Venture Global, Inc. (VG) Q3 2012 Earnings Report, Transcript and Summary

Good day everyone, and welcome to the Vonage Holdings Corporation Third 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.

Thank you. Good morning and welcome to our third quarter 2012 earnings conference call. Speaking on our call this morning will be Marc Lefar, Chief Executive Officer and Barry Rowan, CFO. Marc will discuss the company’s strategy and progress 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 may be forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are based on management's expectations and depend on assumptions that maybe 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 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. First let me express my hopes for a speedy recovery for those who have been impacted by [CLO] over the last couple of days, and a sincere thank you for those people who have left their families to help others, including many of our employees, who have been trying to restore operations and help other families in their time of need. We reported a solid third quarter marked by stability in our core business and steady progress, executing on our growth initiatives. We added 9,000 net lines, driven by strong gross line additions and stable churn. Gross line additions increased 5% sequentially as we acquired new international callers, and continued the direct marketing test of our low end BasicTalk product, which gained traction. Churn declined to 2.5%, down 20 basis points from a year ago, reflecting improvements in customer satisfaction and retention processes. Churn was flat sequentially as we offset the modest seasonal upward pressure traditionally seen during the third quarter. We continued to invest for growth, while generating substantial cash from our core business. EBITDA was comparable to the prior quarter as we generated $34 million after investing $5 million in growth initiatives. Through our intense focus on operational efficiency, we reduced our cost of telephony services by 5% per line, and lowered customer care costs per line by 4% from the prior quarter, and an 11% from the prior year. Customer care costs per line are now at the lowest level in the company’s history. Over the past four years, we have reduced domestic COTS and customer care expenses by a total of more than $140 million. During the quarter, we launched several key services in support of our growth initiatives. These included a compelling new international plan for call to…

Thanks Marc and good morning everyone. I am pleased to review our financial results, and provide you with an update on our outlook and the progress of our share repurchase program. Beginning on slide three, we reported $34 million in adjusted EBITDA as our core business remained stable, and continues to generate substantial cash. The $34 million includes an investment of $5 million in growth initiatives as we increased marketing in support of our Globe Philippines market launch, and invested in development resources for our mobile platform. Adjusted EBITDA was reduced from the $40 million we reported a year ago. As you will recall, we said we plan to invest $5 million to $10 million per quarter in strategic growth initiatives throughout 2012. Reflecting our disciplined approach to investments in growth initiatives, we have invested $16 million through the first three quarters, which is at the low end of our guidance. Excluding spending on growth initiatives in international long distance, mobile, and international expansion, adjusted EBITDA has been stable both sequentially and compared to the year ago quarter. moving to slide four, net income excluding adjustments was flat sequentially at $21 million, or $0.09 per share, and down from $24 million, or $0.11 per share in the year ago quarter. GAAP net income was $13 million, or $0.06 per share, up from a loss of $3 million, or a $0.01 per share sequentially, as the second quarter included the $25 million write-down of software assets. GAAP net income declined from $16 million or $0.07 per share in the year ago quarter due to lower income from operations, and the recognition of income tax expense in this year’s third quarter. As a reminder, in the fourth quarter of 2011, we released our valuation allowance against our net deferred tax assets. Beginning…

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

(Operator instructions) Our first question comes from the line of Mike Latimore - Northland Securities. Your line is open.

Hi guys. This is Ryan MacDonald on for Mike Latimore. First question is, can you kind of elaborate more on the lower ARPU in regards to this shift in the plan mix. Is this kind of the mix we should expect going forward?

Yes Ryan, it is Barry. We did see this pressure on ARPU that we had anticipated. As you know, historically Vonage has been able to maintain and in some cases increase ARPU over previous years. As I mentioned in my part of the remarks, we do expect ARPU to increase, and revenues to increase in the quarter that we are currently in, the fourth quarter, and that is driven by some very tactical targeted pricing that we are taking that we – which is similar to what we have done in the past. And we also do see some impact on ARPU from some marketplace conditions. For example, we continue to refine our retention plans, and adjusting those to really respond to what we need to do there, and with the BasicTalk product that Marc described, which certainly carries a lower ARPU, we have done market testing of that. As we move forward with that product, we view that as a market that is really in addition to what we have been able to attract historically. So we will monitor that carefully, and our expectation is that we will be able to add gross line addition through targeting that lower end part of the market versus if we had not focused on it.

In addition, a number of the new products and services including the plan to Philippines, our AARP affiliation, as well as some of the other international plans, those tend to be at the higher end of the spectrum. So really what you are seeing is a mix effect, and as Barry said, we would expect to see higher ARPU in the fourth quarter.

Okay, and then so then with – of these kind of growth initiatives that you talked about with the Philippines, and the AARP and BasicTalk, which do you see being the most impactful or the biggest revenue generator for fiscal ’13?

It is still little bit early to handicap how large BasicTalk will be in 2013 until we get results from the market rentals. We are bullish about the potential of that low end market. If we can get the SLAC and investment cost right, and/or procure the right partner, we think that could be quite large, but that is more speculative than is the approaches to individual segment marketing within our flagship Vonage World, or new high-end rate plans. So, I would be looking at BasicTalk results carefully, but look for the primary growth to be in our core International growth, and then in our growth initiatives as we have previously given guidance.

Okay, and then just a follow up question, so if BasicTalk is able to ramp up like you would hope, what type of effect do you think this would have on ARPU?

Well, by definition, it would reduce ARPU, but the thing you should be looking at then is total revenues because obviously it is a lower end marketplace that is enormous in size, and if we can – and we believe we can attract that market at a proper acquisition cost, which gives us solid NPV, you would want us to invest and grow that business as aggressively as possible. And that is why as we have talked in the past, you really want to stay focused on long-term service revenues, and compartmentalize the different segments to which we are marketing, and think about those ARPUs uniquely. The same thing can be said for digital calling cards, the same thing can be said for mobile. You need to look at that as a percentage of the mix. Our core flagship Vonage World plan is a flat rate unlimited plan, and by definition that is going to have a higher ARPU. If we can get those other markets incrementally that is going to serve total revenues, but the core mathematics of that would result in a softening of ARPU.

All right. Thanks guys. Good quarter.

Thank you.

(Operator instructions) I’m showing no additional questions. I would like to turn it back to Leslie Arena for any closing remarks.

Thank you for joining us on the call today. Have a nice day. Good bye.

Ladies and gentlemen, this does conclude your conference. You all may disconnect, and have a good day.