Venture Global Inc (VG) 2013 Q4 法說會逐字稿

Good day, everyone, and welcome to the Vonage Holdings Corporation fourth-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 now 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 fourth-quarter and full-year 2013 earnings conference call.

Speaking on our call this morning will be Marc Lefar, Chief Executive Officer, and Dave Pearson, CFO. Also joining on the call are Joe Redling; and by phone in Atlanta, Wain Kellum.

Marc will discuss the Company 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 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 slides, and 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 Marc.

Thank you, Leslie, and good morning, everyone. I'm pleased to review our results for the fourth-quarter and full-year 2013 with you.

Let me start with some context for those of you joining us for the first time. In early 2012, after completing a multi-year operational and financial turnaround, we outlined a three-year strategy to drive substantial additional revenue growth for 2015. We established three areas of strategic focus. First, growth in our core US and Canada markets, by meeting the needs of underserved segments, including entry into the small- and medium-business market. Second, the development of our capabilities in mobile. And third, international expansion.

In 2013, we made important progress against each of these growth priorities. We launched the Basic Talk brand nationally, providing compelling value to domestic callers. In the core Vonage-branded business, we continue to shift marketing investments from mass-reach vehicles like television, to local sales teams focused on ethnic segments. These moves, and the inclusion of lines from Vocalocity in the last six weeks of the year, resulted in 9,000 net line additions for the year, an improvement of nearly 25,000 lines from 2012. This reverses several years of annual line losses.

In addition, churn for the year improved by 10 basis points to 2.5%. We grew the adoption rate of mobile extensions, which extends our home phone service to mobile phones. And we improved our stand-alone mobile app, with quality and feature enhancements including video calling and a unique twist on video voice mail.

Early in the year, we announced a venture to launch service in Brazil, and are on track for the upcoming launch. And most recently, we acquired Vocalocity through what we believe is a transformative transaction for the Company.

Financially, we produced $110 million in adjusted EBITDA, and $66 million in free-cash flow. Contributing to our financial performance were material improvements in the cost of telephony services and customer care, with reductions of 8% and 16%, respectively. Importantly, we delivered the customer care improvements while achieving gains in satisfaction, handle time, and first-call resolution.

We also executed on our balanced approach to capital allocation. Our strong balance sheet enabled both the funding of the Vocalocity acquisition and the continued execution of the share repurchase program we began in August of 2012.

During 2013, we repurchased $56 million, or 19 million shares, of Vonage stock. Since beginning the buyback in 2012, we repurchased 31 million shares for $84 million.

Although we made significant progress on many fronts, revenue growth fell short of our expectations for the year. This is due primarily to two factors. First, the gains driven by Vonage World among key ethnic segments, and Basic Talk among discount value shoppers, were not sufficient in 2013 to offset the impact of line losses from 2012, and a slowdown in sales of premium domestic service plans. Although churn has been stable in this segment, we did experience net line declines.

The second driver has been the timing of revenue contribution from new initiatives, which has been a bit slower than we expected. We're aggressively addressing the challenges in our core business; and with the addition of Vocalocity, we expect to grow the overall Business in 2014.

Results for the fourth quarter were solid. Revenue grew 4% sequentially to $211 million, including the impact of Vocalocity in the last six weeks of the year. Excluding Vocalocity, revenue was stable sequentially at $204 million.

Adjusted EBITDA increased $2 million sequentially to $25 million, and gross line additions of 175,000 were flat sequentially, and up 15% versus the prior year, reflecting customer additions of Basic Talk and Vocalocity. Churn decreased to 2.5%, improving modestly from the third quarter, resulting in 9,000 net line additions. This is our third consecutive quarter of positive net line additions, and both our consumer business and Vocalocity were net line positive in the quarter. Dave will cover the quarterly results in greater detail in a few minutes.

Let me now spend a few minutes covering the highlights of each of our major areas of focus. In our core North American business, we see continued opportunity to grow both our international long distance and domestic customer base.

We've successfully grown our international calling base in multiple ethnic market segments, establishing strong brand presence and awareness. 36% of US Indian households are now Vonage customers. Over the last year, we've grown our revenue from the Filipino segment to more than $10 million annually. And our Hispanic base has grown nearly 50% over the past three years, with a great opportunity for additional share gains.

Although we've worked to optimize our mass-reach media vehicles for ethnic audiences, we see room for additional efficiency. We will continue to shift funds to more targeted approaches, including the assisted sales model in retail stores and community-based sales teams. Sales for these channels, which were virtually nonexistent in 2010, have grown 500% over the last three years, and now comprise over 50% of gross line additions. We now provide assisted selling in 700 stores.

We are also improving our digital platforms and tools. We've undertaken a complete redesign of our online experience to increase prospect flow, enhance the customer learning and buying experience, and improve conversion. We're also optimizing our platform to support all forms of traffic, from desktops, mobiles and tablets.

Basic Talk is our $9.99 per month low-end domestic calling product launched nationally in the second quarter of 2013. Basic Talk is sold in all Walmart stores nationwide and online. The product has performed well, helping the Company to deliver positive net line additions for three consecutive quarters, reversing the decline of the domestic segment, and validating a retail-oriented distribution strategy.

Many buyers view Basic Talk as a complement to their cell phone. 42% of Basic Talk buyers did not have home phone service at the time they signed up. Basic Talk is bringing back cord cutters.

Our data also shows that the strategy to introduce Basic Talk as a separate brand, to avoid cannibalization of the Vonage basis, has been largely successful. Our delivery model for Basic Talk is lower cost than our premium brand in virtually every way, including devices, customer care and acquisition costs. Looking ahead, we see opportunities to grow Basic Talk through additional distribution opportunities and product enhancements. Ultra-value shoppers represent a market of more than 40 million households, and we expect to continue to gain share as we expand distribution and improve our direct channel performance.

To further drive execution of our strategy for our overall core consumer business, we appointed Joe Redling as President of Consumer Services for the US and Canada in December. Joe was a highly engaged member of our Board.

As a former public company Chief Executive and Chief Marketing Officer, he brings more than 20 years of experience in consumer marketing and operations. Joe has specific expertise in transforming and optimizing subscription-based businesses through the use of digital platforms. I'm confident he'll have a positive impact on our Business.

Now let me turn our attention to international. Vonage has operated successfully for many years in Canada and the UK. Now, Brazil is the principal area of focus in our international expansion strategy. Our Brazil business has the potential to be a substantial contributor to revenue over time.

The Brazilian market is large, and growing rapidly, with more than 22 million of its 67 million households already broadband-connected. Brazil is also home to more than 1 million ex-pats, and has a vibrant small-business community. In addition, the government is committed to expanding broadband access in advance of the 2014 World Cup and 2016 Olympics.

The customer appetite for alternatives to existing telecom service providers is strong. Our research has found that incumbent providers are slow to provision service, and poor customer service is a major pain point. Pricing is high and confusing for domestic and international calling on both wireline and wireless networks. Our service addresses these issues, and will be launched with mobile calling through our extensions app, an integral element of the core offering.

We've completed the development of the core components of the service, and are now conducting integrated production testing. We have an experienced local management team, and have established and trained our customer care teams. We're on track for a phased market launch starting early in the second quarter. We plan to launch our service first in select smaller markets, and progress to larger markets later in the year. In addition to our focus on Brazil, we're actively pursuing potential opportunities in India and Mexico.

Mobile is now an essential component of our core service through the extensions product and our global digital phone card. It's also a stand-alone product as the Vonage mobile app. Approximately 87% of our home phone customers who call internationally have mobile extensions. 28% of the international calls made over the Vonage network are made from a mobile phone, representing nearly 200 million calls and almost 2 billion minutes of use in 2013.

And new features, such as video calling and video voice mail, have been received favorably, helping to attract new users to the stand-alone mobile app. In the fourth quarter, nearly 25% of all Vonage mobile calls made on Android devices, and 10% of iPhone calls, were video calls.

In 2014, new capabilities will bring carrier-grade features and improved quality to Vonage's mobile platform. We recently implemented enhancements to our video service, audio call set-up speed, and in-call quality that meet or exceed the experience customers have with their existing mobile carriers in many situations.

Future enhancements will bring new benefits to both businesses and consumers. Business customers will be able to make and receive calls from the desktop number, maintaining both their work identity and their personal identity on a single handset. Our product road map includes the next generation of mobile services that create true alternatives to traditional wireless carriers, and will allow consumers to communicate seamlessly over any connected device at low cost virtually anywhere in the world.

The acquisition of Vocalocity positions Vonage as a leader in the small- and medium-business hosted voice-over-IP market. Frost & Sullivan expects this market, which is in its very early stages with less than 15% penetration, to grow at a rate of 28% over each of the next five years. Vocalocity, which we're in the process of rebranding as Vonage Business Solutions, serves more than 25,000 businesses, and is focused on companies of 20 or fewer employees, which comprise 60% of the SMB market, or $9 billion in revenues.

For the full year, Vocalocity grew revenue 38% from the prior year to $62 million. This rate of growth is nearly double that of 8x8, and comparable to that of RingCentral. And during the fourth quarter, Vocalocity added nearly 1,500 more net new organic customers than 8x8.

Vocalocity continues to be led by Wain Kellum, a highly experienced CEO. Wain has a deep background in the software industry, having built five successful software companies, and had partners including Microsoft and HP take equity stakes in several of these companies. Immediately following the closing in November, we implemented a program to quickly realize many of the cost synergies identified in our diligence activities. In addition, we are aggressively evaluating new revenue opportunities to grow even more quickly, and gain the full benefit of the Vonage brand.

On the cost front, we have already fully interconnected Vocalocity to the Vonage intelligent call routing platform to take advantage of domestic termination costs that are 65% lower. Vocalocity will also have the benefit of some of the lowest international long distance rates in the world. We've also completed the migration of Vocalocity to Vonage's E911 platform.

As the year progresses, we expect to begin to combine portions of our infrastructure, and take advantage of best practices and product development in areas such as mobile. Beyond this, we are in the process of implementing Vonage's customer care technology, leveraging our workforce management tools to improve costs while increasing overall productivity.

On the revenue front, we are quickly working to leverage the Vonage brand. Vonage has aided awareness of 80% among small- and medium-business owners, more than 8 times that of the other major VoIP competitors, providing us with a great opportunity to increase market share as awareness of cloud-based solutions for SMB increases.

We are already implementing or actively testing programs in five areas. First, we are improving our digital yield by redirecting all of our business prospect web traffic and inbound calls from Vonage to Vocalocity, and by working to optimize our digital search programs. Second, we are testing an expansion of the Vocalocity referral program to include Vonage existing consumer customers.

Third, we are evaluating the impact of a broad range of promotional pricing options. Fourth, we're testing the impact of targeted advertising, and our ability to sell to the segment of SMB customers where international calling is an important part of their business. And fifth, we are improving distribution through expansion of our re-seller and telesales channels.

Beyond the programs already in progress, we see additional strategic opportunities, which we are rapidly evaluating. These include: one, improving our capabilities to serve the SoHo market, where the Vonage brand resonates strongly. Two, licensing our cloud-based software, desktop tools, and mobile VoIP projects as white-label services to mobile carriers and enterprises that sell to other businesses.

Three, evaluating the proper timing and approach to expand up-market to companies with more than 20 employees. And four, potentially using the Vocalocity platform to accelerate our international expansion outside of the United States.

Although it's still early, we are quite pleased with the early results of the enhanced marketing programs and the potential of the Vonage brand. Net customer additions for December and January are double that of the prior two months of October and November. We intend to build on this early momentum, and will keep you posted on our progress.

During the year, we also continued to make strong progress developing and protecting the valuable intellectual property invented by our talented employees. In 2013, we more than doubled the size of our US patent portfolio, as the US Patent and Trademark Office awarded Vonage 18 new patents covering diverse technologies such as advanced call-routing techniques, mobile's VoIP hand-offs, roaming, and click-to-call services. Including several applications by Vocalocity, we filed 99 patent applications in 2013, and now have more than 210 pending US patent applications.

In summary, we made solid progress in 2013, but we still have much to do. With the addition of two highly experienced leaders in Wain and Joe, we have strengthened our team and sharpened our focus on executing our growth plan. Revenue growth remains our top priority for 2014, and we expect total Company revenues to increase in the range of 1% to 2%. This is on a pro forma basis, treating Vocalocity as if we owned it for all of 2013.

On a reporting basis, including the Vocalocity revenue only since acquisition, we expect total Company revenues in 2014 to increase in the range of 7% to 9%. These numbers take into account the softness I discussed in our domestic premium business, which we expect will be more than offset by the contributions from our growth initiatives. Strategically, we will continue to allocate capital to the areas of highest return, and will assess additional M&A opportunities that build on our current asset base or tap into current growing markets.

Thank you for joining us today, and now I'll pass the call over to Dave.

Thanks, Mark, and good morning, everyone. I'm pleased to review our financial results and 2014 outlook.

Before I begin, let me provide context for the numbers we reported this morning. We reported consolidated financial results for Vonage and Vocalocity combined as of November 15, the closing date of the merger. As a result, our fourth-quarter results include a partial quarter of Vocalocity's results.

These results also reflect GAAP purchase accounting rules regarding amortization for intangible assets, integration and acquisition expenses, and the one-time exclusion of a portion of Vocalocity's deferred revenue. This exclusion resulted in a reduction to reported revenue coming from Vocalocity in the fourth quarter. In table 2, we show consolidated results as reported, and key Vocalocity operating statistics on a pro forma basis, as if Vonage owned Vocalocity for all periods presented, and not including the effects of purchase accounting.

With that, let's begin on slide 3. For the fourth quarter, adjusted EBITDA was $25 million, up from $23 million sequentially, reflecting improvements in cost of telephony services and customer care costs per line. Adjusted EBITDA was down from $34 million in the year-ago quarter, reflecting our planned investments and strategic growth priorities. Full-year adjusted EBITDA was $110 million, down from $135 million in the prior year, due to investments in growth priorities, including the national launch of Basic Talk in the second quarter, and lower revenue. Adjusted EBITDA excludes deal-related expenses for Vocalocity, but includes the negative impact of the $800,000 purchase accounting adjustment I noted above, and adjusts for the 30% of our Brazil venture that we did not own in the period.

Moving to slide 4, fourth-quarter GAAP net income was $4 million, or $0.02 a share, flat sequentially. GAAP net income was down from $13 million, or $0.06 per share, in the year-ago quarter. Fourth-quarter 2013 reflects the negative effect of $2.5 million of amortization of acquired intangible assets associated with Vocalocity for the six weeks in 2013 during which we owned Vocalocity. Fourth-quarter net income excluding adjustments was $10 million or $0.05 per share, up sequentially from $9 million and $0.04 per share, and down from $23 million or $0.10 per share in the year-ago quarter. As with EBITDA, the reduction in net income reflects our planned investments in growth priorities. Full-year net income excluding adjustments was $52 million or $0.24 per share, down from $84 million or $0.37 per share in 2012.

Moving to slide 5, revenue for the fourth quarter was $211 million, up from $204 million sequentially, due to the inclusion of the partial quarter of Vocalocity revenues. Core Vonage revenues were flat sequentially, and Vocalocity full-quarter revenue prior to the purchase accounting adjustment was $17 million, up 7% sequentially, and up 40% over the year-ago quarter. Revenue declined from $214 million a year ago due to lower customer acquisitions on premium plans, and a $2-million reduction in Universal Service Fund, or USF, fees, which are a pass-through.

For the full year, revenue was $829 million, down $20 million from the prior year, primarily due to plan mix and an $8-million decline in USF fees, which accounted for 39% of the difference, partially offset by Vocalocity. Fourth-quarter average revenue per user was $28.72, down from $28.87 sequentially, primarily due to lower customer acquisitions on premium plans. ARPU was down from $30.15 in the year-ago quarter due to plan mix and USF.

Moving to slide 6, we continue to drive efficiencies in key cost areas, including COTS and customer care. We reduced cost of telephony services to $52 million from $57 million a year ago, primarily due to lower international termination rates per line, which declined by 5%; lower interconnect costs, which declined 43%; and lower USF.

COTS declined from $53 million sequentially due to lower international termination and co-location costs. Continued reductions in this key line item have more than offset the effect of customer plan changes on ARPU, resulting in an increase in direct margins 71%, compared to 69% in the prior year. COTS per line was $7.09, down from $7.48 sequentially, and from $8.02 in the fourth quarter of last year.

Moving to slide 7, selling, general and administrative expense for the fourth quarter was $73 million, up from $65 million in the third quarter, driven by an increase in assisted-selling expense, $2 million in Vocalocity acquisition-related costs, and the absence of the $1-million insurance reimbursement that was recorded in the third quarter. SG&A increased from $62 million in the year-ago quarter due to higher assisted-selling expense, as we more than doubled the number of stores with assisted selling, non-cash stock compensation, and acquisition-related costs. Offsetting a portion of these increases were declines in customer care costs per line, which were reduced by 7% on a sequential basis and 14% from the year-ago quarter, excluding Vocalocity.

For the full year, we again delivered significant cost reductions in customer care and improvements across quality metrics, which also contribute to improved customer retention. Per-line cost declined 16%, excluding Vocalocity, reflecting continued service quality improvements, operating efficiencies, and improvements in average handle time and contact rate, which declined 7% and 8%, respectively, as well as improvements in first-call resolution and customer satisfaction, which were at best-in-class levels.

Moving to slide 8, marketing expense for the fourth quarter was $58 million, down from $59 million sequentially, reflecting a shift in marketing spend to focus on in-person selling and Basic Talk marketing spend levels becoming more normalized post-launch. Marketing was up from $53 million a year ago.

Subscriber line acquisition costs, or SLAC, decreased to $331 from $339 sequentially, due to increased efficiency in acquiring Basic Talk customers and the partial quarter addition of Vocalocity. SLAC declined from $347 in the year-ago quarter, reflecting the impact of higher gross line additions from Basic Talk and Vocalocity. For the year, marketing expense was $227 million, up from $213 million in 2012, primarily due to brand building associated with the national launch of Basic Talk, and Vocalocity. Resulting SLAC was $348, up from $326 a year ago.

Turning to slide 9, gross line additions, or GLAs, were 175,000, flat sequentially, reflecting the partial quarter of Vocalocity lines offset by lower customer line additions on consumer plans. GLAs increased from 152,000 in the prior year's quarter due to Basic Talk, Vocalocity, and UK line additions. We added 653,000 GLAs for the full year, flat with 2012.

Regarding GLAs since closing on Vocalocity, we have directed prospective business customers that come to Vonage by inbound telemarketing or the web to Vocalocity's website and inbound telesales. While this has meant fewer consumer GLAs, the net effect has been positive, with the same lead flow generating more total lines and higher ARPU, and putting the Vocalocity product in customers' hands, which we believe gives us a greater future up-sell opportunity.

Customer churn for the fourth quarter was 2.5%, down from 2.6% sequentially, and flat compared with the year-ago quarter. Churn was also reduced to 2.5% for the full year, the lowest level in three years, reflecting higher customer satisfaction, and improvements in the customer experience. The addition of Vocalocity was immaterial to overall account churn. Vocalocity account churn for the fourth quarter was 1.8%, ending the year with over 25,000 customer accounts.

We added 9,000 net lines in the quarter, our third consecutive quarter of positive net lines. Net lines for the year were also 9,000 positive, 25,000-line swing from 2012, and our first year of positive net lines since 2008. Both the Vonage consumer business and Vocalocity were net line positive for the quarter and the year.

Moving to slide 10, our CapEx for the quarter, including the acquisition and development of software assets, was $6 million, primarily for network infrastructure and systems improvements. This is up from $4 million sequentially, and down from $12 million in the year-ago quarter. For the year, CapEx was $22 million, down from $27 million a year ago.

Free cash flow in the fourth quarter was $30 million, up from $20 million sequentially, due to positive changes in working capital, partially offset by higher CapEx. Free cash flow was down from $49 million in the year-ago quarter, primarily due to lower operating cash flow. Similarly, free cash flow for the year was $66 million, down from $93 million, on lower operating cash flow.

Before reviewing our balance sheet, I wanted to discuss the change to the ownership structure of our joint venture in Brazil. Our joint venture partner there, Datora, has been a strong operating partner in preparation for launch. Our agreements with Datora include provisions which allow for dilution rights in the event either partner does not satisfy certain capital obligations. Datora was unable to fund certain 2013 capital obligations, and as a result, Vonage expects to increase its ownership of the venture to approximately 90%. This is not expected to increase risk to market entry, and Datora continues to be Vonage's operating partner and an equity holder in the Brazil venture.

Let me now discuss the mechanics of the Vocalocity acquisition, and the impact to our balance sheet. Upon deal closing in November, Vocalocity shareholders received $108 million in cash and 8 million shares in Vonage common stock. We financed the cash portion of the transaction with $33 million of cash from the balance sheet and $75 million from our revolving credit facility. Upon close, Vocalocity had $3 million of excess cash on its balance sheet.

Following the acquisition, and as of December 31, 2013, Vonage had cash and cash equivalents of $89 million, including $4 million in restricted cash on the balance sheet. Even after funding the acquisition, our balance sheet remains strong. Our net leverage ratio is 0.5 times on net debt of $50 million, giving us significant strategic and financial flexibility. With this flexibility, we will consider additional M&A opportunities that fit with our asset base, including bolt-ons to Vocalocity.

During the fourth quarter, we continued our balanced approach to capital allocation, repurchasing 3.5 million shares for $12 million. So, slightly lower than the prior quarter, as we were out of the market twice during the quarter due to the Vocalocity acquisition.

During 2013, we repurchased 19 million shares for $56 million. We have repurchased $51 million worth of Vonage stock under our current $100-million authorization, and intend to continue to execute on this program. Since beginning the buyback in August of 2012, we have repurchased 31 million shares of Vonage stock for $84 million at a highly accretive average price of $2.68.

As Marc discussed, in 2014 we are targeting revenue growth in the range of 1% to 2% on a pro forma basis. We expect EBITDA to be stable at its current quarterly run rate, plus or minus several million dollars, as we will exercise discretion to modulate our investments based on the progress we are seeing across our portfolio, and some of the investments, such as Brazil, are lumpy and vary in timing of when they will be made. Our EBITDA projection is based on stable cash flow from our core business, and investments in the launch of Brazil, enhanced distribution of Basic Talk, and accelerating the growth of Vocalocity. We expect CapEx to come in around the $30-million level.

Thank you for your continued support of 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)

And our first question comes from George Sutton from Craig Hallum. Please go ahead.

Thank you very much. I'm not sure if this is best directed to Marc or Wain, but relative to the rebranding program and the impacts that you saw in both December and January, I wondered if you could give us a little more clarity as to was that sort of a one-time impact of the rebranding? Or can you give us a sense of the kind of velocity of demand that you're seeing that you would expect on an ongoing basis?

Okay, George. It's Marc. Thanks for the question. I'll take the first answer, and then I'll invite Wain to provide some additional color.

The December and January results are really a combination of both the Vonage brand and awareness as well as accelerated investment spending, which we talked about to make sure that we built awareness in the marketplace. So we did device promotions as well as targeted advertising announcing the merger. The sustainability of that, given that it's early, is still difficult to know, but we do expect to have an aggressive spending profile during the course of the year. And we would expect to reapply some of those programs that worked in the December and January period.

I would mention that the net doubling of business actually was exclusive of direct traffic that we handed to Vocalocity. So that was really based upon market general interest in the brand, Vocalocity's impressions in the marketplace, as well as the overall marketing and sales activities. So we think we kind of normalized for the direct lead handoff that we pushed in as a little bit of internal gymnastics to get that clear. But we feel very good about the progress.

I don't think it would be fair at this point to take a straight line and go, gee, that's going to be sustainable for the rest of the year, but it's certainly quite encouraging and we've seen continuing strong leads and prospects coming in over the last several weeks. So more to come on that.

To be candid, a lot of activities we put in place since closing have been testing to try to understand what gives us the best financial return. And we'll keep you posted as we go, but our objective here is to invest in those things that could accelerate the growth rate of Vocalocity. And while we want to remain flexible on the investment profile, we're looking more to reinvest the cash being generated out of the business rather than using it as an EBITDA engine. We think there's a lot of opportunity to invest and that we think that investment will get us a long-term solid return in revenue growth.

Wain, do you want to anything to add?

Sure, excuse me. As Marc said, it's been a combination of accelerated spend, and we're early on in learning how to leverage the Vonage brand. But the Vonage brand applied to the Vocalocity business at a minimum has at least four benefits that we have seen.

We get a lot more eyeballs now than we used to which creates selling opportunities, so web traffic is up. Marc described the Vonage referral program which has an enormous potential when you look at the potential number of [referrals]. Our pipeline for partnership development and recruitment appears like it's going to benefit greatly. And even on the digital side, since we've re-branded, we've noticed a quantifiable increase in our form completion, up almost 33%, which indicates we will see an additional improved efficiency in our online paper click spending.

Thanks, Wain. And for those not aware, the form completion is the key first step in qualifying a lead where we actually capture the business name and information. So the ability to have that completed, or interest in getting that far, means we're getting more engaged prospects. Thanks, George. Next question?

Just two other questions relative to the SMB part of the business if I could. Number one, every public competitor on their call has pretty blatantly said they're trying to move up market outside of this 20-and-below market. So I'm curious if you have started to see any positive impacts from those moves. And secondly, you had talked about a White Labeling program, which is the first time I've heard you discuss that, and I'm curious if you could just expand a little on that opportunity.

Sure. So Vocalocity's focus has been on the 20-and-under employee customer base. That's about $9 billion of the $15 billion market. The market we think is still very underpenetrated, and we think there's lots of running room and we're acquiring those customers very efficiently. That's our primary focus.

When we talk about competition or impact from other players, the truth is it's relatively rare, or the less frequent occurrence, that we're competing with the other players in the marketplace or business. It tends to be whoever gets there first has a high probability of winning the business. It's much more of a land grab phase in this marketplace than it is aggressive, competitive markets, at least among the cloud-based providers.

We're going to continue to assess the right way to move up market. That can be efficient, and if you can do that with cost-effective distribution, and there are some serious breakpoints in how you distribute to the move up market, we're assessing that. And there might be some bolt on opportunities they get us into verticals that would make that a natural fit.

Our platform is certainly extensible up market, but we think there's lots of work that we can do particularly in leveraging the Vonage brand within the market space we're in. So we're assessing it, have not seen significant impact from competition, but didn't want to take that off the table as we partner with Wain and think about the long-term growth strategies.

On the White Label front, we really have a very unique asset in Vocalocity, and they have really built what is a complete cloud-based platform. Think about the movement to platform as a service, and we're thinking very strategically about what this platform can do for us, whether it becomes the core platform for expansion rapidly into international markets. We've even thought about how should we be using this approach to our core business in the United States.

We've had significant interest from multiple large companies that service small and medium businesses or have an incumbent base of customers with one set of products that have approached us and have shown real interest in basically leveraging our platform, putting their brand on it, and there's any number of different business structures that support it. And we think that's a significant opportunity as people are trying to think about quick ways to market to be able to drive more revenues in their -- and leverage their existing small- and medium-business markets. So that's something that Wain and his team are focused on right now.

Next question, operator.

Our next question comes from Greg Burns with Sidoti & Company. Please go ahead.

Good morning. I was just hoping to get a little more color on the gross line additions in the quarter. If you can back out any contributions from Vocalocity, they would be down sequentially. So I was just wanting to get a feel for the slowdown in Basic Talk growth, or are you seeing accelerated declines in your domestic calling, high ARPU calling subscriber base.

Sure Greg. It's Marc. Let me take that one as well. So as I mentioned, both of our consumer and Vocalocity businesses were positive net lines for the quarter. That said, the core business was down sequentially, slightly.

There's a couple of factors. One is we are pouring some amount of bucket of customers from the core business into Vocalocity as we shift leads, and that's why these numbers become fairly blended over time. So that was one driver. Second driver was we did see some continued softness in domestic premium customers, particularly in the October period with a little bit of softness.

We saw some shifts in media in an effort to become more efficient that, frankly, while they were less expensive broadcast networks and we thought we would be achieving the same kind of reach and frequency, that was not the case. And we had to pull back on that and reinstate our prior media approaches, which showed a bit of a bounce back. So October was soft.

The other contributor to that was this is the first full year December that we've had with Basic Talk, and as you are aware, this is a largely mass merchant, retail-driven product. We didn't know what to expect, but during the holiday season, Basic Talk sales did slowdown. You might have intuited this, but it's not been the case in our Vonage business. But Basic Talk is very much a shopping experience destination shop.

We don't do assisted store selling for Basic Talk, and as a result during the Christmas holiday, we saw softness in Basic Talk, which has since bounced back post-holiday. So those two factors gave us sequential softness, but again, I reiterate that both the consumer total was net-adds positive as was Vocalocity, which was only six weeks of the quarter.

Next question, operator.

Our next question comes from Mike Latimore from Northland Capital. Please go ahead.

Yes, great thanks. Just trying to sync up a few things on Vocalocity here. I think you did about $16.5 or $16.6 million in the third quarter. It looks like you grew about 2% sequentially. Can you help us think, is there some seasonality in the business there, or can you sync that up with the -- it looks like the number of businesses added grew a lot more than that. And obviously, year-over-year was strong. So maybe talk a little bit about that.

Yes, sure. There really isn't significant seasonality, and Wain can comment further on that in the Vocalocity business. The sequential increase was 7% on revenue, and without the purchase accounting, and you may be looking at the purchase accounting-adjusted number, which took about $800,000 out of revenue for the fourth quarter, so it really -- it was a positive trend. And the fourth quarter was 40% higher than the fourth quarter of 2012.

Great. And then on the traditional Vonage SOHO business, let's say, what percent of revenue was that in the quarter?

We don't track that usually on a segment-specific breakout. But I would tell you that relative to our run rate, we've talked about it being ballpark around 4.5% to 5% of total revenues, and we've talked about being roughly $40 million-ish in revenue. That wouldn't have changed based on the size of that base in the fourth quarter.

I would reiterate the comment I made before which is we have eliminated the proactive selling of small business plans under the Vonage brand. We are moving all of the traffic inquiries that relate to business, even if you go to the Vonage website, links you to fully-branded Vonage Business Solutions pages that access the Vocalocity rate plans and sales teams.

So while we will continue to have churn out of the Vonage core business, you will not see replacement that fit into consumer business. All of that will move to Vocalocity, which makes a tremendous amount of sense. And you will also see blended marketing efforts because you see a lot of small- and medium-business owners who take advantage of the same kind of consumer media that our consumers do. And that's why we look at this really very much as a blended business, and you're going to have to look at total revenues and total additions as the measure of progress.

Next question, operator?

Thanks you, and our next question comes from Michael Rollins from Citi Investment Research. Please go ahead.

Good morning. Thanks for taking my questions. Just first, I'm wondering if you could be just more specific on the impact to unit volume, whether it was on the net add, or on the gross adds, or frankly both, in terms of what Vocalocity contributed during the six weeks roughly that you had it within the financial result?

And then secondly, just taking a step back, I'm wondering if you could talk a little bit more about how investors should think about the acquisition costs of a Vonage business customer from here, either on a per-customer basis or per-line basis, whichever you think would be more helpful to think about it in that form. Thanks.

Sure. I'll take the second question first. The IORR of a Vocalocity customer is quite high. Based on the acquisition costs it is much more oriented towards sales then your standard Vonage customer, and the all-in acquisition cost is leading to an IORR that is above anything we're seeing in the Vonage consumer business today. So call it 50% at current course and speed, and that's using some fairly conservative approaches to that calculation. So we feel like there's a lot of runway to add customers and very high return to doing that.

And then specificity on net and gross adds, you have, what I can tell you is -- so we reported 25,000 customers at Vocalocity for the fourth quarter. We had said accounts -- we had said that we had 23,000 at the end of the third quarter. So you can do the net increase of roughly 2,000. We made some statements in the past about how to think about the size of these accounts. So I think you can back into the net lines -- approximately net lines added, and as Marc said, both the core business, without the leads that we sent to Vocalocity, and Vocalocity were net-line positive.

Thank you.

Thank you, and our next question comes from Raghavan Sarathy from Dougherty & Company. Please go ahead.

Good morning. Thanks for taking my questions. Two questions from my end. Marc, when you talked about Vocalocity business, you indicated that the business accelerated since acquisition. Can you talk about the pricing [around and talk about Vocalocity], and also maybe, Dave, if he can make some sense of the ARPU of the business. That would be great.

The second question is again, Marc, in your prepared comments, you talked about revenue coming really below what you had expected for the year. So if you look at the core business, maybe how should we think about maybe from a metrics perspective, a net [gross of adds, net of adds]. Thank you.

I'm sorry. Gross sub adds, net sub adds?

Okay, so let me try to take those in sequence. So, first, relative to the pricing environment and pricing structure of Vocalocity, as you're probably aware in the small- and medium-business market, there will be headline pricing you'll see in the website, and then on a sale-by-sale basis, customers will engage in that pricing discussion.

What we see is that ARPU per line is actually not terribly dissimilar from what we see on our core Vonage business and is actually pretty consistent across the industry. We are not doing a lot, if any, kind of headline rate plan pricing promotions.

The primary driver of variability in pricing tends to be device and device subsidy, and that's the thing that we've done most of our experimentation with to try to understand if we remove the out-of-pocket cost, as we've seen in the wireless industry and as we've seen in our Vonage core business, what kind of additional elasticity of demand can that get for us. And we're assessing those results from some of those tests in the December and January timeframe.

In terms of the revenue for the total business, as I mentioned in the prepared comments, the primary drivers, we came into the year with lower net line adds, and with the gross margin we have in a pre-marketing operating income in the $17 range, that has a pretty profound implication on both revenues and EBITDA during the following year.

And while we did have positive net line adds for the year, and we'll continue to benefit from Vocalocity next year, we just didn't have enough growth in 2013 for the partial year that you acquire those customers to offset some of the hurt from the prior year. And of course, some of that growth is also coming from Basic Talk as a percentage of the mix, which has a lower revenue level.

I think the thing you want to look at or think about going forward is what is the trajectory of total revenues for the asset base we've got right now. And as we talked about, you'll see reported revenues, we expect, in the 7% to 9% range, and if you take Vocalocity numbers as though we owned it for the entire year, we fully expect to be in a 1% to 2% range. If we achieve those, you should see exceptional growth as you move into 2015 and get full-year benefit of those gross line additions that we got it in 2014.

Thank you.

Next question, operator?

Thank you, and our next question comes from Robert Routh from National Alliance Capital Markets. Please go ahead.

Good morning and thanks for taking the questions. Just a quick one. A few years back, you were reversing your NOLs because you realized that you had hundreds of millions of dollars worth of them and you could actually use them. But I know you didn't reverse all them.

I was curious, given the Vocalocity acquisition, the growth that you are seeing, is there a chance that some of the NOLs that you didn't reverse before could become again a tax asset to the Company? And as a follow-up to that, I'm wondering if you're still subject to the 382 limitations that you were before on which limited your buyback activity?

Yes, we're not anticipating a material shift in our NOL position or our cash tax-paying status. Our NOLs will expire at different rates for federal and state, but that's really the only change you're going to see in that. Vocalocity did come with an NOL as well, and we're in the process of working through exactly how to value that given our projected usage.

And the previous limitations, are you still subject to those?

Yes, we are. But it's much lower than it was, and we've not seen, in terms of executing on the buyback, we don't see an issue executing on the rest of the $100 million authorization this year regarding that or any other issue.

Okay, great. And then one other question. Obviously you guys have a ton of patents that are worth a ton of money that aren't on your balance sheet of much, if anything, due to the accounting laws around that.

I'm just curious if you could give us any sense, I know it would be kind of hard to do, is to what those could be worth, especially given recent announcements like the FCC telling big carriers like Verizon and AT&T to start looking at voice over IP trials, and considering you guys have been doing this for such a long time, I would think some of your patents may be a tremendous value to these carriers as they do those trials.

I'm wondering if you could give us any sense as to how to look at that in terms of the balance sheet value versus what they could be worth. And then also, is there any opportunity for you given what you have that others may need in order to do what they're trying to do?

It's a great question and an astute observation. I don't think that perhaps it's fully appreciated, the strength and value of the patent portfolio that we built in the last few years. Difficult for me to decide what that value might be and how to place that on the balance sheet.

What you can look at is if you look at settlement costs for the Company over the last several years, we've been extremely successful versus ancient history. And a big piece of that as a result of being able to have something of a patent detente, if you will, and that creates a kind of neutral playing field with some players, and that has certainly come into negotiations in conversations in cross-licensing types of agreements.

In terms of going forward for monetization, it's not something I'm really able to comment on in terms of inquiries we've had on folks wanting to license or are offering of the opportunity for companies to license our patents, but we do review that on a regular basis and consider whether it's appropriate to make those available or encourage other entities to take a license so that they're not in violation of our intellectual property. So it is something we pursue, but as you might imagine, commenting on specific intellectual property negotiations would be highly inappropriate.

Yes, absolutely. Again, it reminds me of AOL years ago. It was a $10 stock, and they sold the patents for over $1 billion and suddenly people realized they had this and no one gave it any value for that. It seems you guys have some things that some other entities are going to need [or] violate them in the future, so just kind of looking for hidden value there. Thank you very much.

We have time for one more question, operator.

Thank you, and our next question comes from Bill Dezellem from Tieton Capital Management. Please go ahead.

May I play devil's advocate for just a moment relative to your stock buyback program? And it was very successful when the share price was lower, but any thoughts relative to pulling back and reducing the buyback or stopping it for now given that share price is up?

And then the second question is relative to the net line additions doubling in December and January relative to October and November, I just wanted to confirm that that was Vocalocity. I semi-missed it in your opening remarks. And then, how did that fit relative to your expectations?

So I will take the second question first, and let Dave comment on the stock buyback. So it was Vocalocity, and it was net customers, not to be confused with lines. But fair surrogate since we had pretty consistent level of the types of customers coming in.

And relative to expectations, it exceeded our expectations. We were, frankly, a little concerned about what the disruption could be. We've actually already moved to the point of having Vonage Business Solutions branding on the website. We've had that the last couple of weeks, and we haven't seen at this point any material negatives.

Perhaps there's some positives, but we were pleased, actually, at the responsiveness of some of the marketing activities that Wain and his team put into the marketplace. And we think at least some of those are the kinds of activities we'll want to continue with because they seem to be good financial investments. So encouraged thus far. Difficult to draw a trend from eight weeks, but we like the early progress.

Great. Now, regarding your question on the buyback, I'd say first of all, we continue to believe our stock is a good value, and so we will plan to continue to execute against the authorization, which would average about $12 million a quarter if you just average out what we have left on that through the end of the year.

We are constantly assessing our capital structure and the highest use of capital. Right now, we've got the ability to execute the buyback and do the things we want to do on the growth side. If those two things start to become in conflict or, one, opportunities arise where there's clear accretion, we will direct capital that way. I'd also note that if the situation changes through M&A or some market opportunity, we would make a change. We would make that assessment and course-correct at that point.

I think, as with the other thing I noticed, that as with most buyback programs, we do modulate the buyback at higher prices which is why you may see some variability from what we're buying back quarter-to-quarter. So to your point there is some of that built-in as well which is fairly standard.

Thank you both.

With that, operator, we will conclude the call. Thank you everyone for joining us today.

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