Venture Global Inc (VG) 2015 Q3 法說會逐字稿

Good day, ladies and gentlemen and welcome to the Vonage third quarter 2015 earnings conference call. At this time all participant lines are in a listen-only mode to reduce background noise but later we will be conducting a question and answer session. Instruction will follow at that time. (Operator Instructions)I would now like to introduce your first speaker for today. Hunter Blankenbaker, you have the floor today.

Great. Thanks, Andrew. Good morning, everyone. Welcome to our third quarter 2015 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 Business Solutions Group. Alan will discuss the Company's strategy and third quarter results and Dave will provide a more detailed view of our third quarter financial results. Slides that accompany today's discussion are available on the IR website. At the conclusion of our prepared remarks, we will be happy to take your questions.

As referenced on slide 2, I would like to remind everyone that statements made during this call may be forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These and all forward-looking statements are based on management's expectations and depend on assumptions that may be incorrect or imprecise. Such forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially. More information about those risks and uncertainties are highlighted on the second page of the slide and contained in our SEC filings. We caution listeners not to the 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 with that, I'll now turn the call over to Alan.

Thanks, Hunter. Good morning, everyone. Thanks for joining us. It's hard to believe it's been just one year since I joined Vonage as CEO. Actually, tomorrow is my one-year anniversary. In just that one year we made extraordinary progress executing on our strategic plan to aggressively grow revenues in Vonage's business and to release the inherent profitability in consumer services. Our results for the third quarter and year-to-date reflect this strong progress and the conviction in our strategy.

We've now grown consolidated revenues for three consecutive quarters. Led by the aggressive growth of Vonage business revenues. Our organic growth rate in Q3 for Vonage business was 36%, excluding iCore which we owned only for the last four weeks of the quarter. Vonage business revenues are expected to comprise more than 30% of total revenues in the fourth quarter of 2015 compared to 11% in the year ago quarter and virtually zero just two years ago. And the disciplined operational and financial actions we have taken to optimize consumer services are yielding very strong results. Consolidated EBITDA increased 24% year-to-date versus last year.

Churn and consumer services decreased to 2.3% from 2.6% in the year ago quarter. The strong cash flow from consumer services continues to support our investment and growth in the rapidly expanding UCaaS for business sector. The last quarter's call, I discussed the foundation building we undertook at Vonage business to build a scalable, efficient organization capable of supporting continued rapid organic growth and to successfully absorb future acquisitions.

This includes functionalizing the overall organization to operate more efficiently, reduce redundancies, improve collaboration across teams, and execute new initiatives more quickly. We also discussed the creation of our two product families. Vonage Essentials, based on our proprietary call processing platforms that is purpose built for the SNB market, and Vonage Premier based on Broadsoft's call processing platform which serves larger customers from the mid market up through large enterprises.

This broad product sweep enables us to deliver the right communication services to the right customer with a value proposition that is simply better. The key word is better. And in the third quarter, we broadly launched our business of better campaign to further establish Vonage at a leading business services brand.

This campaign is positioning us at a technology leader that delivers innovative unified communication services and as a market leader serving the full range of businesses and enterprises. Given the great strides we've made in Vonage business, it was particularly rewarding that our rapid growth and progress in UCaaS sector was recognized by multiple industry analyst firms this quarter. Gartner named Vonage a visionary in its 2015 magic quadrant. A particularly impressive achievement given that this was Vonage's inaugural appearance in the magic quadrant.

Vonage was also awarded Frost and Sullivan's 2015 growth leaders excellent leadership award for hosted IP and unified communications and collaboration services. Vonage scored the highest among all providers ranked by Frost and Sullivan. And based on Frost and Sullivan's market share analysis, Vonage is now the second largest UCaaS provider in north America among all UCaaS participants including the pure plays and the large Telco's and cable companies. And remember we had zero market share less than 24 months ago.

We've also made great progress over the last year reinvigorating the Company's culture with a focus on relentless innovation and a commitment to wow our customers. We are making the right investments in our people and we've brought in additional exceptional talent in product, marketing and business execution. A renewed spirit is permeating throughout the organization. We are proud of our employees and how they've embraced sweeping changes throughout our Company. With that as a backdrop, let's move on to our third quarter results and strategic actions in more detail beginning with Vonage business. Vonage business revenue for the third quarter was $57 million. Representing 134% year-over-year revenue growth on a GAAP basis.

As we discussed last quarter, integration of our recent acquisitions continues to be a key priority and I am very encouraged by our progress. We are intently focused on operational clarity and efficiency throughout Vonage business by moving to common systems, network platforms and product catalogs. While fully leveraging the Vonage brand and creating a one Vonage culture. On August 31, we closed on the acquisition of iCore networks. The addition of iCore to Vonage business solidifies our already strong position in the mid market and enterprise segments and enhances our ability to serve the full spectrum of the UCaaS market.

iCore is also a compelling strategic set for three key reasons. First, iCore leverages the same Broadsoft call processing platform with which we have deep experience. And iCore was among the largest private Broadsoft service providers in our industry. Second, iCore expands our field sales force, particularly on the East Coast. We now have a large national sales footprint and the right balance of channel and field sales as well as a national accounts team focused on large enterprises. This sales organization, nearly 200 people strong, enables us to effectively reach and serve the rapidly growing up market UCaaS segments.

And third, iCore expands the Vonage product sweep in important ways. We can now offer a comprehensive Microsoft Skype for business solution by integrating our cloud voice service into an existing Microsoft on-premise solution, or hosting a complete Skype for business solution in the Vonage cloud. We can also increase wallet share with new customers as well as our existing customer base of more than 60,000 businesses while offering complimentary cloud services such as infrastructures of service and virtual desktops.

We now have the largest multi-channel distribution platform in our industry to serve the full range of business customers. In addition to the nearly 200 person channel and field sales team mentioned earlier, we have 150 inside sales professionals selling SMBs. During the quarter, these teams added more than 8,500 new business customers. That's new logos. While many were SMBs more than 30% of Vonage business revenues are for business customers greater than 50 seats and we expect this percentage to increase again here in Q4 as we get benefit from a full quarter of iCore.

As you might recall in the announcement of iCore, 60% of its revenues come from customers with 100 seats, or greater. For these larger customers, what really differentiates Vonage is the combination of our sales force and technology platform with our product and service delivery organizations to provide an unparalleled communications solution which we branded as Vonage Premier. Vonage Premier is purpose built for the upper end of the market providing a complete set of enhanced voice, data and video services delivered over our nationwide 20 POP MPLS network.

Customers value our proprietary provisioning and feature management tool, named Zeus, which enables the rapid deployment of solutions directly by Vonage and our channel partners, or directly by our customers. And rounding out our solution, we use our gUnify middleware layer to integrate communications with the core fast-based business applications that companies use as part of their everyday work flow such as Google at Work, Salesforce, (inaudible) and others. Bringing all of these capabilities together is our robust service delivery team combined of more than 80 team members specializing in product management, voice and data provisioning and line number reporting.

This team is intensely focused on providing an outstanding customer experience and is rapidly becoming a critical competitive differentiator. In fact, Gartner noted account management and customer support are two of Vonage's strength in its recent magic quadrant report. We believe the ability to effectively meet the needs of mid market and enterprise customers with a (inaudible) solution while delivering a flawless install experience is critical to building customer loyalty and winning at the higher end of the market. Remember, our goal is for our value proposition to simply be better.

We are an using our Company's scale and focus to assemble the product, technology, network and service delivery personnel and infrastructure to just be better. And very importantly, our opportunity to be better is structural because others will struggle to match our value proposition because they're either much smaller, unprofitable, under funded or in many instances, simply unfocused, because UCaaS offerings are not their highest strategic priority. Rest assured, UCaaS is our highest strategic priority.

Let me now move on to consumer services. Within consumer we continue to see the benefit of our focused on improving the quality of customers we acquire. Lowering our acquisition cost and driving increased profitability. One element of this effort is the launching of the grab-and-go merchandising strategy in retail that further reduces our use of face-to-face assisted selling. This revised approach has resulted in improved placements and expanded locations with our key retailers. We're also better leveraging the power of the Vonage brand.

We're eliminating the basic top brand in product. Actually, the Basic Talk product is being flushed through retail channels now and it should be completely gone by the end of the year. In addition to benefits derived from this new retail strategy, our continued shift of spending to more efficient acquisition channels like direct response television and digital, has resulted in improved marketing efficiency again this quarter. Overall, we reduced sales and marketing spending and consumer services by another $4 million sequentially.

Over the last 4 quarters, we reduced sales and marketing and consumer services by $29 million. And despite these enormous customer market being spends, Vonage branded gross line additions, or GLAs, remained essentially flat over the last four quarters. As a result, our customer acquisition cost per GLA was 27% lower in Q3 of 2015 than it was in Q3 of 2014. And with churn at 2.3% versus 2.6%, we've increased customer life by five months or close to another $100 in service margin.

This means we're spending much less to add customers with longer lives and greater lifetime values. These results reinforce our conviction that we can continue to generate excellent cash flows from consumer services for many years and importantly, these cash flows will continue well beyond the time we begin to generate substantial profitability from Vonage business. Today we serve almost 2 million residential customers from which we generate all of Vonage's cash flow.

This cash flow is a key competitive differentiator particularly against our private and public pure play competitors. To summarize, Q3 was another great quarter, highlighted by strong performance, further foundation building at Vonage business, the closing of the iCore acquisition and continued focus on profitability and consumer services. On almost any measure, we're executing well against our strategic priorities and we have a terrific set of critical core assets.

These include our stellar brand, larger revenue base, Company scale, and balance sheet strength as compared to other pure play UCaaS provider. A leadership position on the unified communication sector where we are ideally if not uniquely positioned to serve all segments of the market. Our talented management team which has the right experience to lead Vonage forward in its next stage of growth. And finally, a culture that is being reshaped to emphasize innovation, accountability, and a core focus on wow-ing the customer. We're really pleased with our results and progress to date. But we have very high aspirations. So there's much more work to do.

I look forward to updating you again next quarter only our continued progress. Thanks for your support and I'll now turn the call over to Dave to review our financial results in more detail.

Thanks, Alan and good morning, everyone. I'm pleased to review our financial results for the third quarter of 2015. Before reviewing the results, let me provide context for the numbers we're reporting this morning. We closed on the acquisition of iCore on August 31st. Third quarter results therefore include approximately four weeks of iCore's financial results, further adjusted down for purchase accounting. Given the short time period and the adjustment, iCore's results had a modest impact on our financials. Additionally, the quarterly growth rates disclosed in our presentation slides and during our formal remarks are on a year-over-year basis, unless otherwise noted as sequential. With that, let's move to slide 4.

Consolidated revenue for the third quarter was $223 million, up $9 million. Vonage business revenue was $57 million, or GAAP growth of 134% and organic growth of 36% (inaudible) TeleSphere and Simple Signal for the same periods in the previous year. Third quarter average revenue per line in consumer, $27.38, down $0.22 due primarily to promotional pricing. Vonage business average revenue per seat was $41.56, up from $35.39 due to our acquisition of subsequent organic growth in the mid market and enterprise base starting last December. Moving to slide 5. Customer churn in consumers, was 2.3%, down from 2.6% in the year ago quarter.

This year-over-year improvement in consumer churn is the result of our focus on adding high value customers that have a lower churn profile as well as the stability of our tenured base. We expect churn to continue to fluctuate based on seasonal and competitive factors but to stay in this general range. We ended the quarter with two million subscriber lines in consumer, down 199,000, excluding 79,000 paid second line extensions that we adjusted out of the line count after we began offering these extensions for free in the fourth quarter of 2014. Sequentially, net lines in consumer were down 50,000 in the quarter, consistent with our expectations and reflecting relatively flat gross line added to slightly higher churn due to seasonality.

As Alan noted, the flat GLAs on lower consumer sales and marketing expense meant that customer acquisition costs per line continued to decline. Revenue churn for Vonage business was 1.3%, flat year-over-year, and sequentially.

Vonage business grew total seats of $514,000, more than double the prior year reflecting acquisitions and continued strong organic growth. Now moving to income statement cost items. Cost of service was $67 million, up from $56 million due to higher cost of telephony services, and a greater number of business seats. For context, one year ago, our Vonage business operation consisted only of the former Vocalocity operating in our SMB space and our seat count was less than half its current size.

Turning to slide 6, sales and marketing expense for the third quarter was $88 million, down $5 million. This decline reflects continued (inaudible) and reduction of our consumer sales and marketing spend, partially offset by continued investments in our Vonage business organic sales and marketing initiatives. Consumer subscriber acquisition costs were down again in the quarter consistent with the lower sales and marketing spend and the shift to more efficient media channels.

On a sequential basis, sales and marketing was up $4 million reflecting the addition of iCore and increased spend behind our business is better campaign to build the Vonage business brand. We launched this campaign late in 2Q and as discussed on our last earnings call, increased spend in 3Q consistent with our second half 2015 marketing plan. General and administrative expense for the third quarter was $29 million. This is up $5 million reflecting the addition of TeleSphere, Simple Signal and iCore G&A expenses, as well as acquisition related expenses.

Moving to slide 7. For the third quarter, adjusted EBITDA was $34 million, a 13% increase. This reflects another quarter of strong cash flow from consumer which it founded for more than 100% of EBITDA. Sequentially, EBITDA was down $4 million due to the previously mentioned increase at brand spend in Vonage business. Adjusted net income was $14 million, $0.07 per share flat to the year ago quarter. The adjusted net income metric removes non-cash items such as amortization of intangibles from acquired companies and adjusts for the fact that Vonage is not a material cash taxpayer due to our $640 million NOL.

Moving to slide 8, CapEx for the quarter including the acquisition and development of software assets was $10 million primarily for network infrastructure and systems improvement. This is up from $7 million due to acquisitions and licensing costs. Free cash flow, which we define as net cash provided by operating activities minus capital expenditures and acquisition and development of software assets was $28 million, up $7 million.

Adjusted EBITDA minus CapEx was $24 million, up $2 million or 7%, all reflecting the strong cash flow generation capacity of our business. During the third quarter, we repurchased 400,000 shares for $1.8 million under the four year $100 million program authorized at the start of 2015. Since beginning the repurchase of stock in August 2012, we have bought back 48 million shares of Vonage stock for $148 million at a highly accretive average price of $3.08. Our buy-back has provided strong returns for shareholders and will continue to be a flexible capital allocation tool to be deployed at management's discretion.

Cash and cash equivalents and marketable securities as of September 30 were $72 million including $3 million in restricted cash and $10 million in marketable securities. Net debt was $185 million and we ended the quarter with net debt to adjusted EBITDA of $1.3 times. The increase in net debt is attributable to the $92 million cash acquisition of iCore when we financed through the combination of cash on the balance sheet and a portion of our $350 million credit facility. We acquired iCore at an attractive valuation representing a multiple of 1.3 times 2015 revenue.

As we execute on our acquisition integration strategy, we expect to achieve approximately $5 million of annual operational synergy's by leveraging our much larger scale and robust technology platform. Including in the areas of cost of telephony services which include carrier and access cost and e-911 expenses as well as data center consolidation, shipping and G&A. Given the strong cash flow dynamics of consumer services and the capital available under our revolving credit facility, we have ample liquidity to pursue further disciplined organic and inorganic growth.

We continue to actively assess M&A opportunities in the UCaaS space and provide the right strategic fit at attractive valuations. Our primary focus is on providers that utilize the enterprise grade Broadsoft platform where we believe we can accretively acquire customers in key sales capabilities, technologies and/or geographic presence. Regarding guidance, given greater visibility as we approach the end of the year and the closing of the iCore acquisition, we are updating and have increased our full year revenue and adjusted EBITDA guidance for 2015.

We now expect revenue for 2015 to be between $891 million and $895 million. This is up from original full-year guidance of $850 million to $865 million which has been adjusted several times for acquisitions. We expect adjusted EBITDA to be in the range of $142 million to $144 million, versus original guidance of at least $135 million. That concludes my prepared remarks. Thank you for my continued support of Vonage and I will now turn the call over to Hunter to initiate the Q&A session.

Okay. Thank you, great. Thank you, Dave. Andrew, let's take the first question please.

(Operator Instructions). Our first question comes from the line of George Sutton, from Craig-Hallum. Your line is open.

Thank you. Nice job, guys. Relative to the marketing efficiencies which have been very impressive, how much further can that be improved in your view?

Thanks, George. Let me turn it over to Joe to answer that.

Hi, George. I think we can still show some additional efficiencies. I think Alan mentioned in his prepared remarks our shift in retail to a grab-and-go strategy, which is really Vonage on the shelf versus our face-to-face selling. That just launched in September so we're expecting both improved efficiency on the acquisition cost side and those customers have greater lifetime value because their churn profiles are lower. We think we have more efficiency to go and we'll see more of that in the fourth quarter.

Relative to the iCore acquisition, you mentioned given some of their capabilities, you see an ability to increase wallet share of customers. Could you quantify what you mean by that statement?

George, this is Alan. I really can't quantify it yet other than to say that iCore has a cloud business which augments its traditional UC business principally selling for structures of service and virtual desktop. The opportunity for us is to extend that across the whole base of customers. We haven't even begun that process yet. Obviously, we just closed on this company 7 weeks ago but we believe that's enormous opportunity to push those wallet share opportunities across the whole base.

Got you. Okay. Lastly, Dave, did you give an organic growth number for business? If you did, apologize, I missed it.

Yes, we did. So for the quarter it was 36% excluding iCore which we only owned for four weeks and had a purchased accounting adjustment down to the revenue as well.

Okay, great. Thanks, guys.

Thank you.

Thank you. Our next question comes from the line of Matt Latimore, from Northland Capital Market. Your line is open.

Hey, good morning, guys. It's Matt's brother Mike here. I guess Alan, you know, you've done great job of improving the efficiency of the consumer business. I think to start you talked about the potential to stabilize that or grow the top line. Any general thoughts on kind of the consumer strategy here?

When I talk often about in the fixed to the consumer business I refer to it as sort of two broad levers. The first lever is that marketing efficiency and churn lever and the other is core product itself. So we've been attacking the marketing efficiency and churn massively and Joe just commented on that. We think we have more to go there. Concurrently on the product side we just hired a new Chief Product Officer, Omar Gervais, who started less than three months ago and we're focused on innovation. Principally around areas in mobile that we think we can bring greater value to the residential customer. Remember, at the end of the day we're all UCaaS customers.

Today we sell to that residential customer. It is multi-modal. It's voice and text. It's also multi-device because it's your land line phone as well as your mobile phone. So we've been looking at opportunities to bring a different value proposition to the residential customer, but you won't see any of that effort materialize until next year.

Okay, got it. And then on the cost of telephony services per line, I guess what's the general view on that in the next couple quarters?

Sure. And that's not a metric we report anymore just because the consumer line and business theater apples and oranges and in fact an essential seat and a premier seat are apples and oranges. I would say that having just acquired iCore and having not acquired Simple Signal too long ago, over the long term, there's more to do on cost. And specifically as it relates to some of the less termination specific cost costs. So for instance access cost, back hall cost, things like to where the company's we acquired really didn't have much, if any, scale.

So I think over the short term, you're going to see when iCore gets added in, you're going to see cost goes up just because we're going to have a full quarter of that. But I think over the medium term, you're going to see the per line or the efficiency of costs come back down and I think we will be in a position, you know, when we get 2016 guidance, to give you more detail on that.

Great. And you mentioned the field sales force, the inside sales force. Do you expect to add to that or would it be sufficient to kind of grow the business and maybe detail later on more through acquisitions?

The answer is a little bit of both. So we clearly expect to continue to grow the sales force. We tend to think of it, you know, the old adage of a NFL cities strategy in terms of how we grow. And iCore was the huge contributor to that, that created this balance. We were on the premier side principally channel based because that was the focus of TeleSphere and Simple Signal and iCore was the inverse of that. They were almost direct based.

But we'll continue to grow our direct sales force organically into additional cities. Concurrent with that, that's one of the reasons, one of the strategic reasons that we might do another acquisition because they give us strength in a market that we can do the acquisitions as opposed to doing a pure green field basis.

Okay, great. Thanks a lot. Great quarter and last year, really.

Thank you.

Thank you. Our next question comes from the line of Catharine Trebnick, from Dougherty and Company. Your line is open.

Good morning, this is jack on the line for Catherine. Thanks for taking my call, and congratulations on another great quarter. Can you give us an update on the integration of iCore networks? I know some revenue is expected in Q4 but when can we expect the acquisition to really start hitting on all full cylinders?

Sure. As it relates to some of the low hanging fruit on termination cost of telephony services, shipping, e-911, you'll start to see that stuff relatively quickly and that's built into our $5 million of synergy's in 2016 that we think we will realize. I think more broadly as it relates to growth, you know, the asset clearly like all of our acquisitions since Vocalocity is growing slower than we are.

So it is going to take some time to accelerate the growth of iCore so you won't see that in the fourth quarter but what we're really doing is implementing a strategy to accelerate the growth of what we bought but also take what's great about iCore which is direct sales force, broader product capabilities and spread that much more widely so it's going to be integrated very quickly from that perspective and essentially is the direct sales, the hub of our direct sales strategy in the NFL cities that Alan talked about in addition to our sales channel approach.

Jack, this is Alan. Let me add a little bit to the that. So, you know how I talked about last quarter the theme was really all about the foundation building and that continues today. So, when you asked the question about integration, what we're doing is the foundation building is to establish the basis by which we bring additional acquisitions into. And what I mean with about that is organizationally we're a functionalized organization structure so as an example. All sales and marketing and customer care and global operations reports up to Joe, of every one of these acquisitions. I mentioned in my prepared remarks about the common platforms and systems and harmonizing the product catalog.

Those are all essential elements of foundation building so that now you have, you know, one solid base that we can grow to and it goes all the way through our lead generation system, is sales force. Our accounting system is Oracle. Our billing system is engaged IP in the Broadsoft side, etc, etc. putting everybody on those systems. And one nice thing is that many of these acquisitions are already on those systems so is it makes integration that much easier. Those are all the elements that in my experience, where CEOs get tripped up because acquisitions aren't properly integrated and we're focused very intensively on net letting that happen here.

Great. Thanks for taking my call.

Thank you. Our next question comes from the line of Greg Burns, from Sidoti and Company. Your line is open.

Good morning. Just a question on the profitability of the business segments. I guess it's operating at a slight loss right now. I think it will be a pretty decent scale, probably over $300 million of revenue next year. How should we have think about the profitability of that segment progressing into 2016 and beyond?

Sure. So as we talked about, we think we're building significant operating leverage, .1, .2. We will give specific 2016 annual guidance on that issue as well as the other parameters in our February call. That being said, we believe we are going to be more profitable in that business than we have been. I.E we will be narrowing the loss to break even in that business and we're still going through our 2016 budgeting process now to dial that in exactly. I would not expect significant EBITDA to come out of that business in 2016, however we continue to see the customer economics that we're seeing now.

Okay. Thanks. And then when we look at Vonage Premier, would you give us a sense of the complexion of that customer base? Maybe the size of the customers that you're adding or what's your largest customer you're serving there?We've seen some large customer announcements from some of the competitors. I just wanted to get a sense of what you're seeing in that space.

Let me ask Clark Pearson to take that and for those of you who don't know, Clark is President of our Business Solutions Group

I think to answer that question, Greg, you know, we feel very well-suited to be able to handle the mid to large enterprises. We feel like as you look at the upmarket opportunity, we are already there, right? With the systems, the national network, the back office in place and a lot of experience handling these customers. So, we have customers that, over 1,000 seats on our network and we continue to expand our national sales group as we see greater and greater opportunities for these very large, mid to large enterprises that want a national footprint and want somebody who has the back office systems and the full portfolio of services to service all their needs.

Greg. If you think about it, our solution is not limited at all by size of opportunity. What we do every day are very large, multi-geography, multi-location customers for which there's a hybrid solution of connectivity on Prem, cloud, etc. That's just an every day event for us. We find, and we're knocking down more and more of these much larger customers but, the meat of the market still is like all disruptive technologies, started at the bottom of the S&B side and is moving rapidly up through mid market, small enterprise into large enterprise and we're just tracking right with it.

Okay, thank you.

Thank you. Our next question comes from the line of Robert Routh from FBN Securities. Your line is open.

Thank you, and good quarter. Couple quick questions. You talk about the NOLs that you have and obviously if you use off balance and (inaudible). Do you expect to fully utilize how you're doing all of those NOLs given (inaudible) your future profitability going forward?

We do. Yes, within the period that we need to utilize them, we do. When we acquire a company, typically they also have NOLs. So it's not adding when we acquire necessarily in a linear way, but we do believe that we will utilize the full 640 NOL that we have, now.

Something changed from the past when it didn't look that way. Okay. Great. As far as the acquisitions you talk about, obviously you made a bunch of them and you commented you're looking for more Broadsoft based kind of entities. Given how big you've gotten, how many are out there that really sit with what you're doing that probably would be willing to do something with you given the relative size in the market and how good you are? How many opportunities are there near term that accretively you think might be doable?

Sure. We've always talked about two different sets or two different pockets of potential targets. One is companies that typically have over $50 million of revenue and use Broadsoft typically are very deep in a wide geographic area, if not nationwide and there continue to be a handful of those. And we believe given the acquisition of iCore we just did at roughly 1.3 times 2015 that they are a good precedents out there. Not everybody is a seller at that price but we think there are enough of them out there of quality that we can get good value. So that handful continues to be out there.

And then there's a very long tail of companies that are typically sub $20 million of revenue, sometimes sub $10 million of revenue. And having just come back from Broadsoft Connections, which is the annual Broadsoft conference, I would note that we believe that tail is about twice as long as we thought it was when we got into the Broadsoft phase. And that's not only in Europe, I would say about half of the attendees at the conference were not based out of the US. But within the US, in first, second and third tier cities, there are just a lot of these sub scale Broadsoft competitors out there. Alan mentioned that one of the strategies as it relates to the direct sales force build-out is to acquire essentially customers and sales force capabilities in key cities. But for us, it's not math, it's essentially a buy versus build calculation that we're doing.

Okay, great. And just two more if I may. As far as the balance sheet goes, obviously with the increasing guidance and your balance sheet, you're well over capitalized and your leverage is incredibly low. What do you feel is the proper leverage that Vonage could handle if you found (inaudible) and pass opportunities and you didn't want to use your stock as a currency, you wanted to use cash instead, given your equity is probably pretty expensive, long term. Is there a maximum leverage that you would be willing to entertain if that deal came along?

Sure. So first I'd just say that today we're first and foremost about strategic and financial flexibility to take advantage of the organic and M&A growth opportunities. So we're not operating today at a specific target leverage as it relates to capital allocation. We're operating to be able to take advantage and grow the business accretively. Our current loan enables us just normal course to be at 2.5 times leverage. We're only 1.3 right now net, that's 2.5 times is gross and enables us to stretch up to 2.75 for an acquisition. So, we've got a lot of room. And particularly as we think about the pockets of acquisition that we just talked about, we've got ample room to acquire I think what we need to and acquire multiple businesses if that's where we come out.

I think that there are advantages for us to stay, to be able to finance in the investment grade market which is essentially what we're doing today, you know, at a cost of roughly 3.5% fully pre-payable, short amortization schedule and lenders being a group of banks who we maintain close relationships with and know who to talk to as opposed to a group of less sympathetic lenders. So, you know, we like that structure right now. It's serving us well. If we felt like there was a very compelling acquisition that required us to go above three times and was accretive, we would consider that but given the capacity we have now, I don't see that in the near term.

Okay, great. That makes sense. And last question is you talk about what you're doing on the sales side and the direct sales side. Are all of the people that you're hiring, are they all employees of Vonage W2s or do you have any 99s, independent contractors out there doing this for you?

Robert, it's Joe. All of our direct field sales folks are all W2 employees. We obviously have one of the largest if not the largest channel partner program in the industry where we have over 35 people out there as channel managers managing thousands of agents with our master agent relationships. Those folks are under the aging category. But our direct field folks are all W2 employees.

Great. Thank you very much, and congratulations.

Thank you.

Thank you. (Operator Instructions). Our next question comes from the line of Bill Dezellem, from Tieton Capital Management. Your line is open.

If you would allow me to expose my ignorance. You referenced the enormous opportunity with iCore that you're just beginning to tap and yet I did not really understand what it was you were referring to and the size of that opportunity. Would you take a little time and dive into that in some more detail, please?

Yes, this is Alan. When you go through and you sell in a unified communications solution, the ARPUs can range from the low of $36 up to $70. The opportunity is a wallet share play initially and so what iCore had done is they would go in and they would sell. When they became familiar with a customer through the UC sale, you would realize that there was an opportunity to virtualize their servers or to provide other virtual desktop solutions. And there's other cloud-based solutions that they can provide. And the best way to think about it is that when you're providing the UC solutions, the core telephony, and frequently the core connectivity for your customer, the way I like to describe it you're the heart, lung and liver of that operation so you're in a position of trust to begin with.

So the opportunity from that position of trust to add on other cloud services is very natural. As a matter of fact it's much more natural than if you started from sort of a tertiary service and then trying to go inward to grab the UC-based services. So, given where we start, it's a very natural add-on. iCore had roughly 1,300 customers. We have over 60,000. So it's just natural to push that throughout the entire installed base. And again, as I mentioned, we added over 8,500 logos in the quarter alone. So this is the gift that's going to keep on giving so we're very excited about this.

That's very helpful, thank you.

Thank you. Our next question comes from the line of Adam Okowitz, from Citi. Your line is open.

Good morning. Thanks for taking the question. I wanted to ask about Vonage Business Services, the organic business growth decelerated 200 bases points sequentially. Maybe just to help us understand that, can you break out exactly how much iCore with the PPA adjustment contributed during the quarter? And looking forward to 2016, do you think you can sustain that mid 30s percent revenue growth level, or do you think it will continue to decelerate through the focus in on the integration side of things you're doing with the companies you acquired? Thanks.

Sure. In February, we'll give guidance for 2016 and iCore at that point, you know, will be fully part of the Business Solutions Group which is the premier part of Vonage business. So we'll be in a position to talk about the organic growth rate of 2016 at that time. iCore this quarter added roughly $5 million for the month of September to our revenue, and was relatively neutral as it relates to EBITDA given the costs that we took on and give the purchased accounting adjustment.

I think what you're seeing because as we step back, say, okay, bookings are growing, net subscribers are growing, and revenue is growing, that the growth rate is really about the math and the de-acceleration, I guess is the word you used, is really about the larger base. I did mention that iCore, like other acquisitions, is growing slower than we are and you don't reaccelerate that growth overnight. So that's something to take into account as you think about the growth. But we are going to be coming off a much larger base and we believe we can materially accelerate the growth rate of iCore over time as we have done with Simple Signal and TeleSphere.

And moreover the iCore acquisition itself really was about the strategy. It was about creating balance, or better balance, in our selling channels having very strong channel presence, channel partner presence but also a direct presence as well as the products and the geographic compliment that it provides.

If we were to look just at organic growth again, can you break out what iCore added in terms of seats just so we can see what you're adding internally compared to the last couple quarters? And then, I understand the base is getting larger but do you think if we just looked at what was Vonage business a year ago, would it still be growing at a quick rate that you guys are pleased? Or do you think that with the acquisitions, maybe some management focus and sales folks spread in other places. Just trying to understand because the year-over-year that we're looking at for organic has been pretty stable in terms of absolute dollars as well.

So, iCore added, we announced when we acquired the Company, about 85,000 seats. And so that was the ending balance at the end of September of what they added. On a net basis. I think the second part of your question was, are we happy with the growth rate?

We are. The 36% is the organic growth rate and we believe, particularly in the context of having acquired TeleSphere less than a year ago and Simple Signal well less than a year ago, that we are growing at that rate. Given, again, like iCore, neither of them was growing at nearly that rate. These companies tend to be growing by themselves. They tend to be under capitalized and growing more at market-type rates in the kind of 20% area and some cases lower.

Thank you very much for taking the questions. Appreciate it.

Thank you.

Thank you. That it all the questions that we have for today so I would like to turn the call back over to Hunter for closing remarks.

Great, thank you, Andrew. That does conclude our call today and we look forward to speaking with folks next quarter and throughout the quarter. Thank you.

Thank you, all.

Ladies and gentlemen, thank you again for your participation at today's conference. This now concludes the program and you may all disconnect the lines at this time. Everyone, have a great day.