Venture Global Inc (VG) 2014 Q4 法說會逐字稿

Good day everyone and welcome to the Vonage Holding Corporation's fourth-quarter and full-year 2014 earnings conference call. Just as a reminder, today's call is being recorded. At this time, for opening remarks and introductions I would like to turn the conference over to Mr. Hunter Blankenbaker, Vice President of Investor Relations.

Good morning, everyone, and welcome to our fourth-quarter 2014 earnings conference call. Speaking on our call this morning will be Alan Masarek, Chief Executive Officer; and Dave Pearson, CFO. Also joining us are Joe Redling, Chief Operating Officer; and Clark Peterson, President of Telesphere, a Vonage Company. 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 would like to turn the call over to Alan.

Thanks, Hunter.

Morning everyone. Thanks for joining us.

I'm excited to be with you today and to be reporting a very solid quarter highlighted by our highest EBITDA in ten quarters, 56% year-over-year organic revenue growth at Vonage Business Solutions, and the completion of the Telesphere acquisition.

Since this is my first earnings call as CEO, I'd like to take a few moments to share some of my background as well as a few of the reasons I was attracted to Vonage. I joined Vonage from Google, which acquired my company, Quickoffice, in 2012. I was the CEO and cofounder of Quickoffice, the world's most widely embedded mobile office software. Quickoffice had shipped pre-loaded on more than 500 million smart phones and tablets and it had 26 million registered users at the time of Google's purchase. Including Quickoffice I spent the last two decades leading technology-centered companies and have always pursued growth strategies that include organic and inorganic growth; and I plan to bring the same focus to Vonage.

Since joining just four months ago, I have immersed myself in the Company. I've traveled to our various offices, conducted operating and strategic business reviews, have listened to and learned from our employees, investors, and business partners. And, inevitably, one of the first questions I'm asked is, why leave Google and that California weather, for Vonage? And my answer is pretty straightforward. I joined because Vonage has a powerful set of assets that I felt were under-leveraged, yet I believe can be optimized to create significant shareholder value and innovative new services to customers, and I tend to think about these assets in four buckets.

The first asset that attracted me was the Vonage brand. The Company has invested more than $2 billion over the past decade to build its brand; and the result, not surprisingly, is that the Vonage brand has incredibly high awareness. And while traditionally positioned as a consumer brand, the Vonage name extends naturally into the adjacent business markets for unified communications. And this was proven with Vocalocity, which we acquired in 2013 and quickly rebranded as Vonage Business Solutions. The results have been tremendous. It is demonstrated that the Vonage brand adds significant value in the business market. Based on a brand study we conducted last year, Vonage's brand awareness is roughly 80%. This is dramatically higher than our public pure play competitors, each of which had awareness levels in the low single digits.

The second asset that attracted me was Vonage's opportunity in the small and medium business markets for unified communications as a service. UCaaS is a very large market that's now hitting a real tipping point. Frost and Solomon predicts that UCaaS SMB market, which we define as businesses between 1 and 1000 seats, will grow at a 27% tagger over the next five years. And Vonage has already assembled a leadership position in this fast growing business space. When combined with Telesphere, Vonage's 2015 business revenues will be among the largest of the public pure play UCaaS providers, yet our growth rate is a lot higher -- about 40% in 2015. By acquiring two outstanding companies, we now have the platform and the management team to serve the entire SMB market.

So as I considered joining the Company, I felt Vonage's success in SMB wasn't being fully recognized by the market, in large measure because the success we'd had to date and the big opportunity presented in business services, was somewhat buried within our larger consumer services business. Now, after these two acquisitions and their rapid follow-on growth, aggregate business revenues will comprise more than 20% of Vonage's 2015 revenues and will become a larger percentage over time.

The third asset is the strong stable cash flow provided by consumer services. Today we announce consolidated EBITDA for 2014 of $124 million, all of which was generated by consumer services. Now, while this reflects an obviously strong performance, the under-appreciated story in my view is Vonage's opportunity to reallocate those marketing dollars spent in consumer towards higher-returning investments in business services.

I emphasize the reallocation of these marketing dollars, because it helps explain increased current-year declines in revenues in consumer services. In 2014, we reduced consumer services marketing by $30 million over 2013, and we reallocated a portion of those dollars to business services where we have superior customer economics. This year we're going to reduce consumer market even further and allocate even more dollars to business services to continue to fuel the growth of Vonage Business Solutions as well as now Telesphere. In addition, we're reducing TV spend on BasicTalk now that it's in thousands of retail distribution doors; and as we've discussed on previous calls, we continue to modify our approach in the assisted selling channel so that sales partners' incentives are more financially tied to our turn metrics. We're also altering our marketing mix to make it more efficient by allocating more investment to direct response vehicles, and we have coupled this with a much, much greater focus on digital.

The last element of our marketing reallocation is a substantial increase in brand-based spending to further establish Vonage as a business brand. Simply stated, we want everyone to know that Vonage means business.

The net of all these plan changes is that in 2015 we expect consumer services to generate greater profitability. It will also have lower revenues, yet with less account turn as we prioritize acquisition spending to our higher-performing channels. Now, of course we're not satisfied with year-over-year revenue declines in consumer services, so we're focusing on product development with an emphasis on mobile, which is where I come from; and adding project management and engineering resources to accelerate the delivery of new products that will provide greater value to our customers.

The fourth asset I saw was the competitive advantage and financial flexibility that comes from Vonage's scale, its cost structure, and the high cash flows I just spoke about. The cash flows from consumer services fund investment and growth initiatives at a much lower cost of capital than our peers, and we have a borrowing facility in place that gives us borrowing rates below 3.5%. So our low cost of capital, low operating cost structure, and our cash-generating ability give Vonage buy-side advantages as the UCaaS market inevitably consolidates and we intend to be the leader in this consolidation.

So that's how I viewed Vonage's assets when I decided to join. Since I have been here and learned more, my confidence in these assets has only increased. We have a stellar brand -- it's almost iconic -- a low cost structure, great technology platforms, and excellent cash flows and financial flexibility. We combine all of this with a highly experienced leadership team. Altogether, I strongly believe we have the pieces in place to drive sustainable, long-term improvements in shareholder value.

Now, let's move to fourth-quarter results. Our business services area had an outstanding fourth quarter. Vonage Business Solutions' revenue grew to $27 million, a 56% year-over-year increase. The fourth quarter also marked the 1-year anniversary of our acquisition of VBS, and the results of this acquisition have exceeded our most optimistic expectations. Let me share a few of the highlights. We accelerated full-year 2014 revenue growth to 50%. We grew year-over-year bookings by 64% and we achieved cost synergies of more than $5 million, primarily by applying Vonage's lower cost of telephony services to VBS.

We expect to duplicate VBS's success with Telesphere. Telesphere nearly doubled our adjustable market, enabling us to serve larger enterprises within SMB. These customers require higher service level agreements and carrier grade feature sets, bundled with our MPLS broadband, not only for voice, but other cloud services as well. We fundamentally believe that to effectively compete for larger, multi-location customers we've got to offer a bundle that guarantees quality of service as well as provide a single point of responsibility for customer support. The combination of VBS and Telesphere enables Vonage to serve the full range of SMB. Remember -- we define as 1 to a 1000.

Our compelling cloud-based solutions address the needs of businesses that span from small and home office companies up through those larger enterprises with distributed work forces in many locations. While a sizable portion of our business revenues are derived from larger customers, generally with those greater than 50 seats, we also seek great value at the smaller end of SMB. You all have to remember, small businesses drive economic growth and job creation in the US. 98% of businesses have fewer than 20 employees. VBS's low-cost digital and telesales customer acquisition model generates very attractive subscriber economics this segment, and we're going to continue to pursue it aggressively.

Now, since closing the Telesphere acquisition, we followed the same playbook as we used with Vocalocity. We've invested our capital to accelerate Telesphere's sales and marketing, while reducing its cost by leveraging our favorable telephony contracts. Soon we will finalize branding in a way that connects Telesphere more tightly under the Vonage brand umbrella.

To sum it all up, we know how to execute on attractive acquisitions, and, more importantly, how to nurture them and accelerate their growth. We have the platform and the team in place to continue to drive industry-leading growth in business services. We are investing the maximum amount of dollars we believe VBS and Telesphere can productively deploy. Additional dollars will be allocated to acquisitions, and to this end, we have expanded our corporate development resources to support this strategy.

Moving on to consumer services. We're beginning to see the benefits of our focus on customer lifetime value. As planned, gross line additions were down this quarter as we continued improving the quality of customers we acquire while driving lower churn and increased profitability. Customer churn decreased to 2.5% from 2.7%, and the number of actual lines churned has declined for three consecutive quarters. The lower number of churned lines highlights improvement in the early life churn of newly acquired customers and it also highlights the ongoing stability of our tenured base. We're going to continue to execute on this strategy of improving marketing efficiency and allocating spend to our highest return opportunities.

Now, as I mentioned earlier, we are investing in our product road map. In Q4 we launched mobile inbound calling, a new extensions feature that links the Vonage home calling plan to customers' mobile devices, adding both inbound and outbound calling from smart phones. More than half of our subscriber base has extensions and are enjoying a full untethered home calling experience. In fact, mobile now represents 28% of all Vonage outbound international minutes and 2 million inbound minutes per month. And just last week, we launched selective call block, a new mobile feature that allows customers to block unwanted calls in real time with the swipe of the finger.

I think there are many more excellent opportunities for Vonage to introduce new and exciting products, features, and customer experience enhancements. I have been doing product development in my companies for a long time. I have got a great deal of passion for product development and we have what I have found here a talented and committed group of employees that share a renewed sense of excitement and urgency to deliver great products to the customer.

To summarize, let me reiterate the power of the combination of Vonage's consumer and business services. Our brand is a tremendous asset and we're going to invest in it and broaden its market appeal to ensure everyone knows that Vonage means business. Our consumer and business efforts compliment each other from a product and cost perspective and give us the ability to drive UCaaS features into consumer services and to use our scale and cost structure as a competitive advantage in business services. Ultimately, you should come to see Vonage as one Company, united under a single brand which provides UCaaS solutions to multiple customer segments, from individuals to small enterprises, so that Vonage emerges as the clear leader in cloud communications.

Lastly, as you will hear more in detail from Dave, we expect 2015 financial performance to reflect our focus on profitability in consumer services and high revenue growth in business services. We expect double digit year over year EBITDA growth, with revenues slightly down on a GAAP basis. I believe the moves I have outlined are the appropriate steps to position the Company for future revenue growth. In addition, with our track record as a disciplined acquirer and a pipeline of active opportunities, we expect to complete one or more acquisitions in year, which would be additive to 2015 revenue.

I'd now like to turn the call over to Dave to discuss our financials and 2015 guidance in more detail. Thank you.

Thanks, Alan, and good morning everyone.

I'm pleased to review our financial results for the fourth quarter and full-year 2014 and outlook for 2015. Before I begin, let me provide context for the numbers we reported this morning. We closed the acquisition of Telesphere on December 15, 2014. Fourth quarter results, therefore, include approximately two weeks of Telesphere's financial results, further adjusted down for purchase accounting, which had a very modest impact on the financials. And we discussed VBS -- those numbers do not include any contributions from Telesphere.

I'd also like to note that beginning first quarter of 2015, our disclosure structure will evolve to take into account the growing proportion of business service revenues which, as Alan noted, we expect to be in the 20% range for 2015. These changes will enable investors to better compare Vonage to our peers in the SaaS space.

With that, let's begin on slide 5. For the fourth quarter, adjusted EBITDA was $35 million, up from $30 million sequentially, collecting continued cost reductions concluding in consumer sales and marketing. Adjusted EBITDA was up 38% from $25 million in the year-ago quarter, reflecting lower [costs] for cost of telephony services and lower marketing expense. Full-year adjusted EBITDA was up 13% from the prior year to $124 million, and well ahead of our guidance. These EBITDA results reflect the strong cash-flow generation capacity of our consumer business.

Moving to slide 6, revenue for the fourth quarter was $215 million, flat sequentially. Vonage Business Solutions revenue improved to $27 million, a 9% sequential and 56% year-over-year increase, and was offset by a sequential decline in consumer revenues.

Turning to slide 7, for the full year, revenue was $869 million, up 5% from the prior year and in line with our guidance. The increase was due to the addition and subsequent acceleration of Vonage Business Solutions revenue, offset by line reductions in consumer. VBS grew revenue 50% organically in 2014, the first full year of Vonage's ownership, to $93 million.

Fourth-quarter average revenue per user, or ARPU, was $28.61, up from $28.19 sequentially, due primarily to the $1 price increase we implemented across Vonage world and US and Canada Unlimited plans in the third and fourth quarters and the recasting of our number of lines to exclude second line extensions for which we no longer charge, resulting in a reduction of approximately 79,000 subscriber lines.

GAAP net income was $6 million, or $0.03 per share, up from $5 million, or $0.02 per share, sequentially. GAAP net income was up from $4 million, or $0.02 per share in the year-ago quarter. Adjusted net income was $19 million, or $0.09 per share, up sequentially from 14 million and $0.07 per share; and up from $10 million, or $0.05 per share, in the year ago quarter.

Sequential and year-over-year increases were driven by the higher EBITDA. The adjusted net income metric excludes the acquisition-related items of intangible deamortization and adjusts for the fact that Vonage is not a material cash tax payer due to our over $700 million NOL.

We continue to drive efficiencies in COTS. Before giving detail on that, I note that with the filing of our 2014 10-K, we will be reclassifying certain network operations and customer care expenses that were previously reported in SG&A into COTS. Our press release and my comments all reflect this change for the current and prior periods, and our form 10-K will reflect the reclassification as well. This reclassification has no impact on any bottom line metric such as operating income, adjusted EBITDA, or net income.

We reduced COTS to $57 million from $58 million a year ago, primarily due to lower international termination rates per line, which declined by 15%. These reductions are despite the addition of VBS costs. COTS was flat with the third quarter. COTS per line was $7.57, up from $7.46 sequentially, due to an increase in US SEP fees, which are a pass-through; and down from $7.87 in the fourth quarter of last year.

Selling, general, and administrative expense for the fourth quarter was $70 million. This is up $4 million from the third quarter, reflecting acquisition-related expenses and the addition of Telesphere SG&A. SG&A increased from $67 million in the prior-year quarter due to the addition of VBS SG&A.

Marketing expense for the fourth quarter was $52 million, down from $58 million sequentially and year over year. This decline reflects continued efficiencies in our consumer marketing spend, focus on the quality and profitability of subscribers, and our focus on generating cash flow to invest in driving growth and business services. Subscriber line acquisition costs, or SLAC, increased to $373 from $365 sequentially, and from $331 a year ago, due to lower gross line additions in consumer and the removal of paid second-line extensions customers from gross-line additions. As we lower marketing, we expect SLAC to come down over time. In the meantime, we believe that we are getting higher value customers at these SLAC levels.

Turning to slide 8, gross line additions, or GLAs, were 138,000, down from 160,000 sequentially, and 175,000 in the prior year's quarter, due to lower customer line additions in consumer. The lower GLAs, which were planned, reflect our continued focus on adding lines that meet our customer lifetime value objectives and our choice to redeploy capital into business services.

Customer churn for the fourth quarter was 2.5% percent, down from 2.7% sequentially, and flat compared with the year-ago quarter. The actual number of churned accounts was down sequentially and year over year. The churn improvement, as Alan noted, is a result of our focus on adding high-value customers that are less likely to churn, as well as the stability of our tenured base. This demonstrates that the actions we started taking in the second quarter of 2014, the assisted sales channel, have had the desired effect.

Account churn in VBS was 2.2%. Customer account churn for VBS will tend to fluctuate given the relative size of its account base, and increased in Q4 due to early life churn in the presence of more small accounts. Net lines were negative 29,000 in the quarter, a result of the reduction in GLAs.

CapEx for the quarter, including the acquisition and development of software assets, was $7 million, primarily for network infrastructure and systems improvements. This was flat sequentially and up slightly from $6 million in the year-ago quarter. For the year, CapEx was $24 million, up from $22 million a year ago, reflecting the addition of VBS.

Free cash flow, which we define as adjusted EBITDA minus CapEx, cash interest, cash taxes, acquisition expenses, and changes in working capital, was $24 million in the fourth quarter, up $3 million sequentially due to increased EBITDA, offset by acquisition costs related to Telesphere. Free cash flow was down from $30 million in the year-ago quarter primarily due to very positive changes in working capital in that quarter. Free cash flow for the year was $68 million, up from $66 million due to the increased EBITDA. Adjusted EBITDA minus CapEx was $28 million in the fourth quarter, up 48% year over year, and $99 million for 2014, up 14 percent over the prior year, reflecting the strong cash-flow generation of our consumer business.

During the fourth quarter, we repurchased 3.7 million shares for $13 million, completing the $100 million program authorized in February 2013. In addition, our former CEO net share-settled his outstanding in-the-money options, the result of which was the Company effectively buying back an additional 4.3 million shares. Between this transaction and our open market repurchases, we effectively bought back 8 million shares in the fourth quarter, at an accretive average price of $3.54 per share. Excluding the net share-settled transaction, during 2014 we repurchased 13 million shares for $49 million. Since beginning our buy-back program in August of 2012, we have repurchased 45 million shares of Vonage stock for $133 million at a highly accretive average price of $2.97.

As we announced in December, Board of Directors demonstrated its confidence in our high cash flow and strong balance sheet by authorizing a new program to repurchase up to $100 million of our stock over a 4-year period beginning in 2015. We believe this new program provides the right capital allocation balance and flexibility between organic investments, acquisitions, and buybacks.

Cash, cash equivalents, and marketable securities as of December 31 were $51 million, including $3 million in restricted cash and $7 million in marketable securities. Net debt was $119 million, and we ended the quarter with net debt to adjusted EBITDA of less than one time. We had $67 million drawn on our revolving credit facility as a result of the Teleshare acquisition, and have approximately $60 million of additional borrowing capacity remaining in this facility. The revolver also has an accordion feature that provides additional capacity. We have ample [equatian] flexibility to execute on our organic and inorganic growth strategies.

I will now discuss our guidance for 2015. In 2015, we believe consolidated revenue, prior to acquisitions, will be in the range of $850 million to $865 million. Importantly, within this, we believe we can grow organic business services revenue -- that's combined VBS and Telesphere -- approximately 40% in 2015. As Alan mentioned, we expect to be acquisitive in 2015, and based on our M&A pipeline, we plan to deliver revenue above the guidance provided. Acquisitions are an important part of our strategy, and we have proven we can execute them accretively and on a disciplined basis.

We already have the platforms we need to serve the broad, rapidly growing SMB [market], which ranges from small businesses to larger enterprises with hundreds of locations. Therefore, further acquisitions will fit with these assets. We expect them to deliver significant synergies. Acquisition targets would expand our geographic presence, sales force, product set, and our customer base at attractive prices.

Regarding EBITDA for 2015, we expect it to increase from $110 million in 2013 and $124 million in 2014 to at least $135 million consistent with the 2014 second-half run rate. Our EBITDA projection is based on increased cash flow from consumer services, a reallocation of marketing dollars towards business services, and an increase in infrastructure investments in our business services group, where we plan to run modestly EBITDA-negative as we invest to maximize growth and exploit its superior customer economics. 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 Hunter to initiate the Q&A session.

Thanks, Dave. We're ready for the first question, please.

Our first question comes from George Sutton from Craig-Hallum.

Alan, I particularly appreciated the reallocation of spend discussion in the earlier part of the call. I wondered, relative to 2015, how much are you planning to further reallocate to the business side from the consumer side? You mentioned $30 million in 2014. I'm curious from the incremental perspective.

The reallocation has multiple pieces to it. One is, we reallocate into business services as much as we think they can productively deploy. And then, within consumer services, we remix it, essentially by, as I mentioned, continuing to refine what we're doing in the assisted selling channel, moving away from brand spending on BasicTalk, and at the same time investing into the brand. And again, we're focusing more on direct response vehicles and very heavily on digital.

Okay. That's helpful.

And you mentioned 40 -- if I heard correctly -- 40% VBS organic growth (inaudible) for 2015, which I think would comfortably put you above everyone else. Can you give us a sense of the composition you're expecting? Is it relative to a less than 20 lines, greater than 20 lines? Just kind of curious how you're coming up with 40%.

That's VBS and Telesphere combined, and that's across the platform. Both VBS and Telesphere are growing at roughly that rate.

Okay. Lastly, if I could -- relative to acquisitions, are you planning to keep the acquisitions focused on the business side of the equation? And would acquisitions look more similar to Telesphere than anything else? Thanks.

Sure, George. This is Alan again.

Essentially, yes. Our focus is to -- we believe there is a long tail of acquisition opportunities, and things like we have done with VBS and Telesphere are what we're principally focused on as we move forward.

Perfect. Thank you, guys.

Thank you; our next question comes from, Catharine Trebnick. Your line is open.

Thanks for taking my question. Nice print.

One of my questions is on the business services. Would you say, or could you say, in Q4 the average lines are, 1 to 20 or 20 to 50? Just give some color around that.

Sure. I think we can update some information or reference some information we gave before. So within VBS, which represented $93 million of revenue for 2014, the average lines per customer is in the mid-single digits. For Telesphere, as we talked about at the time of acquisition -- and they did about $40 million of revenue in 2014, obviously growing quickly -- their average lines is approaching 50. It's in the 40s per customer.

I would also note that, within Telesphere, their average number of lines per customer is already high, but there's a shift happening right now, which is that, that line count as we add customers is actually going up. And in fact, if you think about our entire complex -- this includes VBS and Telesphere, more than a quarter of that revenue is coming from customers with over 50 lines. And that's actual revenue in the quarter, not revenue added. So that's a number that we intend to accelerate over time.

Okay, thanks. And then the other one, more towards you Alan.

One of the things that some of the competitors feel, because they have contact center support, that they are very attractive to the mid-sized market. How do you look at Telesphere's assets? And do they have contact center support? And is that part of some of the customer acquisitions that you do win?

So we have excellent contact center support. Let me turn that question to Clark. He can speak more directly to it.

Yes, I appreciate the question. On the contact center side, we have been offering contact center and advanced contact center services for, probably five years now. We have contact center customers all over the country and offer very advanced contact center features and services.

All right. Thanks. I'll pass on.

Thank you, Catharine.

Thank you; and our next question comes from Mike Latimore with Northland Capital.

Thanks very much. Great quarter and year, there.

So, just on the cost of telephony services, termination fees, and so forth -- do you think that still trends down over time?

I do. I mean, it can be. It certainly can change quarter to quarter with USF and where rates are in India, which is our biggest termination point internationally. But those rates are capped, so it would be essentially floating only back up to that cap.

But that's the scientific answer. The practical answer is yes, termination rates generally have been coming down, and we believe that, that trend notwithstanding any quarterly fluctuation, will continue.

Okay. And with regards to the guidance for business services, do you still assume the same amount of revenue from Telesphere as you did when you made the acquisition, for 2015?

Yes. What we said about Telesphere at the time stands, which is, we were acquiring it for two times, in that zone, and that would put their revenue into the mid to high 50s for 2015.

And what did they contribute to the quarter, for the fourth quarter?

It was less than $2 million of revenue.

And you had some discussion about consumer product development activity. How much money is going to that and is it really more of a reshuffling of R&D?

This is Alan.

Our focus in product development is not capital intensive at all. It's really organizational and focused, and perhaps a handful of new people. We see opportunities generally driven by mobile; the way I like to describe it is to bend the curve, in terms of the value proposition, to our customers. And in large measure, one of the reasons why I was hired was to bring that experience in mobile here. So we're tacking at that.

Okay. Thanks a lot.

Thank you.

Thank you; our next question comes from Greg Burns from Sidoti & Company.

Can you give us any additional color on the underlying dynamics and composition of the consumer base relative to BasicTalk's growth? And maybe the churn you're seeing from your higher R-approved customers?

Sure. As we have talked about before, you really have three pieces of the consumer base. You've got people who make international long distance calls, and those are people wanting Vonage-branded devices. By definition, that's not BasicTalk. That's about 50% of our base. And that part of the base tends to have better churn than the average, and finds very good utility through extensions. And that's a lot of the product innovation to date has been to address that base.

The second part of the base, which is smaller than that, but bigger, substantially bigger than BasicTalk, is premium domestic. These are people on Vonage-branded devices that are not making long-distance calls. They tend to have a very high ARPU, and very high pre-marketing operating income. That's where we see churn; is where that's the biggest issue. But it's also a very profitable base that we are managing very carefully, and that's where retention offers, additional features, product innovation -- and we think we'll be particularly effective as we develop that.

The third piece is BasicTalk, and I think as we talked about, where we were going on BasicTalk is to get the SLAC below $200, and let the distribution do the work, and essentially take, as Alan referenced, take marketing down very substantially there. That product we believe is profitable, and will continue to chug along essentially at its current pace based on the dynamics. So it's a distinct minority of our base right now, and it's likely to stay in that zone.

Okay. And when we look at the net adds for the quarter, I guess you lost 79,000. How should we think about that number? Because -- does that include the 79,000 that you shed for the second line? Or what does that imply for the actual net adds excluding that?

Yes, that did not include the 79,000. So essentially you had total net lines down 29,000. That was composed of VBS; Telesphere obviously was not a factor. That's composed of positive VBS net lines and pretty consistent with what we've seen in prior quarters. And then, consumer down. So VBS accounted for all of the growth there.

Okay. Then, lastly -- on the credit landscape for the VBS side of the business, a lot of the competitors we see out there are clearly almost walking away from the low end of the market. And what are you seeing, and how are you benefiting from that?

Greg, this is Alan.

First of all, we see great economics in the low end, as I mentioned in my comments. VBS has a very efficient customer acquisition model that enables us to grab the smaller customers very profitably; and our whole, you know, digital [leads in], tele-sales model -- that whole customer acquisition approach is working really well for us. At the same time, Telesphere is tacking ever higher and has a broader range, a carrier-grade set of features. Now, VBS also sells higher line sizes, too. But we think we've got this market, that we define the SMB market as 1 to 1000, covered. And the economics are really exceptional at both the low end and the high end.

Okay. Thank you.

Our next question comes from Michael Rollins from Citigroup.

Yes, thanks for taking the question.

The first question -- I just want to make sure I understand. When you're talking about the $850 million to $865 million for revenue guidance for 2015, is that fully inclusive of the Telesphere and the growth that you expect to get from Telesphere for 2015?

Yes, it is. It does include Telesphere.

And I guess, more broadly, just following up on some of the other questions -- is there a level of line loss that investors should be prepared for, given what's going on in terms of the strategic shift in the business?

I think you're seeing it. Our guidance implies a level of line loss and revenue loss in consumer that we are choosing to take because we believe that the money we would have spent getting those lines, many of which we believe would have been profitable. But the money that we would have spent is better deployed either directly into business in the form of EBITDA, or into debt reduction or cash for these acquisitions that are accretive. The level that our guidance implies is a level that we're comfortable with. The factors that could change that in the future would include product development or that particular avenue becoming more attractive from a capital perspective than the other capital allocation choices that we have.

How should we think about the gross margin profile between a VBS customer versus a consumer customer, relative to what the new pro forma average under the new communication method that you're providing?

Yes, sure. We don't calculate gross margin directly, but obviously the SLAC -- just think about a VBS customer versus a consumer customer: the SLAC on a VBS line is lower. It's in the kind of $250 range. The churn is better. It's as we talked about.

The gross margin does tend to be higher, because your average consumer makes international long distance calls, and those international long distance calls tend to be expensive. Now, the overall dollar margin on an ILD caller is very attractive because the margin is a bit lower. So your average VBS customer doesn't have any ILD, so it also has a higher gross margin or service margin than your average consumer. So when we talk about those economics being more attractive and putting capital there being more attractive, that's the calculation.

Thanks very much.

(Operator Instructions)

We have a follow-up question from Mike Latimore. Please go ahead.

I just wanted to sync up two numbers that you gave. One was that you thought about 20% of the FY15 revenue would come from business, which is $173 million. But then you also said sort of 40% growth, which I think gives you more like $186 million. Can you sync those two comments up a little bit?

Yes, the 20% was a round estimate. The implication you took away on the dollars, divided into the guidance, would be the more exact math.

Okay. All right. Thanks.

I'm showing no further questions at this time. I'll turn the conference back over for closing remarks.

Thanks, that does conclude our call today. We appreciate your support of Vonage and look forward to speaking with you during the quarter. Thank you.

Ladies and gentlemen thank you for participating in today's conference. This concludes our program.