Venture Global Inc (VG) 2013 Q3 法說會逐字稿

Good day, everyone, and welcome to the Vonage Holdings Corporation third 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 third quarter 2013 earnings conference call. Speaking on our call this morning will be Marc Lefar, Chief Executive Officer and Dave Pearson, CFO. Marc 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 will be happy to take your questions.

As referenced on slide two I would like 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. Reconciliation to GAAP is available on the IR website. And now I will turn the call over to Marc.

Thank you, Leslie, and good morning, everyone. Today we reported a solid third quarter. Gross line additions of 175,000 were up 12% sequentially and up 2% versus the prior year. This was our best quarter of GLAs since the first quarter of 2011 as we benefited from a stable volume of international callers and the first full quarter of national basic talk sales. As expected, churn increased modestly to 2.6% due to targeted price increases executed during the quarter and the early life churn associated with higher levels of new gross line additions.

Low seasonal churn during the second quarter also effected the sequential comparison. Total net lines grew by 11,000, a sequential increase of 8,000,The highest level of net additions since the first quarter of 2008. Revenue of $204 million was roughly flat sequentially and down 1.7% versus prior year due to prior period line losses in our premium domestic customer base and [mode] ARPU compression. Basic talk sales and targeted pricing actions helped to offset these factors. Adjusted EBITDA of $23 million was down sequentially from $27 million primarily due to the full quarter impact of national launch investments in support of Basic Talk.

This investment will begin to ramp down towards the end of the year as we move to more normalized levels of acquisition costs. Our steadfast focus on improving efficiency has led to further cost reductions in customer care and telephony services, which are down 14% and 4%, respectively compared to the prior year. We will continue to emphasize structural cost reductions in our 2014 plans to help offset the cost of investments and growth and domestic pricing pressure. Free cash flow was $20 million, $9 million higher sequentially due to positive changes in working capital and lower capital expenditures.

We are now at the halfway point of the three-year plan that I first outlined at a major investor conference in early 2012 in which I elaborated on during our annual earnings call a month later. At that time I described the strategic operational and financial transformation that we just completed. That phase of our plan, which took roughly three years, resulted in a swing of nearly $200 million in EBITDA and dramatic reductions in land losses and churn. Our performance allowed us to restructure our balance sheet, lowering interest rates from a high of 20% to less than 4%, saving over $40 million in annual interest expense. Even after the closing of the recently announced acquisition of Vocalocity, our net debt will be 65% lower than at the end of 2009.

In addition, we've executed on our early 2012 promise to take a balanced approach to capital management. In August 2012 we initiated our first $50 million stock repurchase program which we subsequently replaced with $100 million plan. Through the third quarter of this year we've repurchased 28 million shares for $72 million. It was also during these early 2012 discussions that I outlined a high level strategy for growth with the goal of driving substantial new revenue streams to be realized as we enter 2015. We discussed three strategic areas of emphasis. One, core growth in the US and Canada. Two, mobility services both as a stand alone service and as a compliment to all of our offers globally. And three, international expansion.

As we approach the halfway point of our three year plan let me touch on each of these strategic areas of emphasis and share our progress towards Vonage's reemergence as a premier provider of cloud base communication services. In our first strategic area of emphasis, the US and Canada core business, we established three objectives. The first of these was to continue to penetrate under served ethnic segments with aggressive international calling plans, building upon on our early success with Vonage World. Since that time, we've established a 36% share of the Asian-Indian segment in the US, grown our Hispanic international calling customer base to nearly 200,00 households, built an annualized revenue stream of over $10 million dollars among Filipinos and have 45% of all of our customers making international calls.

While we have grown share in the Indian calling segment our results in other segments have not progressed as quickly as we've expected. During the third quarter gross line additions from premium plans were roughly flat sequentially as gains in the Indian segment were offset by lower [adds] in Hispanic and other segments. In the fourth quarter we've implemented several initiatives to grow faster, including new advertising, enhanced distribution and limited time local events and promotions that place sales agents in high traffic, temporary locations. We continue to make progress growing our retail and alternative sales channels.

Our assisted selling initiative, in which we place Vonage representatives in retail locations to engage directly with customers, continues to perform well. In the third quarter we increased the number of stores with assisted selling from 550 to 700 and saw an increase in gross line additions from this channel. Sales from our community teams also performed well and we're up over 9% from the prior quarter. The Chief Generosity Officer advertising campaign has been working to drive increased awareness and perceptions of credibility and trustworthiness in both the [ILD] and domestic calling segments.

While we were pleased with the early creative results we are testing ways to get similar effectiveness from television at lower cost. Our yield on television media simply isn't where it needs to be. In addition we're focused on improving the efficiency of our digital advertising. We've tested a broad array of tactics and are now focusing our efforts on consolidating our digital retargeting efforts, building on successful new prospecting tactics and optimizing our display activities. In the fourth quarter we are continuing to expand our distribution in assisted sales and community sales teams.

Overall, we expect absolute marketing spend on our core business to decline in the fourth quarteras we adjust our channel mix and improve our efficiency. Our marketing investment in television and direct mail will decline while we increase our use of digital media and search. The second objective for our US and Canada core business was to meet the needs of light use domestic home phone users with an aggressively priced service without cannibalizing the Vonage brand. After significant research, in-market testing and discussion with prospective partners we launched a new [flanker] brand, BasicTalk nationally in mid May.

Results have been strong. BasicTalk is available in all of Walmart's 3700 stores nationwide and online through Walmart.com and BasicTalk.com. While the results are still early, customer satisfaction is high and the churn rates appear to be comparable to the average of the Vonage customer base, in the mid [twos]. This is encouraging for a non contract service. Importantly, we've seen very little cannibalization from the Vonage customer base. Now six months into the market we've established BasicTalk as a high quality, trustworthy brand. Brand awareness is low relative to Vonage but it is growing rapidly. We will continue to invest in BasicTalk during the fourth quarter.

The spending levels will be below those of the third quarter as slack declines on a path towards long-term target levels below $200.00. We tested a range of marketing tactics during the third quarter and are scaling the most successful. Aided by new advertising that focuses on the key brand attributes of believability and trustworthiness along with an expected strong holiday season in retail we expect BasicTalk to be a meaningful contributor to gross line additions in the fourth quarter. The third objective outlined in early 2012 for our US and Canada core business was to evaluate alternatives to enter the small and medium business market.

We considered a range of market entry strategies over the past year and announced our agreement to acquire Vocalosity last month. The Vocalosity acquisition, which is set to close in the next couple of weeks provides us with immediate and significant presence in the high growth SMB hosted voice market. For those of you who weren't on our announcement call last month, Vocalosity is and industry leading SAAS provider of cloud based communications to small and medium businesses. For the first half of 2013 the company grew revenues to $28 million, a 39% increase over the same period last year. Their rate of growth is more than double that of 8x8 and comparable to that of Ring Central.

Vocalosity also added nearly 500 more net new customers than 8x8 during the first six months of the year. Over the same period revenue per customer per month was $229.00, an 8% increase over the prior year and more than five times that of Ring Central. The total small and medium business market for voice service in North America is $15 billion and 32 million lines. Vocalosity has focused on companies with 20 or fewer employees, which represents more than 60% of the total market or roughly $9.5 billion in revenue.

The opportunity for continued rapid growth in this segment is substantial given that 85% of SMBs still purchase voice service from traditional carriers at rates that are frequently 40% to 50% higher than those of Vocalosity. Vocalosity and Vonage use similar SIP-based VOIP technology, presenting well defined opportunities for meaningful synergies. An example is in the cost of telephony services where Vonage's domestic termination rates are one third of Vocalosity's. The use of technology to service customers is another area where we expect to realize meaningful efficiencies.

This acquisition also provides us with the unique opportunity to leverage our investment in the brand over the last decade to accelerate Vocalosity's growth. Vonage brand awareness among SMBs is nearly 80% while aided awareness of 8x8 and Ring Central is less than 10%. In addition, since many consumer and SMB acquisition channels are similar, we anticipate that we will be able to reapply best practices and realize benefits of scale in our sales and marketing over time. We plan to transition the Vocalosity brand Vonage Business Solutions in the coming months. Vocalosity also supports our strategy to expand internationally by enabling us to deliver services to SoHo and SMB markets abroad. We also expect that the investments Vonage has been making to build our mobile capability can be leveraged into the SMB market.

We are acquiring Vocalosity at a compelling transaction price relative to other leading hosted VOIP providers. We are purchasing Vocalosity at 2.4 times the last six months annualized revenue. This compares very favorably to 8x8 and Ring Central, which traded approximately 6.8 times and 8.4 times revenueon the same basis, respectively. Vocalosity will operate as a line of business within Vonage and will be lead by itsexperienced CEO Wain Kellum and many of the members of his existing leadership team. Wain and his team will oversee Vonage Business Solutions, encompassing everything Vocalosity is doing today as well as the current business customers of Vonage.

He'll be responsible for all of our future expansion plans in SMB, including the evaluation of Small Office, Home Office customers, or SoHo, a largely untapped market opportunity that lies between the current Vonage business and Vocalosity's core SMB customer. Our teams are hard at work preparing for the launch of the combined Company. We plan to deliver tangible benefits to customers, prospects and partners immediately. We look forward to updating you on the progress of those launch initiatives on our fourth quarter earnings call. There is much work to do and our teams are excited and invigorated by the prospects ahead of us.

The second area of strategic emphasis has been mobile services. Since the launch of our patented Extensions feature in August of 2011 and our Vonage mobile app in February of 2012, mobile use has grown rapidly among our customers, now representing 31% of all Vonage international calls in the third quarter. Extensions, our mobile products for home phone subscribers, has become a key feature for our customers with nearly 800,000 customers having registered an extension, representing over 80% of our international callers. And more than 40% of Extensions calls are being made over Wi-Fi, hinting at an even larger opportunity for traditional mobile displacement.

A growing number of customers are purchasing second line Extensions priced at $4.99, creating further stickiness and enhancing revenue. In the last 30 days alone over 60% of all Extensions owners were active, generating 12 million calls and 136 million minutes of use. Clearly demonstrating the convenience and utility of the feature. That's an annual rate of over 1.6 billion international minutes. We've come a long way. Since launch in February 2012, Vonage mobile app downloads have continued to grow as our features and quality have become more robust.

Downloads accelerated in third quarter as a result of our April introduction of video calling. In the quarter nearly 20% of all app calls on Vonage mobile were video calls and the app continued to receive high ratings, maintaining a 4.5 plus in iTunes and a 4.2 plus in Google Play. Over the next few weeks, we will add to the compelling feature set when we introduce a truly unique version of video voice mail. Vonage Mobile will be the first over the top app to enable users to leave a video message, instead of an audio voice mail, on the flywhen a traditional voice call has gone unanswered. Nobody else does this.

The number of people leaving and listening to voice messages has declined dramatically over the past few years. Leaving a video message, instead of a traditional voice mail, allows users to break through the voice mail indifference and experience important moments together even if they can't speak at that moment. Video voice mail give users a reason to look forward to voice mail. On the heels of video voice mail we will launch our patented international roaming feature, ReachMe Roaming, that allows users to save on high cost roaming fees when traveling internationally while still receiving inbound calls on their primary phone number even if the caller is not using our app.

Mobile is also an integral part of our growth strategies for small and medium business as well as international expansion, where we plan to leverage our existingplatform and development expertise. Looking into 2014 you would expect to see breakthrough services that create true alternatives to traditional wireless carriers for certain segments. These offers will make use of seconds numbers and alternate identities on traditional mobile phones as well as the enablement of other cloud base connected devices such as [iPads] and iPods. A new world of [NBNO] is truly emerging.

The third area of strategic emphasis has been expansion internationally. Our first international partnership was signed with Globe Telecom in May of 2012. This partnership enabled Vonage to provide Filipinos with cost effective international calls at a fraction of the rate they were accustomed to paying. That business is now in excess of $10 million dollars in annualized revenues and growing. Our second international expansion initiative, the launch of communication services in Brazil through a joint venture with Datora, was signed in February of this year, and we're making good process. The Company has completed network testing, finalized plans to host the billing platform and has continued to build out an experienced local management team with the recent hiring of a chief marketing officer.

The Company is on track for customer and production testing later in the fourth quarter and phased market entry targeted for early in the second quarter of 2014. We remain excited about the Brazil market and the substantial growth opportunity it presents. In addition to Brazil, we are actively pursuing other international opportunities, including partnerships in India and Mexico and are systematically analyzing additional opportunities. At the same time that we are developing innovative products, features and technology, especially in the areas of mobile and call quality, we are successfully executing on our strategy to protect our valuable intellectual property.

Thus far, in 2013, we have filed over 80 US patent applications compared to 59 applications filed in 2012. And we've been granted 12 patents surpassing the seven granted in all of 2012. We now have 30 issued US patents and more that 200 pending US patent applications. In summary we're now at the halfway point of the three-year growth plan that I outlined in early 2012. We've successfully pivoted from a strategic operational and financial transformation, which resulted in a swing of nearly $200 million in EBITDA, dramatic reductions in line losses and churn, a restructuring of our balance sheet and the implementation of our stock repurchase program to the execution of our strategies for growth.

Now 18 months into our growth plan we see that the core business remains stable, BasicTalk is enabling us to successfully attack the lower end domestic market and we're making continued [progress] in international and mobile. With the acquisition of Vocalosity, we have all the right pieces in place. As we build our detailed 2014 plans we will be taking a dynamic approach to resource allocation and investment, focusing greatest energy on those initiatives that are generating the greatest risk adjusted return. Thank you for joining us today, and now let me hand the call over to Dave to review the details of our financials.

Thanks, Marc, and good morning, everyone. I am pleased to review our financial results and provide you with an update on our outlook. Beginning on slide three the adjusted EBITDA was $23 million, down from $27 million sequentially reflecting our planned investments to build BasicTalk brand awareness. This also reflects lower ARPU, which I will discuss in a moment, and $1 million lower net settlements to the Company in the period, as we have benefited from a substantial one-time insurance settlement in the second quarter. Adjusted EBITDA was down from $34 million in the year ago quarter, consistent with our previously discussed plans to increase investments and strategic growth priorities. I'd like to highlight two new financial disclosures for this quarter as we discussed EBITDA.

The first relating to the acquisition of Vocalosity. In the third quarter we incurred one time costs of $680,000.00 associated with the Vocalosity acquisition, mostly relating to professional fees. These costs are included in SG and A but have been excluded from the calculation of adjusted EBITDA in order to maintain period to period comparability. We anticipate additional transaction-related costs in the fourth quarter related to the closing of this acquisition. The second disclosure relates to our joint venture in Brazil in which Vonage has a controlling interest and, therefore, reports on a consolidated basis.

Beginning in the third quarter we were reporting on our income statement and add back of net loss attributable to non-controlling interests, reflecting the interests in this venture owned by our JV partner. For the third quarter this item was $222,000.00For the same comparability reasons this item is also excluded from adjusted EBITDA.

Moving to slide four, GAAP net income was $4 million, or $0.02 per share, down from $7 million, or $0.04 per share, sequentially. GAAP net income was down from $13 million, or $0.06 per share, in the year ago quarter. Net income, excluding adjustments, was $9 million, or $0.04 per share,down sequentially from $12 million, and $0.06 per share, down also from $21 million, or $0.09 per share, in the year ago quarter.

As with EBITDA, the reduction in net income reflects our planned investments and growth priorities. Moving to slide five, revenue is $204 million, down [$1 million] sequentially, primarily driven by a decline in our number of domestic callers on premium plans, mostly offset by growth in customers on BasicTalk and lower priced retention plans. Revenue declined from $208 million a year ago due to prior period line losses in the same plan effects. ARPU was $28.87, down from $29.06 sequentially to $29.31 in the prior year quarter primarily due to the addition of customers on lower priced rate plans, including the impact of incremental volume from BasicTalk.

Moving to slide [six], we continued to execute on our structural cost reduction programs to further reduce cost of telephony services, or COTS, [to] customer care [costs] per line. We reduced COTS to $53 million from $55 million a year ago primarily due to lower domestic termination and interconnection costs, which declined by 16% and 39%, respectively. COTS declined from $54 million sequentially.

Continued reductions in this key line item have more than offset the effect of customer plan changes on ARPU, resulting in stable direct margins sequentially and an increase in direct margins of 69% compared to 68% in the prior year. COTS per line was $7.48, down from $7.60 sequentially and from $7.80 in the thirdquarter of last year. I'd like to take a moment to provide an update on our numbering rights trial. In April, the FCC proposed changing its rules to allow VOIP providers to directly access telephone numbers. It granted us authority to do a trial with up to 125,000 telephone numbers. In June, the FCC approved our plan for the trial.

Purpose of the trial is to demonstrate the absence of technical issues with VOIP providers having direct access to telephone numbers,including issues regarding call routing, local number portability and inter carrier compensation. After the internal testing phases of the trial we have started to serve customers with directly held numbers at the beginning of October in two markets and have now transitioned all of our customers in these markets to Vonage numbers. The trial, which runs through December, is running smoothly with no significant technical issues thus far in these markets.

If the FCC adopts the proposed rules and allows VOIP providers like Vonage to have direct access to their own telephone numbers it will facilitate the shift to direct IP to IP interconnection and enable potential long-term structural cost savings for us in the double digit millions of dollars over the subsequent two to three years. Moving to slide seven. [Selling] general and administrative expense for the third quarter was $65 million. This is up $4 million from the second quarter where we recorded the $2 million insurance claim reimbursement I referred to earlier.

The incremental $2 million in SG and A over the prior quarter was primarily due to expansion, the number of stores in which we provide assisted selling and Vocalosity acquisition expenses, offset in part by a $1 million insurance reimbursement associated with Hurricane Sandy. SG and A increased $5 million over the prior year, also due to the same assisted sales expansion. This year-over-year increase was partially offset by a 14% decline in customer care costs per line, reflecting continued service quality improvements, operating efficiencies and improvements in average handle time. Average handle time declined 7% from a year ago to 677 seconds. The first call resolution improved 1.7 percentage points from a year ago to 80.3%.

Moving to slide eight. Marketing expense was $59 million, up from $58 million sequentially and $51 million a year ago, reflecting planned investments and growth priorities, including BasicTalk. Subscriber line acquisition costs, or SLAC, decreased to $339.00 from $375.00 sequentially as we began to realize efficiencies in BasicTalk acquisition costs. SLAC increased from $299.00 a year ago, partially due to our launch investment in BasicTalk. We expect to continue to reduce BasicTalk SLAC over time as we progress from the early product launch phase to steady state efficiency levels, as Marc referenced.

Turning to slide nine. Gross line additions, or GLAs, were $175,000.00, up from $155,000.00 sequentially, reflecting a full quarter of BasicTalk additions,and up from $172,000.00 in the prior year's quarter. Customer churn was 2.6%,up from 2.4% sequentially, primarily due to three factors. The implementation of targeted pricing actions, early [life] churn associated with higher GLAs and seasonally higher non-pay churn. Churn was up from 2.5% the year ago quarter.

Higher gross lines additions more than offset the uptick in churn, resulting in 11,000 net line additions in the quarterand our second consecutive quarter of growth in net lines. I'll now move to discussion of CapEx, cash flow and the balance sheets on slide ten. For the quarter, CapEx, including the acquisition and development of software assets, was $4 million, primarily for network infrastructure and systems improvements. This is down from $8 million sequentially and up from $1 million in the year ago quarter. Sequential decline is due to several larger projects having been completed in the second quarter.

Free cash flow was $20 million up from $11 million sequentially due, in part, to positive changes in working capital from the timing of payments and the lower capital expenditures,and up from $17 million in the year ago quarter primarily due to changes in working capital. Reflecting the strength of our core business cash flow generation, cash and cash equivalents as of September 30 were $104 million, including $4 million in restricted cash. We ended the quarter with a strong balance sheet reflected in total leverage to adjusted EBITDA of [.6] times and with net cash of $34 million. We continued our balanced approach to capital allocation repurchasing 5 million shares for $15 million during the quarter. This is up from $13 million in the prior quarter.

At the end of the third quarter we had repurchased [39 million] of our current $100 million authorization. Since beginning our buy back in August 2012 we have repurchased 28 million shares for $72 million. We will continue to execute against our $100 million buy back authorization, which runs through the end of 2014. In October we announced our agreement to acquire Vocalosity for $130 million. Under the terms of the agreement Vocalosity shareholders will receive $105 million in cash and $25 million in Vonage common stock.

Stock component of the transaction consideration equates to approximately 8 million shares, or 3.5% of fully diluted Vonage shares. We are financing a cash portion of the transaction with $30 million of cash from the balance sheet and $75 million from our low cost revolving credit facility. Post close we will have $74 million of cash, including [$4 million] of restricted, gross leverage of 1.2 times and net leverage of [.6 times] EBITDA (inaudible) September's financial data. After the close of the Vocalosity acquisition, which we expect in mid-November, we will report consolidated financial results for the two Companies combined as of the date of the acquisition.

As a result, when we report fourth quarter results they will include only a partial quarter of Vocalosity's operations and reflect impacts from GAAP purchase accounting rules. These impacts include additional amortization for intangible assets, integration expenses and the one-time exclusion of a portion of Vocalosity's deferred revenue. This latter point will result in a one-time reduction to Vocalosity's reported revenue and cash flow in the fourth quarter under Vonage's ownership to cause Vocalosity's EBITDA contribution to be negative. I'll now discuss the outlook for the quarter.

For the fourth quarter, excluding Vocalosity, we expect revenue and churn to be stable and adjusted EBITDA to be modestly higher compared to the third quarter. We also expect to report positive net lines for the quarter. As we stated at the end of the second quarter we expect CapEx to come in below our original guidance of $30 million for 2013. Networking capital is expected to be positive in the fourth quarter leading to sequentially higher free cash flow, again, excluding the effects of Vocalosity. As in prior years, we will provide our outlook for 2014 when we report fourth quarter results in February.

As we have discussed previously, profitable long term revenue growth remains our top priority and we believe we have the right assets and teams to execute our strategy. We will continue to monitor performance of our growth portfolio and direct investment dollars to the most compelling initiatives. Thank you for your continued support of Vonage. I will now turn the call over to Leslie to initiate the Q and A session.

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

Certainly. (Operator Instructions). The first comes from Greg Burns from Sidoti and Company. Your line is open and you may proceed.

Good morning. Just a couple of questions around BasicTalk. Could you talk to the linearity that you saw in terms of subscriber growth throughout the quarter? And then also if you've seen any competitive response since you brought that service to market?

Hi, Greg, it's Marc. Thanks for the question. So as you know we actually launched BasicTalk in a direct mail format to those customers that had left Vonage historically or folks who have broken out of the purchase process as part of our trial markets going back as much as a year. We launched nationally, with advertising and distribution, in mid May of this past year. We've seen continuing growth quarter over quarter, as you'd expect, and it's accelerated week over week. In the most recent weeks we've seen that growth flatten a bit as we've got full distribution through Walmart and are through the initial phase of heavy merchandising.

We do expect some additional merchandising behind BasicTalk and Walmart coming into the holidays. And the holidays for retail stores, we expect to get some uplift. In addition, we are -- have been testing a number of other vehicles to optimize BasicTalk sales. That includes a number of different ways to get into direct household from [FSI]s and well as other (inaudible). Some of those tests have worked quite well for us. We're in the process of aggressively expanding those nationally in the fourth quarter. So we're bullish on the long term prospects for BasicTalk.

And as you might expect, one of the key drivers on this business is to evaluate what the right distribution mix is, and Walmart's been a great partner for us. We're also looking at how we might expand distribution and improve our self service capabilities online. So as we look to 2014 we feel very good about the overall contribution of BasicTalk and the efficiency of the BasicTalk business. Keep in mind we only have aided awareness in the mid 20s percentages compared to awareness of Vonage in the 80s. We still believe that launching it as a separate brand was critical to avoid cannibalization. And that has been the case. We've not seen that.

So we're effectively competing at the low end. We did see, initially, some competitive response from magicJack and other players at the low end who changed and rolled back some pricing on devices. But we feel like that is largely stabilized at this point in time. We haven't seen additional aggressive activity so we feel like we're progressing well in the current pricing environment.

Okay. And in terms of mobile, can you speak to the adoption rates?Are they still below what you had been looking for? And what do you need to do to get that viral adoption of platform?

Yes. That's a good question. Relative to the overall expectations when we first launched, for the free mobile client, our downloads are less than we would have expected. We are still in the mid to high single digit millions of downloads. We are seeing solid international usage on those downloads but, obviously, scale matters. So we would have liked to see larger numbers at this point in time. Now keep in mind mobile is the lens through which we look at all of our initiatives. The Vonage mobile extensions product has been ragingly successful and a lot of people have actually shifted their usage from their phone and business phones onto the mobile platform.

When we think about our allocation of revenues to mobile we don't allocate the number of minutes being used on those services, and we are getting incremental revenue on second line extensions that are being sold into the base. As we look at churn levels on customers that are using extensions, we see that to be quite a bit lower and it's also allowed us to take targeted price increases with very modest impacts on churn. So while mobile'sinvestment spend is probably a little bit more transparent, some of the benefits hit our business in many different areas.

It's also a core element to our expansion internationally and we think it will be leverageable in the SMB market with Vocalosity. And we've got some plans for mobile client enhancement for Vocalosity shortly after our day one launch. So, I guess, in short, relative to the original ingoing assumption, we would like to have seen larger viral spread to the point of what will it take to do more? I think it comes to the point of being first in differentiating on a meaningful consumer attribute. We think that the world is quickly moving to some mobile carrier displacement that goes beyond SMS, it goes to this notion of a Wi-Fi or Wi-phone based service with wide area network as a compliment for certain sub segments.

We think about it as a software virtual network operator, a form of an [NBMO], if you will. And we think that for anything from university students to first phones for youth and integrating this with iPads and any other kind of existing device, an iPod or [dead] phone that exists, and integrating the home service, the business service with any number of broadband connected devices, is where the market is going and we've got some exciting things for 2014 in that area. I think that, combined with some of the features I mentioned during my comments has the potential to get us significant stimulation.

Okay I understand the -- having the [features] (inaudible) and the road map you have there's some seemingly pretty exciting stuff on the horizon to be rolled out. But if no one knows about it, it doesn't do much good so do you feel like you need to increase marketing around the mobile platform in the future? Or is just not at the developmental stage yet where it justifies that incremental investment?

As you look at those folks who have gotten viral scale, much of it is referral base. We very much believe when -- if you take a look at the folks who are driving the largest level of downloads and subscription, many of them are still unprofitable and under water. We're not in the business to drive something that's going to be patently unprofitable. We expect that our investment, and we've done this thinking about the whole lens, is our mobile teams and the development expense we spend must drive benefit for our core businesses, our international business and have a revenue option even in the free downloadable marketplace.

So we look at this potentially a little bit differently than some of the venture-funded businesses that we believe are largely trying to build a community regardless of what their profit outlook is and try to get acquired for that network affect. We're in the business of really building functionality that people will use that has an opportunity to drive revenues going forward. As we see that revenue opportunity we will invest behind it but my personal belief, and I think that of -- I know that of our marketing and mobile teams is that the client itself needs to very much be the sales force.

So as you build unique functionality and as you improve, and we do have opportunities for improvement, the referral nature and ability to recommend and invite friends and the social aspects of the client itself, that's what's required in order to really drive rapid spread and download of the application. So we are working that as well.

Okay. Lastly, I saw Straight Path file a lawsuit. Is there any color or commentary you could give us around that?

Yes. So what I'll tell you is we have not actually seen the actual complaint that Straight Path has filed. We are aware of Straight Path. We know the suits that they have filed against some other companies that in the VOIP space. Straight Path is what is called a non-practicing entity. Often called a troll.

We have had -- this is a routine portion of our business and we have successfully fought many of these kinds of suits over the last several years. As soon as we get more information about the specifics of the infringement complaint then we can comment more specifically. But we've successfully defended ourselves against many of these, and we're going to vigorously defend ourselves in this case. We also have a host of patents of our own that will need to be evaluated in terms of their utility as well. Unfortunately, lawsuits like this from non-practicing entities have become pretty commonplace, which is why there is so much focus on patent reform in Washington.

(Inaudible). Thank you.

Next question, operator.

Certainly. Our next question comes from the line of Michael Rollins from Citi Investment Research. Your line is open, and you may proceed.

Hi. Thanks for taking the questions. Just a clarification and then a broader question. On the clarification, Marc, I think you were describing earlier the idea of getting the [lack] down for the BasicTalk to below $200.00, if I heard you right.

That's correct.

Does that include subsidy on the device or is that a separate number you have to add to that?

We think about that in total acquisition costs. But keep in mind the device -- we reengineered our device so it is very inexpensive in the $12.00 to $14.00 range.

So that would be within that $200.00?

Correct. We're targeting below $200.00 but at the $200.00 level we include the device as well.

Okay. And then just more broadly. So as you're thinking about the growth opportunities in the SMB segment, either before or since announcing the Vocalosity acquisition, has the board thought a little bit more about the allocation of capital, and whether there could be a greater return earned for shareholders by maybe slowing the buy back and putting more money into -- whether it's more scale or -- someone before was asking about the marketing. Have there been elements of consideration, just in terms of capital allocation, around this expanded strategy in the SMB segment? Thanks.

That's a great question, Mike. Obviously, every time we have a major new initiative consistent with the original growth priorities, we have to make choices about how we allocate resources. It was actually at your conference a year and a half ago when I spoke to you and you asked me about the small and medium business. At that point we were still deciding whether we were going to build on our own or consider acquiring, and I kept it pretty open ended. We've evaluated a number of acquisitions over the past year. We concluded that was the best method to marketplace and we're really excited about the potential of Vocalosity.

At our Board meeting the week before last, we actually did have significant conversation about how big do we think that business could be, and it is one that, obviously, has relatively low awareness but has a service set, a feature set that is ready now that continues to grow. And so when you look at the risk profile of investing in that business versus some of the other businesses, you have to look hard at trying to accelerate that business as fast as possible. I think we are -- not to be crass but a little bit in a land grab phase in that business. And we bought this to grow it and have a long-term aspiration to be the number one provider of business solutions in this SMB marketplace.

We do not have any intention of changing our share repurchase program. We fully intend to retire that, as expected, in the time frames we've outlined. However with the cash that we do have available and the flexibility, which is substantial, in our own operating business we will evaluate once we put the teams together and review the plans with Wain and his team, and decide what kind of fuel we think we can put on that fire and if we believe that we can drive revenues with a better return there versus other alternatives,we would do that.

The Company's goal is to be the provider of cloud based connected devices for consumers and businesses. So connecting people across multiple devices is squarely inside of our strategy and management's job is to dynamically reallocate resources. So you can expect to see that in 2014.

Last question. In looking at this SMB segment, how do you look at the broadband component of this? The offer that you have, or that Vocalosity has, is a -- I guess you could summarize it as a BYOB, bring your own broadband kind of model, it seems. Do you think that's still the best way to go? Do you think that there's ways of trying to partner or being and agent for broadband to make sure that the customer gets the right experience with the products that you're providing? Just any thoughts on to that. Thanks.

It's a great question, Mike. You're right. It is primarily a bring your own broadband solution to date. Most of the companies do have broadband, but the quality of that broadband varies so we certainly get, at Vocalosity, as I understand it from the team, requests for that kind of service. The question becomes one of, can you actually do it in a way that is of quality, that gets you the right kind of financial return, and is that really required given the upside in the marketplace for the core services that exist to date? I don't have an opinion one way or another at this point in time.

Post closing, I'll engage with the Vocalosity team and get their perspective on the subject. There are a lot of people who wholesale broadband so I think that's a fairly competitive marketplace. I'm not surethere is tremendous margin. I think the real question becomes one of, does that really facilitate increased penetration, and is that a cost of doing business to accelerate revenues on the core services for which Vocalosity is differentiated. So ask me that question again in February, and I'll give you a more specific personal point of view.

Great. Thank you very much.

(Inaudible) question, Operator?

Thank you. (Operator Instructions). Our next question comes from the line of Bill Dezellem from Tieton Capital. You're line is open and you may proceed.

Thank you. We have a group of questions. First of all, with the investments that you're making to build business, clearly that is having a negative impact on profitability right now which, as you've made very clear, is not your long-term intention. When are you anticipating that we hit that inflection point when the benefits from these investments are no longer a drag, and, in fact, a benefit to the business?

Thanks, Bill. Let me take the top line on that -- this is Marc. First, I want to make sure that, as folks are aware, the -- because people confuse some of the items. We certainly have seen some ARPU pressure in our business. So that's [touched] revenue, to some extent. We've more than offset that ARPU impact with reduction in costs, primarily in cost.

So we are engineering our business to deal with the pricing compression we see on some of the old premium domestic services, which we consider, ongoing, to be a drag. That's just the nature of the business that we've got as part of our legacy, and we are building new revenue streams on top of that as we speak. As we speak to the investments that we're making quarterly this year, as we've talked before, we fully expect that those investments will generate revenues, those investments are largely marketing and staff to build out new products and services in 2015. So 2014 you should think about as a stable ongoing investment.

The real question becomes one of as we see additional opportunities for growth in 2015 do we continue to invest? Our philosophy is we are building this Company for long-term profitable revenue growth. And if we can fund that revenue growth at a good return on customer acquisition investment, we'll continue to do that. So I don't want to set an expectation that you're going to see some churning off of investment as we turn the page to calendar 2015, and magically increase EBITDA by $15 million or $20 million a quarter.

That could happen. We certainly have the capacity for that because we spend so much in sales and marketing expense. But we'll be evaluating our approach largely based on, are we largely getting a reasonable return?But you should expect to see, all things being equal, improvements in 2015 as the investments for which we're paying today get us more material revenues.

Thank you. And then two additional questions. First of all, net line additions. You talked that you're expecting those to continue to be favorable. What are you looking for in terms of level relative to where we are at now,meaning are you expecting an increase or to hold steady at the current net line addition rate?

We're only five weeks into the quarter. Just too early for us to know that with the holiday season, given that we're [11,000] net,that can be made or broken around those numberswith too much of the quarter to go. So it's difficult for me to give you any additional guidance versus what I've already shared.

Okay. Let me do a follow up that might be more difficult to answer than that one even and -- over the course of the next year where would you like to see that number move to?

Well, I'd like to see that number move to dramatic net adds and I have great confidence, with Vocalosity's addition even beyond their run rate and our ability to accelerate their growth by some of the things we think we can do under the Vonage brand, I think you should expect that 2015 with the combined Companies will be material net adds for the year. That's right, 2014, the year.

Thank you. And then an income statement question. I don't think this was addressed, that the tax rate moved up approximately 10 percentage points to nearly 49%. Would you discuss the dynamics there, please?

It was mainly due to losses in UK and Brazil. And so these are -- these are one-time items related to our foreign entities.

Great. Thank you.

If there are no further questions, Operator, we'll [end] the call now. Thank you, everyone, for joining us today. Actually, I see one more question. Operator, if you can add that through?

Certainly. Our next question comes from the line of Greg Burns from Sidoti and Company. Your line is open and you may proceed.

Just wanted to follow up on the -- how the model, going forward -- in terms of how you're going to be reporting your subscriber statistics. Will you be breaking out Vocalocity from your core business? (Inaudible) reporting historically or is it going to all be reported in oneconsolidated number?

Greg, we would expect to report it on a consolidated basis. As we do today, we give certain KPIs, which gives specifics around our business. And we would expect to do that. But, generally, we expect to report it on a consolidated basis. I would just note, as we said in our script, that Vonage Business Solutions will actually have what Vocalosity's doing today but also what Vonage is doing today [at] business. So there's going to be a (inaudible) growth initiatives within the SMB business on top of that. So it's going to be some pretty significant mixing there and blending of lines, which is why we're choosing to report it that way.

But we will provide key KPIs so you'll be able to compare general performance with competitors who also, quite frankly, have a different range of KPIs and information they're sharing even though they're considered pure plays. So we'll try to give transparency around how we're performing relative to peers. But, because of the number of moving parts internally and even some of the support infrastructure, it'll be difficult to report that as an individual business in total P and L.

Okay. Thank you.

Okay. Thank you for joining us. With that, we'll conclude the call today.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone have a great day.