Vonage Holdings' CEO Discusses Q2 2012 Results - Earnings Call Transcript

Vonage Holdings Corporation (VG)

Q2 2012 Earnings Call

August 1, 2012, 10:00 am ET

Executives

Leslie Arena - VP, Investor Relations

Marc Lefar - CEO

Barry Rowan - EVP, CFO & CAO

Kurt Rogers - Chief Legal Officer

Analysts

Michael Rollins - Citi Investment Research

Robert Routh - Phoenix Partners

Mike Latimore - Northland Capital

Matt Sherwood - Cooper Creek Partners

Presentation

Operator

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.

Leslie 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.

Marc Lefar

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 upon our progress over the past few years, we have great confidence in the strength and sustainability of the company’s cash flow; combined with a pristine balance sheet and our belief that our stock represents a very attractive value, the Board of Directors has authorized a share repurchase of up to $50 million to be concluded by the end of 2013. This is consistent with our strategy of taking a balanced approach to capital allocation by investing in growth and returning value to shareholders while maintaining ample cash to fund the operational needs of our business.

Let me now move to a discussion of our financial and operating results. Our financial performance remains strong as we generated $35 million in adjusted EBITDA. Continuing operational improvements including lower cost of telephony services, both domestically and internationally and a 6% reduction in customer care cost per line contributed to the sequential improvement in EBITDA. Sequential revenue decline modestly and Barry will talk through the details in a few minutes.

Free cash flow increased by $23 million to $25 million, up from $2 million in the seasonally lower first quarter. Gross line additions or GLAs of a 163,000 were up 5,000 lines compared to a year ago. Similar to last year, we experienced seasonally higher media costs in the second quarter which elevated subscriber acquisition cost.

While GLAs for the full quarter were relatively flat sequentially acceleration throughout the quarter was encouraging and supported by the addition of Pakistan to Vonage World and the introduction of an enhanced plan with mobile minute to Latin America.

Our market test of [Basic Talk], a limited feature service designed to compete aggressively for the low end domestic calling market commenced in May with highly targeted marketing vehicles; resulted in positive and reinforced our belief that we can profitably address consumer’s needs for ultra low cost domestic calling. We will continue our marketing testing during the third quarter and will update you in the future as we consider broader expansion.

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