Vonage Holdings Corp. Reports Third Quarter 2011 Results

HOLMDEL, N.J., Nov. 2, 2011 /PRNewswire/ -- Vonage Holdings Corp. (NYSE: VG), a leading provider of communications services connecting people through broadband devices worldwide, announced results for the third quarter ended September 30, 2011.

The Company reported net income of $24 million or $0.11 per share excluding adjustments.(1)  This is up from $8 million or $0.04 per share in the year ago quarter. Including a one-time adjustment of $8 million related to the Company's refinancing, GAAP net income was $16 million or $0.07 per share.  This is up from a net loss of $55 million or $0.26 per share in the year ago quarter, which included $60 million in one-time charges associated with the Company's 2010 debt refinancing.  

Vonage reported adjusted earnings before interest, taxes, depreciation and amortization ("EBITDA")(2) of $40 million, up from $35 million in the year ago quarter and down from $44 million sequentially.  Revenue totaled $217 million, an increase from $214 million the prior year and down from $218 million sequentially. Income from operations was $27 million, an increase from $20 million in the year ago quarter and down from $31 million sequentially.

Marc Lefar, Vonage Chief Executive Officer, said, "We are pleased to report that we tripled quarterly net income from the same quarter last year, and for the fourth consecutive quarter generated EBITDA of at least $40 million.  Our recently expanded distribution channels contributed to higher customer additions and increased acquisition efficiency. Although gross line additions increased, churn was slightly higher than expected due to the full year impact of the "no contract" policy.  We expect improvements over the next few months as we will no longer experience the churn spike customarily associated with contract expirations. We anticipate stable to lower churn in the fourth quarter."

"We are encouraged by customer response to our new mobile initiatives. Consumers are demonstrating a strong willingness to shift communications from landline calling to Vonage mobile applications.  In addition, we are aggressively focused on international expansion and expect to announce our first partnership early next year."  

Third Quarter Financial and Operating Results

Revenue was $217 million, up from $214 million in the year ago quarter reflecting improvements in customer mix and higher Universal Service Fund ("USF") fees.  Average service revenue per user was $30.06, up from $29.45 in the third quarter of 2010 on improved plan mix and lower bad debt.

Direct cost of telephony services ("COTS") declined to $59 million from $60 million in the year ago quarter driven by lower costs of domestic termination, which more than offset the anticipated growth in international long distance from Vonage World and Vonage Extensions.  On a per line basis, COTS was $8.25, down from $8.36 in the year ago quarter.  

Direct cost of goods sold was $11 million, down from $13 million in the third quarter of 2010.  Direct margin(3) increased to 68% from 66% in the year ago quarter.

Selling, general and administrative ("SG&A") expense was $59 million, flat compared to the year ago quarter.  

Pre-marketing operating income ("PMOI")(2), which represents cash generated from the Company's existing customer base, was $101 million, up from $95 million in the year ago quarter. PMOI per line was $14.11, up from $13.25 in the third quarter of 2010.

Marketing expense was $51 million, up from $49 million in the year ago quarter. Subscriber line acquisition cost ("SLAC") was $300, down from $302 in the prior year and $330 sequentially.  

Gross line additions were 170,000, up from 163,000 the prior year and 158,000 sequentially reflecting progress from the Company's expanded distribution efforts and the addition of customers to its Vonage World plan.  The Company reported a net loss of 9,000 lines, compared to a loss of 5,000 lines in the year-ago quarter and 11,000 net line losses sequentially.  

Churn was 2.7%, up from 2.4% in the year ago quarter and 2.5% sequentially reflecting an increase in customer cancellations in some customer segments and the impact of the Company's "no contract" policy. The Company expects fourth quarter churn to be at or below third quarter levels.

As of September 30, 2011, cash and cash equivalents, including $7 million in restricted cash, totaled $63 million. Capital expenditures for the quarter were $12 million.  Free cash flow(4) was $34 million.

2011 Outlook

Consistent with prior guidance for 2011, the Company expects to achieve adjusted EBITDA of at least $165 million and to report gross line additions that exceed prior year levels.   

Vonage continues to believe in the attractiveness of the strategic markets it has identified as the foundation of its growth initiatives, including international long distance, mobile, and international expansion opportunities, and is continuing to invest in these areas.  Although the Company is encouraged by early results from product launches, distribution gains and international business development activities, revenues are ramping more slowly than originally anticipated.  The revenue ramp from these initiatives is delayed by several months and is expected to more favorably impact results in 2012.  

The Company expects full year churn to be 2.6%, at the high end of its previous guidance of mid two percent.  As a result, full year 2011 net line additions are likely to be slightly negative.  In addition, the Company expects capital expenditures not to exceed $40 million.  

(1) This is a non-GAAP financial measure.  Refer below to Table 4 for a reconciliation to GAAP net income (loss).

(2) This is a non-GAAP financial measure.  Refer below to Table 3 for a reconciliation to GAAP income from operations.

(3) Direct margin is defined as operating revenues less direct cost of telephony services and direct cost of goods sold as a percentage of revenues.

(4) 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 low-cost 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 monthly rate. Vonage's service is sold on the web and through regional and national retailers including Wal-Mart Stores Inc., Best Buy, Kmart and Sears, and is available to customers in the U.S. (www.vonage.com), Canada (www.vonage.ca) and the United Kingdom (www.vonage.co.uk).

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

To follow Vonage on Twitter, please visit www.twitter.com/vonage_voice. To become a fan on Facebook, go to www.facebook.com/vonage.

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 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 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, November 2, 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 November 15, 2011, and may be accessed by dialing (855) 859-2056. International callers should dial (404) 537-3406. The replay passcode is:  16438158.

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, capital expenditures, 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; the Company's ability to implement its new billing and ordering management system; 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.

vg-f

SOURCE Vonage Holdings Corp.