Good day everyone, and welcome to the Vonage Holdings Corporation Second Quarter 2013 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 2013 earnings conference call. Speaking on our call this morning will be Marc Lefar, Chief Executive Officer, and Dave Pearson, CFO. Marc will discuss the company’s strategy and progress and Dave will review our financial results. Slides that accompany Dave’s discussion are available on the IR website. At the conclusion of our prepared remarks, we will be happy to take your question. 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 and all forward-looking 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 these statements and disclaim any intent or obligation to update them. During this call, we will be referring to non-GAAP measures. A reconciliation to GAAP is available on the IR website. And now, I will turn the call over to Marc.

Thank you, Leslie. Good morning everyone and thank you for joining on the call today. We reported a solid second quarter with positive net line additions and our lowest level of churns in 2010. Executing on our growth priorities we achieved a number of milestones. First and perhaps the most significant we successfully launched the BasicTalk flanker nationally in the latter half of May. Second, we made meaningful progress building the foundation for our communication business in Brazil. Third, we grew the number of downloads and active customers on the Vonage mobile app and Vonage Extensions with the help of major feature enhancements in each applications. And lastly, we enhanced our new global digital calling card. A reflection of our stable core business, steadfast focus on cost efficiencies and our planned investments in growth, we generated $27 million in EBITDA squarely inline with the guidance we provided last quarter. This includes the impact to planned investments to build awareness and fund merchandizing for the national launch of BasicTalk. We also continued to execute on the stock repurchase and bought back 5 million shares in the quarter. With that as an overview, I'll now discuss our results in more detail. Net line additions in the quarter were positive reversing the recent trend. This improvement reflects the combination of higher sequential gross line addition due to the late May launch of BasicTalk and a 10 basis point decline in churn sequentially and from the prior year. These factors resulted in an improvement of 15,000 from the prior quarter as we finished 3,000 positive net lines. Revenue in the quarter declined by 2% sequentially due to lower Universal Service Fund fees a pass-through with no EBITDA impact, and the carry over effect of line losses from prior quarters. Churn has been an important…

Thanks, Marc, and good morning everyone. I'm pleased to review our financial results and provide you with an update on our outlook. Beginning on Slide 3 we reported $27 million in adjusted EBITDA, down $7 million in the first quarter, down $8 million year over year. The changes are primarily due to our investment in the nationwide launch of BasicTalk. Cash flow generated from our core business prior to investments on BasicTalk, Brazil and mobile remained strong reflecting the stability of our customer base and improvements in our cost structure. Moving to Slide 4, net income excluding adjustments was $12 million or $0.06 per share, down sequentially from $21 million or $0.10 per share and down also from $21 million or $0.09 per share in the year ago quarter. As with EBITDA these numbers reflect our planned investments in growth priorities. GAAP net income was $7 million or $0.04 per share, down from $13 million or $0.06 per share sequentially. GAAP net income was up from a loss of $3 million or $0.01 per share in the year ago quarter. Note that the year ago quarter included one time non-cash adjustment in connection with the abandonment of certain software assets. Moving to Slide 5, revenue was $205 million down sequentially from $209 million primarily due to the non-operational impact of lower universal service funds for USF fees, lower subscriber addition in prior period and retention activities. These impacts were partially offset by selective pricing actions taken in late 2012. Revenue declined from $212 million a year ago due to the same factors with USF which is a pass-through contributing $3 million of the decline. ARPU was $29.06, down from $29.61 sequentially and $29.98 in the prior year quarter primarily due to lower USF and rate plan mix, which includes the…

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

(Operator Instructions). And one moment for our first question. Our first question will come from the line of Bill Dezellem of Titan Capital. Your line is open, please go ahead.

Thank you. I would like to start with CapEx. You mentioned that you were lowering that number simply because you have more clarity. Is that simply an estimating function that you are talking about having clarity or have you actually changed the some of the planned investment?

That is an estimating function. We have not changed our investments. It's up in the second quarter based on the timing of some projects that we have done and you can long planned. And the $30 million is really about the greater visibility for the remainder of the year we have not. We have not changed our outlook or the projects that we are pursuing.

Thank you. And then, secondarily you referenced the incremental multimillions of investment for BasicTalk. Would you quantified at further may be put some number behind it please?

Sure. We talked about several million and I think that is the right way to think about it. We guided in the last quarter that we would spend $5 million to $7 million on BasicTalk in that quarter and $5 million to $10 million on other growth initiatives. In total, we are spending on mobile and international, spending on BasicTalk and the incremental amount on BasicTalk that we referenced would still be in that range if we have those numbers up, if we have that prior guidance up in a per quarter basis.

This is Marc. We are not going to give specific numbers because that is going to vary from week to week based upon the productivity of our channels. In addition to the heavy advertising to build initial awareness of a new brand which is required and we want to continue to build that awareness and track that weekly. We will be doing a number of variable based programs like direct mail in high traffic Wal-Mart locations, much more digital activity now that we have created some awareness to the brand. All those things will vary based upon the actual throughput. So that's about the best we can give to you. What we shared is, previously we do look at these things on what was required to get launch, what's the ongoing sustain profitability and what kind of MPV we do need to make this a smart investment over time. Churn rates are good. We see virtually zero cannibalization of the Vonage core brand. That is an extremely important point as folks understand the ARPU story. We have seen virtually zero cannibalization of the base. So, you think about that as incremental dollars or revenue on the core business, an area we really was not competing before at all. And yet, it will have an impact on service ARPU as you blend that into the mix. When you look at total revenue and say hey guys, how come you are not moving that faster, that's because of the key motive impact of net line losses which -- it is history, it is the fact we do not like it but that is what was there. And you have the net BasicTalk of that. And that impact of loosing prior period net lines at the Vonage World case rate, that is what is driving your total service revenue numbers. I will offer to you the notes that we expect the second half of the year total revenues to exceed first half total revenues as we get the benefit of that BasicTalk and then positive net adds in the balance of the period.

Next question, operator?

Our next question is comes from the line of Doug Lane of Citi Investments. Your line is open, please go ahead.

Thanks for taking the question. My first question is how much of the sequential churn improvement and the increase in gross adds was attributable both to the BasicTalk launch in the quarter, and secondly if you can provide us an update on the competitive environment from a pricing perspective for the core home replacement service excluding BasicTalk?

Sure, I'll take that one. This is Marc. So, churn improvement would actually cross the board on our core business, very little of that was affected by BasicTalk just because the apps with numbers relative to our total customer base was still relatively small. So, even though BasicTalk is lower than the average you're not going to see an averaging in benefit of that for some period of time. So, the 10 basis points was core and reflected improvements in virtually all of our segments both ethnic, international callers, as well as domestic. On the second question relative to competitive situation, we only seek competitive pressure. We've seen continued stability in bundles. We've seen since the beginning of the year and was probably just continuation of the second quarter strong competition both from cable companies as well as the telcos providing large amounts of gift cards but there's not been a significant acceleration in the second quarter from the big telephone cable companies. We do see sporadic promotions from some of these smaller ethnic targeted international long distance companies pretty tactical respond to those high segment as necessary. That does have some impact as we protect those customers when they call to suggest that they can get better rates, we managed that very proactively in our retention centers. That does and Dave mentioned have some impacts on ARPU period over period because the value of those customers once acquired the contribution margin is high, we want to keep them even if it means re-rating them to lower rate plans as necessary to match what competition is delivering, so you see some of that in our service ARPU rate decline as well as USF. So that's kind of a high level, but I'll mention also on the competitive front it does appear that BasicTalk is hurting other lower end competitors. Well, we got a slower start than we would have liked. We launched advertising in mid to late May and took us longer than we expected actually to get a hold of our merchandising through the Wal-Mart distribution channel, so that continues to accelerate for us. But we saw within two weeks of launch both magicJack take competitive action in terms of a major price rollback and what most folks may not realize is their pricing in Wal-Mart not only rolled back the price but extended the time for which you get service under that $49 up to 12 months from six. They took a very large price decline to try to protect business, so we know we're taking a chunk out of them. We've also seen some advertising from other low end competitors. That said, we're pleased with our BasicTalk progress and continue to support that brand and we're seeing very positive results from customers that have signed up.

Okay. Next question, operator?

Our next question comes from the line of Matt Sherwood of Cooper Creek Partners. Your line is open. Please go ahead.

Hi, guys. Congrats on a good quarter on the ad side and the churn side. Just have a quick question for you. If add a 157, 000-ish adds to the quarter but BasicTalk is really only one month of the quarter, does that mean that hey, you were like running at 148,000 run rate for the first two months and you're out like a $175,000 of the June month? Was there a material acceleration in ads as the quarter progressed?

It's a good question, Matt. We're not going to provide specific numbers in the case of week by week and kind of forecast but your basic thinking that says, hey, you got a run rate of your core Vonage business that seems pretty stable and you've launched BasicTalk late in the quarter, shouldn’t you get benefit from a longer period of time as you move forward, the answer is yes, of course. There's clearly a ramp to BasicTalk, the last couple of weeks are much stronger than the initial weeks that you're ramping distribution, so you definitely see that. One thing that you should keep in mind, however, is that prior to the most recent quarter we were running BasicTalk direct marketing programs nationally under the Vonage brand. So that was in that run rate we ramped that down in the second quarter as a national launch occurred but what we are doing for those who were not in previous calls with us is we were testing this with people who had already quit Vonage for one reason not that we know who they are, we remarketed to them on the Vonage BasicTalk service and we also ramped for those people who had incomplete sales, people that we had through digital tracking or in down telemarketing who are unable to close the sale on a higher end rate plans in the past. And we've been doing this as part of our test markets for an extended period of time. So, we do have, what I would say is not immaterial compared to the May-June timeframe, run rate BasicTalk that was also in that base and funded out of the core budgets. So, I just caution you as you start doing your multiplier effects and trying to forecast GLAs to keep that historical run rate in mind, but we do expect there'll be a fourth quarter of GLA BasicTalk, in the next quarter we expect it to be larger than was certainly all things in Q2, and we do expect that ad and reaffirm that guidance from last week before the third and fourth quarters.

Right, but you're not going to help us with sort of improvements in July or how the quarter progressed?

No, I'm not. The competitive environment and distribution certainty along I think has too much variability for me to try to give you a specific numbers other than say the direction is up.

Okay, fair enough. I guess, second, you usually give your amount of investment spend on the new initiatives plus I guess in this case BasicTalk for the quarter in aggregate I didn't see that in the press release.

That's right. I think in the first question I referenced the fact that its going to fall within the guidance in the third quarter that we gave for the second quarter. And the second quarter also fell within that guidance if you think about the two buckets of the 5 to 10 of mobile and international and the 5 to 7 in BasicTalk.

Maybe to add a little more perspective on that, I think we talked about $6 million of investments last quarter and that last quarter was lion share related to mobile international. We did not significantly shift mobile international spending, yet some ups and downs, and the remainder of that spend which you actually fall through in EBITDA quarter over quarter is the BasicTalk launch.

Fair enough, that's helpful. Okay, then I guess number three, share repurchase you got a covenant waiver that will allow you to repurchase shares much faster. Is that an indication that that could be something you're interested in or did you just get it to give you maximum flexibility?

This is Marc. I will take the tail end of that. It is just responsible management to give us the maximum flexibility. We saw an opportunity, we got a good partners in our bankers and we're able to do this for very, very little cost. We thought it was a good opportunity to give an opportunity to plan for the future and deal with whatever situation might arise.

I mean, because if you're about to materially accelerate your ad profile with BasicTalk and then Brazil coming up might be a good time to sort of accelerate the share repurchase plan.

Yeah, I think the way we think about it is we certainly have that flexibility, I think we already have that flexibility. Now, we don't really have to, up to a certain point, focus on the covenant as we make decisions and judgments about the buyback. So, it's a very good tool and we expect to continue the program in each quarter, adjust the program based on a variety of factors including market conditions.

Okay, fair enough. And then I guess final question on Brazil, now that you have a lot of these approvals that you didn't have before, is there any update and more clarity on launch timeline?

Well, I'll repeat what I shared in my opening comments. We got a quarter by quarter plan that gets us through all of our testing by the late in the first quarter which includes final integration testing. We'll have a number of key milestones before that that will friendly user testing to make sure that operationally things are working, and we expect very late first quarter early second quarter for a full feature complete launch.

Okay. We'll move to the next question, operator?

Thank you. Our next question is from the line of Brian Horey of Aurelian Management. Your line is open, please go ahead.

First, just wanted to little housekeeping. You said the lines added from the retail assisted selling were up 18%, is that correct? Did I hear that correctly?

What I said was retail sales in what would be big box or mass merchants and regional stores were 18% up separate from BasicTalk. It did not include the impact of BasicTalk.

Okay, so 18% of the total adds.

For that channel, for retail, mass merchants and regional stores, yes, the physical bricks and mortar retail stores.

Okay, got it. You also gave a set on the community sales. Can you repeat that as well, community sales teams?

Yeah, the community sales teams grew by 9% sequentially, and we continued to increase staffing in those areas, so continued to increase productivity and would expect that number to increase as well. And this reflects a long term over the past really five, six quarters shift to move to more variable cost, direct selling model particularly into ethnic communities or in stores where we can see ethnic communities and engage them for the value proposition and shift our spending away from what is now a more cluttered and more expensive television media environment. So, we're moving to more targeted vehicles which is digital when you think about buying as well as the ability to actually put people in front of our customers and engage selling there if (inaudible) helps us target those customer base a little bit more cost effectively and it variablizes our costs.

Okay. And that's the number of teams and not the number of lines added through that channel, is that -- just to be clear, right?

Well, I didn't mention the number of teams, so let me be clear. The 9% was actually the gross line additions generated by our community sales teams.

Okay, got it. And then, just trying to think about the difference impact on line additions outside of that. Would you say that the BasicTalk adds were able to offset the impact of the declining efficiency that you referenced in TV and direct mail and kind of the -- some of the more traditional channels that you used for the core offering?

Yeah, I will probably rephrase it a little bit in that BasicTalk as a long-term growth drive, where we feel a lot of confidence then and this is going to help us to deliver that net ads, positive net ads and total top-line revenue growth as a over time, that is going to be a major contributor for us. Relative to the -- digital offset obviously, our selling and acquisition cost is up on a per line basis to reflecting what is upfront more than kind of a normal per GLA rate. We have to invest in advertising reasonably heavily to build awareness and drive traffic into retail stores and online. So, your overall subscriber line acquisition cost was higher, which means that by definition it is not completely offsetting but it also suggest to you that that number over time will come down significantly. The reason why it is so high was because of the upfront investment on BasicTalk.

Right. I understand that. I was just trying to get out the number of lines added as opposed to the cost, whether the volume of ads from BasicTalk was enough to offset the weakness in the core product through the traditional marketing needs?

Yeah. So I think, it is way to think about it is, there is little bit of softness. And obviously, with the increase in total net line ads, I think by the definition BasicTalk offset any weakness that we saw in Vonage World during the quarter.

Okay. Fair enough. I am sorry. Can you go back through the stats on the mobile, you said average downloads I think we up 33% on a daily basis I guess versus last quarter, is that the right comparison?

It is versus the time -- it versus only launch the video service, so we looked at kind of the average number downloads for the two months prior to the launch of video and then, we looked at the subsequent three months post launch and that overall downloads increased by a third post versus pre.

Okay, great. And then, you gave some stat about usage of the iOS in the Android app, I think with the video, can you just reiterate that as well?

Well, we are seeing that of all our on net calls and on net calls obviously are those where both that parties have the software. Our products differentiated from a lot of other companies, but we allow you to make calls to anybody and we bill this calls obviously through our prepaid plan for international long distance. But if you are on net, meaning both people have the software, we are much like some of the other smaller companies that have on net free. Video only works if both people have the software. And for those on net customers, our video calling rate has been 25% of all calls on net on Android or video calls. So, one out of four calls during the period has been a video call on Android and the level for iOS is about half of that. I attribute that two things, one is face time, so iOS does have functionally iOS-to-iOS. As well as, I think the user experience generally speaking for Android tends to deal with better for all over the top operators; they give a little more flexibility for developers than does iOS.

Our next question, operator?

Thank you. (Operator instructions) Our next question comes from a line of David Cannon from Aegis Capital. Your line is open. Please go ahead.

Good morning. Getting back to the rule out of BasicTalk through Wal-Mart, can you tell me when you were fully operational in all 3700 stores?

I would say it is difficult because we don't have instantaneous audit. We do have merchandizing firm that are actually in stores, so did a count each week. I would say that we were fully operational across all stores in early June.

Okay. And then, I know somebody attempted to ask this question but I was still ambiguous of the answer. Of the $6.50 million of incremental marketing spend, how much of that went towards BasicTalk versus international versus mobile, if you can give me a breakdown?

All of the incremental went to BasicTalk and then some.

Okay. So, I mean, this is my concern or question, what is the payback on that? If you are investing $6 million, what is your internal expense expectation in terms of subscriber additions, and how long will it take you to recover that investment? Have you guys through kind of what is your internal model on that?

We have. I'm going to get into details on specific GLA numbers based upon modeling; I will give you some of the component parts on target goal that make it a good investment. We build our -- a big piece of this also relates to customer life. We had expectations internally that customer life would be in the mid 2% range. We are seeing early indication because it is going to be well below 2%, which extends customer life on churn. In addition, ARPU, we obviously have that is very easy to calculate. And we then look at what are the other cost components internally, we are very comfortable with our assumptions on customer service cost, all of our online sales and service is meeting our internal expectations from our core model. When we think about that we look to get a net present value on these customers -- if we look to get the kind of net present value on these customers that we consider be reasonable return and reasonable discount rate, it allows us a long-term slack where once we get out of the initial startup phase to be somewhere around the $200 range. We shared that previously and as churn declines you might get some additional flexibility, but that's what the sales and marketing teams are focused on. You are not going to see that in the first 20 weeks of any major new brand launch, and as we look at our long-term three to seven year kind of program of BasicTalk in a GLA that we expect to get as the percentage of our total that $6 million will have no problem being paid out.

Okay, operator -- do you have one more question, Dave?

Yes, regarding mobile, to me it seems like mobile is a more exciting opportunity. You reference here international roaming product. When do you anticipate marketing that full throttle?

We expect to expand our roaming product into the U.S. marketplace before year end. We have not given specific timetable. We are completing our testing on multiple networks and I do not want to try to predict something that I do not have enough visibility for to give you a specific month and I would not do it for competitive reasons anyway.

Okay. And then, somebody asked about the Philippines, can you give me I guess of your partner Globe, what is the status of that and if there is any impact or contribution?

So, our relationship with Globe continues. We have got solid and stable gross line additions from Globe. We market it a lot less in the second quarter against Globe than we had in the prior periods. We saw concerns from our partner about some heavy users, so we restructured our rate plan from unlimited plan to a high number of minutes capped plan and have just started marketing again at the levels that we are doing in Q4 of last year. So, our subscriber line acquisition cost on Globe customers has been below $300, so we think that that is a very good investment, but we did stand down and redeploy some of those dollars during the last quarter.

Okay. Next question, operator?

Thank you. Our next question comes from the line of Robert Routh with National Alliance. Your line is open, please go ahead.

Rob, are you with us?

Please check with your phone, it is on mute.

Sorry about that. And thanks for taking my question. Just two quick ones. First, I was wondering if you could remind us, are you still subject to (inaudible) limitations as it relates to potential stock buybacks going forward now that you are making money and free cash flow and things are doing well? And second, if you could remind us about your NOL situation a while back because these change in reverse order to NOLs, you can't reverse all of them. Why don't you give us as sense as to when you could possibly be a cash tax payer and if then how much in NOLs do you still have and potentially could be reversed in the future as the outlook continues to look very bring for the company?

Rob, you broke up a little bit while you were talking, so we're going to try to make sure we got those captured. I'll turn it to Dave and he may incorporate one of his guys who's here with us Jerry, who is our controller and could perhaps provide some additional specificity on those two points. So, I think the first one is related to 382 buyback limitations?

Yes, sir.

And we're subject to that. We still have a $740 million. It continues to be valuable. We released a portion of that based on visibility on being the fact that we would have been a cash tax payer or going into that scenario. We do not anticipate paying cash taxes anytime in the foreseeable future based on what we released but also what's in unreleased as part of that $740 million NOL.

Great. And do you think, I know its obviously (inaudible) to say, but is there a chance that you will be able to release the remaining portion of that $740 million if things continue to progress as they have?

At some point but that's a calculation we'll make in the future. It's not something that feels near term.

Okay, operator, if there are no additional questions that will conclude the call. Thank you for joining us today.

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program and you may all disconnect. Have a great rest of the day.