CALL is a new position and a turn around story. I can see why you might be interested in own the company. But I’m wondering why you chose to allocate such a large amount (3% to a new position).


Here’s some reading material. (Whitney Tilson is (an apparently well thought of) hedge-fund manager.


MagicJack: My Next Netflix
Whitney Tilson, February 7, 2014
I’m always looking for my next Netflix: another stock with multi-bagger upside potential.

Such stocks tend to have the following 10 characteristics:

  1. A tainted company with a beaten-down, heavily shorted stock;
  2. Great management;
  3. Fixable problems;
  4. An enormous, global market;
  5. Big, lumbering competitors that are resistant to change;
  6. A paradigm-shifting technology or way of doing business;
  7. A position of market leadership in the new arena;
  8. Attractive economic characteristics: high margins, low capital intensity, robust cash flows, a strong balance sheet, customer acquisition cost far lower than the lifetime value of each incremental new customer; and
  9. A moat around the business;
  10. An extraordinary value proposition to customers, combined with great service, resulting in intensely loyal customers.

I believe, magicJack has – or will soon have – all of them:

  1. A tainted company with a beaten-down, heavily shorted stock. MagicJack’s stock, at $13.75, is barely half its peak reached in September 2012, trades at a mere 5.6x trailing earnings(!) and 3.3x enterprise value (EV) to EBITDA, and 29% of the company’s shares (and 43% of the float) are sold short.

  2. Great management. I’ve met three times with the new management team (which has only been in place for a few months without interference from the founder and former CEO), and I’m extremely impressed with them and their track records.

  3. Fixable problems. MagicJack’s problems – spotty customer service, unsophisticated marketing, unprofessional web site, and the tendency to manipulate the stock – were all attributable to the former CEO, and are rapidly being fixed.

  4. An enormous, global market. In the U.S. alone, there are 70 million households with either plain old telephone service or a bundled “triple play” of TV, internet and phone service from their cable company.

While the number of people “cutting the cord” and getting rid of their home phone line is growing, magicJack’s 3.3 million subscribers are only a drop in the bucket, so even if the total market shrinks over time, there’s still enormous room for magicJack to grow in the U.S. In addition, there’s another huge market that magicJack hasn’t even begun to address: the individuals and businesses overseas who want the ability to inexpensively make and receive U.S. phone calls. My parents live in Kenya and are thrilled to now have a home phone line that operates as if they lived in the U.S.

  1. Big, lumbering competitors that are resistant to change. Verizon, AT&T, the cable companies…you get the idea…

  2. A paradigm-shifting technology or way of doing business. MagicJack uses the internet (voice over IP or VOIP) to carry its calls rather than traditional phone lines, which cuts costs dramatically. I’ve been using the product, both as a second phone line in my home as well as during a vacation in Costa Rica, and I think it’s fantastic. It’s easy to set up and use, the sound quality is excellent, and I’m saving a ton of money.

  3. A position of market leadership in the new arena. There’s some ambiguity here because it depends on how one defines the “new arena”. MagicJack has 3.3 million active subscribers and 5.6 million registered users of its smartphone app, so it’s bigger than Vonage, which has 2.4 million subscribers. But if one defines the new arena as all internet calling, Skype is exponentially larger – but as I describe below, it’s comparing apples and oranges, as Skype typically doesn’t replace a home phone line.

  4. Attractive economic characteristics: high margins, low capital intensity, robust cash flows, a strong balance sheet, and customer acquisition cost far lower than the lifetime value of each incremental new customer. In the first three quarters of 2013, magicJack’s gross and net margins were a mouth-watering 66% and 24%, respectively, cap ex was a mere $84,000, and free cash flow exceeded net income by a healthy margin. In addition, the balance sheet shows no debt and more than $60 million in cash, equal to nearly 25% of the company’s current market cap.

Regarding customer acquisition cost, magicJack has said that its CPGA (cost per gross add) is in the $4-5 range, a phenomenally low number. I believe this includes the de minimis cost of renewing customers, however, so to be conservative I assume that the cost to attract each new customer is $10. This is still very low relative to the lifetime value of a new customer, which I estimate is around $80, based on the following assumptions:
_The purchase of a $35 magicJack unit at a 60% incremental margin (excluding SG&A) = $21
_3-4% monthly churn (which I think new management will be able to reduce substantially), which means the average customer stays approximately 30 months
_$2.75/month in service fees (a bit more than the base $2.50/month fee because some customers buy international minutes, vanity numbers, etc., partially offset by some customers who pay $100 up front for five years, or $1.67/month)
_70% incremental margin on service fees
_Total: 30 months x $2.75/month x 70% margin = $58 + $21 in hardware = $79 in incremental lifetime pretax profit for each new customer.

In summary, I estimate that magicJack is getting an incredible 8:1 return on its investment in new customer acquisition.

  1. A moat around the business to ensure that the company’s market leadership and attractive economic characteristics endure. The question I get most often is: “How does magicJack make such fat margins charging such a low price? It’s either unsustainable or it will attract many, larger competitors.” (Boy, does this remind me of the consensus thinking about Netflix over the years, yet Netflix continues to grab the lion’s share of all new streaming subscribers.) The key thing to understand about magicJack is that it’s a CLEC (competitive local exchange carrier), which means that, while magicJack has to pay “termination fees” when its customers make outbound phone calls, other carriers must pay magicJack when their customers call magicJack users. This incoming call volume allows magicJack to negotiate better rates with other carriers and significantly reduce network costs: In 2009, network costs were 22% of revenues. They have fallen steadily to less than 18% in 2013.

  2. An extraordinary value proposition to customers, combined with great service, resulting in intensely loyal customers who are “evangelists” for the company. MagicJack has nailed the value proposition – at $2.50/month, it’s exponentially cheaper than what most people are currently paying for their home phone line – and the phone service itself works great, but there’s no doubt that magicJack has a lot of work to do on its customer service. In spite of this, however, the company continues to attract new subscribers – 273,534 last quarter alone – with minimal advertising, which speaks to magicJack’s strong brand name and word-of-mouth. Once magicJack improves its customer service and ramps up a sophisticated marketing campaign, I think subscriber growth could take off – which is precisely what drove Netflix’s stock to the moon.

I want to underscore, however, that this is a risky investment and should be sized appropriately. It’s a small company with a checkered history, competing with giants, and there are some regulatory risks, which I think are minimal but shouldn’t be ignored. For me, this stock is a small part of a portfolio of mostly conservative, value-oriented stocks.

The high short interest also introduces risk because short sellers are the smartest investors in the market – they have to be to survive! – so, in general, it’s a terrible idea to go long a heavily shorted stock. However, on rare occasions when I’ve developed a high degree of conviction that the shorts are wrong and bought such a stock, it’s resulted in some of the biggest winners in my 15+ years of running a hedge fund.

What is MagicJack?
Before I go on, allow me to describe magicJack, which is both a product (hardware) and service (software).

The MagicJack+ is very compact: less than 3” long, 2” wide, and weighs less than 2 ounces (very nice when you travel). There’s a USB port with a plug at one end and an Ethernet jack and regular phone jack at the other end.

It works in two ways: At home, plug the magicJack into a standard electric outlet and into your router via the provided Ethernet cable, and then plug your current phone into the phone port (note that, unlike earlier versions of magicJack, no computer is needed – it’s always on). Then go to the web site to register (which you only have to do once) and you’re good to go. It’s very easy to set up: no software needs to be installed and the entire process takes only a few minutes.

If you only have access to wifi, not a router, just plug the magicJack into your computer. Then, you can make and receive phone calls, either on your computer or by plugging a regular phone into the magicJack.

Another key benefit is the seamless integration between the device and the smartphone app. If someone calls my magicJack number, it rings at home but also on my smartphone, so it’s a universal number. (Incidentally, I think the magicJack app, by itself, could be enormously valuable someday, in light of its 5.6 million registered users.)

MagicJack’s Extraordinary Value Proposition
MagicJack’s biggest advantage is its ultra-low cost: its annual price of $30 ($20 for customers who pay $100 up front for five years) is less than the monthly $30-$50 price of most households’ regular phone line (even phone lines bundled with internet and TV service are typically around $20/month). In other words, magicJack is more than ten times cheaper than what the average American is paying for home phone service.
It’s really important to understand how cheap magicJack is and the implications of this. When something is massively cheaper than current alternatives and costs so little it can lead to a paradigm shift and mass adoption.

I believe tens of millions of Americans – and anyone overseas who wants to make and receive U.S. phone calls – should have one (and, marketed properly, will have one!).

Old vs. New Marketing
Speaking of proper marketing, it’s hard to describe how incredibly unsophisticated and unprofessional magicJack’s marketing was under its former CEO – basically cheesy late-night infomercials. The fact that the company was able to overcome this and have 3.3 million active subscribers and 5.6 million registered users of its smartphone app is a testament to magicJack’s value proposition.

MagicJack vs. Vonage
Perhaps the best way to understand magicJack is to compare it to two better known internet calling service, Vonage (VG) and Skype (which is owned by Microsoft). MagicJack combines the best of both – at a fraction of the cost.

For a home phone setup, magicJack and Vonage are nearly identical: plug your phone into a small device, connect it to an outlet and a router, and you’re good to go. MagicJack, however, has three advantages, one huge and two minor: first, though Vonage provides its device for free (vs. magicJack at $34.95 plus $15 for the first six months service = $49.95 plus S&H&tax), its monthly cost (after an initial promotional period) is 14 times as much: $36.07/month (including fees and taxes) for the same unlimited calling in the U.S. and Canada that magicJack offers for only $2.50/month. (Vonage has launched a new service, Basic Talk, but it still costs 5x as much and doesn’t even include unlimited free calls to Canada.)

Secondly, the Vonage box only works when plugged into a router with an Ethernet cable – it won’t work plugged into a computer like the magicJack does (though both magicJack and Vonage have apps for Android and Apple phones). So imagine you’re on vacation in a hotel room or condo with a regular phone in it, where there’s wifi but no access to the router. If you prefer to make calls using a phone rather than through the computer (I certainly do!), you can plug the phone into the magicJack and it’s just as if you were at home – you can make unlimited domestic calls, receive calls, etc., even if you’re overseas.

Lastly, the Vonage box is quite a bit larger than the magicJack (plus it has a bulky power adapter), so it’s not as easy to toss in your bag when you travel.

MagicJack vs. Skype
Skype is cheap – it’s free to download and make calls to other Skype users – but both you and the other person have to be logged on at the same time. If you want phone service like magicJack, you have to buy a special Skype phone that costs at least $80 and then pay $60/year to get a phone number and another $36/year to get unlimited calling in the U.S. and Canada – in total, more than triple what magicJack costs.

Capital Allocation
When I met with the management team last week, at the end of our conversation, I shared with them the following thoughts on capital allocation:

I only buy stocks that are trading well below what I believe intrinsic value is, so normally I push companies to buy back shares. If your stock is trading at half its intrinsic value, then each dollar spent to buy back stock creates two dollars of value – a great return on investment.
But your case is different. If your customer acquisition cost is $10 and the lifetime value of a customer is $80, then you’re creating eight dollars of value for every dollar you spend on marketing – a vastly better return.

If that’s true, then I don’t want you to buy back any stock, but instead ramp up your marketing spend to acquire new customers. Obviously you need to carefully track it to make sure it’s working, but as long as your customer acquisition cost remains a tiny fraction of the lifetime value of a customer, I want you to forego near-term profitability and invest every dollar of your cash and cash flow into seizing the growth opportunity.

I was pleased when they replied: “We understand what you’re saying and are thinking along the same lines.” They, like I, are not in this stock for a mere double.

MagicJack is a fantastic product and service, which offers its customers an extraordinary value proposition, but its potential was barely tapped under the former CEO. The new management team has (correctly) delayed investing in growth until they fix customer service, finish upgrading the web site, etc. (which is why advertising spending was down 56% in the first three quarters of 2013).

But they’re moving fast – and the results are already visible – so I think when magicJack reports Q4 earnings in mid-March we’re likely to see the beginnings of an enormous marketing push, which will result in rapid subscriber growth for the foreseeable future.

I think the sky is the limit for the company – and the stock. This is the kind of growth story that investors could really fall in love with, so I wouldn’t be surprised if magicJack has a $2.5 billion market cap in a few years – which would make the stock a 10-bagger from here.

Facebook’s $19 billion acquisition of WhatsApp Inc. got the attention of MagicJack’s executives.

Three weeks after the Feb. 19 deal, they dedicated part of their quarterly earnings call to point out the similarities between MagicJack’s business and WhatsApp’s – a growing number of subscribers for a mobile phone application that allows users to communicate for free. Asked a week later whether he was looking for a buyer, MagicJack CEO Vento called it a “very appropriate question” before going on to say that he’s “never worried about exit strategy.”

The WhatsApp deal “raises the value of messaging, and it raises it to a height that maybe wasn’t thought of before, or wasn’t thought of as realistic.”

Cheap Alternative
MagicJack, whose main product is a device that connects to a computer or router to enable voice calls over the Internet, is revamping its mobile application as it seeks to benefit from the same business model of free communication services offered by Viber and WhatsApp. The company, which has a headquarters in Israel in addition to its West Palm Beach offices, markets itself as a cheap alternative to landline and mobile phone plans, charging an annual fee of $29.95 to make calls with the device to the U.S. and Canada.

“There’s billions and billions of dollars in market capitalization at play here, and we believe we’re in the right place at the right time,” Vento said in a telephone interview. “We clearly view ourselves not just in the device space, but in the app space.”

WhatsApp has more than 450 million members, with one million users being added daily. Viber has 300 million users of its instant messaging and free Internet phone services. MagicJack said in a March 12 earnings call that registered users of its free app jumped 23 percent to 6.9 million in the fourth quarter from the previous three months. Of those, 3.3 million used the app in the past 30 days, it said.

Crowded Field

MagicJack has a “significant” number of active app users, but not enough to attract a bidder, Blau said. It needs to break into the mobile application business because the value of voice services is declining across the industry, threatening its niche as a low-cost provider over the next five to 10 years, he said.

To lure a buyer, MagicJack will have to distinguish itself in a crowded field of competitors by touting its low cost, offering high call quality, and addressing data privacy concerns, said Scott Kessler, an analyst at S&P Capital IQ.

“There is no shortage of options for people,” Kessler said in a March 14 telephone interview. “Companies can talk about how they’re using IP-based platforms to enable mobile communications, but there’s a big difference between doing it, and doing it with the level and scale and success that WhatsApp has achieved.”

WhatsApp will be introducing voice functionality later this year, making it a more attractive product, CEO Jan Koum said on Feb. 24.
Premium Services

MagicJack can differentiate itself from WhatsApp and Viber because its service allows users to call any fixed or mobile phone line, not just people who are using the same application, according to CEO Vento, who previously headed TeleCorp PCS Inc., which was sold to AT&T Inc. in 2002 for $5.7 billion.

The shares rallied 20 percent to $21.04 on March 13, a day after the company reported fourth-quarter earnings that beat analyst estimates and forecast revenue of $163 million in 2014, surpassing analysts’ average projection of $148 million.

Canaccord Genuity Inc. raised last week its price goal for MagicJack to $24 from $17, citing better-than-forecast earnings and a renewed advertising campaign.

‘Upside Scenario’
Tilson said last month that MagicJack’s marketing push could result in rapid subscriber growth and stock appreciation.

“I don’t own the stock because I think someone’s going to pay a silly WhatsApp kind of price for MagicJack, but it’s a nice possible upside scenario.”

Tilson said his firm owns more than the 0.9 percent stake in MagicJack that was reported in a Dec. 31 regulatory filing.

Mar 2014 - Conference Call…

We appreciate the opportunity to update you on our progress with the transition to the new magicJack. Q4 marks the beginning of a fundamental transformation of the Company. We are implementing a top to bottom restructuring with a goal of re-energizing the magicJack brand and capitalizing on what we see as the next wave of disruption in the mobile markets, which is the growth in over the top communication.

In the fourth quarter, as well as into the first quarter, we began a series of strategic initiatives that will pay dividends throughout 2014. But let me quickly recap what we have delivered in the first three months on repositioning.

We expanded our distribution channel by adding 10,000 new doors.
We partnered with a prepay card provider to enable cash-based renewals as well as providing an incremental card-only distribution channel.
We refreshed our website and updated our TV ads with a simplified value-based campaign entitled “Do The Math.”

We expanded our management team.

We have begun the pivot from a single device product company to a recurring revenue business with a strong and growing mobile opportunity.
But there’s more to do, and over the first half of 2014, you’ll see us continue to execute against our strategy and deliver on our plans. So let’s turn to some of the key financial and operating metrics that highlight our Q4 and fiscal year 2013 results.

We delivered our highest revenue quarter of 2013, generating $38.2 million in revenue, up 8% sequentially.

We exceeded our revised forecast for revenues for the year.
We delivered on our promise to grow our renewals business.
For the quarter we grew renewals, which are called access rights revenue, to $14.8 million, the highest quarter in the Company’s history. This represents a 23% increase on a year-over-year basis.

For the year we grew access rights revenue 30%, or $57 million, on a year-over-year basis, demonstrating growth of our recurring revenue business.

Renewals now represent 40% of our revenue base, up from 28% in 2012. For the year we had pro forma costs for gross subscriber adds of $4.61, a 43% decrease on a year-over-year basis. We currently calculate CPSA as marketing spend divided by total units and renewal sales.
We continued to grow our strong balance sheet with $54.8 million in cash, and no debt.

We had 3.2 million active device users, a slight decline from 3.3 million active users in the prior quarter.

And we ended the quarter with 6.9 million registered app users, an increase of 23% sequentially.

We’re pleased with the performance in the quarter, particularly with the growth in renewals business which reflects the increased importance of this reoccurring revenue business. And we are encouraged by the significant growth in our app user base which points to future growth opportunities for the Company.

We delivered on early stages of our repositioning, with our new ads and website refresh providing a glimpse into where we intend to take the brand and service in 2014. But these steps are just the beginning.
We are simplifying our value-based ad message and highlighting the benefits of our app as a key feature of the device.

We’re updating our packing with a crisp simplified message, enhancing our product design and more tightly integrating our mobile features.
We will be re-launching the magicJack brands and updated product in May.
We are enhancing our positioning and improving our merchandising in our retail locations. These initiatives will be deployed over Q2 in line with planned ramp updates of our retail partners.

We are expanding our retail footprint. And the rollout of our new channels begins immediately. We will release an update of our iOS and Android app, providing linkage with the device, an easier up sell for other value-added mobile features. And this update we’ll rollout in April. We are deploying and improving our shopping card experience to make it easier and more seamless for customers to purchase our service. This rollout will take place later in Q2.

We are providing ongoing improvements with our customer care experience with both our customer sales help and upgrading our chat experience. And we are continuing to hire additional talent to enhance our team to support our ongoing retail expansion and the continued development of our multiplatform app. These initiatives will be executed over the first half of 2014. So, as a result of these initiatives as well as others currently underway we are reaffirming our guidance of double-digit top-line growth and currently forecast 2014 revenues of $158 million to $163 million. We anticipate that our revenue growth will begin in the second half of Q2 and will progressively ramp over the remainder of the year.
Now let me take a minute to define how we make money. We have a surprisingly simple model. We sell prepaid voice services under annual service contract. We deliver our over the top voice services over both fixed and mobile broadband networks. Our customers are principally in the U.S. and Canada. And we are seeing growing evidence of the adoption of our mobile app across the globe.

Going forward, we see an expanding addressable market for our OTT voice services.

Over-the-top content (OTT) refers to delivery of audio and other media over the Internet without an operator being involved in the control or distribution of the content. The provider is not responsible for, nor able to control, the viewing abilities, copyrights, and/or redistribution of the content. This is in contrast to purchase or rental of audio content from an Internet service provider (ISP), such as AT&T U-Verse. OTT in particular refers to content that arrives from a third party, such as Netflix, and which is delivered to an end user device, leaving the ISP responsible only for transporting IP packets.

We operate our own Cilek Network which provides us with a cost structure similar to an incumbent carrier. As a network operator, our marginal costs are quite low. We pass along our low costs to consumers and provide a no frills over the top voice service with $30 a year.
Historically our customers access our subscription services through our proprietary device the magicJack. We sell the device both through retail partners as well as directly through site. While we make a margin on the sale of the device, this is a one-time margin and not reoccurring revenue stream. This device can be viewed as a customer acquisition channel for our subscription services similar to Amazon selling Kindle.

Increasingly, we make our money on recurring subscription service. In fact, as we’ll discuss shortly, our renewals business grew 30% year-over-year in 2013. Renewals revenue represents 40% of 2013 revenues, up from 28% in 2012. And our shareholder value increased as we demonstrated growth in our recurring revenue business. So our business is simple. We sell low cost prepaid voice services. Consumers access our services through both our proprietary magicJack device as well as through smartphone apps. Our revenue model today is two legged, one-time device sales and subscription renewals tied to the device.

In the coming months, you’ll see us broaden our revenue model through the introduction of app-only and related voice services. Again, we sell over the top voice services, accessible at home and on the go, accessible both over fixed and mobile broadband networks. We measure demand for these services based on the growth of the users irrespective of whether they access our service via a device or via an app. What the numbers tell us is that the underlying demand for our service is growing at an accelerating rate. In fact we now have more users per month accessing our service over an app than we ever had accessing the service via the device, including during the peak periods of the Company’s growth in 2012.
In Q4 app users accounted for 31% of total traffic across our network, up from 23% in Q2. Simply put, this is growing demand for our no frills service. It is management’s job now to capitalize on this demand, and make no mistake, demand for our service is increasing.

As recognized brand and a low cost voice platform like ours, we have the key assets to win customers in the OTG space. As we have said consumers are increasingly accessing our voice services through our iOS’ and Android’s apps. Today we’re stimulating the growth of this channel by providing free access to unlimited calling in the U.S. and Canada while not providing free customers with access to a dedicated number or certain other value-added calling features.

We’re investing in the growth of this channel by choosing to leverage our low cost operating platform, to cost effectively acquire our customers onto the magicJack network. We’re able to pursue this strategy as our cost to support an incremental mobile user is quite low. And this strategy has been successful, I should note that over the last five years or so the Company spent close to $100 million to acquire device customers, while we have spent virtually no marketing dollars to-date to acquire our app user base.

Again our app user base is larger than our device user base. The markets have certainly taken note of the recent acquisition of WhatsApp and Viber both of which were acquired for their growing base of subscribers. WhatsApp was reported to have approximately 20 million of revenues, while Viber had approximately 1.5 million of revenue, and the market is clearly valuing scale over monetization as one follows the other.

Our new distribution partners are excited to be selling the magicJack as their retailers are already familiar with our brand and service and see strong demand for our offer. Again let me underscore that our new channel partners see strong demand for our product in their doors. We intend to continue to invest in the expansion of our distribution channels, in 2014 particularly in the value segment.

Renewals remain a growth engine for our business. On our last call, we indicated that we would be introducing prepaid cards in 2014. We have entered into a partnership with the leading national prepaid platform and will deploy our cards in Q2 in one or more major big box retailers. We see this card platform as valuable to support renewals as well as in providing a mechanism to sell incremental prepaid voice services.
Additionally, this partnership will enable us to provide our card services to thousands of incremental doors in which we currently do not have distribution today.

Turning to international, we continue to work with distribution partners to add significant opportunity for international distribution of both the device and the app. Interest remains strong in Latin America and elsewhere where our brand is well recognized and where our services are already being actively used to provide low cost calling back into the U.S.

We are currently in discussions with certain mobile operators and other over the top voice and messaging providers that are interested in providing alternative or low cost calling into the U.S. and Canada. We are encouraged by the interest we have received and the recognition of the value our ultra low cost voice platform provides.

Tim McDonald - COO
We provide value-priced prepaid voice services at home and on the go for $30 a year and you can keep your own number. Customers access our voice services either through the magicJack device or via the magicJack App. We are simplifying the messaging of this compelling value proposition by stripping away the complexity in the noise. Today, we are midway through our repositioning and certain elements of this transition have been implemented such as a new ad campaign and top level site redesign.

In Q2, we will reintroduce the magicJack brand to consumers with a top to bottom redesign of our offer, which includes a new device design, updated packaging, enhanced merchandising and a tighter integration between the device and the app.

Now let’s turn to our app which we believe points to both the underlying demand for our offer and provides a window into our growth potential. So, let’s begin with some stats. We ended Q4 with approximately 6.9 million registered users and 3.3 million monthly active unique app users. This is a number of unique users who have used the app within the last 30 days. In the fourth quarter, the increase in our monthly active unique app users exceeded the churn on our device. The net effect is that growth in our app base is serving to offset device churn in key users on the magicJack network. The challenge is that when a customer turns off the device we’re losing a customer with a renewal ARPU of $2.50 a month and adding an app user with a current ARPU of 0.

We also view the app as an important incremental distribution channel for our device business and see an opportunity to offer the device as an attractive accessory to an app-only user. Now many have asked about our plans to monetize our app, well the first step is to more effectively leverage the app to sell more devices which after all is our cash engine. When we talk about device features, the app is simply the most compelling feature we have today yet we need to improve how we highlight this feature and we need to make our device offer more relevant to users by providing a tight linkage with mobile and enhancing the value and utility of our service.

Second with the redesign, we’re making it easier for app-only users to buy a broader suite of voice services including low cost international calling, dedicated numbers and other value-added services. We will begin by selling low cost international calling via the app in April. We currently have highly competitive international calling rate yet in the past we have not effectively marketed these services in any significant way to our customers. Today our device users who purchased international calling services generate an ARPU of $9 per month. We believe that international calling via the app provides an attractive and highly scalable revenue growth opportunity.

Now we recognize that the app-only user may generate a lower average revenue per user than the $2.50 per month for our device users. However, the app provides a series of advantages that we believe will materially improve the value of this potentially lower ARPU customer.

First, we’re working off of higher base of users than the device has ever had.

Second, we currently have more app-users than we had device users at the peak of the Company’s growth in 2012.

Third, we have a low cost structure to support customer acquisition by providing a limited amount of inbound and outbound calling.
Fourth, the customer acquisition costs for app users are materially lower than for device users.

Fifth, our free calling provides an acquisition channel to up sell our services in the same way our devices provide an up sell opportunity for renewal and the app provides opportunity to seamlessly up sell value-added services for our customers.

Sixth, the app also avoids certain costs and other operational requirements of the physical device. Now these advantages would include the fact that there is no device cost we have substantially reduced care cost. There are no product returns, refunds or replacements and there is no physical distribution required.

Many of investors have asked us when we intend to deploy texting. Well, the simple answer is we’ll announce texting when it’s ready for deployment. We see a significant growth opportunity in the voice market. There is plenty of room for innovation in voice providing value-add voice service through the app, innovations such as enhanced conference calling, push to talk, voice messaging are about a few example of value-add voice features that might be incorporated in a voice-add.

We are implementing a four part plan to reduce churn.
First, we’re making our service more relevant to customers though a tighter integration with our app feature.

Second, we’re providing cash renewal cards that will be in stores in the May-June timeframe coinciding with the planogram update of our retail partners.

Third, we’re dedicating a specific resource whose sole job is to reduce churn and increase renewal recapture.
And fourth we are providing regular email communications with our customers in advance of their renewal date.

Now we have received a number of questions from investors regarding our advertising spend and strategy into 2014. First, we agree that we have a very attractive return on our ad spend. Based on our current 49-95 direct offer with six months of service, and an average churn rate of 3.5%, a direct customer generates approximately $100 in lifetime revenue.

So the obvious question is why don’t you increase your ad spend to acquire more customers today? Well the simple answer is we intend to ramp our ad spend in Q2 coinciding with the re-launch of our product, update to our app, and expansion of our distribution channels. We believe we are better off putting our marketing horsepower behind a fully revamped offer.


Thanks Saul. It does look promising. So you think that a 3% position is a good allocation? I thought that you normally build positions more slowly and prefer to let stocks grow into a larger position size for you. Is that still true and if so are you making an exception with CALL? Thanks.


Chris, It may be slightly larger than I should have taken, but then again, it’s the next to smallest of my average positions.

In fact, in a range of position sizes running from 8.6% to 0.4% (or to 0.9% if we eliminate the two anomalous tiny positions), a position of 3.25% is definitely in the bottom group. My biggest position is more than twice as large, in fact it’s 2.65 times as large. My biggest position at 8.6% is 5.35% bigger, while a my smallest legitimate position at 0.9% is 2.45% smaller.

Those figures are really meaningless. They are just to illustrate that CALL is really one of my smaller positions.

That’s not outlandish for a new position that I like. On the other hand CALL has gone down like almost everything else I own in April, and may continue to do so.


That’s not outlandish for a new position that I like. On the other hand CALL has gone down like almost everything else I own in April, and may continue to do so.

Yes, it could and the telling moment begins in May when their campaign should begin to show some results.

Here’s hoping.
PS great board and even though I am on vacation, I can’t stop reading here. Addictive…so much to learn, so little time but this is the place to be.