U.S. Markets closed

Edited Transcript of CALL earnings conference call or presentation 9-Aug-17 9:30pm GMT

Thomson Reuters StreetEvents

Q2 2017 Magicjack Vocaltec Ltd Earnings Call

NETANYA Sep 7, 2017 (Thomson StreetEvents) -- Edited Transcript of Magicjack Vocaltec Ltd earnings conference call or presentation Wednesday, August 9, 2017 at 9:30:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Don Carlos Bell

magicJack VocalTec Ltd. - CEO, President & Director

* Thomas Fuller

magicJack VocalTec Ltd. - Executive VP & CFO

================================================================================

Conference Call Participants

================================================================================

* Gregory John Burns

Sidoti & Company, LLC - Senior Equity Research Analyst

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Good afternoon, and welcome to magicJack's Second Quarter 2017 Earnings Call. Today's conference is being recorded. With us on the call today is Don Bell, Chief Executive Officer; and Tom Fuller, Chief Financial Officer.

During the call, we will make statements related to our business that may be considered forward-looking in nature under federal securities laws. These statements reflect our current views regarding the future only as of today and should not be reflected upon as representing our views as of any subsequent date. These statements are subject to a variety of risks and uncertainties that could cause actual results to differ materially from expectations. For a discussion of the material risks and other important factors that could affect our actual results, please refer to our quarterly report on Form 10-Q, which will be filed today, August 9, 2017, with the SEC and to our 2016 annual report on Form 10-K, also filed with the SEC.

Also during the course of today's call, we will refer to certain non-GAAP financial measures. This is a reconciliation schedule showing GAAP versus non-GAAP schedule -- sorry, versus non-GAAP results currently available in our press release issued after the close of the market today, which is located on our website at www.vocaltec.com.

With that, I will turn the call over to Don.

--------------------------------------------------------------------------------

Don Carlos Bell, magicJack VocalTec Ltd. - CEO, President & Director [2]

--------------------------------------------------------------------------------

Thank you. Good evening, everyone. This is Don Bell, CEO of magicJack. Thank you for joining us.

The second quarter was the first full quarter under the new management team, which joined in mid-March. During the quarter, we accomplished 4 things. We improved our retention efforts and lowered monthly churn from 2.5% to 2.1%. Second, we scoped opportunities to increase ARPU and are now executing on them. Third, we identified an opportunity to disrupt a large segment of the growing UCaaS market at low cost to magicJack, and we launched a beta test of 1 component of that offer. Fourth, we put Broadsmart on a stronger footing and growth trajectory. We're very pleased with the progress we've made, our speed of execution and what that means for the quarters ahead.

Before we begin our discussion of the just-completed quarter and first 6 months, I'd like to acknowledge that the strategic process we announced on March 15 remains underway. As we previously disclosed to you, and as is typical in these situations, we will not be commenting further unless and until we have a definitive agreement to announce.

With that, I'd like to turn to the just-completed quarter and share with you the continued progress we are making on creating value.

During the quarter, we focused a great deal of analysis and effort on the GO subscriber base, and as a result, we're pursuing opportunities to increase ARPU and lower churn within our base. In the second quarter, we achieved a reduced churn rate of 2.1%, down from 2.5% in Q1. We've implemented changes to our processes -- our retention processes, and I'll point out a few.

Previously, auto renewal was not the default option in our activation flow, and we had suboptimal processes in place to maintain valid credit cards. Fewer than half of our customers were on auto renewal, and we think we can significantly increase that. We've changed the flows and implemented improvements to our credit card validation, customer notification and update process.

We've also taken several steps to enhance both our communication flows and upgrade customer care without adding costs, which helps with churn. Previously, the company took 2 steps: one, investment in an online customer care portal to more efficiently resolve issues for customers in an automated fashion; and two, onshoring of first-line customer care.

Our team has moved forward with the portal and reversed the second decision to onshore some components of customer care in-house, and instead, we've outsourced in Costa Rica. Those changes took place in the second quarter when customer care costs peaked at approximately $400,000 per month, and we expect to be down in the mid-$200,000 range per month at some point in the third quarter with better customer care metrics than before. So far, the metrics we see give us confidence we'll achieve both the cost and care objectives in the third quarter.

To increase ARPU of our base, we're enhancing the service we provide and optimizing pricing. First, we're testing pricing elasticity particularly on renewals. We are currently evaluating in small test groups increases to our renewal pricing and are preparing to roll that test out more broadly this quarter along with different subscription periods of 1, 2 and 3 years instead of 1- and 5-year offers, potentially eliminating the 5-year option.

Additionally, we have a quarterly schedule of enhancements to the GO service that we plan to roll out starting in the third quarter. Some opportunities we've discovered by spending more time with our call center agents, getting a closer feel for customer wants, trouble spots and areas to improve in our sales and care processes.

In the second quarter, we moved the corporate staff into available space in our call center and distribution facility in West Palm Beach. We did that to save on office rent, but it's also getting us closer to the customer. For example, one common request is call blocking, which is something we can implement on the switch and make available to our existing subscriber base. We have on our road map a quarterly release schedule of new GO features like that one. Essentially, we've identified opportunities to deliver more value to existing and new GO subscribers at minimal incremental cost to us, and that presents us with options to charge for these features individually, to bundle them, to offer as renewal incentives or as value add to the base service.

On the hardware side, we will be upgrading the GO chip with our more capable TJ911 chip once we run through remaining supplies. The new chip will provide upgraded call quality and other enhancements. And in addition to upgraded GO hardware and hosted services, we'll be commercially testing business market demand for a second device with additional ports and capabilities, a project named The Phoenix, and built on the TJ911 chip, which we build ourselves in San Jose.

Net-net, as we consider one of our most prized assets, our loyal base of GO customers, we believe that we have the opportunity to capture higher ARPU while managing churn rate on the other side of the equation for an accretive total result.

On the March 15 call, I'm going to turn to unJacked, which is now called Spark. On that March 15 call, I announced our strategy to extend into the business market, specifically SOHO, with a web-first mobile first approach with project name unJacked. We recently launched a beta test of 1 component of that offer under our new brand name, magicJack Spark. From here on, I'll refer to our SOHO UCaaS business as Spark, as differentiated from our enterprise UCaaS business, Broadsmart.

First, it bears repeating which market opportunity we are targeting with Spark. Both the SMB effort last year and being in the UCaaS business via Broadsmart have together informed our approach. We estimate the U.S. SOHO market encompasses 20 million businesses of less than 5 employees, and we believe that market needs an offer with magicJack characteristics: easy to buy, easy to use, reliable and, most of all, shockingly cheap relative to the incumbent offers. We believe that the SOHO market is not well served in that regard just as home phone subscribers didn't have a choice like ours from the ILECs and CLECs until we arrived. With SOHO, we are extending that magicJack value proposition into a business line alternative in competition with higher-priced offers from other UCaaS providers.

Last year, our SMB effort indicated that SOHOs are actively searching for inexpensive and easy-to-use phone systems. However, we shut down that effort before we reached a profitable CAC to LTV ratio. Because we were selling direct but not online, our prospective customers had to fill out a contact form in order to -- in order for a rep to sell over the phone. We were also only selling hardware with no ability for customers to use our service with a mobile app unless they purchased desk phones. We believe these activities revealed a potential opportunity in the SOHO UCaaS market.

With our SMB offering, we saw that the average number of lines for a new customer was approximately 1.7. We know the majority of SMBs in the U.S. are SOHOs, so this validates the need amongst small office and home office businesses. We then conducted research to understand what their telecom needs are. Majority of SOHOs with a business line currently use a landline. In our research, SOHOs said that hardware is burdensome and expensive. Of the SOHOs who are considering a business line, we found the majority of those wanted to be mobile. We believe that we can potentially disrupt this market in a couple of ways.

Because of our vertically integrated operations and cost structure, we believe we can offer a much lower price point than our competitors. As I've noted before, even with 2 million subscribers, we still have more than 90% excess peak capacity on our network. We own our own softswitch, and our entire infrastructure and operations are underwritten by the consumer GO business. Looking at the array of UCaaS offers sold direct online, we think we can offer the core features SOHOs really want at a more competitive price.

We also learned that SOHOs often select hardware in order to take advantage of business calling features. The hardware itself is often secondary. We determined what those business features are and saw that we can offer most of them with our mobile app such as call routing, conference features, do not disturb, hold music, international calling and so forth. Based on the research we did, we chose to lead with mobile rather than hardware. As part of our product road map, we plan to combine our mobile app and offer hardware to anyone who wants a desk phone, but the key for us is offering a solution that aligns with SOHO's needs today at a price that's disruptive. Because of our work in the last year, we think that there is a significant addressable market and that we can scale the direct channel online and price competitively.

We recently launched a beta test of one component of our product vision, a mobile iOS app, which gives users the ability to add a second line to their own smartphone starting at $4.99 a month. In less than 5 minutes, they have access to talk, text, voice mail, contact integration, a native dialer, conference calling and more, all with a second phone number on their current device. Our plan is to roll out the core components of our UCaaS business offer during the next 2 quarters, including multi-user administrator functions in preparation for a full commercial launch in the first half of 2018. During the beta period, we are testing a paid service and using digital media for customer acquisition and marketing plan development.

Now I'll turn to our enterprise UCaaS business, Broadsmart, which, in contrast to Spark, is focused on enterprise clients and sold indirect through channels. With Broadsmart, we offer a white-glove service to our customers with distributed operations. Today, I'm pleased to report positive momentum exiting the quarter following the impairment charges we discussed in Q1. We now feel better about the longevity of our largest enterprise client who was on our watch list at the beginning of the quarter.

We also attracted new channel agents and invigorated our existing channel during the quarter by rescoping our offer and pricing to be more competitive. We signed multiple new agents to that agreement and hired new channel and account managers. The immediate result of these initiatives is that we exited the quarter with substantially higher lead volume versus Q1. And in June, we promoted Kerrin Parker to CEO of Broadsmart and are confident in her ability to grow our enterprise business.

To sum it up, Q2 was our first quarter at the helm, and we took that opportunity to aggressively pursue our strategic priorities and to decisively make needed changes that will benefit the company. We kicked no cans down the road in those first 100 days so that we can now move forward with the greatest speed towards the financial and strategic growth that we envision in the quarters and years ahead.

With that, I'll turn the call over to CFO, Tom Fuller, for the financial update. Tom?

--------------------------------------------------------------------------------

Thomas Fuller, magicJack VocalTec Ltd. - Executive VP & CFO [3]

--------------------------------------------------------------------------------

Thank you, Don.

I'll start with an overview of our second quarter financial performance, and then I'll move on to provide an outlook of our full year 2017.

In the second quarter, total net revenues came in at $22.4 million. Of this total, most revenues continue to come from our consumer segment, which had revenues of $19.3 million compared to revenues of $20.4 million last quarter and $22.4 million during the same quarter last year.

In Q2, Broadsmart, our enterprise segment, had revenues of $3 million, up from $2.7 million in Q1 and consistent with the same quarter last year. In Q1, we discussed the impairment of the carrying value of intangible assets associated with our enterprise segment. Since Q1, the new management of our enterprise segment has invested in account management resources to strengthen customer relationships and improve retention, and has sought to expand our sales channel and sales pipeline by signing new master agency agreement and renegotiating our channel commission rates to meet what we believe are market commission rates needed in order to grow our lead pipeline. We are encouraged by the positive response to these changes by our channel partners and have seen a significant increase in new leads in Q2.

In our consumer segment, during the quarter, there were approximately 87,000 device activations compared with 92,000 last quarter. And we achieved churn rate of approximately 2.1%, an improvement over recent quarters, and ended the quarter with approximately 2.04 million active subscribers. We continue to focus on customer care as part of our improvement to customer retention.

During the quarter, we implemented a new self-service portal and made improvements to our FAQs that enable our customers to address many of the issues that they had previously needed to contact customer care for. We believe this contributed to a significant improvement in the quarter in our rate of first contact customer resolution. We believe these investments, improvements in customer care have helped contribute to an improving customer view of magicJack's products and services. In addition, we have also refreshed and reviewed our renewal marketing approach and also renewal processes.

In regards to executing our product development plan, as Don mentioned, we had recently launched the beta of magicJack Spark. We estimate that during Q2, we incurred approximately $1 million of operating cost associated with Spark, mainly in allocated R&D and marketing personnel costs. During the remainder of financial '17, we estimate that we will incur a further $2 million to $4 million in costs relating to the continued development and marketing launch of our Spark product.

As we discussed on the prior call, we closed our SMB offices in Atlanta and have consolidated the functions with our consumer segment, retaining only a small number of engineering personnel who are now integrated into our core consumer function.

We remain focused on managing our operating cost. The on-shoring of customer care, the decision that was previously made, had increased cost in Q2 due to increasing the proportion of onshore versus offshore resources.

Having now made improvements to care processes, we are now able to change back and will go back to the old model of using more offshore resources for chat services. We entered into a new agreement with the offshore provider for customer care chat services in July 2017, and we believe that will result in a significant reduction of our current heads by about 30 heads.

In addition, in July 2017, we have entered into an outsource agreement with a large fulfillment and logistics company to manage the distribution of our magicJackGO devices to our direct and retail customers. This transition will result in the closure of our West Palm Beach distribution center and the severance of related employees.

Further in the quarter, we consolidated our West Palm Beach-based corporate office with our customer care facility, resulting in us terminating our corporate office lease to further reduce costs.

As Don mentioned, we are only at the beginning stages of implementing our strategy, which we expect to gain traction over the course of this year. We have made great progress in the second quarter, which has positioned the company to leverage brand, efficient network and enterprise channel partners.

In terms of profitability for the quarter, we reported adjusted EBITDA of $3.4 million and non-GAAP net income of $3.4 million or $0.21 per share based on 16.1 million weighted average diluted shares outstanding. On a GAAP basis, we recorded a net loss attributable to common shareholders for the second quarter totaling $1.6 million or $0.10 per share based on 16.1 million shares outstanding.

In addition, GAAP net losses included the following items: a $2.6 million add-back to tax related items, which included a $2.4 million tax impact due to the expiration of stock options; $0.6 million in share-based compensation; $0.6 million accrual for a proposed settlement to certain tax-related items; $0.5 million in costs related to the strategic process that Don previously discussed; $0.4 million accrual related to an expected settlement of a class action lawsuit which represents the remainder of the costs we do not expect to recover from insurance; and finally, $0.2 million in severance and executive management transition expenses.

A reconciliation of GAAP to non-GAAP financial measures has been provided in the financial statement tables included in our earnings press release from earlier today and is available on our website.

Turning to our balance sheet. As of June 30, we had cash and cash equivalents of $47.0 million and 0 debt. Our cash balance reflects the $0.3 million used in cash flow from operations, which was impacted by lower renewal sales in our customer business as well as approximately $2.4 million spent on severance and senior management transition expenses, approximately $1 million in payments of expenses associated with proxy dispute and the timing of payments for customer care vendors.

Turning to our financial outlook for the full year 2017. We are increasing slightly our previously advised 2017 revenue guidance from previously guiding range of $85 million to $87 million to $86 million to $88 million. This is based on our current subscriber and customer base and our trend of churn and activations.

Turning to adjusted EBITDA. Our guidance range is for $19 million to $22 million before investment in new strategies and products that Don mentioned, specifically magicJack Spark. This is a slight increase to our previous guidance of $17 million to $21 million as advised in Q1.

The net investment in the new products and strategies will depend on what we experience in terms of cost of acquisition and ARPU, and it may, therefore, significantly change. However, this time, we continue to estimate the net investment of 2017 to be in the range of $3 million to $5 million.

With that, let me turn back over to Don for some closing remarks.

--------------------------------------------------------------------------------

Don Carlos Bell, magicJack VocalTec Ltd. - CEO, President & Director [4]

--------------------------------------------------------------------------------

Thank you, Tom. In the second quarter, we improved retention, identified promising opportunities to increase ARPU, we defined our SOHO offer and launched the first component in beta, and we put Broadsmart on a better footing and growth trajectory, and we are just getting started.

Now we'd like to take questions on the quarter and our operations. Operator?

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) We have Greg Burns from Sidoti & Company.

--------------------------------------------------------------------------------

Gregory John Burns, Sidoti & Company, LLC - Senior Equity Research Analyst [2]

--------------------------------------------------------------------------------

Great job on the churn. That's probably the lowest number I've seen since starting covering the company. So I just want to kind of understand if you feel that, that's sustainable, if it could go lower. And maybe understand the complexion of your subscriber base in terms of their maturity. Is the churn just going down because the mix of customers are -- you have a larger installed base of customers that have been with you for a while that typically would churn less than maybe a less mature customer?

--------------------------------------------------------------------------------

Don Carlos Bell, magicJack VocalTec Ltd. - CEO, President & Director [3]

--------------------------------------------------------------------------------

Thank you, Greg. There are many things that factor in the churn. I don't think you'd see a step change like that. I think it's around a 16% improvement quarter-to-quarter simply from the natural aging of the base and the stickiness of those that remain. We did many, many things in retention.

At first, we thought we'd test them sequentially, but our systems didn't really let us do side-by-side tests. So instead, we decided to throw everything that we could think of into the mix and see what came out of it. So it's kind of hard to specifically identify that, "Oh, this particular change in churn is due to any one of those efforts." But I do think that we've had a significant -- I think that what they've done has been a contributor to that reduction in churn.

And to your question of can it be maintained and reduced, I would, quarter-to-quarter, might have some variations, but on the whole, we do expect a reduction in churn over time from here. So if you look at the next 4 quarters or so, I think we're going to be under that.

--------------------------------------------------------------------------------

Thomas Fuller, magicJack VocalTec Ltd. - Executive VP & CFO [4]

--------------------------------------------------------------------------------

I think, Greg, on previous calls, we said that our competitors are slightly ahead of us on churn, and we have been looking to approach the levels that we're at. One quarter doesn't a trend make, but we are pleased with the results in Q2.

--------------------------------------------------------------------------------

Don Carlos Bell, magicJack VocalTec Ltd. - CEO, President & Director [5]

--------------------------------------------------------------------------------

Yes. And I'd note, Greg, that some of the things we're doing don't turn up until a year later or whenever the subscriber -- like auto renewal, for example, that's not going to show its full force for some time. So there are various things that we're doing to have long lives to them or longer payoffs and other things that were kind of quick hits.

--------------------------------------------------------------------------------

Gregory John Burns, Sidoti & Company, LLC - Senior Equity Research Analyst [6]

--------------------------------------------------------------------------------

Okay. And I wanted to kind of better understand the evolution of your mobile strategy. I guess, the previous management's strategy was to offer a consumer-based application, second-line-type application. Now it sounds like you're evolving that to a full SMB offering by adding features to it. Is the consumer angle of that offering going to still live? Or is that something that will kind of be consumed by the SMB offering as you add features and then that's what that offering becomes in the future?

--------------------------------------------------------------------------------

Don Carlos Bell, magicJack VocalTec Ltd. - CEO, President & Director [7]

--------------------------------------------------------------------------------

Let's separate for a moment, Greg, the -- what the features are that one group get versus another and what the underlying technology is for the 2.

So we had the magicJack Connect app. Our current apps are based on 2 different technology infrastructures, neither of which we wrote the code for. The new app, Spark, is built -- we wrote it ourselves, and we built it in a way with the flexibility to develop all of the different feature sets that we want over time as well as have it connect desk phones and integrate in a UCaaS environment. Our old apps wouldn't have been able to do that. So the technology infrastructure is completely new, and the old apps will be consumed by -- will be ported over to the new infrastructure.

You're right in saying that the vision for our mobile app strategy for Spark is much more than a second line on a mobile phone. There is this -- a place in the market between -- in the business market between, on the one side, those that offer just a mobile app on a phone at a low price and then on the other end of the spectrum, a much broader set of UCaaS features, some of which are not really relevant to SOHOs, like integration with Salesforce and various other kind of collaboration tools that people are either getting through other apps, some of which -- many of which are free, or that they just don't need.

If you look at our -- it was very interesting to see in our SMB effort. We didn't try to get -- the company didn't try to target businesses with 2 or fewer lines, but that's what they ended up with. We ended up with a SOHO type of consumer base, and that teaches us about what they need.

So the mobile app for business is -- the best way to think of it is a VoIP PBX with kind of the Pareto principle, the 80-20, of what SOHOs really want out of the full feature set that you'll find from other providers but at a much lower price. So we're kind of sitting in the middle between the very featureless, just second line on your mobile phone apps, and the feature-rich but expensive and filtered other methods and channels on the other end of the spectrum. There's this big gap, and we think that's what SOHO customers really want, and we're going to fill it.

The reason we can be cost competitive there is twofold. One is that we're narrowing the feature sets to what they really demand. But more important than that is that all of these features are resident of our softswitch. We build the software ourselves and so we don't pay any licensing fees. As I said, we have over 90% excess peak capacity on our network or a CLEC. And so even with 2 million subscribers, we can effectively offer free minutes -- free to us, rather, to everybody that we'll bring on in the SOHO business line for a long time coming. So there's really no incremental cost to us of providing unlimited calling in the U.S. and Canada, whereas some of the other providers charge -- they'll lead with a low-cost offer but tied to 100 minutes or 500 minutes of time, which is really just a lead offer.

If you want to get to a level of the number of minutes that one would actually need to run a business, you'd start jumping up into those price points that we can then offer more relevant features at that price point.

--------------------------------------------------------------------------------

Gregory John Burns, Sidoti & Company, LLC - Senior Equity Research Analyst [8]

--------------------------------------------------------------------------------

Okay. Sorry, go ahead.

--------------------------------------------------------------------------------

Don Carlos Bell, magicJack VocalTec Ltd. - CEO, President & Director [9]

--------------------------------------------------------------------------------

No, please, go ahead. So I was just going to sum up. 2 different -- we will have an app, a companion app to the magicJackGO, just like we currently do. It will be based on the same platform as Spark but with a specified feature set. And we very well may offer additional features to our consumer GO subscribers, as I described, just a very simple one, the call blocking. But we could offer auto attendant if we'd like. We could offer many of the distinct feature sets as we'll have on the Spark side and let the customer decide whether they want to pay for the kind of bundles that we were targeting towards those folks, or if they want to remain as a much simpler -- with a much simpler service.

--------------------------------------------------------------------------------

Gregory John Burns, Sidoti & Company, LLC - Senior Equity Research Analyst [10]

--------------------------------------------------------------------------------

Okay. What was the cash flow from operations for the first 6 months if we exclude the onetime items?

--------------------------------------------------------------------------------

Thomas Fuller, magicJack VocalTec Ltd. - Executive VP & CFO [11]

--------------------------------------------------------------------------------

That's not a figure I have to hand now, Greg. We would have to look at timing differences, onetime items, because some of those onetime items can be -- may not have been paid for as yet. So I don't have that figure to hand. I just want to correct a mistake in a figure I read earlier, which was in relation to the reported adjusted EBITDA for this quarter, which is $4.4 million, not as I -- I said $3.4 million. So that the press release that we put out prior to this call has the correct quarter ended 2000 -- June 30, 2017 adjusted EBITDA of $4.4 million.

--------------------------------------------------------------------------------

Gregory John Burns, Sidoti & Company, LLC - Senior Equity Research Analyst [12]

--------------------------------------------------------------------------------

Okay, is there anyone else in the queue?

--------------------------------------------------------------------------------

Operator [13]

--------------------------------------------------------------------------------

No.

--------------------------------------------------------------------------------

Don Carlos Bell, magicJack VocalTec Ltd. - CEO, President & Director [14]

--------------------------------------------------------------------------------

Please continue.

--------------------------------------------------------------------------------

Gregory John Burns, Sidoti & Company, LLC - Senior Equity Research Analyst [15]

--------------------------------------------------------------------------------

Okay. I wanted to get your thoughts on the GO product and continuing to invest dollars behind that acquiring customers. Obviously, it sounds like you think you could drive churn down and get ARPU up. So it seems a lifetime value of the subscribers could potentially be going up. What are your thoughts on spending there in terms of marketing or customer acquisition costs and whether you'd be willing to increase spending to go after subscribers for that part of the business?

--------------------------------------------------------------------------------

Don Carlos Bell, magicJack VocalTec Ltd. - CEO, President & Director [16]

--------------------------------------------------------------------------------

Yes, once we -- but not getting ahead of ourselves. So we're in the early stages of testing the higher pricing for renewals in particular. And we find that our -- I think our customers might be getting too good of a deal relative to our shareholders in that respect. And we find that they're very loyal.

When we have customers leave us, something that's interesting is they don't port their numbers out. The vast majority of those that discontinue are not leaving for another competitor, which you would see in them porting their number to another service. So they're very happy with their service, and we expect to extend the customer life.

Once we have a clear sense of what that -- let's call it, that pricing elasticity is on the optimizing pricing, at that point, when we have confidence in it will we increase our allowable on customer acquisition costs, but it's still a little bit early. And as I mentioned before, we're doing 2 things, and I'll just preview a little bit of what we found. When we increased the cost meaningfully for renewal, we found out that we didn't have a reduction in subscriptions from that test group. What we found is that they shifted towards the 5-year model or towards the 5-year option. So good news.

But we want to then see if we can reduce the term of that longest offer. So what the customer is effectively saying is, "I expect to be with you for a long time." Now that the renewal price on a 1 year is higher, that 5-year looks even more advantageous. So now we're going to test whether we can reduce the period of the longer offer, and between the 2 -- between both of those 2 moves realize a meaningful difference in our renewal revenue as well.

Additionally, we're going to be testing our device pricing also. Currently at $35 is the lowest device price we've had in our history. We're not sure that, that's necessary. And we have discontinued, for example, using incentives like the powerpack with our 5-year offer and didn't see any impact on that. So that also contributes additional dollars for what we were paying for those power banks.

--------------------------------------------------------------------------------

Gregory John Burns, Sidoti & Company, LLC - Senior Equity Research Analyst [17]

--------------------------------------------------------------------------------

Okay. And what percent of your...

--------------------------------------------------------------------------------

Don Carlos Bell, magicJack VocalTec Ltd. - CEO, President & Director [18]

--------------------------------------------------------------------------------

We will invest in customer acquisition. And if we can raise our lifetime value by x percent, that gives us that much more allowable to go after. It's harder to find a big pool of additional subscribers at a $35 per year revenue. And probably our biggest opportunity, we have a little bit of opportunity to increase the longevity of our customers, as we just did. But the greater opportunity from a percentage basis is increasing the ARPU, and that comes in 2 forms: one in testing the pricing elasticity; and the other is in up charging for certain features like the call blocking.

--------------------------------------------------------------------------------

Gregory John Burns, Sidoti & Company, LLC - Senior Equity Research Analyst [19]

--------------------------------------------------------------------------------

Okay. And what percentage of your activations are coming through retail versus direct?

--------------------------------------------------------------------------------

Thomas Fuller, magicJack VocalTec Ltd. - Executive VP & CFO [20]

--------------------------------------------------------------------------------

I think I don't have that exact stat. I believe it's approximately -- are you talking about new sales? I can talk to the activations. I'm not sure we have that. But in terms of new sales, we're running at about 50-50.

--------------------------------------------------------------------------------

Gregory John Burns, Sidoti & Company, LLC - Senior Equity Research Analyst [21]

--------------------------------------------------------------------------------

Okay, do you hope to -- are you trying to drive that more towards direct? Are you still committed to kind of retail? How should we think about that going forward?

--------------------------------------------------------------------------------

Don Carlos Bell, magicJack VocalTec Ltd. - CEO, President & Director [22]

--------------------------------------------------------------------------------

We're committed to retail, and we'd like to also -- but we make more money from direct. So, of course, we'd like to see additional direct, but I don't want that to imply that we're any less committed to retail. We're committed to both, and we'll get as much business as we can from both. But with retail, we're effectively paying a 1-year acquisition cost. We don't really receive much margin from the device sale, and so all the revenue -- all the contribution margin is in the renewal, whereas on direct, we will receive a higher first year cash flow.

--------------------------------------------------------------------------------

Thomas Fuller, magicJack VocalTec Ltd. - Executive VP & CFO [23]

--------------------------------------------------------------------------------

Yes. I mean, we still are very committed to the retail. We've actually been working with retail partners during the quarter. We -- and retail, for example, would include some of our retailers who use Amazon as a portal for distribution of products. We actually did a reasonable amount of work to ensure that we had a consistent pricing within our Amazon portal and that we standardize pricing there to enable that Amazon portal to succeed.

--------------------------------------------------------------------------------

Gregory John Burns, Sidoti & Company, LLC - Senior Equity Research Analyst [24]

--------------------------------------------------------------------------------

Okay. And just looking at the updated EBITDA guidance, it looks like the guidance implies a stronger second half of the year, yet spending should be going up on Spark. I just wanted to kind of better understand that.

--------------------------------------------------------------------------------

Thomas Fuller, magicJack VocalTec Ltd. - Executive VP & CFO [25]

--------------------------------------------------------------------------------

It's a little bit up, but it's mainly just the impact of we had some high, obviously, costs in Q1. We are -- things I've spoken to that are in our guidance are some of the operating cost changes we've made in respect of customer care and brand with the distribution fulfillment and the flow full effect with other we had in Q1. I know we talked about in this last quarter, we had some SMB costs built within the business.

--------------------------------------------------------------------------------

Operator [26]

--------------------------------------------------------------------------------

That does conclude our question-and-answer portion for today and also concludes our call. We appreciate you joining us today and look forward to you joining us again next quarter.