Venture Global Inc (VG) 2014 Q1 法說會逐字稿

Good day, everyone, and welcome to the Vonage Holdings Corporation first-quarter 2014 earnings conference call. Just as a reminder, today's call is being recorded. At this time for opening remarks and introduction, 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 first-quarter 2014 earnings conference call.

Speaking on our call this morning will be Marc Lafar, Chief Executive Officer, and Dave Pearson, CFO. Also joining us are Joe Redling, President, Consumer Services, and by phone in Atlanta, Wain Kellum, President, Vonage Business Solutions. Marc will discuss the Company's strategy and progress, and Dave will review our financial results.

Slides that accompany today's discussion are available on the IR website. At the conclusion of our prepared remarks, we'll be happy to take your questions.

As referenced on slide 2, I would like to remind everyone that statements made during this call may be forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These and all forward-looking statements are based on Management's expectations, and depend on assumptions that may be incorrect or imprecise. Such forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially. More information about those risks and uncertainties is highlighted on the second page of the slides, and contained in our SEC filings. We caution listeners not to rely unduly on these statements, and disclaim any intent or obligation to update them.

During this call, we will be referring to non-GAAP financial measures. A reconciliation to GAAP is available on the IR website.

And now, I will turn the call over to Marc.

Thank you Leslie. Good morning, everyone, and thank you for joining us on the call today.

We reported a solid start to the year highlighted by continued excellent results at Vocalocity, stable revenue and strong cash flow in our North American consumer business, a launch of consumer services in Brazil, and the introduction of our ReachMe Roaming mobile feature.

Vocalocity, now rebranded as Vonage Business Solutions, or VBS for short, grew revenue 40% year over year and 12% sequentially on a pro forma basis. Led by these strong results, consolidated gross line additions grew to 191,000, the highest level since the first quarter in 2009. Churn increased by 10 basis points to 2.6% and net line additions grew to 13,000.

This morning we announced a material increase in retail distribution. Through agreements signed with four new retail partners, we are tripling the number of stores that will be offering Basic Talk. In addition, we signed an online distribution agreement with Amazon. Once completed, we expect the expanded retail footprint and improved on-line presence will drive additional subscriber growth in the low-end segment with minimal incremental marketing investment.

Our financial results for the quarter were solid. Adjusted EBITDA was $29 million, the highest level in four quarters. Revenue increased 5% sequentially and 6% year over year to $221 million, reflecting the accelerating growth of VBS. This is our first quarter of year-over-year revenue growth since the third quarter of 2011. We continued executing on our balanced approach to capital allocation by investing for growth and returning capital to shareholders. During the first quarter, we repurchased $10 million or 2.4 million shares of Vonage stock.

Let me now spend a few minutes talking in more detail about Vonage Business Solutions. Results for VBS clearly demonstrate the power of the combination of Vonage and Vocalocity and our ability to accelerate VBS' already rapid growth.

Revenue for VBS was $19 million. As I mentioned, this is up 40% year over year and 12% sequentially on a pro forma basis. Net new accounts for the quarter were a record 4,600, up 249% versus the prior year and up 72% sequentially.

Due to the great collaboration of our teams immediately after closing, we have already realized many of the synergies targeted at the time of acquisition, including a dramatic reduction in the cost of telephony services.

Revenue synergies are also evident. The completion of our rebranding efforts , increased marketing investment, expanded distribution, and a shifting of Vonage small business leads to Vonage Business Solutions, have all contributed to the accelerated revenue growth. On the cost front, we have fully interconnected VBS to Vonage's Intelligent Call Routing platform, reducing domestic termination rates by 67%. And we are providing VBS customers with access to some of the lowest international long-distance rates in the market.

We also reduced E911 costs by more than 50% and have plans to capitalize on cost synergies in other areas, including mobile product development. Collectively, these actions have contributed to a 4 percentage point improvement in VBS direct margins. We anticipate further cost reductions and productivity improvements as we implement the same customer care technology and workforce management tools that have delivered major savings and service improvements at Vonage over the past five years.

On our last call, I spoke about a number of initiatives underway to drive growth. Let me update you on our progress.

First, we said we were focused on improving our digital yield by redirecting business prospect web traffic from Vonage to VBS and by optimizing our search programs. These activities are well underway. As a result of page search optimization and increased investment, we've meaningfully increased bookings for this channel cost efficiently. Although page search currently represents less than 20% of VBS bookings, the contribution from this channel is growing more than 50% faster than the growth of the overall business.

Second, I discussed the expansion of Vocalocity's referral program to include existing Vonage customers. Launched in January, this expanded program shows promise, as we have already signed up 1,000 existing Vonage customers to our referral network. While VBS customers still make up the vast majority of our referrals today, we expect the number of Vonage customers participating in this program and their level of contribution to grow over time. Referrals are our lowest cost channel and an important contributor to efficient growth.

Third, we continue to test the impact of a variety of device and service promotions. Many of these programs have been very successful in driving incremental sales. We will continue to refine and expand the most productive of these programs.

Fourth, as a result of our highly competitive cost structure, we're now able to test offers to small and medium businesses for which international calling is an important part of their business.

And fifth, we are building distribution for the expansion of our reseller and telesales channels. Since closing the acquisition, we have substantially increased our direct and outbound telesales staffing and the number of value-added resellers. We have expanded our direct and outbound teams by nearly 40% since the closing of the acquisition. These investments have been a key driver of the sales growth achieved during the quarter.

In summary, we very pleased with our progress since closing on the acquisition. In most regards, we are exceeding our original expectations. We will continue to invest for accelerated growth through additional scaling of direct and channel distribution, while adding resources in R&D and we will strengthen our customer support and service capabilities. In the coming months, we will turn more of our attention to new strategic opportunities including SOHO with full self-service capability, possible approaches to move up-market, white-label partnerships, and additional acquisitions.

Let's now move to a discussion of our North American consumer services business. Over the past several years, we've gained substantial traction attracting international long-distance callers. We're the market share leader in the Asian-Indian calling segment, have a growing base of Hispanic international callers, and we see further opportunities to grow this segment. Our Extensions product, which allows customers to extend their home international calling plans to their mobile phone, has been extremely popular with Vonage World customers. We are finding that consumers are increasingly responsive to marketing efforts that highlight value-added features such as Extensions and Virtual Numbers. In fact, we recently featured Extensions in our television advertising and immediately saw an increase in prospect flow, reinforcing the strong appeal of extending our calling plans to mobile.

In addition, in the coming weeks we will launch our physical calling card product through a new retail distribution network that will put our product into thousands of targeted locations serving a large segment of the international long-distance market that prefers to pay cash, use prepaid calling cards, and call from their mobile phone. We will be evaluating our early entry into this business over the next several months and will provide updates as we progress.

While we made progress in certain segments in the core consumer business during the quarter, we did experience some challenges. Gross line additions or GLAs were up year over year due to the continued contributions of Basic Talk. On a sequential basis, however, we experienced a modest quarterly decline in GLAs. This decline was due to several factors. First, the impact of inclement weather in January and February had a disproportionate negative impact in our retail channel. Second, seasonality played a role as we saw stronger sales during the holiday period in Q4 through the retail channel than we did in the later part of Q1. And third, we're no longer adding SOHO customers as these leads are now transferred to VBS.

In addition to a shortfall in GLAs, we experienced a modest uptick in churn due to the historically higher churn rate of early-life customers acquired in retail channels, which has increased as a percentage of the total customer base. As a result, overall net line additions in the consumer business were slightly negative for the quarter.

On the digital front, work is progressing on the upgrading of our digital platforms and tools. We're in the midst of redesigning our online experience and e-commerce platform to increase prospect traffic, enhance the learning and buying experience, and improve conversion. We are also optimizing our platform to better support customers using smartphones and tablets. We expect to be in market with testing of the redesigned site in late Q3.

Basic Talk is our $9.99 per month low-end domestic calling product launched nationally nearly one year ago. For the past year, the product was sold exclusively through Walmart stores nationwide and online. It has performed well and is the best seller in its category on Walmart.com. In just 12 months we've created a compelling new brand, which has helped to attract new customers, validate a retail oriented distribution strategy, and establish a strong foothold in the low-end domestic calling market.

As I mentioned earlier, we are now taking the next step in the evolution of Basic Talk by broadly expanding its availability to new retailers and online with Amazon. These new partnerships triple our current footprint to 12,000 locations nationwide and will provide access to the 500 million unique visitors to Amazon.com every month. We expect that this expanded distribution, combined with our existing strong relationship with Walmart, will enable us to attract a growing portion of the ultra-value segment who represent a market of more than 40 million households.

It should also lead to improvements in marketing efficiency and SLAC as we spread our fixed costs over more locations. We expect initial availability of Basic Talk in the first of these new locations beginning late this quarter with expansion throughout the third quarter.

Now let us turn our attention to international and mobile. In the past several weeks, we reached two important milestones against these growth priorities. The first is the launch of our consumer service in Brazil. Just over a year ago, we announced our plans to enter this large and rapidly growing market. Applying a phased market entry approach, we are now offering consumers in select markets a straightforward, high-value calling solution delivering substantial savings over current rates.

Our plans offer unlimited calling to land lines throughout the country for a low flat monthly rate. Customers can also make calls to mobiles within Brazil at low fixed per-minute rates regardless of the network called or time of day, offering savings of up to 50% compared to leading providers.

In a market known for complex high pricing, we are focused on meeting consumer demand that delivers transparent pricing and a positive customer service experience. This service leverages our cloud-based VolP platform and is supportive of Vonage customer care. The core offering also includes a localized Vonage Mobile app that allows customers to use their home calling plans to place calls from their smartphones at no additional cost. This is particularly valuable in this market where calling across cellular providers is very expensive.

Our plans also leverage Vonage's international long-distance rates, which are among the most competitive available with calls to the United States and other top destinations more than 80% lower than major competitors.

As part of our phased rollout we are now marketing services in two cities -- Curitiba and Brasilia and expanding to additional markets over the next several months. Our television, print, and digital marketing all emphasize the key benefits of our service -- simplicity, transparency, and mobility at extremely competitive prices. We believe that Brazil can become a substantial contributor to revenue over time and will update you on our progress in the coming quarters.

Last week, we introduced a patented new feature on our Vonage Mobile app, ReachMe Roaming, which allows US travelers to receive free incoming calls when connected to Wi-Fi no matter where they are in the world. Combined with free outbound calling to all US phone numbers in Vonage mobile, US customers can enjoy seamless two-way communication using their existing phone numbers while traveling abroad at no cost.

ReachMe Roaming is currently available in the United States for Android users on GSM carriers. We expect to expand this service to additional carriers, countries, and iOS. Current app users can simply update their Vonage Mobile app with the latest version to utilize this feature. The feature is easy to turn on when traveling. Users simply select ReachMe Roaming from the app settings to activate the service. US travelers can use the feature for free in any country where a Wi-Fi connection is available. The feature can also be used over 3G and 4G, though data charges may apply. To build adoption and enable us to learn about usage behavior, we are providing ReachMe Roaming free for a limited period.

Throughout the past year, quality improvements and new features, including video calling and video voicemail, have made us one of the most robust communication apps available. We also continue to make solid progress adding customers on Mobile Extensions with 850,000 customers signed up for this feature.

Since launching the service in 2012, approximately 3 billion international long-distance minutes of use have occurred over Extensions. Today, 40% of Extension's app calls are made over Wi-Fi. Importantly, many of our mobile capabilities are now being leveraged across geographies and business units including Brazil, the UK, and in the future, Vonage Business Solutions.

Future enhancements will bring new benefits to both businesses and consumers. Business customers will be able to make and receive calls from their 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.

In summary, it was a solid quarter lead by very strong results at VBS. This strong performance reaffirms our belief in the large growth opportunity presented by the SMB market. We're pleased with the acquisition and the progress we've made as a combined company.

Looking ahead, we remain focused on investments to drive long-term revenue growth and will continually reallocate resources based upon market response. We will also continue to return value to shareholders through our buy-back.

I'd like to close by commenting on my plans to retire from Vonage. During the past six years, I've been privileged to work with an exceptional team and a highly-engaged supportive board of directors. Together, we completed a comprehensive turnaround of the Company. Vonage is financially stronger than it's ever been and we're making good progress against our growth initiatives. The acquisition of Volcalocity is complete and has positioned the Company well in a growing new market.

As a result of our progress, and after considering the long-term needs of the Company as well as my personal goals, it became clear that now is the right time to select a new leader for Vonage. I'm committed to leading our efforts as the Board searches for a new chief executive and will continue to serve as CEO through an orderly leadership transition, which we expect to conclude by year end.

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

Thanks, Marc, and good morning, everyone. I'm pleased to review our first-quarter financial results.

Before beginning, I'd like to note that this is the first quarter for which the Company is reporting consolidated results including Vonage Business Solutions for the entire quarter. As you may recall, fourth-quarter 2013 results included only a partial quarter of VBS' results reflecting the November 15th close of the acquisition. Similar to last quarter, table 2 of our earnings release shows VBS key operating statistics on a pro forma basis as if Vonage owned VBS for all periods presented.

Beginning on slide 4. Adjusted EBITDA was $29 million, up from $25 million sequentially. For context, we are managing VBS in the area of EBITDA breakeven. Although there were a number of offsetting items regarding EBITDA, the primary operating drivers of the sequential increase were a reduction at Vonage consumer marketing and selling and improved COTS due to international termination rates. Adjusted EBITDA was down from $34 million in the year-ago quarter due to lower Vonage consumer revenue and higher SG&A.

Moving to slide 5. Revenue was $221 million, up $10 million sequentially due to a full quarter of VBS and the acceleration of VBS revenue. On a pro forma basis, revenue was flat sequentially. Revenue increased from $209 million a year ago due to the addition of VBS revenue, which more than offset the impact of lower ARPU in the consumer business as we added more customers on lower priced plans. On a pro forma basis, VBS revenue grew 40% year over year and 12% sequentially to $19 million.

ARPU was $28.86, up from $28.72 sequentially, and down from $29.61 in the prior-year quarter. The ARPU decline from the prior-year quarter reflects the growing proportion of Basic Talk lines in our base over the past year. This impact was lessened by the inclusion of VBS, which accounted for the sequential increase.

GAAP net income was $5 million, or $0.02 per share, up from $4 million, or $0.02 per share, sequentially. This increase is the result of higher EBITDA and lower acquisition related costs offset by higher acquisition amortization of intangibles of $3.8 million. GAAP net income was down from $13 million, or $0.06 per share, in the year-ago quarter. This reflects the deal-related amortization above and higher interest expense, offset by lower income taxes.

GAAP net income also includes an add-back of net loss attributable to noncontrolling interest, collecting the 30% of our Brazil venture owned by our partner in the quarter. For the first quarter, this item was $383,000. As we discussed last quarter, we implemented a change to the ownership structure of our joint venture reflecting Datora's inability to meet certain of its JV funding obligations. As a result, Vonage's ownership in the joint venture increased from 70% to approximately 90% as of the end of the first quarter. Datora continues to be Vonage's operating partner and maintains an equity position in the Brazil venture.

Adjusted net income was $13 million, or $0.06 per share, up sequentially from $10 million and $0.05 per share and down from $21 million, or $0.10 per share, in the year-ago quarter. These changes are primarily driven by the adjusted EBITDA trends I noted. The adjusted net income metric excludes the acquisitions-related items of intangibles amortization and deal expenses and adjusts for the fact that Vonage is not a material cash taxpayer due to our over $700 million NOL.

Moving to slide 6, we continue to execute on structural cost reduction opportunities and further reduce cost of telephony services, or COTS. COTS increased to $53 million from $52 million sequentially due to the addition of VBS' costs. COTS decreased from $55 million a year ago despite the incremental volume from VBS, which added several million dollars of termination costs in the first quarter. The overall decline was due to lower termination [and] network costs, led by meaningful improvement in international long-distance termination costs per line, which declined by 18%.

As Marc discussed, we've already fully interconnected VBS to the Vonage Intelligent Call Routing platform and lowered VBS's termination costs by 67%. Combined with the reduction in VBS' E911 costs and other COTS savings I mentioned, we've improved our consolidated direct margins to 72%. COTS per line was $6.88, down from $7.09 sequentially, and from $7.82 in the first quarter of last year.

Selling, general, and administrative expense for the first quarter was $78 million. This is up $5 million from the fourth quarter reflecting the inclusion of a full quarter of VBS. SG&A increased from $63 million in the prior year due to the addition of VBS SG&A, higher assisted-selling expense, and an increase in compensation and employee-related expense across Vonage. These factors were partially offset by an 11% improvement in customer care costs per line, reflecting continued improvements in care metrics including average handle time, which declined 8% from a year ago and first call resolution, which improved by 5%.

Marketing expense was $57 million, down from $58 million sequentially, and up from $52 million a year ago due to the addition of VBS. Subscriber line acquisition cost or SLAC decreased to $299 from $331 sequentially, and from $349 a year ago. SLAC decreased versus both periods as a result of higher gross subscriber line additions, driven by Basic Talk and Vonage Business Solutions. SLAC in consumer was down year over year and sequentially.

Turning to slide 7, gross line addition,s or GLAs were 191,000 up from 175,000 sequentially and up from 148,000 in the prior year's quarter aided by VBS, which grew accounts to 30,000, up 18% sequentially and 53% from the prior year.

Consolidated customer churn was 2.6% up, from 2.5% sequentially, primarily due to the higher churn rate of customers coming through retail channels, which have increased as a percentage of the total customer base. VBS churn declined to 1.6% in the quarter from 1.8% sequentially and will tend to fluctuate given the relative size of its account base.

Higher gross line additions more than offset the uptick in churn resulting in 13,000 net line additions in the quarter, our fourth consecutive quarter of positive net lines.

It is important to understand that our strategy is to maximize the total number of lines and revenue for Vonage on a consolidated basis. As a result, in the last quarter, we directed thousands of Vonage consumer leads seeking to purchase a small business product to VBS. This shift, along with the other market factors that Marc referenced, resulted in a net line loss in the consumer business. Although accounts from the Vonage leads have lower average lines per account that VBS's historical number, all of these accounts are incremental to VBS's organic growth. In addition the ARPU and average lines generated by VBS on these leads is better than the levels achieved by Vonage before the acquisition. Even without the effect of these leads, VBS revenue grew materially faster than last quarter.

We'll now move to a discussion of CapEx, cash flow, and the balance sheet on slide 8.

For the quarter, CapEx, including the acquisition and development of software assets, was $4 million, down from $6 million sequentially, and flat compared to the year-ago quarter. The adjusted EBITDA minus CapEx calculation was $25 million, reflecting the substantial cash flow generation capacity of our business.

Free cash flow in the seasonally low first quarter was $6 million, down from $30 million sequentially, due primarily to changes in working capital from the timing of payments, was up from $5 million in the year-ago quarter.

Cash and cash equivalents as of March 31, were $59 million, including $4 million in restricted cash, and net debt was $54 million. This takes into account the repayment of $20 million of our revolving credit facility debt to save interest expense. Revolver borrowings were, therefore, $55 million at the end of the quarter, leaving $20 million of revolver capacity and term debt was amortized down to $41 million.

We ended the quarter with a strong balance sheet, reflected a net debt to adjusted EBITDA of 0.5 times.

With a strong balance sheet and cash flow generation capacity, Vonage has significant strategic and financial flexibility. We continue to see interesting M&A opportunities, particularly in the SMB hosted VoiP market and we believe our financial strength is a competitive advantage.

We continued our balanced approach to capital allocation in the quarter, repurchasing 2.4 million shares for $10 million.

At the end of the first quarter, we had $39 million left on our current $100 million share repurchase authorization, which runs through the end of 2014. We intend to continue to execute on this authorization. Since beginning our buyback in 2012, we have repurchased 34 million shares for $94 million at an accretive average price of $2.78 per share.

We have made strong progress integrating Vocalocity into our business and are pleased with the synergies we have already realized. Our confidence in the opportunity in SMB is only strengthened and we will continue to invest for growth in this critical component of our business.

We look forward to providing an update on our progress in Brazil, and expanded distribution of Basic Talk in retail and online. We remain focused on revenue growth and plan to continue the discipline of improving our cost structure and the return of capital to shareholders.

Thank you for your 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 lines for questions.

(Operator Instructions)

Our first question comes from George Sutton of Craig-Hallum. Your line is open, please go ahead.

Thank you and good morning and congratulations on the results.

I wonder if you could talk about the 40% growth number on the SMB side. Obviously that's a great result and I'm wondering what's causing that. Obviously the market is growing nicely, but I'm curious if you could break it down into the brand changes you've made -- maybe some competitive changes that have occurred, meaning others moving up-market, and what you've done uniquely on the marketing side.

George, good morning, thanks. I'm going to flip this to Wain who's joining us from Atlanta and let him comment on the progress. Wain?

Wain, do we have you?

Sorry about that. Thanks, Marc.

One of the things that we were concerned about when we put the two companies together was that we just had a lot of work to do -- new systems to migrate, compliance work and rebranding. And we were able to get the rebranding work done incredibly quickly. And that rebranding work has had a really positive impact on taking our marketing dollars and making them work harder and do more. So we've been able to cast a wider net and increase our marketing spend to generate a lot more lead flow, which generated a lot more customers and a lot more bookings as you noted from the numbers.

But we've been able to do it in a way to where our marketing efficiencies have actually improved as opposed to eroded, which would have happened before the merger. And so now what we're doing is just trying to find new ways to put money to work and cast a wider net.

I think (inaudible) also, Wain, you guys have invested a fair bit in increasing rapidly the scale of your direct sales teams, both direct and outbound teams as well, correct? You've increased size almost 40% just in the last couple of quarters alone I believe. Right?

Yes, that's true and it all starts with spending marketing dollars to generate leads and then having the staff to be able to pursue the leads and close. And so everything has been scaling exactly like you would expect.

Last question for me. Marc, if we could think forward a bit -- this is clearly a forward-looking question. When we look at the movement of apps and sort of how significant that ultimately I think will be to this business, how does it change the business model in your view? How does it look different in a few years than it does today?

That's a great question. My view of this is a few years from now is we won't talk about home phone service or even mobile phone service. We'll talk about communications accessible from any device based on who you are or where you are, the way you want to experience it. If you think about mobile today and people initially go to mobile phone, I think that you're going to see that expanded to tablets and all forms of computing devices. I think even some of the in-home broadband connected devices from television screens and then all different forms of notebook computers -- everything is going to be communications enabled. And I think you'd want to have those serve you, whichever one you're engaged with, for traditional voice messaging and video.

So as we think about the business, when we talk about are mobile initiatives, we build those with a mindset to how can we leverage that across our business units and geographies. So for our launch in Brazil, for example, where we've built essentially what is the Extensions product in the US, our initial pitch, just as people experience Vonage's -- when you buy service with Vonage, you can make calls from your mobile devices or from your home, whatever you prefer and the value proposition is actually competitive versus mobile carriers and home service providers simultaneously.

So it's a completely different lens through which consumers will experience the value proposition and I think that's how it's going to be in the future. I think people on this call, we still even in our own business, think about it as you get a home phone service and we will add mobile or mobile becomes an afterthought. Going forward I think you're going to see is truly integrated unified communications and the way people experience it will vary by customer segment, whether it's B2B or whether it's in a consumer set across all of your devices. And people won't really consider how they buy legacy-type home versus mobile. They'll just expect that it works on any of their devices.

That's a very helpful perspective. Thank you.

Next question, Operator?

Our next question comes from Greg Burns from Sidoti & Company. Your line is open, please go ahead.

Good morning. If you could just compare the Brazilian offerings to your domestic offerings in terms of maybe ARPU? And then also, are the Brazilian subscribers included in the GLAs and the total subscriber numbers that you will be reporting on a go-forward basis?

So let me take the first part of that and I'll ask Dave to comment on the actual reporting structure because of the joint venture structure.

So in terms of pricing, keep in mind that the Brazil market is actually a bit more like the US market was 10 or 12 years ago. To call from city to city or state to state in Brazil you're paying significant permanent charges. You pay differently on mobile phones based on time of day and whether you're on your own carrier mobile to mobile calling within the carrier network or to different carriers.

Over the last decade in the US, we've all become accustomed to flat rate pricing. Distance doesn't matter inside the country. That simply doesn't exist with any major carrier in Brazil. So our value proposition is, anywhere in Brazil, you have the ability to make calls regardless of distance at one flat rate. Calls to mobiles, which have very high termination rates and are on a permitted basis, we provide significant discounts, roughly 50% to what other carriers are providing. And that comes inside of an existing package.

If you want to upgrade that to include international calling to the US, our rates for international calling are about 80% lower than what you can get from anybody else. So international value proposition is huge, but to be clear, our primary market segment is really domestic calling regardless of device in Brazil. And as I mentioned earlier, it is making calls from a cordless phone in your home or from your mobile phone from the very start.

So that's a little bit about the value proposition. And we've seen very strong initial traffic into our website and the telesale center, but it's only in two small markets and it's been less than two weeks. So we don't have a lot of quantitative numbers to report at this point. We'll obviously report our progress in future quarters.

ARPU, because we don't know the rate plan mix in totality, is difficult to project, but it's going to be roughly similar to Vonage World kinds of services, depending on what attach rates we have to some of our enhanced features. So you can think about that as roughly the $30 US equivalent ARPU plus or minus 10%, 15%. So that gives you a ballpark kind of range. We're not entering with Basic-Talk-like kinds of pricing, it's more like the traditional Vonage ARPU. So you shouldn't expect to see any kind of diluted impact at the ARPU level on a consolidated basis. I'll flip it to Dave to talk about the reporting.

Sure, Greg, going forward you will see GLAs from Brazil in our total GLAs reported. So we have consolidated and will continue to consolidate the joint venture. That didn't change with the ownership change. Hence, you will see GLAs and net lines appear in our reporting going forward.

Okay, thank you.

Next question Operator?

Next question comes from the line of Mike Latimore of Northland Capital. Your line is open, please go ahead.

Thanks. Very nice quarter. The cost per line, it's very low. Is that sustainable, do you think?

I'd say that the main component -- so, it's termination costs and networks costs and termination costs are the things that tend to fluctuate and have been driving the decline in COTS. A big part of that for us is international long distance, termination costs, and we've had a very good trend on those. They can fluctuate. It depends on the country. We typically have a contract with a termination partner or termination partners in a country and, depending on what that contract looks like, the rate can fluctuate. It's been to our favor over the last few quarters and moreover we've done a lot to control that. And, in particular, we have a contract with Tata in India, and which has been publically filed, which governs our termination there. That's the biggest country in which we terminate traffic.

Mike, this is Marc. I'll add to that. As you think about the components of COTS, if we're thinking about VBS for example, that COTS per line is obviously quite sustainable because it's primarily domestic. So the savings we've got, those are sustainable, those are systematic and won't change. But as Dave rightly pointed out, the real variable portion and frankly the only one that could even be material, is termination to India, so we watch that carefully. We try to manage that. We have very good and highly competitive long-term contracts with India.

I would also mention that if we were to see any kind of increases, we know that we are at least as buffered as all the major competitors that are completing calls to India. We believe we've got a competitive advantage to that country, which is the one that has the largest international COTS cost to us.

Okay. With regard to VBS you mentioned the possibility of going up-market there. Any new thoughts there? Is that something that is definitive or still in the works?

Nothing definitive at this point in time, Mike. We have been focused primarily on accelerating what was already a very nice trajectory that Wain and his team had delivered. We're pleased with the brand transition, which is complete. The team's doing a great job improving our search engine marketing. We're comfortable that we're able to keep track of growth and keep up with the pace of growth and accelerate that by expanding our existing channels.

And we've got additional folks that are spending a lot of time thinking about and actually working on a host of strategic opportunities, which includes actually inking white-label partnerships with large third parties, as well as, going up-market directly, M&A activities, and actually there's still we believe a large SOHO opportunity that the Vonage brands can extend to. We'd have to build out an improved self-service capability to deliver that. So we're still looking through the priority and sequencing of those. But we're pretty pleased right now fishing in the existing pond. But you can't help but look at in this market place where it's pretty much greenfield, how fast you want to move into some of these other segments. So I expect you'll hear a little bit more about our plans in the next three to six months.

And just last question. On the VBS, what kind of features or where is the R&D focus for the remainder of the year there?

Wain, would you like to take that one?

Sure. So mainly, we're working on building capacity out because we see an accelerated growth and so a decent amount of the R&D is just building out capacity. We're adding features that we need for -- and as you know, Mike, larger clients are willing to use our cloud service and they need more analytics and more reporting. So we're adding more analytics and more reporting.

And we also are working really hard with the Vonage core mobile team to integrate a combined mobile strategy to where people can do more and more things and leverage a lot of the rich robust features that Vonage has been offering their consumers, like video voice mail. So you'll see a lot more mobility things come up.

Okay. Great. Good luck.

Next question, Operator?

The next question comes from Dmitry Netis of William Blair and Company. Your line is open, please go ahead.

Yes. Thank you very much. I have three questions to ask. First, I think just to sort of follow on the VBS side, did I hear you say that the current channel program includes the referral network only for VBS? And if so, can we expect you to go into this really enablement mode where some of your VARs potentially kind of own the customer and you revenue share that, which might kind of drive better sale momentum? Any thoughts there would be great.

Let me just clarify my comment and then I'll let Wain describe the enablement for VARs. No, the referral network is not the only channel. It is one subset. We have increased the number of VARs [in]channel over the last couple of quarters. The nature of those agreements and how that's progressing I'll let Wain talk about in a bit more detail.

Sure. And then just to be clear, because this ties back to Mike Latimore's question as well as moving up-market. The unique dynamic that we're seeing at VBS is that in our core market we serve -- and this is what Marc said with a little bit more detail. In the core market we serve, we're finding that for every dollar of marketing dollars that we spend, we can generate an increasingly larger number of lifetime value. So some of our competitors felt the need to move up-market because they started to see a market decline in marketing efficiency. And what we're seeing is the exact opposite. Our lifetime value in our core market is doing well.

And then when you take our COTS advantage that's significant and meaningful. Our lifetime profitability compares very favorably to people we compete with. So a big part of our effort is just putting more and more dollars to work to generate the kind of flow that we have been generating in the past.

Marc mentioned pay-for-click, that's going very well. Our organic work on the website is going very well. Our direct mail and our outbound is going very well. Our referrals continue to scale alongside. One of the new things that Marc mentioned in January is we launched an ability for Vonage residential customers to refer and, although we're early on, we've already had 1,000 people register to be (technical difficulty). We think that over time can be meaningful as well. So we see a tremendous amount of upside that we can continue to grow pretty rapidly in our core market.

That's very helpful Wain. So there's nothing in store at the moment to move up-market or have channel partners really take (multiple speakers) --

Well, resellers are an important part of our business model and so that continues to grow as well. And in fact, the number of resellers that we've added since -- were very pleased with the number of resellers we've added since we closed the transaction.

And the thing you're mentioning, Dmitry, is that there are certain kind of resellers that are interested in partnering with Vonage but either in a white-label or a co-branded scenario. So they are interested in using our software but they want to own the customer, they want to own the terms of service. Our software is enabled to be able to white-label as well as co-branded. And Marc had mentioned in his formal statement that our expectations through the end of the year we'll be able to announce several white-label or co-branded relationships that should be meaningful in 2015.

Very good. Thank you. That helps answer that question.

And then very quickly on the other side of the business, Marc, I think you said Amazon is a project or one of the retail channel partners you're working on. That seems quite interesting. Can you elaborate on that and how material that contribution might possibly be for Basic Talk? And is that just domestic or do you think it can also take you outside the US?

The only thing that I'm really permitted to share at this point in time is that we have signed a definitive distribution agreement, where we will be distributed on Amazon.com. This is not a white-label agreement. It will not be under an Amazon brand. It will be the Basic Talk brand sold through the traditional Amazon retail store environment. Beyond that there is not any additional perspective I can share with you at this time.

Okay. When is that launch, again? Is that this quarter?

It will be before the quarter is over. Yes.

Got you. Okay, thank you. And then the last one, sort of a high level thoughts on the new leader you are looking to hire to replace you, Marc. Obviously it goes without saying there's been tremendous progress on the turnaround and what you've done with this company. So, what are some of the qualities you look for in a new leader? What's the focus going to be on? Is it revenue growth mostly? Is it something else? Can you give us a sense of that?

First, I'll mention we've started a search. We've formed a search committee. We're down to the final selection among a few top search firms. We expect to be well underway on a search very, very quickly.

In terms in the range of experiences or the type of leader, we're looking for a lot of established and proven leaders that both have a understanding of technology and software. We'd love to see somebody who has the mix of business-to-business skill set as well as those that might be traditionally expected within Vonage. Mobile would certainly be a plus. But open to a lot of experience and tenured potential executives. We've got a very strong executive team here, so we have the ability to have a different range of profiles that could fit exceptionally well.

I think the [remit] for that CEO is very much unchanged, which is aggressive focus on revenue growth. As you can certainly feel from body language, we're pleased with what the SMB market has presented to us thus far. And under my tenure and I fully expect ongoing, we would expect to continue to invest heavily in that market place while there's a lot of room for significant growth.

I think that you will also see a focus on proving the scalability of some of the international ventures and thinking about how Mobile can serve all of our business units. I don't think you're going to see a substantial change in the fundamental strategies. The way those may be executed may certainly change over time based upon the individual fingerprints of the thinking of a new leader.

Next question, Operator?

Next question comes from Raghavan Sarathy of Dougherty & Company. Your line is open, please go ahead.

Hi, good morning. Thanks for taking my questions. Just a couple of questions from my end. First, on the VBS business, the revenues grew 40% year on year in the quarter consistent with what we saw last quarter. But you talked about [more than] 70% sequential increase in net subscriber additions. So can you talk about whether you continue to see momentum in the business, if so, whether we should expect acceleration in revenue growth of the business?

So let me hit the top of the waves and see if Wain has additional comments. So just to clarify, last quarter's growth was 37%, this quarter was 40%. So actually we're accelerating growth on what is obviously a larger base. So, particularly in light of doing that on top of merger integration, we're feeling pretty good about the early returns.

In terms of the 72% sequential growth, that was for net new accounts. So as you know, we report churn and net new accounts, so that net new accounts includes both the gross new customers coming in, netted for cancellations. And that number versus a year ago is up 250%. That's what was up 70% sequentially.

Obviously that new customers, so that's a forward-looking indicator of what future revenues would do. So you can think about that as that's what you've added and that group of customers over the next 12 months will be what continues your ramp in revenues. You don't see much revenues in a quarter from folks who have just signed up because you're only getting a partial quarter of revenues, maybe only one bill, maybe two at maximum.

So hopefully that provides perspective. Think about that as a measure of rate of growth for revenues -- not exactly to growth, but a leading indicator of revenues going forward and the revenue number speaks for itself. That's what's actually booked and paid for based upon the acquisition from prior quarters.

Just to follow up on that if I may. I think the last call you sort of talked about how the net subscriber additions actually, I believe, doubled in the month of December. January [was just] the previous two months. I guess my question was, do you continue to see that type of momentum continuing in your [net sub adds]?

Yes, I think we talked was the number of bookings that we were seeing shortly after close that in the prior couple of months just befpre closing to the two months after that we'd seen a roughly doubling of new customer bookings. That was not net bookings. So this net takes out deletes. This is kind of more of a what's the real net revenue approach versus what are the bookings [in] sales. We're not going to ongoing report existing percentages of gross numbers, but suffice it to say to achieve a 72% sequential increase in our net, we continue to see very, very strong acceleration versus pre-closing on our gross account sales.

Okay. And then on the core business, I know Marc you talked about some of the factors that impacted, like weather and some increased churn coming from retail and also in redirecting leads to VBS. But then you have some new things happening now in your retail distribution. So if you look at all the different factors, how should we think about the core business? Is the revenue stable from here on out or should we expect some growth in the business? Or how should we think about given that -- some of the puts and takes here.

You should be thinking about the core business as one that has and will continue to provide very stable strong cash flow. We do see opportunities for growth in certain sub-segments and we certainly -- Basic Talk being one of them. Its ARPU-dynamic. It's quite different obviously than Vonage World. So, there's definitely some positives that we're looking at, but there's certainly some pressure that exists within the core business.

And we're really focused on making sure we're doing this cost effectively. So as you've seen, we have actually de-invested some in selling and marketing in the consumer business and we're trying to optimize. If we can redeploy dollars into other business units and get a better return for revenues, then we're going to make that decision. So we're not going to limit ourselves by unit. Our goal is to take the investment we make in selling and marketing resources and optimize that for the full company.

But generally, I think you can think about the core business as stable and we'll see fluctuations in different sub-segments, positive and negative. The one thing that will be an ongoing hit is we're getting much better yield by taking all of our small business leads that were coming in, many thousands of them every quarter into the Vonage website, and we are handing those directly to VBS where we are seeing a higher increase, a better average number of lines per lead, as well as higher ARPU when we turn them over to VBS. That's still a very small percentage of VBS's growth but it is on a sequential basis something that is a long-term shift in what the consumer business has benefited from. So that one is not one that is going to go away.

Okay, thank you.

We have time for one more question, Operator?

Our final question comes from a line of Robert Routh of National Alliance. Your line is open, please go ahead.

Good morning. Nice results. A couple of quick questions. You mentioned that you have four new retail chains in addition to Walmart and Amazon for the Basic Talk product. I was wondering if you could tell us who they are or give us any sense. Obviously it's a big endorsement of your product to get that many people willing to carry it in addition to Walmart. But do you have any more insight as to who these partners may be?

Rob, it's Marc. I would love to share, but unfortunately the partners won't allow us to do that until we're actually in distribution. And, frankly, for some competitive reasons, I probably wouldn't want to reveal that. But obviously, tripling the size of distribution, you can probably look at the number of mass merchant -- these are not small players. These are large mass merchandisers and you can probably come up with a short list of who you think they would be. But I'm not permitted to share that at this point.

Okay, great. Fair enough. And one followup on the Amazon relationship. I know you can't say much about it and right now they're just kind of reselling your product in the online environment. But is it safe to say that there is nothing that would prohibit that relationship from deepening and at some point, if you wanted to, it is potentially for you and Amazon to enter into a larger scale kind of deal given they have Amazon Prime, they're doing video and all of that and the Facebook acquisition that was made recently. Is it safe to say that, that could happen going forward, or is that out of line, to deepen the relationship?

I think I have talked in the past about suggesting that Basic Talk is a white-label kind of product for any number of large consumer-friendly brands that have a forward-leaning technology bias would be a wonderful fit. So we would certainly love to see that relationship deepen over time. And if we see some success, maybe there'll be some interest in that. But we would be very much open to it.

I should mention, because I think I was not clear earlier, the relationship with Amazon is not just for Basic Talk. We'll be selling Vonage in the online environment for Amazon as well. It was the doors for the mass merchants that I was referring to that was Basic Talk expansion only.

Okay, great, great. Makes sense. And just the last question is, can you give us an update as to your patent portfolio. Obviously, you've gotten a few during the quarter. You have a big patent portfolio already, a bunch pending, a bunch granted. Obviously, you don't get any value when your stock prices go down but clearly they have value, otherwise you wouldn't go after and secure them. Could you give us an update as to that and what the outlook is for this year in terms of what you expect in terms of patents granted?

Well we continue to have a patent -- sorry -- an intellectual property extraction process that we run monthly and quarterly. You've seen the pace and we've talked about some of the very specific numbers. We can shoot those to you again, if you don't have them in terms of what's been issued recently. We can't project what that harvesting will be and what we'll actually get granted. But we do have hundreds of applications pending in the US and abroad and we expect to continue the pace of innovation and to protect those inventions. But you can expect historical course and speed to largely continue. Of course, we can't guarantee what the Patent Office is going to do.

Great. Thank you very much.

With that, we'll conclude our call today. Thank you for joining us this morning.

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program and you may all disconnect. Have a great rest of your day.