expanding our retail presence in the second half of 2011. To further take advantage of our value proposition, we will also extend our product line opportunistically into adjacent area such as a small office, home office marketplace. These customers needs are very similar to those of our core consumers and they buy through many of the same channels.

We expect to increase our focus on these customers in the first half of 2012. As a second plank in our growth strategy, mobile is a clear priority. Consumers globally are shifting their communications to mobile devices, and we are meeting their needs through Extensions and Time-to-Call. Extensions meets the needs of mobile users and provides value and convenience to international long distance callers. Early response to Extensions has been strong.

Hundreds of thousands of customers in our ILD caller base have registered an extension and 97% of these Extensions have been added to mobile phones. More than 70% of those registered are active callers. We are clearly striking a cord with customers who increasingly prefer to dial internationally on mobile. Approximately 30% of users minutes have shifted to Extensions in the first three months since introduction and overall usage is up only modestly.

Customers clearly value the ability to use Vonage service on mobile devices. We believe Extensions will ultimately lower churn in our high value ILD customer segments. Building on this early success, we recently launched Extensions apps for Android and iPhones that greatly simplify ease of use. Time-to-Call and its future evolutions support our strategies or both mobile and international expansion. Time to call has been downloaded in 85 different countries and provides calling to 190 countries highlighting the appeal of this product far beyond the US. Time-to -call has recently been named a finalist for the 2011 Mobile Excellence Awards for best mobile application for utility or business.

The Mobile Excellence Awards on or excellence in mobile technology and celebrate business innovation. We are pleased that Time-to-Call is considered among the best. Looking ahead, our international and mobile product plans include additional extension capabilities, mobile standalone products, and a variety of calling plans targeting country-specific callers.

In 2012, we plan to bring these services together to provide an integrated communications experience that will include free app tap calling and messaging along with traditional offnet international long distance services and new roaming solutions. The third plank of our growth strategy is geographic expansion. This represents a significant opportunity. The global consumer communications market outside of North America is estimated at $320 billion and is growing at nearly 7% annually. Shifts in technology, economic development, and changing government regulation are opening the door for new entrants to disrupt existing markets that are characterized by high-priced voice and messaging services.

Over the next year, we expect to offer a range of mobile and international voice and messaging services outside of the US. We expect most of this growth to occur through partnerships, and we are active in discussions with several prospective partners. Let me describe three examples of the kinds of products we may offer. First is something you might call International Friends and Family. Through agreements with partners who also provide consumer services, We could mutually extend free or highly discounted international calling to our combined customer bases. Think of it as a virtual on-net calling plan.

Second, other companies have expressed interest in having us provide voice services that they can add to their bundle of video and Internet access. And third, we believe there are opportunities to partner with local companies to develop communication kiosks placed in high-traffic locations for people to make inexpensive calls in developing markets. This is not dissimilar from the wide array of Internet kiosks that are emerging all over the globe.

We are pursuing a range of options and partners and hope to be in a position to announce our first partnership agreements in the next several months. Let me now address the outlook for the year. With the stable core business, strong cash flow and a pristine balance sheet, we believe we are well positioned to address the significant market opportunities we have targeted.

We are pleased to report strong net income, EBITDA and cash flow performance this quarter. And looking ahead, we continue to expect to achieve adjusted EBITDA of at least $165 million, and we are on track to deliver higher gross- line additions in 2011 than in 2010. We continue to believe in the attractiveness of the strategic markets we have identified as the foundation of our growth initiatives including international long distance, mobile, and international expansion opportunities. And we will continue to invest in these areas.

While we are encouraged by early results from product launches distribution gains, and international business-development activities, our revenue are ramping more slowly than originally anticipated. The revenue ramp from these initiatives is delayed by several months and is expected to more favorable impact results in 2012. We expect churn to be stable to lower than the third quarter levels and expect full year churn of 2.6%. Although we anticipate additional progress in the fourth quarter, it is unlikely to be sufficient to offset year-to-date net line results. Consequently, 2011 net-line additions are likely to be slightly negative.

We expect that capital expenditures will not exceed $40 million, and we are on track to generate at least $105 million in free cash flow for the full year. We look forward to sharing greater detail on our 2012 plans during our next quarterly call, and now I will turn the call over to Barry, and thank you again for your interest in Vonage.

Thanks, Marc and good morning, everyone. I am pleased to review our third quarter results with you. We reported another quarter of strong financial results and are on track to deliver record high net income and EBITDA for the year. Our free cash flow continues to grow enhanced by our recent refinancings with significant savings in interest expense.

We are on track to generate more than $105 million or $0.47 per share in free cash flow during 2011. Our expanded retail distribution channels including event teams are driving higher and more efficient customer acquisitions. Importantly, we have begun to shift our business beyond the home phone to mobile with the recent introduction of new mobile products and applications. And as Marc discussed, we are taking meaningful steps to grow our business outside of North America.

Let us now move to a discussion of the financial results for the quarter. Turning to slide three. Net income excluding adjustments tripled to $24 million or $0.11 per share from $8 million or $0.04 per share in the prior year.

This improvement was driven by a 38% increase in income from operations to $27 million and a 75% or $9 million reduction in interest expense reflecting the positive impact of our debt refinancing. Net income excluding adjustments was essentially flat from $25 million or $0.11 per share sequentially. We reported GAAP net income of $16 million or $0.07 per share, up from a loss of $55 million or $0.26 in the year-ago quarter which included $60 million in one-time charges.

GAAP net income was down from $22 million or $0.10 sequentially. The sequential decline is due to an $8 million charge related to the early extinguishment of debt associated with our July refinancing. This charge represents the final accounting adjustment related to our previous refinancings.

Effective cost management and operating efficiencies led to our fourth consecutive quarter of EBITDA at or above $40 million. EBITDA increased 15% from the prior year to $40 million on modestly higher revenue and lower direct costs. EBITDA declined sequentially from $44 million reflecting impact of higher international calling related to Vonage World and Vonage Extensions and increased costs associated with acquiring more customers during the quarter.

We continue to expect to generate at least $165 million in EBITDA for the full year. Moving to slide five. Revenue increased $2 million or 1% from the prior year to $217 million. From improvements in customer mix as we added more customers on our Vonage World plan and higher universal service fees. These positive impacts more then offset a nearly $3 million revenue decrease associated with a decline in legacy activation fees which do not impact EBITDA.

Revenue declined slightly from $218 million sequentially primarily due to an increase in service credits and rebates as we added more customers through our lower-cost retail channels. Average revenue per user or ARPU for telephony services increased to $30.06 from $29.45 inthe prior year primarily due to improved customer mix and lower bad debt. Service ARPU declined less than 1% sequentially from $30.14 on modestly higher credits and rebates. Turning to slide six.

We continue to focus aggressively on reducing cost of telephony services or COTS, one of our largest expense items. In spite of higher international call volumes, we were able to modestly reduce COTS to $59 million from $60 million in the year-ago quarter. This cost management was led by a 41% decline in domestic termination costs aided in part by lower usage and the consolidation of our E 911 vendors.

These improvements coupled with continued reductions in international long distance termination rates more than offset the costs associated with the growth in ILD minutes. As a result, costs declined to $8.25 from $8.36 a year ago on a per- line basis. Sequentially COTS per line increased 3% from $8.03 due to higher international termination costs associated with Vonage World callers.

In the fourth quarter we expect COTS to increase modestly due to the impact of higher international calling related to Vonage Extensions. These increases will be partially offset by savings by structural cost reductions as we implement our next generation call-routing infrastructure and peering agreements. We expect to see meaningful cost benefit from these efforts in 2012 which will offset anticipated continuing growth in ILD minutes next year. We reduced costs-of-goods sold by $2 million in the prior year through lower device costs and activation fees.

As mentioned on prior calls, we have reduced the cost of our devices to less than $30, a more than 25% reduction from the $40 we were paying two years ago. These lower devices costs, along with lower costs improved direct margins to 68% up from 66% a year-ago. Direct margins declined from 69% sequentially as a result of the COTS increase we discussed. Moving to slide seven. SG&A of $59 million was flat year-over-year and up $1 million sequentially from the expansion of our third-party retailer channels. These efforts are yielding positive early results as Marc outlined.

New distribution channels and continued effectiveness of our event teams contributed to an 8% sequential increase in gross-line additions to 170,000. Year-to-date, GLAs are up 7% compared to the same period a year ago. As anticipated, we saw some moderation in advertising costs from seasonally higher second quarter prices.

This benefit combined with increased sales from our low-cost acquisition channels reduced subscriber line acquisition costs by 9% sequentially to $300. SLAC also improved modestly from the $302 level of a year ago. Moving to slide nine. We experienced upward pressure on churn from our no contract offer increasing churn to 2.7% from 2.5% sequentially.

While churn in some customer segments increased, it is important to note that churn for international long distance callers in most segments remains well below that of domestic callers. The value proposition provided by Vonage World is a key contributor to this lower international churn. As Marc discussed, after assessing the tradeoffs of our no contract policy, we plan to offer customers the option of taking a contract.

Customers who sign up for a contract will receive a discount from the pricing they would receive without signing a contract. The combination of higher gross line additions and increased churn resulted in a net line loss of 9,000 lines within the quarter a modest improvement of 2,000 lines from the second quarter.

We will now move to a discussion of our CapEx and cash flow on slide ten. As discussed on prior calls, our strong cash flow is helped by our low CapEx which we continue to manage to less than 5% of revenue. Approximately three quarters of our capital expenditures are for investments in information technology and systems infrastructure with the balance dedicated to maintenance capital. For the quarter, CapEx was $12 million, up from $9 million sequentially. Year-to-date, CapEx is $25 million, and we continue to expect CapEx to be below $40 million for the year.

Our business model is stable and generates substantial free cash flow aided by low CapEx and interest expense and substantial NOLs of $885 million. Free cash flow for the quarter totaled $34 million, and is expected to be more than $105 million in 2011, up from our previous expectations of $100 million. As of September 30, cash and cash equivalents was $63 million, including restricted cash of $7 million. We ended the quarter with a strong balance sheet with total leverage to EBITDA of .7 times and net debt of $55 million. Our strong balance sheet and continued cash generation provide us with substantial flexibility to invest for future growth. In summary, it was a solid financial quarter.

We tripled net income, excluding adjustments from the prior year and are on track to deliver record financial results for the full year 2011. We strengthened our customer base and are enhancing our distribution channels to drive customer additions. We believe we are taking appropriate steps to stabilize customer churn. We have also begun the strategic shift to mobile and international expansion and are encouraged by the early response from our customers. Thank you again for your interest in Vonage. I will now turn the call back over to Leslie to initiate the question and answer session.

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

Thank you. (Operator Instructions). Our first question comes from Mike Latimore with Northland Capital.

Great. Thanks a lot. Good morning. In terms of just a question I guess on churn,you have had a number -- you have had subscribers coming off annual contracts, pretty much every quarter over the course of the year. What did you see was maybe a little different this quarter around that dynamic?

Mike, this is Marc. So this was the quarter in which we actually completed a full 12 months of customers without a contract. So the entire customer base at this point is no longer under a service agreement. As you have seen in terms of the tick here just a cumulative impact of customers from the prior nine months as well as customers now coming up on their 12th month that layered into the cumulative impact on churn.

It was slightly higher than we expected and that was combined with who we saw as a tick-up in churn among some of our Spanish speaking segments. As we talked in prior calls, we have been actually pleased over the last year that our Spanish speaking efforts have not only brought international long distance callers, but a fair number of domestic users in the Spanish speaking segment that have basically not talked to by any tell telcos in the past. In addition to having then ILD level of churn,

we are seeing higher churn among the Spanish domestic customer subsequent. We hypothesize some of that might be socio-economic issues and current economy issues, itmay also be a function of understanding of the core offerings and what that delivers. As we look forward to the fourth quarter, we feel quite good about stable to lower churn.

We have actually seen evidence now that we are entering the 13th to 15th month of customers being outside of contract reduction in churn as folks on the call are probably well aware, the cycle of contracts is one that basically builds up a spike after the initial contracts expire, and we were no different than that historically. Because we have had customers who have been moving out more steadily throughout the course of the year, that pent-up contract expire churn no longer exists, and we will get the benefit of that gradually over the next couple of quarters as new you cohorts enter their 13th to 15th month. So that is kind of what the churn dynamics are.

How about October? Is October you have seen some evidence of that in the month of October, improvements?

In the first couple of weeks we have seen some evidence of that 13 through 15 month reduction in churn.

Got it. And then with regard to the Extensions and Time-to-Call. Is that -- it sounds like that, the revenue associated with that maybe pushed out a little bit. What do you think is the reason for that? And what gives you confidence that you might see that improve next year?

So the revenue is both Time-to-Call and Extensions also relates to the growth we had expected to come on a little fast from some of the new distribution channels. The bottom line on Extensions and Time-to-Call, is you have got in Time-to-Call free calls that were part of people's initial promotional offer to get them in. So it is very difficult to think about what that recurring rate will be.

You have to understand and see what the ongoing habits are that get formed and on Extensions, we are still pretty early days of this. Recall that the first extension is added for free. We had significant uptake on that. We were actually delighted to see a huge amount of shift of usage, roughly 30% of people's total usage moved to mobile very quickly with very modest increase in total minutes. Actually far less than what we expected in our business case, and we are seeing some pay-per-use revenues that come from that customer base as well. We didn't start doing the third line sales at 499 until late in the quarter.

It is still difficult to understand what the stasis point will be on that product. As is true with most new products until you understand the novelty impact it is difficult to fully appreciate what the long-term revenue impact will be and then candidly as we look at some of the other new products and services as well as expansion into the international markets, we are looking at the time frames of those and some of those are taking longer then we expected. New distribution partners including TracFONE while things are on plan and we are executing, it is just taking longer to get them into marketplace and longer to get the customer response that we expected.

And this last question now it sounds like spending a little more in SG&A for the successful retail channel,does SG&A keep trending up a little bit as you focus on retail or is this kind of a run rate?

As you see, Mike, we have increased marketing, selling modestly a couple million dollars from the first quarter of this year. So we see it being relatively stable in this zone. We may increase it modestly, but we did have a couple million dollars increase there in the second and third quarters. And we are very pleased with the success that we are seeing there. So as you know, we continually manage the mix of marketing and selling spend and with the success and in some of the retail channels that we are describing we will continue to emphasize that, but we will then also tear back in some other areas as required to keep ourselves stable.

Thank you.

Next question, operator.

Thank you. Our next question comes from Robert Ruth with Phoenix Partners Group.

Yeah, good morning, guys. Good quarter. A few quick questions. Given your balance sheet and how low the debt is and given your cost of debt is below 4% now from where it was and $105 million in free cash flow expected from 100, I'm curious as to why the company has not put in place a stock buyback plan or tender for shares the equity leverage that would create given how solid your EBITDA is supposed to be and going forward the opportunities that you are talking about just seems like it would make a lot of sense because your cost of equity is off the charts and your cost of debt is very low.

So you are not going to be paying tax, you don't get a shield from the interest anyway. I am curious as to is that is something management is considering or is considered you could do to show would the public markets that you feel shares are undervalued?

Robert, thanks for the question. As we he have talked in prior quarters, we continually assess the wisdom and timing of any kind of stock buyback. But again consistent with our prior comments, our objective is primarily growth, and as we look at our growth trajectory, we are primarily focused on use of cash for potential acquisitions done smartly.

So those would be things where we are acquiring technology, people or communities that have a headstart in a consumer market that is consistent with our mobile and international growth areas. Keep in mind that this phenomenon of cash on the balance sheet and rapid paydown, the cash flow potential is relatively new phenomenon for us. It has only been several months and we would like the opportunity to appropriately evaluate the acquisition opportunities that exist before us. We think that is a better approach for shareholder value and sustained growth. As we can find the right opportunities then at this point in time return cash directly to shareholders. but, it is something we continually asses and will continue to as we get through our evaluation of potential acquisitions.

Great. I totally get that and I understand. Just given where your stock is today it is down 15%. The acquisition would have to have quite a return on capital compared to an investment in your own stock at this level. If your stock was at five or six bucks I would get it. Here it seems as that could be a little bit one of the best uses of your cash.

I see what you're saying. I guess the real question kind - -Is there anything that would prohibit you from buying back stock now if you wanted to. Any there any covenants, restrictive covenants with your debt, or could you put in place a buyback and do that if you decided there was nothing else worth buying in the stock was the best use of your cash?

We do not have any covenants or barriers that prevent us from doing that if we decide that would be the best way to invest that cash.

Ok. Great. And then one follow-up on what you said before about acquisitions. I notice reading the financials that it looked like you had your acquisition of software during the quarter was $8.2 million which was about double what it has been historically. What you guys bought and how that will help you guys going forward.

And then when it comes to the partnerships that you expect to announce, I know obviously Canada, the US and UK are big in the markets now. Can you give us a sense as to who what other area you think are big growth opportunities for the company that maybe investors are missing where you can really leverage the infrastructure that you built.

Let me take the first part of the question, Robert, and then I will turn it over to Marc to handle the other growth opportunities. On the software side, we as you know are in the process -- we are investing in IP infrastructure as we go along including investing in AmDOCS which will be operationallized this year. That is what you saw during this quarter. As a reminder about a fourth of our CapEx is for maintenance CapEx. The balance is for infrastructure and IT investment. So that gets reflected in --

Okay. And in terms of area of growth to leverage the infrastructure. There is really three.

One of those is international expansion. So our ability to conduct business outside the US with partners and others requires that we have different types of billing support infrastructure as well as operational support infrastructure so that allows to us conduct business outside of the US efficiently and be able to do that on a revenue-bearing basis. Many of these folks that get into the businesses with free models do not need to actually track what is happening. You actually have to have the OSSBSS to support a revenue-bearing model that requires infrastructure. That is piece one. Piece two is the ability for us to have flexibility to have very different pricing models including that for mobile.

As you know, we currently have a traditional home phone service business, that is what the original architecture was built for. It allows you to with the shipping of an adaptor tie to the issuance of a phone number, track and manage customers. We envision a different kind of model where we might have user IDs, you might have multiple customers per ID, you might have very different billing models and all that being tracked through software. The infrastructure to allow us complete flexibility for individual or integrated offerings for mobile is another area that the infrastructure investment will help us. And third is that which manages our cost structure.

The ability to provide highly efficient customer service much of which becomes online customer self-service as well as simply efficiency for our live representatives to be able to better serve customers to cross-sell, to upsell and to anticipate what their issues are so we can meet their needs and reduce churn are all areas where we think we can leverage the infrastructure investments we are making.

Great and one last question. Obviously during the quarter you managed to reduce your bad debt your reserve for that and it seems I am just curious how you managed to do that. Are you really - -you mentioned a little bit in terms of the contracts at a lower price point but the credit quality and how are you successfully able to do that, and do you think you can squeeze a little bit more out of that going forward as you kind of look at the credit quality of the Vonage consumer.

Robert, let me comment on that. Just to be clear on the bad debt. Virtually all of the customers are the pay- in-advance, so we do not incur the usual kind of bad debt exposure that is characteristic of some customers. The way it shows up is in the quality of the customers and it is a has improved relative to where we were a year ago, we have seen some benefit of that I mentioned on the call. How do we continue to manage it? It is in the acquisition process of the kinds of customers that we bring in. And monitoring that and monitoring the early life results of those customers.

As you know, we have focused on the Hispanic segment over the last year or so have been pleased with the opportunity there. It is something that we have to continue to look at, particularly for people who are domestic callers as Marc pointed out within that segment. So it is something that we actively manage. We have a revenue-assurance group here that is very capable at that, but we have seen that improve relative to where it was a year ago.

Next question, Operate.

Thank you.

Our next question comes from William Vogel of Merlin.

Good morning. I was wondering if you could give us an update on the progress with getting the time-to -call software on the Android platform? And then separately I was wondering if you could talk a little bit about -- get a little more detail on your network roaming activity and how it phases in this fourth quarter and into next year from the standpoint of does it come in small chunks, is it lumpy, does it start big and then taper? It would be just helpful to understand what your expectations are in terms of that offset to the other cost increases that you had outlined.

Let me take the Time-to-Call question. The Android application was actually launched into the market earlier this quarter and the iPhone app launched several weeks ago. We had tens of thousands of downloads between those two. I think we are now in excess of 35,000 on iPhone alone just in a couple of weeks and recognize that the Extension service -- I'm sorry are, the -- I'm sorry, excuse me, I just mixed up Extensions with Time-to-Call. The Extensions applications have been in both stores for Android and iPhone, and the results I was speaking to were for Extensions.

For our Time-to-Call those products are now available as well. However, we did have a point in time where we needed to pull those back. There was an issue related to Apple and the iPhone store which caused us to address some development that has now been addressed.

So you are saying that you have Time-to-Call on both Apple and on Android now.

Android is forth coming.

That is my question. Do you have a date? Is that goon be year-end? Is that going to be next year. Can you give us a sense of when you add the Android capability?

I don't think we have a firm date on that yet. Let me check on that and get back with you.

Okay. And then network grooming?

Yes, let me take that one, Bill. As you know, we are continuing to make investments in IT infrastructure. And that is particularly the case on the domestic side this year. You saw the domestic cost reduction over are 40% this year for termination costs. Some of that was usage for the line-share of that was driving down domestic costs. We see that benefit continuing into 2012 and really gaining the line-share of that benefit in 2011.

As we are able to move to more to a type of arrangement a peering kind of arrangement with our carriers that will enable us to continue to drive cost out of the system. As we do that, the objective is to have the benefits of that infrastructure investment offset substantial portion of line-share of the costs associated with the continuing growth in ILD minutes which as you know is the center piece of our strategy to target international long distance callers.

Okay. And then lastly, you mentioned AMDOCS. Can you just sort of generally discuss the key benefits that you feel AMDOCS will provide you with? I think it entered in a little bit in the bad debt discussion, but if you could just elaborate a little bit on what you think AMDOCS is going to do for you once it gets fired up that would be helpful.

Sure, I will take that. AMDOCS really is a complete infrastructure lift from what we had before. The original Vonage legacy billing system was based on one macro database upon which most of our applications in production including customer service as well as real-time queries from virtually anywhere in the business were banging against that very large database. Fundamentally built on Oracle technologies. AMDOCS basically provides a completely new approach to billing support services.

It will change how our customer service and sales activities in the front-end pull information for use by front line representatives and gives us a flexible what we call product catalog which allows the ability for new products and services to be implemented much more quickly than in the legacy systems which required completely new code every time we wanted to enhance the service.

Okay. And when do you anticipate having the AMDOCS up and running?

We expect to stand it up before the end of this year and then really we will get the primary benefits of it won't occur until 2012.

Okay.

Next question.

Thank you very much.

Let me just pick up -- let me follow up on the Android discussion. I apologize for the confusion because we have done so much in the Extensions area in the last few weeks. So we are not going to deploy the current version of Time-to-Call on Android. I alluded to some enhanced services that we expect very early in the next year which is the new evolution of Time-to-Call that will have enhanced services and features and that is what we will deploy on the Android platform and again we expect that after the new year.

Can you give us a sense of what the enhanced features might be?

I alluded to some of those. I am not going to go specific for what the launch in January but a number of the kinds of things we are looking to include going forward will have on-net free calling communities, as well as enhanced international long distance services that are integrated into a sleek application. As we look further into the year, we also will have messaging services and expect solutions for international roaming.

Great. Thank you very much.

Next question, operator.

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