Vonage Holdings Corp. Reports Second Quarter 2012 Results

 Vonage Holdings Corp., a leading provider of communications services connecting people through cloud-connected devices worldwide, announced results for the second quarter ended June 30, 2012.

"Operationally, we continued to improve our core business.  We substantially lowered churn, reduced customer line losses from the prior quarter, and attracted new international clients with offers targeted to Pakistani and Mexican callers," said Marc Lefar, Vonage Chief Executive Officer. 

The quarter

"While the quarter, we as well took significant steps forward in our mobile and international expansion initiatives.  We improved the quality and functionality of our mobile app, and yesterday, launched a compelling new offer for callers to the Philippines as part of our recently announced alliance with Globe, a leading telecommunications provider in the Philippines," Lefar continued.

"As a result of our progress and continued confidence in the stability of our cash flows, Vonage's Board authorized a share repurchase program designed to return value to our shareholders. This reflects our strategy of taking a balanced approach to capital allocation as we invest for growth and deliver value to shareholders, during maintaining ample cash to fund the ongoing operational needs of our business."

Revenue totaled $212 million, down from $216 million sequentially due to non-operational impacts including lower Universal Service Fund fees and the accounting impact from legacy activation fees that the Company discontinued in 2009, as so then as customer mix.  Revenue declined from $218 million in the year ago quarter primarily due to lower average lines.  Average revenue per user was $29.98, down from $30.42 sequentially, and $30.28 in the second quarter of 2011.

Vonage continues to execute on its growth initiatives in international expansion and mobile.  Yesterday, in partnership with Globe, a leading telecommunications company, Vonage announced an exclusive new calling plan.  The plan combines unlimited calling to all of Globe's more than 31 million mobile and wireline subscribers, at the same time with Vonage's ultra-low per minute rates to all other numbers in the Philippines.  Additionally, the plan provides unlimited calling to the U.S., Canada, Puerto Rico, and 60 other countries around the world. Vonage Extension service is as well included for no additional charge.  The new plan is available suddenly at a flat rate of $29.99.  With more than three million Filipinos living in the U.S., the Filipino calling segment represents a substantial growth possibility for Vonage and for Globe.  The Company is actively involved in discussions with several prospective partners and expects to announce anyway one additional alliance earlier the end of this year.

The capabilities of its Vonage Mobile app

Building on the capabilities of its Vonage Mobile app, the Company furthermore improved the product's calling capabilities and added new features, including Bluetooth functionality and photo and location sharing.  In the coming weeks, the Company expects to launch a beta trial of its low-cost international roaming product, which will allow clients traveling outside their home country to avoid high roaming fees.

Users continue to be attracted to Vonage Extensions, which expands the benefits of the Company's core service beyond the walls of the home to any other phone, including mobile. More than 560,000 clients have now signed up for Extensions, using the service primarily for its mobile and international calling capabilities. 

The past three years

Over the past three years, the Company has made substantial progress transforming its IT infrastructure, including improved application stability, better data analytics, enhanced capability to quickly solve customer problems, upgrades to customer and billing databases, and the implementation of virtualization and cloud computing technologies.  During significant progress has been made overall, as earlier disclosed, the Company has encountered delays and incremental costs while the development and implementation of the Amdocs billing and order management system. Based upon discussions with Amdocs, and afterwards consideration of the progress made improving the Company's IT infrastructure, the incremental time and costs to implement the Amdocs system, as then as the expected reduction in capital expenditures, Vonage and Amdocs determined that it was in the best interest of both parties to terminate their earlier disclosed License and Managed Services Agreement, effective July 30, 2012. As a result, Vonage recorded a non-cash adjustment of $25 million, net of settlements to the Company, in the second quarter of 2012. During the Company did not realize the benefits from the new billing and order management system, it believes that the improvements to its IT infrastructure, in combination with planned capital expenditures, will support the Company's systems needs hereafter.

(1)     This is a non-GAAP financial measure. Refer below to Table 3 for a reconciliation to GAAP income from operations.(2)     This is a non-GAAP financial measure.  Refer below to Table 4 for a reconciliation to GAAP net income.(3)     Direct margin is defined as operating earnings less direct cost of telephony services and direct cost of goods sold as a percentage of earnings.     This is a non-GAAP financial measure.  Refer below to Table 5 for a reconciliation to GAAP cash provided by operating activities.

About VonageVonage is a leading provider of communications services connecting individuals through cloud-connected devices worldwide. Our research serves roughly 2.4 million subscriber lines. 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 visual voicemail -- for one low monthly rate. Our Vonage Mobile® app lets users make free high-definition calls and send free texts to all users of the app, worldwide. The app works over Wi-Fi, 3G and 4G wireless data networks. Vonage's service is sold on the web and through regional and national retailers including Wal-Mart, Best Buy, Kmart and Sears, and is available to clients in the U.S., Canada and the United Kingdom.

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

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. Just in case, 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.

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, afterwards 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 just as debt service that are not deducted from the measure.

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, and loss from abandonment of software assets.

Safe Harbor Statement This press release contains forward-looking statements regarding growth strategy, adjusted EBITDA, churn, capital allocation, and capital and software expenditures. Just in case, 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 that 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 nevertheless 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 clients and attract new clients; the Company's ability to establish and expand strategic alliances; the Company's dependence on third party facilities, equipment, systems and services; system disruptions or flaws in the Company's research and systems including any disruption caused by the termination of our billing and order management project; intellectual property and other litigation that have been and 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; results of regulatory inquiries into the Company's business practices; uncertainties relating to regulation of VoIP (Voice over Internet Protocol) services; increased governmental regulation, currency restrictions, and other restraints and burdensome taxes and risks incident to foreign operations; the Company's dependence upon key personnel; the Company's history of net losses and ability to achieve consistent profitability hereafter; fraudulent use of the Company's name or services; the Company's ability to maintain data security; security breaches and other compromises of information security; the Company's dependence on the Company's clients' existing broadband connections; differences between the Company's service and traditional phone services, including the Company's 911 service; any reinstatement of holdbacks by the Company's vendors; 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; the Company's available capital resources and other financial and operational performance which may cause the Company not to make share repurchases as currently anticipated or to commence or suspend such repurchases from place to place without prior notice; 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, 2011, as then as in the Company's Quarterly Reports on Form 10-Q and Current Reports on Form 8-K. During the Company may elect to update forward-looking statements at some point henceforth, it exactly disclaims any obligation to do so, and in a nutshell, you should not rely on these forward-looking statements as representing the Company's views subsequent to today.

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