Vonage Holdings Corp. Reports Second Quarter 2011 Results

HOLMDEL, N.J., Aug. 3, 2011 /PRNewswire/ -- Vonage Holdings Corp. (NYSE: VG), a leading provider of communications services connecting individuals through broadband devices worldwide, announced results for the second quarter ended June 30, 2011.

The Company reported record high net income of $22 million and record high adjusted earnings before interest, taxes, depreciation and amortization ("EBITDA")(1) of $44 million.

Consistent with Vonage's strategic focus on mobile and international markets, the Company announced two new products during the past week, Extensions™ and Time to Call™.   In addition, the Company entered into a distribution agreement to promote its services and announced plans to double its retail presence through agreements with three leading nationwide retailers.  

The Company also announced completion of a debt refinancing which reduced interest rates to LIBOR plus 3.5%, resulting in annual savings of $43 million from 2010.

Marc Lefar, Vonage Chief Executive Officer, said, "We generated record high financial results while improving our core value proposition and laying the foundation for future growth."  

"The launches of Extensions™ and Time to Call™ enhance our domestic and global service offerings for landline and mobile customers.  Beyond this, we've expanded the availability of our service through agreements with TracFone, Best Buy, Kmart and Sears.  And, as a result of our strong financial performance, we have refinanced our debt for the second time in eight months.  These are meaningful steps."

Second Quarter Financial and Operating Results

Vonage generated record high adjusted EBITDA of $44 million, up from $41 million in the year ago quarter and $43 million sequentially. Income from operations increased to $31 million from $24 million in the year ago quarter and $30 million sequentially.

Net income increased to a record high $22 million or $0.10 per share, up from a net loss of $1 million or $0.00 per share in the year ago quarter, which included $12 million in charges relating to the Company's prior debt.  This increase was driven by a $7 million increase in income from operations and a $7 million reduction in interest expense.  Net income increased from $21 million or $0.10 per share sequentially.  

Revenue was $218 million, down from $225 million in the year ago quarter due to a $3 million decline in deferred revenues related to discontinuation of activation fees and lower customer equipment and shipping revenue.  Revenue declined from $220 million sequentially, primarily due to lower activation revenue and Universal Service Fund ("USF") fees.  These factors contributed to a decline in average revenue per user ("ARPU") to $30.28, down from $31.21 in the prior year and $30.45 sequentially.

Telephony services ARPU was $30.14, down from $30.71 a year ago due primarily to impacts from lower deferred activation revenue.  Telephony services ARPU decreased sequentially from $30.23 due to lower deferred activation revenue and USF fees.

Direct cost of telephony services ("COTS") declined to $58 million from $63 million in the year ago quarter driven by lower costs of domestic termination and usage, which more than offset the anticipated increase from international termination resulting from more international callers on Vonage World.  On a per line basis, the cost of telephony services was reduced to $8.03 from $8.72 in the year ago quarter and $8.34 sequentially.  

Direct cost of goods sold was $10 million, down from $14 million in the year ago quarter and $11 million sequentially.  Direct margin(2) increased to 69% from 66% in the year ago quarter and 68% sequentially.

Selling, general and administrative ("SG&A") expense was $58 million, down from $61 million in the year ago quarter and flat sequentially.  

Pre-marketing operating income ("PMOI")(1), which represents cash generated from the Company's existing customer base, was $105 million, up from $100 million in the year ago quarter and up from $102 million sequentially. PMOI per line was $14.53, up from $13.89 in the second quarter of 2010 and $14.17 sequentially.

Marketing expense was $52 million, up from $49 million in the year ago quarter and sequentially as the Company increased its marketing spend to offset seasonally higher advertising costs. Subscriber line acquisition cost ("SLAC") increased to $330 from $318 in the prior year and $282 sequentially.  

Gross line additions increased to 158,000 from 155,000 the prior year and decreased from 175,000 sequentially.  The Company reported a net loss of 11,000 lines, compared to a loss of 5,000 lines in the year-ago quarter and 3,000 net line additions sequentially.  

Churn increased to 2.5% from 2.3% in the year ago quarter and was flat sequentially.

Balance Sheet and Debt Refinancing

As of June 30, 2011, cash, cash equivalents and restricted cash totaled $70 million. Unrestricted cash was $63 million.  Capital expenditures for the quarter were $9 million.  Free cash flow(3) was $37 million, up from $13 million sequentially.

Leveraging continued progress generating strong cash flow, the Company successfully executed on its two-part strategy to prepay and refinance its debt.  During the second quarter, Vonage prepaid $50 million, which, combined with $10 million of prepayments in the first quarter and $10 million of scheduled amortization, reduced debt outstanding to $130 million. The Company achieved this targeted debt level approximately five months ahead of plan as a result of strong cash generated from operations, which totaled $63 million in the first half of 2011.

On July 29, 2011, the Company completed the refinancing of its term loan, entering into a $120 million credit facility including an $85 million, three-year loan and a $35 million revolver bearing interest at LIBOR plus 3.5%.  This debt replaces the prior $200 million facility which carried interest of LIBOR plus 8% with a 1.75% LIBOR floor.

Growth Initiatives

Executing on its growth initiatives in international long distance, mobile, and geographic expansion, Vonage announced two new products during the past week.  Extensions™, a free enhancement to the Company's flat rate, unlimited international calling plan, addresses the needs of international long distance callers by extending the value provided by Vonage's home service plans to additional phone numbers and devices including smartphones and feature phones.

Time to Call™ provides low-cost, easy to use international calling on smartphones around the world.  It is the first downloadable mobile application that allows pay-per-call international dialing to more than 190 countries. To promote its global launch, the Company is providing a free international call to everyone that downloads the application. This mobile application, designed for iPhones, allows consumers to make international calls of up to 15 minutes while avoiding high prices and roaming fees charged by traditional telecommunications carriers. The service is available in 87 countries around the world.  Time to Call™ provides direct payment through iTunes, requires far less effort than calling card services and other international calling plan options, and delivers substantial savings versus major mobile carriers.  

The Company also expanded its marketing and distribution capabilities as it partnered with three national big-box retailers which will double to 6,000 its retail presence across the United States and signed a distribution agreement with TracFone to market Vonage services.

2011 Outlook

The Company expects to achieve adjusted EBITDA of at least $165 million and report higher gross line additions in 2011 than in 2010.   Churn in 2011 is expected to be stable in the mid two percent range.

1. This is a non-GAAP financial measure.  Refer below to Table 3 for a reconciliation to GAAP income from operations.
2. Direct margin is defined as operating revenues less direct cost of telephony services and direct cost of goods sold as a percentage of revenues.
3. This is a non-GAAP financial measure.  Refer to Table 5 for a reconciliation to GAAP net cash provided by operating activities.

About Vonage  

Vonage (NYSE: VG) is a leading provider of communications services connecting individuals through broadband devices worldwide. Our technology serves approximately 2.4 million subscribers. We provide feature-rich, affordable communication solutions that offer flexibility, portability and ease-of-use.

Our Vonage World plan offers unlimited calling to more than 60 countries with popular features like call waiting, call forwarding and voicemail — for one low, flat monthly rate.

Vonage's service is sold on the web and through regional and national retailers including Wal-Mart Stores Inc. and is available to customers in the U.S., Canada and the United Kingdom. For more information about Vonage's products and services, please visit http://www.vonage.com.

Vonage Holdings Corp. is headquartered in Holmdel, New Jersey. Vonage® is a registered trademark of Vonage Marketing Inc., a subsidiary of Vonage Holdings Corp.

Use of Non-GAAP Financial Measures

This press release includes the following measures defined as non-GAAP financial measures by the Securities and Exchange Commission: adjusted earnings before interest, taxes, depreciation and amortization ("adjusted EBITDA"), pre-marketing operating income, net income (loss) excluding adjustments, and free cash flow.

Vonage uses adjusted EBITDA and pre-marketing operating income as principal indicators of the operating performance of its business.

Vonage believes that adjusted EBITDA permits a comparative assessment of its operating performance, relative to its performance based on its GAAP results, while isolating the effects of depreciation and amortization, which may vary from period to period without any correlation to underlying operating performance, and of share-based expense, which is a non-cash expense that also varies from period to period.

Vonage believes that pre-marketing operating income is an important metric to evaluate the profitability of the existing customer base to justify the level of continued investment in growing that customer base. In addition, as the Company is focused on growing both its revenue and customer base, the Company has chosen to invest significant amounts on its marketing activities to acquire and replace subscribers.

The Company provides information relating to its adjusted EBITDA and pre-marketing operating income so that investors have the same data that the Company employs in assessing its overall operations. The Company believes that trends in its adjusted EBITDA and pre-marketing operating income are valuable indicators of the operating performance of the Company on a consolidated basis and of its ability to produce operating cash flow to fund working capital needs, to service debt obligations, and to fund capital expenditures.

The Company has also excluded from its net income (loss) the change in fair value of embedded features within notes payable and stock warrant and gain (loss) on extinguishment of notes. The Company believes that excluding these items will assist investors in evaluating the Company's operating performance and in better understanding its results of operations when these events occurred on a comparative basis.

Vonage considers free cash flow to be a liquidity measure that provides useful information to management about the amount of cash generated by the business that, after the acquisition of equipment and software, can be used by Vonage for debt service and strategic opportunities.  Free cash flow is not a measure of cash available for discretionary expenditures since the Company has certain non-discretionary obligations such as debt service that are not deducted from the measure.

The non-GAAP financial measures used by Vonage may not be directly comparable to similarly titled measures reported by other companies due to differences in accounting policies and items excluded or included in the adjustments, which limits its usefulness as a comparative measure.  These non-GAAP financial measures should be considered in addition to results prepared in accordance with GAAP, but should not be considered a substitute for, or superior to, GAAP results.

Vonage defines adjusted EBITDA as GAAP income from operations excluding depreciation and amortization and share-based expense.

Vonage defines pre-marketing operating income as GAAP income from operations excluding customer equipment and shipping revenue, direct cost of goods sold, depreciation and amortization, marketing and share-based expense.

Vonage defines net income (loss) excluding adjustments, as GAAP net income (loss) excluding the change in fair value of embedded features within notes payable and stock warrant and the gain (loss) on extinguishment of notes.

Vonage defines free cash flow as net cash provided by operating activities minus capital expenditures, and acquisition and development of software assets.

Conference Call and Webcast

Management will host a webcast discussion of the quarter's results on Wednesday, August 3, 2011 at 10:00 AM Eastern Time. To participate, please dial (877) 359-9508 approximately ten minutes prior to the call. International callers should dial (224) 357-2393. A replay will be available approximately two hours after the conclusion of the call until midnight August 16, 2011, and may be accessed by dialing (855) 859-2056. International callers should dial (404) 537-3406. The replay passcode is:  83177750.

The webcast will be broadcast live through Vonage's Investor Relations website at http://ir.vonage.com. Windows Media Player or RealPlayer is required to listen to this webcast. A replay will be available shortly after the live webcast.

Safe Harbor Statement

This press release contains forward-looking statements regarding growth strategy, financial results, subscriber line additions, and churn.  In addition, other statements in this press release that are not historical facts or information may be forward-looking statements. The forward-looking statements in this release are based on information available at the time the statements are made and/or management's belief as of that time with respect to future events and involve risks and uncertainties that could cause actual results and outcomes to be materially different. Important factors that could cause such differences include but are not limited to: the competition the Company faces; the Company's ability to adapt to rapid changes in the market for voice and messaging services; the Company's ability to retain customers and attract new customers; results of pending litigation and intellectual property and other litigation that may be brought against the Company; failure to protect the Company's trademarks and internally developed software; the Company's ability to obtain or maintain relevant intellectual property licenses; the Company's dependence on third party facilities, equipment, systems, and services; system disruptions or flaws in the Company's technology; fraudulent use of the Company's name or services; the Company's ability to maintain data security; results of regulatory inquiries into the Company's business practices; the Company's ability to obtain additional financing if required; restrictions in the Company's debt agreements that may limit the Company's operating flexibility; any reinstatement of holdbacks by the Company's vendors; the Company's dependence on the Company's customers' existing broadband connections; uncertainties relating to regulation of VoIP services; increased governmental regulation, currency restrictions, and other restraints and burdensome taxes and risks incident to foreign operations; differences between the Company's service and traditional phone services, including the Company's 911 service;  the Company's dependence upon key personnel; the Company's history of net losses and ability to achieve consistent profitability in the future; and other factors that are set forth in the "Risk Factors" section and other sections of Vonage's Annual Report on Form 10-K for the year ended December 31, 2010, as well as in the Company's Quarterly Reports on Form 10-Q and Current Reports on Form 8-K. While the Company may elect to update forward-looking statements at some point in the future, it specifically disclaims any obligation to do so, and therefore, you should not rely on these forward-looking statements as representing the Company's views as of any date subsequent to today.

SOURCE Vonage Holdings Corp.