Venture Global, Inc. (VG) Q1 2013 Earnings Report, Transcript and Summary

Good day everyone, and welcome to the Vonage Holdings Corp. First Quarter 2013 Earnings Conference Call. 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 first 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 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 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 these 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 and good morning everyone. I’d like to begin by welcoming Dave Pearson, our new chief financial officer. Dave joined Vonage from Deutsche Bank where he was head of their global media and telecom group. Prior to Deutsche Bank, Dave worked at Goldman Sachs for nine years. Dave brings deep knowledge and leadership experience in the telecom and wireless industry that will be invaluable as we continue to execute on our strategic growth priorities. We are thrilled to have him onboard. David, welcome to the team Our financial results for the first quarter of 2013 were solid. We generated $34 million in adjusted EBITDA, $2 million higher than the prior year and flat sequentially. During the quarter we continued to execute on our balanced approach to capital allocation by repurchasing shares, and we are on target to complete our $100 million buyback by the end of 2014. Operational results for the quarter were mixed. We continued to implement structural improvements that drove operating efficiencies. We significantly reduced the number of calls in the customer care, an indication of a better overall experience. And our churn rate of 2.5% is down 30 basis points from the prior year. Churn has been stable at this level for four consecutive quarters. Although gross line additions of 148,000 were softer for the period than we expected, we did see encouraging results from our growing assisted sales and community sales channels, as well as from our new BasicTalk flanker brand. Net line losses improved by 7000 from prior year to 12,000 due to the 30 basis point reduction in churn. Our focus on structural cost improvement led to reduced expenses in a few major areas. For the fourth consecutive quarter, we lowered customer care costs through ongoing process and design improvements. We reduced…

Thanks Marc and good morning everyone. Let me begin by saying how thrilled I am to be joining Vonage. I really admire the company's business since the announced turnaround over the last several years. I am excited about Vonage’s future and the opportunity to help shape its strategic direction and contribute to its ongoing success. I look forward to meeting with many of you on the call in the near future. With that, I am pleased to review our financial results and provide you with an update on our outlook. Beginning on slide 3, we reported $34 million in adjusted EBITDA which includes an investment of $6 million in growth priorities. We invested in development resources for our mobile platform again to build out of our international business in Brazil, invested in technical support and platform development for our nationwide launch of BasicTalk. Adjusted EBITDA increased from the $32 million we reported a year ago due to lower cost of telephony services costs and reduced customer care costs as Marc mentioned. Adjusted EBITDA was flat sequentially. Moving to slide four, net income, excluding adjustments, increased to $21 million, $0.10 per share, up from $19 million or $0.08 per share in the year ago quarter and declined from $23 million sequentially. GAAP net income was $13 million, down from $14 million in the year ago quarter due to higher income tax expense as the year ago period included a non-cash deferred tax adjustment of $4 million for certain stock compensation previously considered non-deductible. GAAP earnings-per-share of $0.06 was flat year-over-year and sequentially. Moving to slide five, revenue of $200 million declined from $216 million a year ago due in part to the non-operational impact of lower universal service funds or USF fees which contributed $2.5 million of the decline. Operationally the…

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

(Operator Instructions) And we do have a question from the line of Michael Rollins from Citi Investment Research.

A couple of questions for you. First, if you look at the gross line additions on slide nine, can you talk about the impact that BasicTalk has on the 148,000 in 1Q’13 and maybe talk about what some of the changes you are seeing in distribution productivity for the core business? And then secondly, if you could talk a little bit about a little more from the trial in terms of what you're seeing with respect to the risk of existing home replacement customers or Vonage customers moving to BasicTalk, is that something when they see those price points or they see that brand, they look at, there is an opportunity to try to save money or the features of what you provide in the full-fledged Vonage product, showing to be a significant point of retention for those customers?

Hey Mike, it’s Marc. I will take that. So looking at BasicTalk quarter over quarter, so as you move from the fourth quarter to the first quarter, volume of BasicTalk as you know last year we were doing a couple of different trials. We had launched nationally via direct mail in the spring going to people who had previously rejected the Vonage proposition in other marketing materials for people that cancelled us. And we built the run rate and then we saw there was some real success in that business people who were not taking our product but were anxious in BasicTalk. We then expanded in a couple of test markets during the course of the third and fourth quarter. As we look at all of those GLAs relative to Q1, we did come off of the gap in the first quarter, largely because we were preparing for our national launch. We haven’t given specific breakout but BasicTalk was off a couple hundred, sorry couple of thousand GLAs quarter over quarter, that represented a small percentage of the drop. The other reconciling item that we didn’t actually talk about in the script that contributed to some of that drop because our international numbers were roughly flat, was second line extension. So as you know, we sell second line extensions into the base, the first one is free, the second one we collect $5 a month for -- we have over the last year been cross-selling into the base and obviously once you saturate your existing base, that number tends to slow off. So that was a piece out in GLAs as well. That pretty much rounds out the reconciliation quarter over quarter. Let me move to your question about the trial for cannibalization because it’s savvy and an important one.…

Our next question comes from the line of Matt Sherwood from CCP.

Just have a quick question on BasicTalk, is there any way you can give us some sort of broad brush metrics on the potential GLAs that could contributed to if it’s successful?

As you would well expect we have – we have done that work internally because we got enough test markets and we’ve run three periods, most periods with actually very different levels of advertising and different marketing stimuli in multiple markets. And we benchmarked that against the overall size of core Vonage business. And while it’s premature for me on a national scale to give you an overall sizing, I guess I am dodging the question until we talk again next and see what the national launch really brings us. We are quite confident that the investment levels we are putting in place, we will see material results in the back half of this year. We think this could be a very significant marketplace and I am just going to leave it at that for now. I promise to give you an update perhaps when we speak later this quarter.

And then how do you look at this sort of breakeven – I mean is this something where you can take $30 a sub a quarter and put like a 60, 70% direct contribution margin on it and sort of look at that relative to the ad spend or how do you look at breakeven here?

It’s a great question. So we look at everything on a customer life – net present value and aside from some of the initial spend which is required to build awareness and initial distribution of traffic, the ongoing approach to this, based on our test market and having a lot of experience with contracts, no contract, we understand what the churn rate on this is likely to be. And we do believe the churn rate to be ultimately be in the low mid 2s, we’ve modeled it conservatively and had some up real experience on that at the low price, we could find ourselves doing even better than that. We have taken a conservative view of what that churn number would be in our economics and then we look at how much acquisition costs we have to be able to invest to drive traffic. And we will invest to drive and take as much incremental revenue as we can up to point we’re getting a net present value, which is getting you the shareholder return. You talked about some of the contribution margin on this business and it’s an important one to point out, the pre-marketing operating income contribution margin was extremely high. We keep a large percentage of that $10 once we get past the initial acquisition period. So if we grow this business it can be a very nice cash flow contributor. And we do expect most of it to be incremental. Keep in mind since we are not paying international termination rates and domestic termination rates are extremely small and have been decreasing over time. And domestic usage tends to be a little bit lighter than what we see in the international side. There is an awful lot of margin in this product if we can get the acquisition cost in the right place.

Obviously given that it’s just third of the price, it’s probably – at least the third, when it stabilizes it’s going to be a third of the whatever the 320 to 350 spending per sub.

I think that you can think about it as south of $200 all-in. We feel pretty good about the return we get if we can have all-in acquisition cost in that range.

(Operator Instructions)

If there are no further questions, operator, we will conclude the call. Thanks everyone for joining us today.

Thank you. Ladies and gentlemen, thank you for your participation in today’s conference. This does conclude the program and you may now disconnect. Everyone have a good day.