Good day, ladies and gentlemen, and welcome to the Vonage Third Quarter 2014 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will be given at that time. (Operator Instructions) As a reminder, today’s conference is being recorded. I would now like to turn the call over to Hunter Blankenbaker, Vice President of Investor Relations. Please go ahead, sir.

Thank you, Jamie, and good morning everyone and welcome to our third quarter 2014 earnings conference call. Speaking on our call this morning will be Marc Lefar, Chief Executive Officer; Dave Pearson, CFO; and Alan Masarek, Vonage's CEO effective tomorrow. Also joining us are Joe Redling, President, Consumer Services; Wain Kellum, President, Vonage Business Solutions; and Clark Peterson, CEO of Telesphere. Marc will discuss the Company’s acquisition of Telesphere and third quarter results, and Dave will provide a more detailed view of the Telesphere acquisition and our third quarter financial results. Slides that accompany today’s discussion are available on the IR Web-site. At the conclusion of our prepared remarks, we’ll be happy to take your questions. As referenced on Slide 2, 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 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 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 financial measures. A reconciliation to GAAP is available on the IR Web-site. With that, I'll turn the call over to Marc.

Good morning everyone and thank you for joining us today. It's an exciting time at Vonage and I'm pleased to be with you today to discuss our third quarter results and a transformational acquisition of Telesphere which we announced earlier this morning. Before I begin, I'd like to introduce Alan Masarek who's on the call with us today. Alan officially takes over CEO tomorrow, but has been with us as a special advisor over the last three weeks as we assessed and finalised the Telesphere transaction. He brings more than 20 years of C-Level experience at technology-centric companies. Alan joins us from Google to which he sold his prior company, Quickoffice, one of the world's most widely recognised mobile brands. He has built several successful companies demonstrating great vision and strong execution skills along the way, an innovator with deep experience in mobile, SMB and consumer sectors, we're delighted to welcome him as the new Chief Executive of the Company. Alan, welcome.

Thank you very much, Marc.

Turning to Slide 4, let's now move to the acquisition of Telesphere, a leading provider of unified communications as a service. This transaction accelerates Vonage's evolution into a leading company in the rapidly growing cloud communication sector and reflects the continued execution of our long-term growth strategy. Upon closing, the combined 2014 pro forma revenues of Vonage Business Solutions, Telesphere, and our existing small business customers will comprise approximately 18% of total revenue, and if independent will be the second largest pure-play UCaaS provider surpassing 8x8. We believe that our higher growth rate, completeness of offering and exceptional cost structure position us well to gain market share while generating strong returns for our investors. As we demonstrated with Vocalocity, the use of Vonage's scale, brand, balance sheet and cash generation to invest in the acquisition of complementary growth businesses has been successful by any measure. One year after the acquisition of Vocalocity, we have far exceeded all of our original performance expectations. We have realized and reinvested cost synergies that along with the Vonage brand have accelerated revenue growth from 38% to 52%. We're confident in our ability to accelerate growth at Telesphere as we bring it under the Vonage umbrella. This acquisition immediately moves the Company into a considerably larger SMB and enterprise market, generally requiring quality of service management, service level agreements, and carrier-grade feature sets matching those provided by on-premise PBX vendors. While large business solutions has demonstrated exceptional growth for customers who generally use the public Internet, Telesphere expands our addressable market to serve customers requiring greater security and guaranteed service levels. Our addressable market is well north of $15 billion in North America and these segments all offer highly attractive customer economics. With Telesphere as part of the Vonage family, we will now be able…

Thanks, Marc, and good morning everyone. On behalf of the entire management team, I would like to begin by thanking Marc for his 6.5 years of exemplary service to Vonage. He is leaving the Company in a strong position and has set up this team for success. With that, I'm pleased to provide additional details on the Telesphere acquisition as well as discuss our third quarter financial results. Starting on Page 10, as Marc referenced, Vonage is paying a total of $114 million to acquire Telesphere. This value represents a 2015 revenue multiple of 2x or less relative to our closest cloud peers who were trading at around 3x revenue on the same 2015 basis. We believe that Telesphere which is modestly EBITDA positive is already on track to grow revenue at a faster rate than these comparables in 2015, prior to any benefits of Vonage ownership. And we believe that Telesphere can grow faster within Vonage just as Vocalocity's already rapid growth accelerated after the acquisition. Telesphere customers sign-up to multiyear contracts and the company has more than $50 million of revenue already under contract for 2015. Furthermore, as we did with Vocalocity, we expect to achieve annual operational synergies through scale and technology beginning in the first year after close. These synergies are expected to be realized in similar areas to Vocalocity, including cost of telephony services which includes termination and E-911, shipping and G&A which is primarily financial, and other shared systems and services. Under the agreement, Telesphere shareholders will receive $91 million in cash and 6.86 million shares of Vonage common stock equating to $23 million. Stock consideration represents approximately 3% of outstanding shares. These shares are restricted under Rule 144 and therefore cannot be sold or transferred for six months. Vonage is financing the cash…

Thank you, Dave. Jamie, can you initiate the call session Q&A please?

(Operator Instructions) The first question comes from George Sutton from Craig-Hallum.

First, a lot of welcome to Alan, Clark and Hunter and thanks to Marc. So my first question was for Wain, and that is as we look at the strength that you're seeing in the SMB space, we are seeing a lot of your competitors move away from the smaller account opportunities and you're having a lot of success there. Can you discuss if that's a large part of why you're seeing the growth you are and are you able to break down growth from distribution versus the growth from productivity of the sales force?

You got that, Wain?

Yes, I got it. Thanks Marc. For us, consistent with what we said last quarter, the majority of the market that we're going after is still on Extensions and then flexible legacy platforms. So for the market that we sell to, the majority of businesses are using old platforms that don't serve them well. And so for us, we continue to find new ways to put marketing and sales dollars to work, both directly and indirectly, to give selling opportunities, and then in the selling opportunity our value proposition, our price point and feature set puts us in a position where our close rate is extraordinarily high. So without stopping short of telegraphing our sales and marketing tactic, what we're doing is pretty straightforward which is just putting our way into explaining what we do to customers that are on legacy platforms and they are glad to migrate over.

Okay. And my second and final question relates to this Telesphere integration. It sounds like you're not going to be integrating the name or the Telesphere name will remain. So just want to confirm that. And then also, can you discuss the network, because I know Telesphere has quite a bit of POPs in data center in their annual number of data centers, can you discuss that integration?

So let's take that two pieces. This is Marc. Let me take the first one on brand and I'll let Clark talk about his network and what makes them unique. From a branding standpoint, as we described in the call, we are going to at closing refer to it as Telesphere, a Vonage company. We've seen both at Vocalocity and in our research that the Vonage name, although most folks still think about it as a consumer name, it is quickly and easily extensible to business. Folks are familiar with it, have confidence in it and it has a quality impact to it. We've seen that it has helped to drive digital traffic and searches to Vocalocity, now Vonage Business Solutions, and the team will be working post-closing and actually prior to closing with Alan and the new team to talk about what leverage we can get from the Vonage brand and at what course and speed we leverage that in our marking material. So you'll see Vonage at the moment of closing and then the degree to which Vonage becomes the umbrella will be determined in the coming couple of months. Clark, you want to take the network question?

Sure. Thanks, Marc. And George, appreciate the question. I first – since you are the first question that I'm answering, I would like to say on behalf of Telesphere, we are very excited about this deal and feel that we are a powerful enabler in this industry to really create a leader in the UCaaS space and I think we will talk a little bit about that, but this is a great day at Telesphere and I believe for Vonage as well. As you mentioned, we have 16 POPs throughout the country as our network and really that creates an MPLS network that enables us to provide not only QoS and guaranteed SLAs for these larger customers but also other cloud services and also data services for them. So we utilize that network really as a facilitator for providing all of the full robust feature set of call communication services.

Thanks, Clark. Jamie, can we have the next question please?

The next question comes from Greg Burns from Sidoti & Company.

Given that Telesphere is using like a BroadSoft core, is there any plans to kind of unify the platforms onto maybe Vocalocity's platform? And then also, what is the margin structure of Telesphere look like given that they are using a BroadSoft core and they do offer the MPLS?

It's Marc. So relative to the platform, Alan and the technology teams from both companies will spend time over the next couple of months evaluating the wide range of what are the functions, features, capabilities of the platforms that have been built at both companies. It's important to note that while the BroadSoft platform is the base-level communications module, Telesphere is really differentiated by having created a lot of apps and tools sitting on top of that that radically extends the feature set they can deliver. In addition, some of their differentiating service comes from their OSS/BSS tool which as I mentioned was called Zeus, and we've been extremely impressed with the capability that provides for provisioning, for channel partners to access, to sell, to understand where they stand relative to what they've earned and for customers to be able to access and customize their feature set. So it's really an impressive suite and array. Those are things that are quite unique and do sit on top of that BroadSoft platform. In the case of Vocalocity or VBS when it was built, the proprietary platform absolutely made the most sense to build and continues to be one that is expanded upon. At this point, we expect to operate both platforms and we'll consider what additional technology integration needs to occur in the coming months into 2015, but there's no current plan and we don't have a need nor is the thesis for the acquisition in any way based on a technology integration.

Great. Then I'll take the margin question. So first of all, as with Vocalocity, we expect to be able to increase the margins through some of the synergy opportunities that we talked about. Secondly, the aspect of the Telesphere business, that is their primary product which is the feature set built on top of BroadSoft and the call processing, are some of the highest margins that we've seen in this space. The MPLS which is really sold as a bundle and pulled along in that whole package is growing at a very high rate, as we indicated with the 2x. The MPLS gets pulled along, it does have a lower margin and CaaS but overall we think the margin is quite compelling and we can add we believe over time pretty significant increase to that.

Okay. And what percentage of the $40 million that Telesphere did this year or the $50 million that's booked is MPLS versus out of recurring service revenue for like the telephony component of the business?

Again, we sell it as a bundle and customers can choose to take it or not. Almost all of them do. And so having it together is a critical part of the product. I would just say that the MPLS piece is materially less than half of the revenue.

Okay. And in terms of the core consumer subscriber base, Marc, I think you mentioned you expect the churn to kind of improve and GLAs to at least stabilize. What are you seeing I guess more recently or what trends are you seeing more recently that kind of give you confidence that you've hit the trough here with that consumer business?

I mean we see stabilized gross line additions and we see lower churn. So it was planned to actually expect GLAs to decline. We've shut down investment in a number of channels and candidly what we found in some of these channels was we call spinners folks who were coming in the top for promotions, who may stay for a couple of months then going right off the bottom again. So as you drop GLAs or there's a lag time of several months, you will see that that GLAs, a good portion of it quickly becomes offset with lower customer attrition, and that's the trend we're actually seeing. We obviously started this process last quarter and now you have a full quarter of that impact. So we think that we've seen that kind of pass through the system at this point.

Okay, so the linearity through the quarter has improved, the trajectory through the quarter you've seen improve?

Yes.

Okay, alright, thank you.

Jamie, can we have the next question please?

The next question comes from Mike Latimore from Northland Capital.

This is Jim Fitzgerald tuning in for Mike Latimore. So my first question is surrounding research and development for VBS. What features or areas is that research and development really devoted to for VBS right now?

This is Marc, I'll just – I'll turn it to Wain but obviously for competitive reasons we're not going to spend too much time talking about the specifics. Wain, if you want to talk about the areas where you see emerging needs and the kind of customers and generally the feature sets that we're seeing increase in demand, that would probably be most appropriate.

Sure. Primarily it's in three buckets. Customers expected more and more mobility, so we continue to innovate in that area and have a huge advantage in that we can do that company-wide at Vonage instead of just one-sided VBS, which is good for us. We're growing like crazy, so we continue to invest in capacity expansion and tools, and that work fell well. And then the third bucket is we continue to take our software spec and advance it allowing other companies to do innovative things, and that's one of the things that we like about our Dell relationship. Dell could have done business with anybody that they wanted to and they chose Vonage to be able to use our software and our infrastructure to be able to innovate and introduce that Dell's second line, and that takes some work to do things to allow companies like Dell to use our software.

Okay, great. And then my second question, can you give us an update on any incremental distribution channels you have for VBS?

Go ahead, Wain.

So we continue to expand out our distribution channel, Dell being one example. Marc mentioned in his scripted comments about VBS. We also continue to see really good growth in channel partners that's telco resellers and we realize that they need to sell cloud because of the value proposition that earns. So last quarter we signed four master agents which gave us thousands of sub-agents that are out repping the VBS platform. So we think that will continue to scale nicely for this foreseeable future.

Thanks, Wain. Jamie, can we have the next question please?

The next question comes from Catharine Trebnick from Dougherty.

Congratulations to the new people, and sorry Marc, you're moving on. So on Telesphere, is that revenue more geographic to the southwest region or is it a more national footprint?

Clark, do you want to take that one?

Sure. We serve customers all over the United States. Our network is national. There's not a state or a city that we don't serve. I think you'll see most of our growth is on the East Coast actually. From the past our revenue where we started was more West-centric but almost all of our larger growth and larger customers especially as we've gone upmarket dramatically is coming from the East Coast. So it's pretty much spreading across the country based on our legacy base and our current growth areas.

One of the things we found compelling when we kind of looked at the profile of the business was, every place that Clark and his team has actually built distribution out, they penetrate market share very quickly. So the distribution of revenues that Clark is talking about really is followed where the investment sales force has been and that's why we think there's so much upside opportunity here, the ability to provide some cash and support the teams to expand their channels we think can grow, accelerate growth very, very quickly based on their history.

Okay, thanks. And then also another question would be, when you compete for customers, who do you typically compete against, 8x8, RingCentral, Comcast, AT&T, CenturyLink? That would help give me an idea of the landscape too.

Clark, you got that?

Sure. We really compete for – and our type of customers are those that currently have on-prem PBXs, so these are larger customers of the SMB market, and most of the customers that we acquire are previously in the traditional mode of having an on-prem PBX and with the traditional [indiscernible] that type carrier, and so we're really taking those customers from that legacy product and moving them to the cloud, and it is those larger enterprises who we compete against.

And then the larger enterprises obviously have multiple branches and headquarters, right?

Correct, yes. And we've been very effective at both kind of top down as well as bottom up being able to sell headquarter companies with thousands of locations around the country as well as selling satellite offices that then that excitement about our robust feature set and our ability to have great disaster recovery and great connectivity and high quality services for them spreads up from those satellite offices to headquarters, and been able to grow that way as well.

Alright. And then just one, Marc, an update on how you're doing with the Dell relationship and how that's working both from a consumer and a business point of view?

Wain, do you want to just talk about briefly how the timing on sales from the time we deployed it?

Yes.

Sure. As you know we announced Dell at the CTIA Mobility Conference, but the product was still being completed. We are near completion and feature-set ready. So that means by the end of the year Dell will have a complete enterprise mobility management solution where we're providing the voice and messaging communications in February. They'll start a national rollout with formal sales training and hopefully engage thousands of Dell people to go out and represent the EMM solution to their client, but we don't expect to see meaningful commercial traction until after the Dell sales training in February of 2015.

Jamie, next question please.

The next question comes from Robert Routh from National Alliance.

Congratulations on the deals. As far as the BasicTalk product, I know you launched a while ago with Amazon, can you give us an update as to how well that's going and is there any chance that you could expand that? And I think also in May when you announced the expansion of the BasicTalk product, you said there were going to be four new retail partnerships and one online in addition to Walmart and we have the CVS, I'm wondering who the other three retail partners are if you're finished with the expansion of that product?

This is Joe. The other big partner was Family Dollar that rolled out through the month of September with 8,000 doors. That was the primary add-on. Amazon, we've been in since the end of June where we're happy with the results there. They are actually delivering similar kind of volumes as we're seeing at Walmart.com. So BasicTalk is fully integrated into the Amazon channel.

Okay, great. And so that's the only other retail partner, CVS, Family Dollar and then Walmart?

Between the two you have 15,000 to 16,000 locations.

Okay, great. And then as far as the cash value of your NOLs, I know you had a bunch of NOLs from years ago when you reversed some of them and it's obviously a hidden asset of the Company, I'm just curious as to can you give us an update now as to where that stands and are there still any NOLs that you could reverse going forward given how well you guys are doing? And then how incentivized is this management in the form of options and all that to continue doing what you've been doing and staying with the Company? I'm just curious as to above the compensation point of view, how that's structured. I would assume you guys are highly incentivized to keep doing what you're doing but just wanted kind of an update on that.

Sure. I'll start with the NOL question and then turn it over to Marc and Alan for the options question. Regarding NOL, we don't – first of all, it's over $700 million. We do not anticipate being a cash tax payer in this decade and we don't anticipate a major shift in how we're recognizing that at this point in time. I would also note that Vocalocity came with an NOL and Telesphere is coming with an NOL as well which we'll be valuing over the pre-closing time.

And I'll take the first half of the employee compensation structure. As you well know, we do provide to many of our employees incentivization in the form of some stock options and performance RSUs. Those performance RSUs which have been granted this year are tied very much to shareholder return over a three-year window and the details of that are public information, so you can read that in our historical filings and get a feel for what those are as well as the compensation for the senior executive management and what that split is and what those performance – and how those performance metrics are delivered. Relative to the leaders that you hear on the phone here today, so Clark and Wain, both in terms of their annual cash bonus as well as their stock performance plans are very tightly tied specifically to the performance of their business units. So we are looking very clearly to Telesphere performance and Clark is highly incentivized to perform within his business specifically in the form of stock, as is Wain. Relative to Alan, I think I'll let him speak for himself on that.

Thank you, Marc. So clearly that's a large chunk of my compensation in terms of aligning with the shareholders, but philosophically going forward we'll continue that with future hires as well to make sure that the team is well aligned with the shareholders in terms of incentives.

Great. Thank you very much.

At this time, I'm showing no further questions. I would now like to turn the call back over to the presenters.

Okay, Jamie. Thank you very much and that wraps up the call for today, and we look forward to speaking with you further in the future.

Thank you, everybody.

Thank you.

Ladies and gentlemen, that does conclude the conference for today. Again, thank you for your participation. You may all disconnect. Have a good day.