Vonage Holdings CEO Discusses Q3 2010 Results – Earnings Call Transcript
Vonage Holdings Corporation (
)
Q3 2010 Earnings Conference Call
November 3, 2010 10:00 AM ET
Executives
Leslie Arena – VP, IR
Marc Lefar – CEO
Barry Rowan – EVP, CFO & CAO
Analysts
Michael Rollins – Citigroup Inc.
Mike Latimore – Northland Securities, Inc.
Jonathan Shukral – EVA Corp
Uri Miller – CWCapital
Presentation
Operator
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Vonage Holdings Corporation Q3 2009 Earnings Call Transcript
Good day, everyone and welcome to the Vonage Holdings Corporation Third Quarter 2010 Earnings Conference Call. Just as a reminder, today’s call is being recorded.
At this time, for opening remarks and introduction, I would like to turn the conference over to Ms. Leslie Arena, Vice President of Investor Relations. Please go ahead, Ms. Arena.
Leslie Arena
Thank you. Good morning and welcome to our third quarter 2010 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 planned refinancing and progress in the quarter. Barry will discuss the details our refinancing and 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 2, 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 slide and contained in Vonage’s SEC filings. We caution listeners not to rely unduly on forward-looking statements, and we disclaim any intent or obligation to update them.
During this call, we will be referring to non-GAAP financial measures. A reconciliation of these measures to comparable GAAP measures is available on the Investor Relations website.
And now, I will turn the call over to Marc.
Marc Lefar
Thank you, Leslie and thank you all for joining our call today. This morning, we announced the plan for refinancing the company. This marks a major milestone in our continued transformation. In many ways, it’s the combination of the significant and sustained progress we’ve achieved on our operating performance over the past two years. It’s the realization of our strategy to the [inaudible] company, unencumbered by inefficient capital structure and restrictive governance.
Yesterday, we entered into an agreement with our debt holders to retire 100% of our outstanding debt. And today, we announce plans to issue approximately $200 million of new debt essentially restructuring our balance sheet. We expect this transaction will lead to earnings accretion of at least 40% due to dramatically lower interest rates along with the added benefit of far less restrictive governance. We’ll have much greater flexibility and to grow the business.
This is exciting news for Vonage, for our employees and our shareholders. It was just two years ago, during my first full quarter at Vonage, we were forced to refinance our debt during the toughest credit market in recent history. Our business operations were not efficient and customer loyalty was weak. Churn was well over 3%, EBITDA was a third of what it is today and free cash flow was negative $35 million.
Over the past two years, we dramatically improved our core operations and significantly improved loyalty while improving the quality of our customer base. We’ve enhanced our cost structure and driven churn to its lowest level in many years. We’ve battle through threats of stock delisting and we’ve resolved all the major litigation issues facing us.
We launched new products including Vonage World and entered the mobile market with the international calling application and Vonage Mobile for Facebook. Today, trailing fourth quarter EBITDA and free cash flow are roughly a $150 million each and $185 million in cash. Although we have much more to do, we have made tremendous progress.
Let’s move on to our current results. Our financial progress has been strong. Year-to-date, we generated a $115 million in EBITDA, nearly as much as we generated in all of 2009. Our third quarter results were solid. Our core business continues to generate substantial cash driven by an aggressive focus on cost management and process improvements throughout our operations and in our call centers. We stabilized our customer base and reduce churn to the lowest third quarter level in five years.
We generated nearly $40 million of EBITDA excluding non-operational litigation cost and reduce expenses in virtually every category.
Year-over-year, we reduced SG&A by 7% and drove customer care cost per line, down by 24% while increasing customer satisfaction ratings, and we continue to reduce international termination rates, which declined meaningfully since the third quarter of last year.
Consistent with our prior guidance, revenue declined sequentially to $214 million. It’s important to note that more than half of the decline was driven by non-operational items. The first was a decline in universal service fund fees, which did not impact earnings. These revenues are direct pass-through. The second item affecting the quarter is reserve for refunds paid to customers as part of our Consumer Class Action Settlement. This was recorded against revenue.
From an operations perspective, we continue to make fundamental improvements in the customer experience. Network call quality continues to improve as the percent of impaired calls decline by more than 20% over the past year and the number of customers experiencing one or more impaired calls drops more than 40% in the last quarter alone. Platform reliability is also improving as we deliver a 26% decrease in incidence from a year ago and reduce our average time to restore by 20% sequentially.
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