Vonage Holdings Corp. Reports Fourth Quarter and Full Year 2011 Results Company Reports Record High Annual Adjusted EBITDA(1) and Net Income, Excluding Adjustments(2)

Fourth Quarter 2011

Net Income of $25 Million or $0.11 per Share, Excluding Adjustments

Adjusted EBITDA of $40 Million

Revenue of $216 Million

Full Year 2011

Net Income More than Doubles to $96 Million or $0.43 per Share, Excluding Adjustments

Adjusted EBITDA of $168 Million

Free Cash Flow(3) of $108 Million

Revenue of $870 Million

HOLMDEL, N.J., Feb. 15, 2012 /PRNewswire/ -- Vonage Holdings Corp. (NYSE: VG) a leading provider of communications services connecting people through broadband devices worldwide, today announced results for the fourth quarter and full year ended December 31, 2011.

Strong Financial Platform Enables Investment for Growth

Marc Lefar, Vonage Chief Executive Officer, said, "We are pleased to report record high annual net income, excluding adjustments and adjusted EBITDA along with free cash flow in excess of $100 million for the second consecutive year. For the quarter, we maintained adjusted EBITDA above $40 million, the fifth consecutive quarter, while net income, excluding adjustments grew 68 percent over the prior year.

"Now that we have stabilized our core business and are generating meaningful cash flow, we will accelerate our investment in strategic growth initiatives during 2012.  While reducing adjusted EBITDA in the short term, we believe this investment will fund growth in mobile and geographic expansion. Even with this increased level of funding, we expect to further strengthen our cash position during the year.

"The time is right to increase our investment in organizational capacity and marketing. Early response to last week's launch of Vonage Mobile has exceeded all of our expectations. The potential to rapidly build a global calling community with many millions of users is not unrealistic. And, we plan to invest in international opportunities as our partnerships and service offerings are brought to market."

Fourth Quarter 2011

Vonage reported adjusted earnings before interest, taxes, depreciation and amortization ("EBITDA")(1) of $40 million which was flat sequentially and down from $41 million in the year ago quarter.  Revenue of $216 million decreased from $217 million sequentially and from $218 million in the year ago quarter. Income from operations was $28 million, up from $27 million sequentially and up from $26 million in the year ago quarter.

The Company reported net income of $25 million or $0.11 per share excluding adjustments(2), up from $24 million or $0.11 per share sequentially and up from $15 million or $0.07 per share in the prior year's quarter.  

Reflecting its sustained profitable operating performance over the past three years and continued expectations for future income, the Company determined that its net operating losses were likely to be used prior to their expiration. Accordingly, the Company released its valuation allowance, which previously reduced its net deferred tax assets, resulting in a one-time non-cash income tax benefit of $326 million and a corresponding net deferred tax asset of $326 million on December 31, 2011.  As a result, GAAP net income was $350 million or $1.55 per share, up from $16 million or $0.07 per share sequentially, and up from a net loss of $42 million or $0.19 per share in the year ago quarter. This accounting adjustment will not affect the cash taxes paid by the Company, which will continue to be substantially offset by net operating loss carry forwards. As a result of releasing the valuation allowance, the Company expects to recognize non-cash income tax expense in 2012.

Telephony services ARPU was $30.12, up from $29.78 in the year ago quarter reflecting an increase in the number of customers taking higher priced rate plans and higher Universal Service Fund ("USF") fees.

Total direct cost of telephony services ("COTS") was $59 million, an increase from $58 million in the year ago quarter as lower domestic termination costs and savings from E-911 vendor consolidation were offset by an expected increase in international usage associated with the growth of subscribers on Vonage World.  On a per line basis, the cost of telephony services was $8.24, up from $8.06 in the prior year.  

Direct cost of goods sold was $10 million, down from $12 million in the year ago quarter.  Direct margin(4) of 68% was flat compared to the year ago quarter.  

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

Pre-marketing operating income ("PMOI")(1) was $102 million, up from $100 million in the year ago quarter.  PMOI per line was $14.22, up from $13.93 in the year ago quarter.

Gross Line Additions were up modestly over the year ago quarter, as marketing expense increased to $52 million from $50 million in the year ago quarter.  Subscriber line acquisition cost ("SLAC") was $306, up from $301 in the prior year's quarter.

Churn in the fourth quarter was 2.7%, which was flat sequentially and up from 2.4% in the year ago quarter. The increase over the prior year is attributable to the impact of the Company's change to a "no contract" policy, higher churn among its growing base of Hispanic subscribers relative to other international callers, and competitive pressures in other ethnic segments.  The Company lost 14,000 net lines in the fourth quarter and 30,000 lines for the year, on par with the line losses in 2010, and finished the year with 2.4 million lines in service.

Interest expense was $2 million, down from $11 million in the year ago quarter driven by the Company's recent debt refinancings, which lowered interest rates to less than 4 percent from highs of 20 percent in 2010.

As of December 31, 2011, cash and cash equivalents were $59 million and restricted cash was $7 million.  Capital expenditures were $13 million in the fourth quarter.

Full Year 2011

Vonage reported adjusted EBITDA of $168 million, up from $156 million the prior year.  The Company generated income from operations of $116 million, up from $95 million in the prior year.  

Net income was $96 million or $0.43 per share excluding adjustments, more than double the $47 million or $0.22 per share excluding adjustments reported in 2010.  Reflecting the release of the valuation allowance against the Company's net deferred tax assets, GAAP net income was $409 million or $1.82 per share, an increase from a GAAP net loss of $84 million or $0.40 per share in 2010, which included $130 million of charges related the Company's December 2010 refinancing.  

Telephony services revenue was $867 million, down from $873 million the prior year primarily due to a reduction in deferred revenues from legacy activation fees which were phased out in prior periods.  Total revenue was $870 million, down from $885 million in 2010 due to the reduction in deferred revenues and a reduction in customer equipment and shipping revenue.  

Strong operating results and a reduction in interest expense, which declined to $17 million from $49 million in 2010, resulted in cash generated from operations of $147 million. Capital expenditures totaled $39 million.  The resulting free cash flow(3) was $108 million, the second consecutive year of free cash flow generation above $100 million.    

2012 Outlook

Building on its strong financial platform, including sustained cash flow, the Company plans to increase the level of investment in its strategic growth initiatives.  This funding will be targeted at the substantial market opportunity in mobile services, expansion into new geographies, and further penetration of international calling segments in the United States. The Company expects its increased investment in organizational capacity and marketing will range from $5-10 million per quarter versus 2011 levels.

Based on these plans, Vonage provided the following financial guidance:

  • 2012 adjusted EBITDA of $30-35 million per quarter, and $120-140 million for the year, reflecting the additional investment in strategic growth initiatives; and
  • 2012 capital and software expenditures in the range of $40-45 million

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

VONAGE HOLDINGS CORP.

TABLE 1. CONSOLIDATED FINANCIAL DATA

(Dollars in thousands, except per share amounts)



Three Months Ended


For the Years Ended


December 31,


September 30,


December 31,


December 31,


2011


2011


2010


2011


2010


(unaudited)





Statement of Operations Data:










Operating Revenues:










Telephony services

$

215,218



$

215,824



$

214,568



$

866,560



$

872,934


Customer equipment and shipping

472



683



3,056



3,763



12,108



215,690



216,507



217,624



870,323



885,042


Operating Expenses:










Direct cost of telephony services (excluding depreciation and amortization of $3,969, $3,864, $4,428, $15,824, and $18,725, respectively)

58,847



59,230



58,067



236,149



243,794


Direct cost of goods sold

10,125



10,711



12,051



41,756



55,965


Selling, general and administrative

58,579



59,451



58,523



234,754



238,986


Marketing

51,604



51,044



50,352



204,263



198,170


Depreciation and amortization

8,638



8,683



12,727



37,051



53,073



187,793



189,119



191,720



753,973



789,988


Income from operations

27,897



27,388



25,904



116,350



95,054


Other income (expense):










Interest income

23



33



139



135



519


Interest expense

(2,002)



(2,926)



(11,338)



(17,118)



(48,541)


Change in fair value of embedded features within notes payable and stock warrant





(29,782)



(950)



(99,338)


Loss on extinguishment of notes



(7,985)



(26,531)



(11,806)



(31,023)


Other expense, net

(266)



(47)



(59)



(271)



(18)



(2,245)



(10,925)



(67,571)



(30,010)



(178,401)


Income (loss) before income tax benefit (expense)

25,652



16,463



(41,667)



86,340



(83,347)


Income tax benefit (expense)

324,494



(426)



(22)



322,704



(318)


Net income (loss)

$

350,146



$

16,037



$

(41,689)



$

409,044



$

(83,665)


Net income (loss) per common share:










Basic

$

1.55



$

0.07



$

(0.19)



$

1.82



$

(0.40)


Diluted

$

1.48



$

0.07



$

(0.19)



$

1.69



$

(0.40)


Weighted-average common shares outstanding:










Basic

225,572



225,281



214,586



224,324



209,868


Diluted

237,342



241,189



214,586



241,744



209,868





VONAGE HOLDINGS CORP.

TABLE 1. SUMMARY CONSOLIDATED FINANCIAL DATA - (Continued)

(Dollars in thousands, except per share amounts)



Three Months Ended


For the Years Ended


December 31,


September 30,


December 31,


December 31,


2011


2011


2010


2011


2010


(unaudited)





Statement of Cash Flow Data:










Net cash provided by operating activities

$

38,645



$

45,533



$

18,858



$

146,786



$

194,212


Net cash provided by (used in) investing activities

(13,249)



(11,938)



24,735



(37,604)



(4,686)


Net cash used in financing activities

(22,522)



(40,708)



(101,672)



(130,138)



(143,762)


Capital expenditures, intangible asset purchases and development of software assets

(13,250)



(11,939)



(15,774)



(38,653)



(40,386)
























December 31, 2011


December 31, 2010

Balance Sheet Data (at period end):










Cash and cash equivalents







$

58,863



$

78,934


Restricted cash







6,929



7,978


Accounts receivable, net of allowance







17,862



15,207


Inventory, net of allowance







6,715



6,143


Prepaid expenses and other current assets







16,820



17,231


Deferred customer acquisition costs







5,685



7,574


Property and equipment, net







67,978



79,050


Software, net







45,661



35,516


Debt related costs, net







2,007



5,372


Intangible assets, net







9,056



4,186


Total deferred tax assets, including current portion, net







325,601




Other assets







3,038



3,201


Total assets







$

566,215



$

260,392


Accounts payable and accrued expenses







$

135,740



$

126,535


Deferred revenue







39,981



45,181


Total notes payable, including current portion, net of discount







70,833



193,004


Capital lease obligations







17,665



19,448


Other liabilities







2,429



5,871


Total liabilities







$

266,648



$

390,039


Total stockholders' equity (deficit)







$

299,567



$

(129,647)





VONAGE HOLDINGS CORP.

TABLE 2. SUMMARY CONSOLIDATED OPERATING DATA

(unaudited)



Three Months Ended


For the Years Ended


December 31,


September 30,


December 31,


December 31,


2011


2011


2010


2011


2010

Gross subscriber line additions

168,538



170,344



167,435



672,274



640,205


Change in net subscriber lines

(13,834)



(8,939)



5,848



(29,996)



(30,013)


Subscriber lines (at period end)

2,374,887



2,388,721



2,404,883



2,374,887



2,404,883


Average monthly customer churn

2.7

%


2.7

%


2.4

%


2.6

%


2.4

%

Average monthly revenue per line

$

30.19



$

30.16



$

30.20



$

30.35



$

30.48


Average monthly telephony services revenue per line

$

30.12



$

30.06



$

29.78



$

30.22



$

30.06


Average monthly direct cost of telephony services per line

$

8.24



$

8.25



$

8.06



$

8.23



$

8.40


Marketing costs per gross subscriber line addition

$

306



$

300



$

301



$

304



$

310


Employees (excluding temporary help) (at period end)

1,008



1,035



1,140



1,008



1,140


Direct margin as a % of total revenue

68.0

%


67.7

%


67.8

%


68.1

%


66.1

%




VONAGE HOLDINGS CORP.

TABLE 3. RECONCILIATION OF GAAP INCOME FROM OPERATIONS TO ADJUSTED

EBITDA AND PRE-MARKETING OPERATING INCOME

(Dollars in thousands)

(unaudited)



Three Months Ended


For the Years Ended


December 31,


September 30,


December 31,


December 31,


2011


2011


2010


2011


2010

Income from operations

$

27,897



$

27,388



$

25,904



$

116,350



$

95,054


Depreciation and amortization

8,638



8,683



12,727



37,051



53,073


Share-based expense

3,819



4,131



2,424



14,279



8,255


Adjusted EBITDA

40,354



40,202



41,055



167,680



156,382


Marketing

51,604



51,044



50,352



204,263



198,170


Customer equipment and shipping

(472)



(683)



(3,056)



(3,763)



(12,108)


Direct cost of goods sold

10,125



10,711



12,051



41,756



55,965


Pre-marketing operating income

$

101,611



$

101,274



$

100,402



$

409,936



$

398,409


As a % of telephony services revenue

47.2

%


46.9

%


46.8

%


47.3

%


45.6

%




VONAGE HOLDINGS CORP.
TABLE 4. RECONCILIATION OF GAAP NET INCOME (LOSS) TO
NET INCOME EXCLUDING ADJUSTMENTS
(Dollars in thousands, except per share amounts)
(unaudited)



Three Months Ended


For the Years Ended


December 31,


September 30,


December 31,


December 31,


2011


2011


2010


2011


2010

Net income (loss)

$

350,146



$

16,037



$

(41,689)



$

409,044



$

(83,665)


Change in fair value of embedded features within notes payable and stock warrant





29,782



950



99,338


Deferred taxes (benefit) expense

(325,601)







(325,601)




Loss on extinguishment of notes



7,985



26,531



11,806



31,023


Net income excluding adjustments

$

24,545



$

24,022



$

14,624



$

96,199



$

46,696


Net income (loss) per common share:










Basic

$

1.55



$

0.07



$

(0.19)



$

1.82



$

(0.40)


Diluted

$

1.48



$

0.07



$

(0.19)



$

1.69



$

(0.40)


Weighted-average common shares outstanding:










Basic

225,572



225,281



214,586



224,324



209,868


Diluted

237,342



241,189



214,586



241,744



209,868


Net income per common share, excluding adjustments:










Basic

$

0.11



$

0.11



$

0.07



$

0.43



$

0.22


Diluted

$

0.10



$

0.10



$

0.06



$

0.40



$

0.21


Weighted-average common shares outstanding:










Basic

225,572



225,281



214,586



224,324



209,868


Diluted

237,342



241,189



232,290



241,807



226,874





VONAGE HOLDINGS CORP.

TABLE 5. FREE CASH FLOW

(Dollars in thousands)

(unaudited)



Three Months Ended


For the Years Ended


December 31,


September 30,


December 31,


December 31,


2011


2011


2010


2011


2010

Net cash provided by operating activities

$

38,645



$

45,533



$

18,858



$

146,786



$

194,212


Less:










Capital expenditures

(3,783)



(3,686)



(6,328)



(12,636)



(17,674)


Intangible assets

(3,725)







(3,725)




Acquisition and development of software assets

(5,742)



(8,253)



(9,446)



(22,292)



(22,712)


Free cash flow

$

25,395



$

33,594



$

3,084



$

108,133



$

153,826





VONAGE HOLDINGS CORP.

TABLE 6. RECONCILIATION OF NOTES PAYABLE AND CAPITAL LEASES TO NET DEBT

(Dollars in thousands)

(unaudited)



Three Months Ended


For the Years Ended