Venture Global, Inc. (VG) Q3 2011 Earnings Report, Transcript and Summary

Good day everyone and welcome to the Vonage Holdings Corporation third quarter 2011 earnings conference call. Just as a reminder, today’s call is being recorded. At this time, for opening remarks and introductions I would like to turn the conference over to Ms. Leslie Arena, Vice President of Investor Relations. Please go ahead Ms. Arena.

Thank you, operator. Good morning and welcome to our third quarter 2011 earnings conference call. Speaking on our call this morning will be Marc Lefar, Chief Executive Officer and Barry Rowan, CFO and Chief Administrative Officer. Marc will discuss the company’s progress and strategy and Barry will review our financial results. Slides that accompany Barry’s discussion are available on the Investor Relations website. At the conclusion of our prepared remarks, we will be happy to take your questions. As referenced on slide two, I would like to remind everyone that statements made during this call that are not historical facts or information, 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 current beliefs and expectations and depend on assumptions or data 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 forward-looking 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 comparable GAAP measures is available on the Investor Relations website. And now, I will turn the call over to Marc.

Thank you, Leslie and good morning everyone. This quarter we took another step forward in transforming our business beyond traditional home phone service. The two new mobile products we launched during the quarter are striking a chord with consumers seeking easy to use low cost mobile solutions for their international communication needs. Approximately 400,000 customers have either registered their mobile phone as an extension to their Vonage World plan or downloaded our time to call app since we launched these products just three months ago. We are delivering on our promise to enable communications from any broadband connected device as we integrate the landline and mobile experience for our customers. We will build on this progress as we launch new products in the coming year. At the same time we are strengthening our core business. We increased gross line additions 8% in the second quarter and improved our efficiency in acquiring new customers lowering acquisition cost 9% from the seasonally higher cost second quarter. We continue to add customers on Vonage World enabling, enabled by our growing success whether outsourced paid for performance even teams and broader retail distribution. 50% of our customer base is now on the Vonage World plan. A testament to our core business financial results for the quarter were strong we tripled net income excluding adjustments from a year ago and for the fourth consecutive quarter EBITDA exceeded $40 million. Revenues grew a modest 1% in the prior year while we generated free cash flow of $34 million fueled by strong operating results, low CapEx and dramatically lower interest expense. I would now like to review our results in more detail and the, I will provide a recap of our strategy and our outlook. We reported another strong quarter with year-over-year gains in net income and…

Thanks Marc and good morning everyone. I’m pleased to review our third quarter results with you. We reported another quarter of strong financial results and are on track to deliver record high net income and EBTIDA for the year. Our free cash flow continues to grow enhanced by our recent refinancing with significant savings in interest expense. We are on track to generate more than $105 million or $0.47 per share in free cash flow during 2011. Our expanded retail distribution channels including event teams are driving higher and more efficient customer acquisitions. Importantly, we have begun to shift our business beyond the home phone to mobile with a brief introduction of new mobile products and applications. And as Marc discussed we are taking meaningful steps to grow our business outside of North America. Let’s now move to a discussion of the financial results for the quarter. Turning to slide three, net income excluding adjustment tripled to $24 million or $0.11 per share from $8 million or $0.04 per share in the prior year. This improvement was driven by a 38% increase in income from operations to $27 million and a 75% or $9 million reduction in interest expense reflecting the positive impact of our debt refinancing. Net income excluding adjustments was essentially flat from $25 million or $0.11 per share sequentially. We reported GAAP net income of $16 million or $0.07 per share up from a loss of $55 million or $0.26 in the year ago quarter, which included $60 million in one-time charges. GAAP net income was down from $22 million or $0.10 sequentially. The sequential decline was due to an $8 million charge related to the early extinguishment of debt associated with our July refinancing. This charge represents the final accounting adjustment related to our previous refinancing.…

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

Thank you (Operator Instructions) and our first question comes from Mike Latimore with Northland Capital.

Alright, thanks a lot. Good morning. In terms of I just have a question on churn you know you’ve had a number, you’ve had subscribers coming up annual contracts pretty much every quarter over the course of the year. What did you see that was maybe a little different this quarter around that dynamic?

Mike, this is Marc. So this was the quarter in which we actually completed a full 12 months of contracts. For the entire customer base this point is no longer under a service agreement so what you’ve seen in terms of the tick here is that the cumulative impact of customers from the prior nine months as well as customers now coming up on their 12th month that layers into the cumulative impact on churn. It was slightly higher than we expected and that was combined with what we saw as a tick up in churn among some of our Spanish speaking segments as we’ve talked in prior calls. We’ve been actually pleased over the last year that our Spanish speaking efforts have not only brought international long distance callers but a fair number of domestic users in the Spanish speaking segment but it basically not talk to by any telco’s in the past. In addition, having a higher than the ILD level of churn we are seeing higher churn among that Spanish domestic customer sub segment we hypothesize some of that might be socio economic issues and current economy issues that may also be a function of understanding of the core offering and what that delivers. As we look forward to the fourth quarter, we feel quite good about stable to lower churn we’ve actually seen evidence now that we are entering the 13th to 15th month of customers being outside of contract, reduction in churn has folks on the call are probably well aware the cycle of contract is one that basically builds up a spike after the initial contracts expires. And we were no different than that historically because we’ve had customers who have been moving out more steadily throughout the course of the year that pins up contract expiry churn no longer exist and we will get the benefit of that gradually over the next couple of quarters as new cohorts enter their 13th to 15th month. So that’s kind of what’s, what the churn dynamics are.

How about October, has October you’ve seen some evidence on that in the month of October improvement.

In the couple of weeks we actually have seen some evidence of that 13 through 15 month reduction in churn.

And then with regard to the Extensions and Time to Call is that, it sounds like that is there revenue associated with that maybe pushed down a little bit and what do you think is the reason for that and what gives you confidence that you might see that improve next year?

So the revenue is on both Time to Call and Extensions also relates to the growth we have expected to come a little bit faster from some of the new distribution channels. The bottom line on Extensions and Time to Call is you’ve got Time to Call free calls that were part of people’s initial promotional offer to get them in so it’s very difficult to think about what that recurring rate will be you got to understand and see what the ongoing habits are that you formed. And on Extensions we are still pretty early days of this we call that the first Extension is added for free we had significant uptick on that. We were actually delighted to see a huge amount of shift of usage roughly 30% of people’s total usage moved to mobile very quickly with very modest increase in total minutes actually far less than what we expected in our business case and we are seeing some pay per use revenues that come from that customer base as well. But we didn’t start doing the third line sales at 499 until late in the quarter. So it’s still difficult to understand what the safest point will be on that product. And as it’s true with most new products until you understand the novelty impact it’s difficult to fully appreciate what the long-term revenue impact will be. And then candidly as we look at some of the other new products and services as well as expansion into international markets we are looking at the timeframe of those and some of those just taken longer than we expected. New distribution partners including track phone while things are on plan and we are executing it’s just taken longer to get them into marketplace and longer to get the customer response that we expected.

And just last question it sounds like you are spending a little more on SG&A for the successful retail channel does SG&A keep trending up little up as you focus on retail or is this kind of a run rate?

Well as you see Mike we have increased marketing at selling modestly couple of million dollars from the first quarter of this year. So we see that, see it being relatively stable in this only that we may increase it modestly but we didn’t have a couple of million dollar increase there in the second or third quarters. And we are very pleased with the success that we are seeing there so as you know we continually manage the mix of marketing and selling spend and with the success in some of the retail channels that we are describing we will continue to emphasize that but we will them also curve back in some other areas as required. So we think it’s relatively stable.

Thank you.

Next question operator.

Thank you. Our next question comes from Robert Routh with Phoenix Partners Group.

Yeah, good morning guys a good quarter. Two quick questions. In your balance sheet how low the debt is in given your cost it’s below 4% from where it was and $105 million of free cash flow expected from $110. I’m just curious as why the company hasn’t put in place a stock buyback plan as intended for shares. The equity and leverage that would create given how solid your EBITDA is suppose to be going forward the opportunities that you are talking about. It just seems like it would make a lot of sense because your cost of equity is off the charts and your cost of debt it’s very low. So and you are not going to be paying taxes you don’t get a shield from the interest. Anyway, I’m sure it’s just is that something the management would consider or is considering you could do to show the public markets that you feel the shares are undervalued.

Robert thanks for the question. As we talk in prior quarters we will continuously assess the wisdom and timing of any kind of stock buyback. But again consistent with our prior comments our objective is primarily growth and as we look at our growth trajectory we are primarily focused on use of cash for potential acquisitions done smartly so those are the things we will be requiring technology, people or communities that have a head start in a consumer market that’s consistent with our mobile international growth areas. So keep in mind that this phenomenon of cash in the balance sheet and the rapid pay down the cash flow potential is relatively new phenomenon for us. It’s only been several months and we would like to have the opportunity to appropriately evaluate the acquisition opportunity that exists before us. We think that’s a better approach for shareholder value and sustained growth if we are going to find the right opportunities then at this point in time returning cash directly to shareholders. But it’s something we continue to assess and we continue to as we get through our evaluation of potential acquisitions.

Great, I totally get that I understand just given where your stock is today its down 15% I mean the acquisition would have to have quite a return on capital compared to an investment in your own stock at this level I mean your stock is just 5 or 6 bucks I would get it. But anybody here that seems like that could be at least a little bit one of the best use of your cash and but I hear you saying I mean I guess the real question if I’m getting is there anything that would prohibit you from buying that stock now if you wanted to, is there a need to covenants restricted covenants with your debt or could you put in place a buyback and do that if you decided there was nothing else worth buying in the stockers the best use of your cash.

We do not have any covenants or barriers that prevents from doing that if we decide that was the, that’s the way to invest that cash.

Okay, great. And then one follow up on what you said for that acquisition I noticed reading the financials that looks like you had your acquisition of software during the quarter it was like $8.2 million, which was at double what it’s been historically just what you guys bought and how that’s going to help you guys going forward. And then when it comes to the partnerships do you expect to announce I know obviously Canada and the U.S. and the UK are big markets for now. Can you give us any senses to what other areas that you take a big growth opportunity for the company that maybe investors are missing where you can really leverage the infrastructure you built?

Let me take the first part of that question and Robert then I will turn it over to Marc to handle the other growth opportunities. On the software side we as you know are in the process we are investing in IT infrastructure as we go along including investing in Amdocs, which will be operationalized this year. So that’s what you saw during this quarter. As a reminder about a fourth of our CapEx is for maintenance the balance is for infrastructure and IT investment so that get’s reflected in the things we are pointing out.

Okay and in terms of areas of growth to leverage the infrastructure there is really three one of those is international expansion. So our ability to conduct business outside the U.S. with partners and others requires that we have different types of building support infrastructures as well as operational support infrastructures that it allows us to conduct business outside of the U.S. efficiently and be able to do that on a revenue bearing basis. Many folks who get to these businesses with free models don’t need to actually track what’s happening you actually have to have the OSS, BSS to support a revenue bearing model that requires infrastructure so that’s piece one. Piece two is the ability for us to have flexibility to have very different pricing models including that for mobile as you know we currently have a traditional home phone service business that’s what the original architecture was built for that allows you to with the shipping of an adapter tied to the issuance of the phone number track and manage customers. We envision a different kind of model where you might have user IDs you might have customers per ID, you might have very different billing models and all that being tracked through software. So the infrastructure to allow us complete flexibility for individual or integrated offerings for mobile is another area that the infrastructure investments will help us. And third is that which manages our cost structure. So the ability to provide highly efficient customer service much of which becomes online customer self service as well as simply efficiency for our live representatives to be able to better serve customers to cross sell to up sell and to anticipate what their issues are so we can meet their needs and reduce churn are all areas where we think we can leverage the infrastructure investments we are making.

Okay, great. And just one last question and I will (Inaudible). Obviously during the quarter I mean you managed to reduce your bad debts your reserve for that. It seems I just want to know how you managed to do that are you really I know you mentioned a little bit in terms of the contracts at lower price points and with the credit quality I mean how are you successfully be able to do that and do you think that you can squeeze a little bit more out of that going forward as you kind of look at the credit quality of the Vonage consumer.

Robert, I made a comment on that. Just to be clear on the bad debt virtually all of our customers are pay in advance so we don’t encourage the usual kind of bad debt exposure that is characteristic of some customers. The way it shows up is in the quality of the customers and as that has improved relative to where we were a year ago we have seen some benefit of that that I mentioned on the call. So how do we continue to manage it we it’s in the acquisition process of the kinds of customer’s that we bring in and monitoring that and monitoring the early life results of those customers as we know we have focused on the static segment over the last year. So I have been pleased with the opportunity there it’s something that we have to continue to look at particularly for people who are domestic callers as Marc pointed out within that segment. So it’s something that we actively manage we have a revenue assurance group here that is very capable of that and but we’ve seen that improve relative to where it was a year ago. Leslie Arena Next question operator.

Thank you.

Thank you. Our next question comes from William Focal of Maryland.

Good morning. I was wondering if you could give us an update on the progress with getting the Time to Call software on the Android platform and then separately I was wondering if you could talk a little bit about give a little more detail on your network grooming activity and how it phases in, in fourth quarter and into next year from the standpoint of does it come in small chunks, is it lumpy, does it start big and then taper it would be just helpful to understand what your expectations are in terms of that offset to the other cost increases that you had outlined.

Let me take the Time to Call question the Android application was actually launched into the market earlier this quarter and the iPhone app launched several weeks ago. We’ve had 10s of 1000s of downloads between those two I think we are now in excess of 35000 on iPhone alone just in a couple of weeks to recognize that the Extension service I’m sorry the, I’m sorry excuse me just mixed up Extensions with Time to Call. The Extensions applications have been in both of those stores for Android and iPhone and the results I was just speaking to was for Extensions. For Time to Call, the those products are now available as well where we did have a point in time where we needed to pull those back, there was an issue related to Apple and the iPhone store which is riposted addressed and development that is now been addressed.

So you are saying that you have Time to Call on both Apple and on Android now?

Android is forth coming.

Okay, so that’s my question is do you have a date is that going to be yearend is it going to be next year can you give us a sense when you add the Android capability.

I don’t think we’ve got a firm date on that yet let me check on that and get back with you.

Okay and then network grooming.

Yes, let me take that one Bill. As you know we are continue to make investments in IT infrastructure and that is particularly the case on the domestic side where you saw the domestic cost reduction of 40% this year or termination costs, some of that was usage but the lion’s share of that was driving down the domestic costs we see. That benefit continuing into 2012 and really gaining the lion’s share of that benefit in 2012 so as we are able to move to more of a (Inaudible) type of arrangement up hearing kind of arrangement with our carriers that will enable us continue to drive cost out of the system. So as we do that the objective is to have the benefit of that infrastructure investment offset substantial portion of the lion’s share of the cost associated with the continuing growth in ILD minutes, which as you know is the center piece of our strategy to target our international long distance callers.

Okay, and then lastly you mentioned Amdocs can you just sort of generally discuss the key benefits that you feel Amdocs will provide you with. I think that it entered in a little bit in the bad debt discussion. But if you could just elaborate a little bit on what you think Amdocs is going to do for you once it gets fired up that would be helpful.

Sure, I will take that. Amdocs really is a complete infrastructure lift from what we had before the original Vonage legacy billing system was based on one macro database upon which most of our applications in production including customer services as well as real time queries and virtually anywhere in the business are banging against that very large database fundamentally built on Oracle technologies. Amdocs basically provides a completely new approach to billing support services it will change how our customer service and sales activities in the front end, pool information for use by front line representatives and it gives us a flexible what we call product catalogue, which allow us the ability for new products and services to be implemented much more quickly in a legacy system, which required completely new code every time we wanted to enhance the service.

Okay and when do you anticipate having the Amdocs up and running?

We expect to stand it up before the end of this year and then really the primary benefits of it won’t encourage until 2012.

Okay, thank you very much.

Let me follow up on the Android discussion I apologize for the confusion because we’ve done so much in the Extensions area in the last few weeks. So we are not going to deploy the current version of Time to Call on Android I alluded to some enhanced services that we expect very early in the next year, which is a new evolution of Time to Call that will have enhanced services and features and that’s when we will deploy on the Android platform and again we expect that after the New Year.

Can you give us a sense of what the enhanced features might be?

I alluded to some of those I’m not going to go specific for what the launch in January but remember the kinds of things that we are looking to include going forward. We will have no net free calling communities as well as enhanced international long distance services that are integrated into a sleek application as we look further into the year we also will have messaging services and expect solutions for international roaming.

Great, thank you very much.

Operator.

Thank you (Operator Instructions).

There are no further questions, operator we will conclude the call. Thank you for joining us today.

Thank you ladies and gentlemen thank you for your participation in today’s conference. This concludes the program. You may now disconnect. Have a great day.