Venture Global Inc (VG) 2013 Q2 法說會逐字稿

Good day, everyone, and welcome to the Vonage Holdings Corporation Second Quarter 2013 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 conference 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 2013 Earnings conference call. Speaking on our call this morning will be Marc Lefar, Chief Executive Officer, and Dave Pearson, CFO. Mark will discuss the Company's strategy and progress, and Dave will review our financial results. Slides that accompany Dave's discussion are available on the IR website. At the conclusion of our prepared remarks, we'll be happy to take your questions.

As referenced on slide 2, I would like to remind everyone that statements made during this call 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 expectations and depend on assumptions 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 our SEC filings. We caution listeners not to rely unduly on these 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 GAAP is available on the IR website.

And now I will turn the call over to Mark.

Thank you, Leslie, good morning, everyone, and thank you for joining us on the call today. We reported a solid second quarter with positive net line additions and our lowest level of churn since 2010.

Executing on our growth priorities, we achieved a number of milestones. First, and perhaps most significant, we successfully launched the Basic Talk anchor brand nationally in the latter half of May. Second, we made meaningful progress building the foundation for our communications business in Brazil. Third, we grew the number of downloads and active customers on the Vonage mobile app and the Vonage extensions with the help of major feature enhancements in each application. And, lastly, we enhanced our new global digital calling card.

A reflection of our stable core business, steadfast focus on cost efficiencies, and our planned investments in growth, we generated $27 million in EBITDA squarely in line with the guidance we provided last quarter. This includes the impacts to planned investment to build awareness and to fund merchandising support for the national launch of Basic Talk. We also continue to execute on the stock repurchase and bought back 5 million shares in the quarter.

With that as an overview, I'll now discuss our results in more detail.

Net line additions in the quarter were positive reversing the recent trend. This improvement reflects the combination of higher sequential gross line additions due to the late May launch of Basic Talk and a 10-basis-point decline in churn sequentially and from the prior year. These factors resulted in an improvement of 15,000 net lines from the prior quarter, as we finished with 3,000 positive net lines.

Revenue in the quarter declined by 2% sequentially due to lower universal service fund fees, a pass through with no EBITDA impact, and the carryover effect of line losses from prior quarters.

Churn has been an important good news story for us, and this quarter was no different as churn declined to 2.4%, a result of our attractive value proposition and high quality of service. We have now reported churn of 2.5% or lower for five consecutive quarters, concrete evidence of the stability of our customer base.

Although the third quarter typically shows a modest uptick in the nonpay component of churn, we expect churn to remain stable in the mid 2% range.

During the quarter, we also continued to execute well against our multi-year structural cost savings initiatives. We reduced customer care cost per line by 17%, and cost of telephony services by 8% in the prior year. This is the fifth consecutive quarter of reductions in customer care cost per line. This improvement was accomplished while simultaneously improving all major customer care metrics.

First Call resolution increased to an all-time high of 79.6%, average handle time declined by 6% from a year ago, and contact rate, which measures the average number of times per year a customer contacts us, declined by 5%.

We see further opportunities to reduce costs through negotiations with key partners, like the long-term call termination agreement we recently signed with TATA and by gaining direct access to telephone numbers. And we will continue our long-term efforts to lower customer care costs through improved self-service and by addressing some of the root causes that continue to drive call volume into our care centers. Simply stated, the core business is stable and generates substantial cash enabling us to fund the investments in our growth initiatives while we also return value to shareholders through the buyback.

Let me briefly discuss our progress in each of the areas we are targeting for growth. Since launching Basic Talk in May, we have now deployed in all of Wal-Mart's 3,700 stores nationwide, and our Web sales and service experiences are running smoothly. Early results are strong, and consumer feedback has been very positive with consistent comments about good call quality and ease of setup and use.

Our post-launch research involving 2,200 Basic Talk subscribers was also enlightening. Customers cited four principal reasons for purchasing Basic Talk. One, poor in-home cell coverage; two, the added security of always having a phone within reach; three, the convenience of having multiple home phone extensions; and, four, the low price.

Many buyers view Basic Talk as a complement to their cell phone. Perhaps most encouraging is the fact that 42% of all buyers said they did not have home phone service from another provider at the time they sign up for Basic Talk.

Many cord cutters were simply not satisfied with sell-only service, and they're coming back. Of the remaining 58% of purchasers, half of them reported that they left a bundle to buy Basic Talk.

In addition, we've been very pleased with the success of our self-service portal. The number of calls into customer care has been low, reinforcing our confidence in the post-acquisition profitability of this segment.

As I've discussed previously, we are carefully monitoring the risk of cannibalization of the Vonage base by Basic Talk, and we're pleased that, so far, customer migrations are at the very low end of what we forecast based on our market tests. Although the establishment of a new brand does require up front marketing investments to build awareness and drive traffic, our test markets prove that this is a far better strategic approach than one that would create significant ARPU risk by launching under the Vonage brand.

While it is still early, cohort analysis from our test market customers and recent purchasers suggest that churn on the Basic Talk customer will be below 2%. Given the size of the opportunity, strong consumer reaction and limited migration, we plan to continue to invest and to build a Basic Talk brand and subscriber base. We expect to spend several million incremental dollars in the third quarter to support this effort.

While the launch-related costs contributed to higher subscriber line acquisition costs in the second quarter, we expect these costs to decline, over time. We anticipate that Basic Talk will ultimately grow to be a meaningful contributor to gross line additions and revenue.

At the same time, our flagship Vonage World product continues to provide strong value to international long distance callers. Our patented extension service has successfully extended this value to mobile. Today 29% of our international calls are made on a mobile phone, up from 18% one year ago.

There were some bright spots for the Vonage World business as well as some challenges. In June, we launched a new national advertising campaign, "Crazy Generous." The campaign features a new character, Vonage's Chief Generosity Officer, who is endearing, authentic, and memorable. He exudes a passion for providing innovative, affordable and generous communication options to our customers in an industry with a reputation for doing exactly the opposite. Consumer reaction, especially among international callers, has been positive. Our research has shown significant increases in willingness to consider Vonage for their next home phone service and in overall preference for Vonage among all providers being considered.

While we are encouraged by this response to the new campaign, we do continue to see persistent declines in the efficiency of television media and direct mail. We are aggressively testing new media approaches and formats to drive cost-effective lead generation.

Retail sales and big box in regional stores were strong, posting an 18% increase in gross line additions before accounting for the impact of Basic Talk. This gain reflects continued strength in our assisted selling program. As of the end of June, we provided assisted sales in 600 stores, up from 490 at the end of the first quarter. This represents the eighth consecutive quarter of growth in retail.

In addition, the performance of our community sales teams grew by 9% sequentially and continues to be a cost-effective channel to reach ethnic segments.

As we look toward the remainder of the year in 2014, we expect to reduce our marketing investment in television media and direct mail and increase our use of digital media and search to more effectively target international calling segments.

Let me now discuss our progress building our business in Brazil. In the past 12 weeks, we formally established the joint venture legal entity, secured a headquarters facility, and successfully hired key executives to operate the venture, including our managing director and heads of technology and operations. We also received certification of our device from Anatel, the Brazilian national telecommunications agency, and solidified our solutions and operational plans with delivery timelines.

Technical development is currently underway on systems and engineering elements of the business. Testing of the network components will commence in the third quarter to be followed by testing of the business operations components before year-end. We expect a complete testing of financial and regulatory elements of the platform and final integration by the end of the first quarter of 2014 with a full feature launch to follow shortly thereafter.

Our conviction remains strong that Brazil presents a substantial opportunity for growth due to its large and dynamic market increasing penetration of broadband and relatively high-priced service providers. In addition to Brazil, we are in active discussions with other prospective international partners in additional target geographies.

Turning to mobile, the recent addition of video to the mobile app, and the addition of wi-fi calling to Vonage extensions have accelerated both downloads and usage. The standalone Vonage mobile app now provides one of the most broadly functional over-the-top apps in the market and competitive product testing suggests that our quality is unsurpassed.

Customer response to the addition of video has been positive with average daily downloads increasing by 33% since the feature launched. Video calls on android and IOS phones are now 25% and 12% of all on-net calls, respectively.

We continue to see a positive response to our quality improvements and feature additions. The app is highly rated, receiving 4.5 stars in the iTunes app store and 4.2 stars in Google Play. The number of downloads, active users, and revenues continues to grow. Although we are behind our original internal expectations for the standalone mobile app, we are encouraged that downloads usage and the number of paying customers accelerated during the quarter.

Our product roadmap is robust, and we expect that new services that leverage our core platform will further differentiate us and drive growth in the future.

Use of our extensions mobile service continues to grow rapidly. Currently, 85% of our international callers have an extension, and 76% have used the service in the last 90 days. Extensions is clearly delivering value to our subscribers and making them stickier contributing to the stability of our international calling base.

Our Vonage global phone card, a digital calling card for mobile phones, provides an additional path to penetrate the international calling market. In the second quarter, we improved our service to integrate direct Web purchases with Vonage mobile, providing a seamless smart phone experience without the commissions charged by app stores. This has also allowed us to price more aggressively and to invest in targeted search engine marketing programs to meet the needs of light and medium-use international callers who prefer pay-per-minute pricing.

In the future, we plan to expand the global phone card service to include physical cards sold at retail locations.

Finally, we continue to make progress toward the commercial launch of our international roaming feature, Reach Me Roaming, which is scheduled for later this year in the US. This feature allows users to save on high-cost roaming fees when traveling internationally.

Our commitment to protect our valuable intellectual property has intensified in the past year. This is reflected in the strong progress we've made to grow our patent portfolio. So far, in 2013, we have filed 63 patent applications and have already been granted nine, eclipsing our performance for all of last year. We now have 27 US patents, 52 foreign patents, and 284 pending applications.

During the second quarter, we continue to execute on our balanced approach to capital allocation. We repurchased 5 million shares for $13 million and remain on track to complete our $100 million buyback by the end of 2014.

In addition, we just closed on an amendment to our bank facility in the past week. This gives us even greater flexibility to repurchase stock. Dave will discuss this in greater detail in a few moments.

In summary, it was a solid quarter. We reduced churn to the lowest level in 10 quarters, increased gross line additions, and grew net subscriber lines. Our customer base is stable, and our cost structure continues to improve. As I've reinforced, revenue growth remains our top priority, and we're executing up on our plans to grow the top line.

Consistent with our prior guidance, we continue to expect positive net line additions for the third quarter. We expect to invest several million dollars above second quarter levels to continue to build awareness, drive traffic, and provide merchandising support for the Basic Talk brand.

Our investment will shift from primarily fixed launch costs, which comprise a large portion of second quarter spend to a mix of fixed and variable costs allowing us to ramp our investment up or down depending upon the level of our success. We will continue to exercise financial discipline, and we'll accelerate or moderate spending based upon our progress.

Consistent with the level of prior quarter commitments, we will continue to invest international expansion and mobile development activities.

With that, I'll pass the call to Dave.

Thanks, Mark, and good morning, everyone. I'm pleased to review our financial results and provide you with an update on our outlook. Beginning on slide 3, we reported $27 million in adjusted EBITDA, down $7 million versus the first quarter and down $8 million year-over-year. These changes are primarily due to our investment in the nationwide launch of Basic Talk.

Cash flow generated from our core business prior to investments in Basic Talk, Brazil, and mobile remains strong, reflecting the stability of our customer base and improvements in our cost structure.

Moving to slide 4 -- net income excluding adjustments was $12 million, or $0.06 per share, down sequentially from $21 million and $0.10 per share and down also from $21 million, or $0.09 per share in the year-ago quarter. As with EBITDA, these numbers reflect our planned investments and growth priorities.

Cap net income was $7 million, or $0.04 per share down from $13 million, or $0.06 per share sequentially. Cap net income was up from a loss of $3 million, or $0.01 per share in the year-ago quarter. Note that the year-ago quarter included a one-time noncash adjustment in connection with the abandonment of certain software assets.

Moving to slide 5, revenue was $205 million down sequentially from $209 million primarily due to the non-operational impact of lower Universal Service Fund, or USF fees, lower subscriber additions in prior periods, and retention activities. These impacts were partially offset by selective pricing actions taken in late 2012.

Revenue declined from $212 million a year ago due to the same factors with USF, which is a pass through, contributing $3 million of the decline. ARPU was $29.06 down from $29.61 sequentially, and $29.98 in the prior-year quarter primarily due to USF, the rate plan mix, which includes the impact of incremental volume behind the new Basic Talk plan.

Moving to slide 6, we continue to reduce our cost structure by implementing efficiencies and structural cost improvements in key areas of our business.

In the second quarter we reduced our costs to $54 million driven by lower domestic and international termination costs and interconnect expenses as well as the decline in USFPs. This is a reduction of $1 million over the prior quarter and nearly $5 million over the prior year.

Importantly, the year-over-year reductions in costs more than offset the effect of customer plan changes in ARPU resulting in an improvement in direct margins 69% from 68%.

Cost per line was $7.60 reduced from $7.82 sequentially and from $8.23 in the second quarter of last year.

In addition to the cost reductions we have already realized, our recent termination agreement with TATA and potential savings from gaining direct access to telephone numbers both provide a meaningful path to reduce our cost structure, going forward.

Under the agreement, TATA provides international call terminations for portions of our traffic to India, Canada, and the rest of the world. With access to some of the lowest termination rates available, we are well positioned to continue to provide highly competitive offers to nearly any international calling destination. And we continue to be encouraged by the FCC's recent notice of proposal rulemaking to allow voice providers like Vonage to have direct access to their own telephone numbers. As a reminder, in April the FCC granted Vonage approval to conduct numbering trial concurrent with the rulemaking. The trial is progressing well.

If the proposed rules are adopted, they'll facilitate the shift to direct IP-to-IP interconnection and enable potential long-term structural cost savings in the double-digit millions of dollars in the subsequent two to three years.

Moving to slide 7 -- so in general and administrative expense, $61 million, down $2 million sequentially, due to the one-time benefit from the favorable resolution of an insurance claim as well as from continued reductions in the cost of customer care per line, which declined by 17% year-over-year, is the lowest level in Company history.

SG&A was up $3 million from the year-ago quarter due to higher selling expense as we expanded our retail and community sales teams partially offset by lower G&A.

Moving to slide 8, marketing expense was $58 million up from $52 million sequentially and $55 million a year ago, reflecting planned investment for the nationwide launch of Basic Talk.

Subscriber line acquisition costs, or SLAC, increased to $375 from $349 sequentially and $336 a year ago as a significant portion of the launch costs were fixed in nature and not variable with customer acquisitions, as Marc mentioned.

Turning to slide 9 -- gross line additions, or GLAs, were 155,000 up from 148,000 sequentially benefiting from a partial quarter of basic talk line additions and down from 163,000 in the prior year's quarter.

Churn results were strong, as we decreased churn to 2.4% from 2.5% sequentially and in the prior year's period.

Higher gross line additions combined with lower sequential churn resulted in a gain of 3,000 net line additions in the quarter.

We'll now to move to a discussion of CapEx, cash flow, and the balance sheet on slide 10. For the quarter, CapEx, including the acquisition and development of software assets was $8 million, which was primarily for network infrastructure and systems improvements. This is up from $4 million sequentially and in the year-ago quarter.

We are updating our full-year 2013 CapEx guidance to be no greater than $30 million from the prior in the range of $30 million to $35 million due to greater visibility on expenditures for the remainder of the year.

Free cash flow in the second quarter was $11 million increasing from $5 million sequentially reflecting seasonality and working capital due to timing of payments. Free cash flow was down from $25 million in the year-ago quarter due primarily to lower EBITDA and higher CapEx.

Reflecting the strength of our core business cash flow generation, cash and cash equivalents as of June 30 were $103 million including $4 million in restricted cash. We ended the quarter with a strong balance sheet reflected in total leverage to adjusted EBITDA of 0.6 times and with net cash of $26 million.

We are executing on our $100 million stock repurchase plan, which was authorized in February and replaced our prior $50 million program. During the second quarter, we repurchased a total of 5 million shares for $13 million. At the end of the second quarter, we had repurchased a total of 23 million shares for $58 million since launching our program in August of 2012.

In the past week, we obtained an amendment to our credit facility that increases the restricted payments amount from $50 million to $80 million. This amendment gives us the flexibility to buy back up to $80 million of stock in any 12-month period before the relevant covenant test is applied and repurchase additional amounts as and if allowed within our covenant calculations.

In addition to continuing with our buyback program, we will also evaluate additional opportunities for growth, organic and inorganic, including in mobile, international, and adjacent markets. Their strong balance sheet, cash flow generation, and $75 million revolving credit facility, we believe we have sufficient capacity to pursue compelling inorganic growth opportunities where there is strategic fit.

In summary, we are well positioned to execute our balanced approach to capital allocation. We will continue to invest for long-term growth in international expansion and mobile consistent with the level of prior-quarter investments and plan to spend an incremental several million dollars above second quarter levels to build the Basic Talk brand and customer base.

Thank you for your interest in Vonage. I will now turn the call back over to Leslie to initiate the Q&A session.

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

(Operator Instructions) Bill Dezellem, Titan Capital.

Thank you. I'd like to start with CapEx. You mentioned that you were lowering that number simply because you have more clarity. Is that simply an estimating function that you're talking about having clarity or have you actually changed the -- some of the planned investments?

That's an estimating function. We haven't changed our investments. It's up in the second quarter based on the timing of some projects that we've done that have been long planned. And the $30 million is really about the greater visibility for the remainder of the year. We've not changed our outlook or the projects that we're pursuing.

Thank you, and then, secondarily, you referenced the incremental multimillions of investment for Basic Talk. Would you quantify that further, maybe put some numbers behind it, please?

Sure. We talked about several million, and I think that's the right way to think about it. We guided, in the last quarter, that we would spend $5 million to $7 million on Basic Talk in that quarter and $5 million to $10 million on other growth initiatives.

In total, with spending on mobile and international, spending on Basic Talk, and the incremental amount on Basic Talk that we referenced will still be in that range if you add those numbers up -- if you add that prior guidance up on a per-quarter basis.

This is Marc. We're not going to give specific numbers because that's going to vary from week to week based upon the productivity of our channels. In addition to the heavy advertising to build initial awareness of the new brand, which was required, and we want to continue to build that awareness, and we track that weekly, we'll be doing a number of variable-based programs like direct mail in high-traffic Wal-Mart locations, much more digital activity now that we've created some awareness of the brand -- all of those things will vary based upon the actual throughput. So that's about the best we can give to you. What we shared as -- we previously we do look at these things on what's required to get launched, what's the ongoing sustained profitability, and what kind of MPV do we need to make this a smart investment over time.

Churn rates are good, we see virtually zero cannibalization of the Vonage core brand. That's an extremely important point as folks understand the ARPU story. We have seen virtually zero cannibalization of the base, so you think about that as incremental dollars of revenue on the core business -- an area where we really weren't competing before at all and, yes, it will have an impact on service ARPU as you blend that into the mix.

When you look at total revenue and say, hey, guys, how come you're not moving that faster? That's because of the cumulative impact of net line losses, which, you know, it's history, it is the fact. We don't like it, but that's what was there, and you have to net Basic Talk out of that, and that impact of losing prior-period net lines at the Vonage World case rate, that's what's driving your total service revenue numbers.

I will offer to you the notion that we expect the second half of the year total revenues to exceed first half total revenues as we get the benefit of that basic talk and then positive net adds in the balance of the period.

Next question, Operator.

[Noel Blaine], Citi Investments.

My first question is how much of sequential churn improvement and the increase in gross adds was attributable to the Basic Talk launch in the quarter? And, secondly, if you could provide us with an update on the competitive environment from a pricing perspective for the core home replacement service excluding Basic Talk.

Sure, I'll take that one, this is Marc. So churn improvement was actually across the board on our core business. Very little of that was affected by Basic Talk just because the absolute numbers relative to our total customer base were still relatively small. So even though Basic Talk is lower than the average, you're not going to see an averaging in benefit of that for some period of time. So the 10 basis points was core, and it reflected improvements in virtually all of our segments -- both ethnic international callers as well as domestic.

On the second question, relative to competitive situation, we've seen -- we always seek competitive pressure. We've seen continued stability in bundles. We've seen, since the beginning of the year that was probably just continuation of the second quarter, strong competition both from cable companies as well as the telcos providing large amounts in gift cards, but there's not been a significant acceleration in the second quarter from the big telcos and cable companies.

We do see sporadic promotions from some of these smaller ethnic targeted international long distance companies -- pretty tactical. We respond to those by segment as necessary. That does have some impact as we protect those customers when they call to suggest that they can get better rates. We manage that very proactively in our retention centers. That does, and Dave mentioned, have some impact on ARPU period over period because the value of those customers, once acquired, the contribution margin is high; we want to keep them even if it means rerating them to lower rate plans, as necessary, to match what competition is delivering. So you see some of that in our service ARPU rate decline as well as USF.

So that's kind of a high level. But I will mention also on a competitive front, it does appear that Basic Talk is hurting other low-end competitors. While we got a slower start than we would have liked, we launched advertising in mid to late May, and it took us longer than we expected to actually get all of our merchandising through the Wal-Mart distribution channel. So that continues to accelerate for us.

But we saw within two weeks of launch, both Magic Jack take competitive action in terms of a major price rollback, and what most folks may not realize is their pricing in Wal-Mart not only rolled back the price but extended the time for which you get service under that $49 up to 12 months from six. So they took a very large price decline to try to protect business. So we know we're taking a chunk out of them. We both have seen some advertising from other low-end competitors.

That said, we're pleased with our Basic Talk progress and continue to support that brand, and we're seeing very positive results from customers that have signed up.

Next question, Operator.

Matt Sherwood, Cooper Creek Partners.

Hi, guys, congrats on a good quarter on the add side and the churn side. I just have a [good] question for you. If you're at 157,000-ish adds for the quarter, but Basic Talk was really only one month of the quarter, does that mean that, hey, you were, like, running at 148,000 run rate for the first two months, and you're at, like, 175,000 for the June month. Was there a material acceleration in adds as the quarter progressed?

It's a good question, Matt. We're not going to provide specific numbers that gives you the week by week and kind of the forecast forward, but your basic thinking that says, hey, you've got a run rate of your core Vonage business. That seems pretty stable, and you've launched Basic Talk late in the quarter, shouldn't you get benefit from a longer period of time as you move forward? The answer is yes, of course. There's clearly a ramp to Basic Talk. The last couple of weeks were much stronger than the initial weeks as you're ramping distribution, so you definitely see that.

One thing that you should keep in mind, however, is that prior to the most recent quarter, we were running Basic Talk direct marketing programs nationally under the Vonage brand. So that was -- in that run rate, we ramped that down in the second quarter as the national launch occurred, but what we were doing for those who were not on previous calls with us is we were testing this with people who had already quit Vonage for one reason or another. We know who they are, and we've re-marketed to them under the Vonage Basic Talk service, and we also went after those people who had incomplete sales -- people that we had through digital tracking or in down telemarketing were unable to close a sale on a higher-end rate plan in the past. And we've been doing that as part of our test markets for an extended period of time.

So we do have, what I would say is not immaterial compared to the May/June timeframe. Run rate, Basic Talk, that was also in that base and funded out of the core budgets. So I just caution you as you start doing your multiplier [effects] and trying to forecast GLAs to keep that historical run rate in mind. But we do expect, obviously, a full quarter of GLAs of Basic Talk next quarter, and we expect it to be larger than it was, certainly, all things in Q2. And we do expect positive net adds and reaffirm that guidance from last period for the third and fourth quarters.

Right,. but you're not going to help us with the sort of improvements in July or, you know, as the quarter progressed?

No, I'm not. The competitive environment and distribution certainty along [with] rising -- has too much variability for me to try to give you a specific number other than to say the direction is up.

Okay, fair enough. Now, a second -- you usually give your amount of investment spend on the new initiatives plus, I guess in this case, Basic Talk for the quarter in aggregate? I didn't see that in the press release.

That's right. I think in the first question I referenced the fact that it's going to fall within the guidance in the third quarter that we gave for the second quarter. And the second quarter also fell within that guidance if you think about the two buckets of the 5 to 10 of mobile and international and the 5 to 7 in Basic Talk.

Maybe to add just a little more perspective on that, I think we talked about $6 million of investment last quarter, and net last quarter was lion's share related to mobile international. We did not significantly shift mobile international spending. We had some ups and downs and the remainder of that spend, which you actually see fall through in EBITDA quarter over quarter is the Basic Talk launch.

Fair enough, that's helpful. Okay then, I guess, number three, share repurchase -- you got a covenant waiver that will allow you to repurchase shares much faster. Is that an indication that that could be something you're interested in, or did you just get it to give you maximum flexibility?

This is Marc. I'll take the tail end of that. This is just responsible management to give us the maximum of flexibility. We saw an opportunity, we've got good partners in our bankers, and we're able to do this for very, very little cost. We thought it was a good opportunity to give us an opportunity to plan for the future and deal with whatever situation might arise.

I mean, because if you're about to materially accelerate your add profile with Basic Talk and then Brazil coming up might be a good time to sort of accelerate, for sure, a purchase plan.

I think the way we think about it is we certainly have that flexibility. I think we already had that flexibility. Now we don't really have to, up to a certain point, focus on the covenants as we make decisions and judgments about the buyback. So it's a very good tool, and we expect to continue the program. In each quarter we adjust the program based on a variety of factors including market conditions.

Okay, fair enough. And then, I guess, a final question on Brazil now that you have a lot of these approvals that you didn't have before. Is there any update and more clarity on the launch timeline?

Well, I'll repeat what I shared in my opening comments. We've got a quarter-by-quarter plan that gets us through all of our testing by late in the first quarter, which includes final integration testing. We'll have a number of key milestones before that that will have friendly user testing to make sure that operationally things are working, and we expect very late first quarter, early fourth quarter -- sorry -- late first quarter, early second quarter, for a full feature complete launch.

Okay, we'll move to the next question, Operator.

Brian Horey, Aurelian Management.

First, I just wanted a little housekeeping. You said the lines added from the retail assisted selling were up 18%. Is that correct -- did I hear that correctly?

What I said was retail sales in what would be our big box or mass merchants in regional stores were 18% up separate from Basic Talk. So it did not include the impact of Basic Talk.

Okay, so 18% of the total adds?

No -- of the -- for that channel, for mass merchants and regional stores. Yes, the physical bricks and mortar retail stores.

Okay, got it. And you also gave a stat on the community sales. Can you repeat that as well -- community sales teams?

Yes, so the community sales teams grew by 9% sequentially. And we continue to increase staffing in those areas so we continue to increase productivity and would expect that number to increase as well. And this reflects a long term, over the past, really, five, six quarters shift to move to more variable cost, direct selling models, particularly into ethnic communities or in stores where we can see ethnic communities and engage them for the value proposition and shift our spending away from what is now a more cluttered and more expensive television media environment. So we're moving to more targeted vehicles, which includes digital, when you think about buying media as well as the ability to actually put people in front of our customers in an engaged selling manner at mid range. It helps us target this customer base a little bit more cost effectively, and it [variableizes] our costs.

Okay, and that's the number of teams and not the number of lines added through that channel. Is that -- just to be clear, right?

I didn't mention the number of teams, so let me be clear. The 9% was actually the gross line additions --

Got it.

-- generated by our community sales teams.

Okay, great. And then just trying to think about the different impacts on line additions, outside of that, would you say that the Basic Talk adds were able to offset the impact of the declining efficiency that you referenced in TV and direct mail and kind of -- some of the more traditional channels that you've used for the core offering?

Yes, I'd probably rephrase it a little bit in that Basic Talk, as a long-term growth driver, we feel a lot of confidence in, and it's going to help us to deliver that positive net adds and total top line revenue growth as it, over time, that's going to be a major contributor for us.

Relative to the offset, obviously, our selling and acquisition cost is up on a per-line basis reflecting what is up front more than, kind of, a normal per-GLA rate. You have to invest in advertising reasonably heavily to build awareness and drive traffic into retail stores and online.

So your overall subscriber line acquisition cost was higher, which means that, by definition, it's not completely offsetting, but it also suggests to you that that number, over time, will come down significantly. The reason why it's so high was because the up front investment in Basic Talk.

Right, I understand that. I was just trying to get at the number of lines added as opposed to the cost. Whether the volume of adds from Basic Talk was enough to offset the weakness in the core product through the traditional marketing means.

Yes, so I think the way to think about is there is a little bit of softness and, obviously, with the increase in total net line adds, I think, by definition, Basic Talk offset any weakness that we saw in Vonage World during the quarter.

Okay, fair enough. I'm sorry, can you go back through the stats on the mobile? You said average downloads, I think, were up 33% on a daily basis, I guess, versus last quarter? Is that the right comparison?

It's versus the time -- versus when we launched the video service. So we looked at kind of the average number of downloads for the two months prior to the launch of video, and then we looked at the subsequent three months post launch, and that -- overall downloads increased by a third post versus pre.

Okay, great. And then you gave some stat about usage of the IOS and the android app, I think with the video. Can you just reiterate that as well?

We're seeing that of all of our on-net call, and on-net calls, obviously, are those where both parties have the software, our products differentiated from a lot of other companies where we allow you to make calls to anybody, and we build those calls, obviously, through a prepaid plan for international long distance. But if you're on-net, meaning both people have the software, we're much like some of the other smaller companies that have on-net free.

Video only works if both people have the software. And for those on-net customers our video calling rate has been 25% of all calls on-net, on android or video calls. So one out of four calls during the period have been a video call on android, and the level for IOS is about half of that. I attribute that to two things. One is face time, so IOS does have functionality, IOS-to-IOS, as well I think the user experience, generally speaking, for android tends to be a little bit better for all over-the-top operators. They give a little bit more flexibility for developers than does IOS.

Next question, Operator.

(Operator Instructions) David Cannon, Aegis Capital.

Getting back to the rollout of Basic Talk through Wal-Mart, can you tell me when you were fully operational in all 3,700 stores?

I would say -- it's difficult, because you don't have instantaneous audit. We do have merchandising firms that are actually in stores so we get a count each week. I would say that we were fully operational across all stores in early June.

Okay. And then I know somebody attempted to ask this question, but I was still ambiguous of the answer. Of the $6.5 million of incremental marketing spend, how much of that went towards Basic Talk versus international versus mobile -- if you can give me a breakdown.

All of the incremental went to Basic Talk and then some.

Okay, so, I mean, here is -- this is my concern or question. What is the payback on that? If you're investing $6 million, what is your internal expectation in terms of subscriber additions, and how long will it take you to recover that investment? Have you guys thought that through -- kind of what's your internal model on that?

We have. I'm not going to get into details on specific GLA numbers based upon modeling. I'll give you some of the component parts on target goals that make it a good investment. We built our -- a big piece of this also relates to customer life. We had expectations internally that customer life would be in the mid 2% range. We're seeing early indications because it's going to be well below 2%, which extends customer life on churn.

In addition, ARPU, we obviously have that as very easy to calculate, and we then look at what are the other cost components internally? We are very comfortable with our assumptions on customer service cost, all of our online sales and service is meeting our internal expectations from our core model.

When we think about that, we look to get a net present value on these customer -- if we look to get a net present value on these customers that we consider to be reasonable return and reasonable discount rates, it allows us a long-term slack or once we get out of the initial startup phase, to be somewhere around the $200 range. We've shared that previously, and as churn declines, you might get some additional flexibility. But that's what the sales and marketing teams are focused on. You're not going to see that in the first 20 weeks of any major new brand launch, and as we look at our long-term, three- to seven-year kind of program of Basic Talk and the GLAs that we expect to get as a percentage of our total, that $6 million will have no problem being paid out.

Okay, Operator, if there are no -- do you have one more question, Dave?

Yes. Regarding mobile -- to me, it seems like mobile is a more exciting opportunity. You referenced your international roaming product. When do you anticipate marketing that full throttle?

We expect to expand our roaming product into the US marketplace before year-end. We've not given specific timetables. We're completing our testing on multiple networks, and I don't want to try to predict something that I don't have enough visibility for to give you a specific month. And I wouldn't do it for competitive reasons, anyway.

Okay, and then nobody asked about the Philippines. Can you give me, I guess, your partner, Globe, what's the status of that and if there's any impact or contribution?

So -- our relationship with Globe continues. We've got solid and stable gross line additions from Globe. We marketed a lot less in the second quarter against Globe than we had in prior periods. We saw concerns from our partner about some heavy users, so we've restructured our rate plan from unlimited plan to a high number of minutes capped plan and have just started marketing again at the levels that we were doing in Q4 of last year.

So -- our subscriber line acquisition cost on Globe customers has been below $300, so we think that that's a very good investment, but we did stand down and redeploy some of those dollars during the last quarter.

Next question, Operator.

[Robert Rouse], National Alliance.

Just two quick ones -- first, I was wondering if you could remind us -- are you still subject to any 382 limitations as it relates to potential stock buybacks, going forward, now that you're making money in free cash flow and things are going well? And, second, if you could remind us about your NOL situation? I know a while back because things changed, you reversed a lot of your NOLs, but you didn't reverse all of them. I wonder if you can give us a sense as to when you could possibly be a cash taxpayer and if then how much in NOLs do you still have that potentially could be reversed in the future as the outlook continues to look bright, going forward, for the Company?

Well, you broke up a little bit while you were talking, so we're going to try to make sure we've got those captured. I'll turn it to Dave and he may incorporate -- one of his guys is here with us, Jerry, who is our controller could perhaps provide some additional specificity on those two points.

So I think the first one was related to 382 buyback limitations.

Yes, sir.

And we are subject to those. And as it relates to -- we still have a $740 million NOL that continues to be valuable. We released a portion of that based on visibility on being a cash -- on the fact that we would have been a cash taxpayer or going into that scenario. We do not anticipate paying cash taxes anytime in the foreseeable future based on what we released but also what's been unreleased as part of that $740 million NOL.

Great. And do you think, I know it's obviously too early to say, but is there a chance that you will be able to release the remaining portion of that $740 million if things continue to progress as they have?

At some point, but that's a calculation we'll make in the future. It's not something that feels near term.

Okay, Operator, if there are no additional questions, that 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. Have a great rest of the day.