Venture Global, Inc. (VG) Q2 2012 Earnings Report, Transcript and Summary

Good day everyone, and welcome to Vonage Holdings Corporation’s second quarter 2012 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. Good morning and welcome to our second quarter 2012 earnings conference call. Speaking on the call this morning will be Marc Lefar, Chief Executive Officer and Barry Rowan, CFO. Marc will discuss the company’s strategy and progress we are making on our growth initiatives and Barry will review our financial results. Slides that accompany Barry'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 two, I would like to remind, everyone, that statements made during this call that are not historical facts or information maybe 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 maybe incorrect or imprecise. Such 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 GAAP measures is available on the IR website. And now, I will turn the call over to Marc.

Thank you, Leslie, and good morning, everyone. The second quarter was marked by a number of key accomplishments. We reduced churn to 2.5%, a 30 basis points improvement from the first quarter and returned to some of our best quarterly levels in the past four years. Our balance sheet is stronger than it's ever been. We now have essentially no net debt for the first time since 2007. We grew EBITDA by $3 million sequentially to $35 million after investing $4 million in growth initiatives, and although we were disappointed that circumstances led to the cancellation of the Amdocs ordering and billing project. Our decision was made possible by the improvements in the stability and flexibility of our existing IT infrastructure over the past three years. As a result, we are also lowering our CapEx guidance for 2012 by at least $5 million to $10 million. Across our growth initiatives, we continue to make progress. In international long distance, we continue to reinforce the compelling value proposition of our flagship Vonage World plan to large growth segments such as Pakistan and Mexico with highly targeted sales and marketing campaigns. And just this week, we launched a new calling plan in the Philippines with our partner Globe Telecom, delivering unprecedented value to the more than 3 million Filipinos living in the U.S. We expect to announce at least one more partnership in the second half of the year. In Mobile, we delivered an important improvement to our Vonage Mobile App enhancing call and connection quality and adding key features including Bluetooth and the ability to share photos and locations. In the next few weeks, we’ll invite smartphone users to participate in the beta trial of our innovative mobile roaming solution as an important step toward a broader market launch. Lastly, based…

Thanks Marc and good morning everyone. Marc has covered the strategic and operational highlights for the quarter. And I am pleased to provide more detail on our financial results and outlook for the balance of the year. Beginning on slide three, adjusted EBITDA increased to $35 million up from $32 million sequentially and down from $44 million in the prior year. As a reminder, at the start of the year we said we plan to invest $5 million to $10 million per quarter in our strategic growth initiatives throughout 2012. We invested $4 million in the second quarter which is slightly below the targeted range and lower than the $7 million invested in the first quarter which included marketing cost associated with the launch of Vonage Mobile. As we've stated previously, the investment in our growth initiatives is primarily focused on building organizational capacity, development, marketing new products and network and IT infrastructure. Moving to slide four, GAAP net loss was $3 million or a penny a share down from income of $14 million or $0.6 per share sequentially and $22 million or $0.10 per share in the year ago quarter. The second quarter 2012 net income and EPS including one time non-cash adjustment of $25 million related to the write off of software assets associated with the termination of Amdocs contract. I'll discuss this further in our review of capital expenditures. Excluding this impact, net income rose to $21 million or $0.09 per share from $19 million or $0.08 per share sequentially. And declined from $26 million or $0.11 per share in the year-ago quarter reflecting our investment in growth initiatives this year. Moving to slide five, revenue of $212 million was down from $216 million sequentially. About half of this decline was due to non-operational factors including lower…

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

(Operator Instructions) We have a question from Michael Rollins from Citi Investment Research. Your line is open.

A couple of questions. First, I was wondering if you could talk a little bit more about the decision to stop the Amdocs project. And if you could just help us with maybe a little bit more background of what went wrong and what this does to you in terms of capabilities that you are hoping to have or whether that you would revisit a new billing project with a new vendor and so some of the phasing is pending this year might just come back as you pursue this initiative with someone else down the road? And then I have a follow-up if that's okay as well.

So as we shared previously you know we've been adding this project quite carefully. We've been sharing all along the way that we've had time delays relative to specific milestones in the project as well as incremental costs. While doing that we've also been all along the way enhancing our existing systems and applications ability. We've enhanced our data analytics with the implementation of EDW that helps us guide our decision making. We've also implemented enhanced systems to solve customer trouble tickets. We upgraded our customers and billing data bases as well as implemented virtualization and cloud computing technology. The simple straightforward answer is the delays that we experienced as well as the incremental costs, some related to stability of platforms as well as just overall progress and reliability of software we are taking longer and we are making progress against our core IT systems and as we look at projects on a regular basis, on a go forward view, we consider what was the additional timeframe to get to completion, the additional cash we have invested and do not believe that that investment was worthwhile. We are also confident by the fact that we've made tremendous improvements over the past couple of years. We do not anticipate any major additional partners or deployments such as Amdocs. We are comfortable that we continue to make enhancements within the capital expense profile very outlined that will help us to support existing products as well as those we anticipate in the future. Well, there are a couple of initiatives that we think will be a little bit slower to market, they were not initiative that were material to our outlook for the current year.

And Mike if I can just build on to what Marc said regarding the CapEx requirements going forward, as he said we do not have plans to implement a different a billing system and the CapEx requirements that we outlined were this year we’re lowering the CapEx expectations from $40 million to $45 million down to less than $35 million reflects both the organic expenditures that we would have had to make with regards to Amdocs as well as on the offset side of that some additional investments in our internal systems that we continue to enhance. So that’s reflected in 2012; as we look out to 2013, of course we haven't given guidance for 2013, but we had been running CapEx in the $40 million range for the past several years, you know, I think that as we look forward to 2013, we expect that given this decision that we can see some continuing benefit from that lower CapEx relative to the historical spend in recent years.

And then just one follow-up if I could, I think you mentioned the percent of mobile or the percentage of your voice traffic that was originating from mobile, will you have that same percentage in terms of revenue and just how to think about you know the pace that which starting to monetize the mobile application? Thank you.

Overall mobile revenues as a percentage of total business Mike is still quite small. The 17% minutes that are coming from originating traffic on mobile phones includes our mobile standalone initiatives as well as our extensions product where you are collecting a lot of those revenues in the overall Vonage World fees that improves churn as well as allows great stability in ARPU, difficult to allocate specific dollar amounts the contribution that mobile minutes would make in that case, but we view it is both strategic and critical going forward and expect that revenue number to increase overtime. At the point, it becomes [material] component of our overall revenues we will break that out and develop an ongoing plan to specifically report those revenues.

The next question is from Robert Routh of Phoenix Partners. Your line is open.

Two quick questions, first and obviously you guys are being granted few patents since June and I know it’s kind of a hidden assets you guys quite have that nobody gives much value, just how should we look at your patent portfolio, is there anyway to get a sense of how we should value them in terms of --?

I am going to introduce our General Counsel Kurt Rogers who is with us here and overseas our intellectual property, strategy and plan and as per his thoughts.

Good morning. So I think they way to think about our portfolio is it’s something we have over the past three years focused increased attention on its part of an overall comprehensive [IP] strategy. We have significantly increased the number of applications we filed and now have nearly 100 applications pending in the US patent office and many applications pending overseas. The three patents that were granted recently are part of that focus on IT and overtime we expect that our portfolio will continue to grow at the point where it does become material I am sure we will be sharing additional information on that but we do have increased emphasis in focus on growing that portfolio and in part that's a benefit of our expanded focus on research and development as part of our new growth initiatives.

I think it is this is Marc again, difficult to place its specific dollar value on the patents that have been granted as well as those that are pending. I think you should you think about them as both proactive patent strategy to be able to potentially assert our rights as we innovate in areas that are of global interest in rapid growth markets including mobile but also defensively so that we can clearly protect our interest in the event that other more aggressive parties have a bone to pick. We think about the portfolio and building that portfolio from a defensive stand point as well, and we are taking a pretty balanced approach but you can see over the last three years, a market turnaround in the amount of activity, filings and relevant patents that are being granted.

And also, I kind of changing gear here how is the partnership obviously you have announced the first one and the announcement yesterday, you know, people waiting for you have one more new planning by the end of the year. But on the last call you guys also hinted the possibility of partnering with one of your retail partners for positive, we have a white label product or something like that I am wondering if you can give us any sense as to whether or not that still makes sense? And if so whether or not we could see something along the lines in the near term or about further in the future?

Great comments, thanks for bringing it up. Service for those who were not with us last quarter, it's something called Basic Talk and we have done a lot of research to understand what the underlying consumer need is for basic low cost domestic service, strip down low feature service that fundamentally is a compliment to potential mobile applications and mobile services, and we found that the majority of US households actually are interested in having a common identity or phone number with the convenience of cordless phones. They just wanted at an exceptionally low price. We have actually been testing quietly a version of Basic Talk during the quarter and have had very good results. We are pleased with that, we are expanding our test to understand better what the market potential is and how that will work with the Vonage portfolio of products. In addition, we do think that this is one where we want to go to the market with a very low cost of acquisition. And to that end what we can do it extremely profitability, we do think that the opportunity here to white label a service like this with a large retail partner whether that be bricks and mortar, digital or both or potentially organizations with large affiliations makes a tremendous amount of sense because they have a captive audience, they have foot traffic, they already have shoppers and as we have tested the concept we believe it is something that is universally appealing and these are the kinds of disruption that some of these merchants have been known to do exceptionally well with. So we continue our conversations at the point that we have something that is binding contract that would take us into at least the test market. We certainly share that publicly. In the meantime, that's not a requirement for us to take advantage of this opportunity and that's why our marketing teams initiated the test in quarter and we will expand that in the third.

And then just one follow-up if I may, given how good the results are and how dramatic the turnaround whether we see in this quarter relative to last year and sequentially, can you give us any sense as to what you are seeing so far in July, what have you seen since June 30 as far as, is this continuing the stellar results that you are posting in [churn] reduction or if there are any kind of guidance you can give us there what are you seeing?

As you will know the quarter is not done until the quarter is done, and we have seen individual months that have significant variability in fact, in the second quarter as I mentioned or alluded to in my script the quarter got to a great slow start in April and we were very positively impressed at the kind of turnaround we saw in the back half of the quarter. We expect to have good momentum; we got a lot of initiatives in place including the launch of Globe, the Philippines product they just launched. We continue to accelerate our penetration of the Pakistani market and we are excited about some of the things we are seeing in Mexico and the structural price changes. So we feel good overall about the plans that we have for the quarter, but I don’t think it could be appropriate to share specifics on a three week window given that the speed with which things can change to the good or to the bad.

Next question operator.

Next question is from Mike Latimore of Northland Capital. Your line is open.

On the cost (inaudible) services to line then improved sequentially, could you talk a little about that, is that going to be, do you feel like that’s a stable metric going forward or with more international traffic that should end up a little bit, how do you think about that metric?

Yeah, Mike its Barry. We have been very pleased to see the kinds of reductions that we have as you know, over the last couple of years with the strategic emphasis on international distant callers that have both higher rates than domestic callers as well as higher usage that certainly puts meaningful offered pressure on COTS and on a year over year basis it was relatively flat. We saw a good sequential decline this quarter; that kinds of things that we are putting in place, we expect to continue going forward. I think the best way to think about COTS for the next number of quarters is that those are the puts and takes and that those ongoing cost reductions will offset that upward pressure as we continue to drive the calling base. But as you see on a quarter to quarter basis, it can go up or down. So in general we feel like that I think the way to think about that is the ongoing cost reductions that we continue to push on will largely offset the upward pressure.

And then, these international partnerships that you're working on, are you collecting another one here? I mean to put the effort in, you obviously assume some sort of revenue level. I mean can be generally talk about the revenue levels you expect on these things to get a little more mature?

Sure Mike. Each individual partnership has different scale based upon the country and based upon the products. So there is a wide range, program by program. As Barry talked about, I think you know the total revenue of the portfolio of these growth initiatives over the 2 to 3 year timeframe, we feel pretty good about the $100 million plus revenue target and you know beyond that it wouldn't be prudent to give specifics until we are in market and see what kind of customer traction we receive.

And then your subscribers that make international calls, I think you said they are 35% of the total. You know it's been there for about a year now. With all the international efforts, I would have thought that might have moved up a little bit in terms of in terms of a percent. I mean what’s your general view on that percent, does it start to move up overtime?

Overtime, we do expect that to increase (inaudible) at least modestly over the last four, five quarters, but as still overtime we expect that number to increase.

I think Mike if you look at on a longer-term historical basis certainly from a standing start before introduction of it on its world, it’s grown very quickly to the 35% level, but when you look at the kind of percentage of adds that are international callers over the last number of quarters, on the world in total, it is about 70% of gross line additions. And a majority of those are international callers, but still a substantial minority are largely domestic callers. So with that relatively narrowing differential in the percentage of GLAs coming from international callers versus where we were a couple of years ago, you are not going to see that continuing rate of change that we have seen over the last several years.

And just last on the basic talk, is this the main difference between that and Vonage Lite kind of white label aspect there or something else?

I am sorry, could you just repeat that question please?

Sure, you had a low cost offering, Vonage Lite in the past, is the basic talk the main difference just sort of the white label aspect there?

No, there are other elements in terms of comprehensively how the product will be structured including much lower device. Over time upon expansion we expect it to be a self service only and how we branded it likely to be quite different. It’s not likely to be something just kind of starter plan simply to be up sold. We view this as a this is a complete proposition, it will be more aggressively priced in total in terms of cash out of the pocket than what we do with the test on Vonage Lite a couple of years ago. And as you are well aware, the domestic home phone market has become more aggressive in the last six months and we absolutely expect to be highly aggressive in this market. Consumers expect us to be able to be the leader in that marketplace and we think we have got some ways to do that without creating tremendous revenue risk for our existing base.

Next question is from Matt Sherwood of Cooper Creek Partners.

I just had a quick question on capital allocation. Just was wondering sort of what parameters you are likely to use in order to determine sort of how quickly you can pursue your buyback plan?

Well first of all we are pleased to have the buyback plan in place. We have been receiving comments from shareholders for a fairly long period of time over the last several quarters, expressing your desire to see capital returned to shareholders through this mechanism. So we do for the reasons that I outlined, think that this is an appropriate time to do that. The plan approved by the board provides for a buyback at $50 million through the end of 2013. You know certainly looking at the stock price of late, now taken in tandem with some of the internal factors we think that the stock represents a very good value. So you know we would have plans to put those -- that program in place during the open trading window. We just think we can do it this time and then move forward from there on the basis that is typical. But bear in mind, that perspective that we have is that of these prices being a good value.

Still I mean in that, are you just going to say gee, while we have the plan in place through 2013 we are just going to buy back ratably or if you believe that the stock’s very attractive relative to your operational turnaround of late, could you buy back all the shares in the couple of quarters, just without telegraphing your intentions, you know, how do you look at the options?

Yeah, I think the good news about that Matt is based on the strength of the balance sheet and the cash flow that we have, we have the potential to execute the plan reasonably aggressively based on what we see in the market and the stock price. I don't think it's appropriate for us to get into how fast we are going to, we would spend the $50 million, whether it's done ratably or not. I think it's fair to say that the strategy is not necessarily to do it ratably, but to do it, we have the flexibility now with the plan that is in place that goes through the end of next year. We have the cash to be able to begin that plan immediately and as typical, we will report the number of shares that we acquire at the close of this quarter.

(Operator Instructions) I'm showing no further questions at this time. I would like to turn the call over to management for any closing remarks.

Okay, thank you for joining us today. We will conclude the call now. Have a nice day.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may now disconnect and have a wonderful day.