Vonage Holdings Corp. Reports Second Quarter 2012 Results -- Adjusted EBITDA(1) of $35 Million --

-- Net Income of $21 Million or $0.09 per Share Excluding Adjustments(2) --

-- Revenue of $212 Million --

-- Churn Reduced to 2.5% from 2.8% Sequentially --

-- Company Announces $50 Million Share Repurchase Program --

HOLMDEL, N.J., Aug.1, 2012 /PRNewswire/ -- Vonage Holdings Corp. (NYSE: VG), a leading provider of communications services connecting people through cloud-connected devices worldwide, announced results for the second quarter ended June 30, 2012.

Vonage reported adjusted earnings before interest, taxes, depreciation and amortization ("Adjusted EBITDA")1 of $35 million, up from $32 million sequentially and down from the record high $44 million in the year ago quarter, reflecting the Company's previously stated plans to increase investment in its strategic growth initiatives. 

The Company incurred a loss from operations of $3 million, due to a one-time, non-cash adjustment of $25 million on the write-down of software assets.  This loss compares to income from operations of $21 million sequentially and $31 million in the year ago quarter.  GAAP net loss was $3 million or $0.01 per share, down from GAAP net income of $14 million or $0.06 per share sequentially and $22 million or $0.10 per share a year ago.  Net income excluding adjustments2 was $21 million or $0.09 per share, up from $19 million or $0.08 per share sequentially, and a decline from $26 million or $0.11 per share a year ago. 

Customer churn was reduced to 2.5% from 2.8%, sequentially.  This decline is the result of improvements in overall customer satisfaction, as well as changes in retention processes and the early impact of service agreements, which were put in place in February of 2012.  The Company expects to strengthen its customer churn profile over time as the majority of new customers are expected to take service agreements.

Based on the Company's sustainable cash flow, strong balance sheet, and the belief that its stock represents a highly attractive value, Vonage's Board of Directors has authorized a share repurchase of up to $50 million to be concluded by the end of 2013. 

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

"During the quarter, we also 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, while maintaining ample cash to fund the ongoing operational needs of our business."

Second Quarter Financial and Operating Results

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 well 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.

Direct cost of telephony services ("COTS") was $58 million, reduced from $62 million sequentially and flat compared to the year ago quarter reflecting continued reductions in termination rates which offset the Company's planned growth in international long distance minutes. On a per line basis, COTS was $8.23, down from $8.68 sequentially and up from $8.03 in the second quarter of last year. 

Direct cost of goods sold was $9 million, down from $10 million sequentially and year-over-year.  Direct margin3 increased to 68% from 67% sequentially and declined from 69% in the year ago quarter.

Selling, general and administrative ("SG&A") expense was $58 million, an improvement from $62 million sequentially and flat compared to the year ago quarter.

Pre-marketing operating income ("PMOI")1, which represents cash generated from the Company's existing customer base, was $98 million, up from $95 million sequentially and down from $105 million the year ago quarter reflecting the Company's investment in growth initiatives. PMOI per line was $13.91, up from $13.33 sequentially and down from $14.53 in the year ago quarter.

Marketing expense was $55 million, up from $53 million sequentially due in part to seasonally higher costs and marketing tests conducted during the quarter, and up from $52 million in the year ago quarter. Subscriber line acquisition cost ("SLAC") was $336, up from $323 sequentially and $330 in the prior year. 

Gross line additions were 163,000, versus 165,000 sequentially and up from 158,000 the prior year. Primarily as a result of the 30 basis point decline in sequential churn, net line losses declined by 19,000 to breakeven net lines, reversing four quarters of negative line losses. 

As of June 30, 2012, cash and cash equivalents, including $6 million in restricted cash, totaled $78 million. Capital expenditures for the quarter were $4 million.  Free cash flow4 was $25 million, up from $2 million in the seasonally lower first quarter.

Growth Initiatives

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, together 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 also included for no additional charge.  The new plan is available immediately 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 opportunity for Vonage and for Globe.  The Company is actively involved in discussions with several prospective partners and expects to announce at least one additional alliance before the end of this year.

Building on the capabilities of its Vonage Mobile app, the Company further 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 customers 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 customers have now signed up for Extensions, using the service primarily for its mobile and international calling capabilities. 

Share Repurchase

On July 25, 2012, Vonage's Board of Directors authorized a program to repurchase up to $50 million of its outstanding shares to be concluded by the end of 2013.  Repurchases can be conducted in open market or through private transactions from time to time, and through purchases made in accordance with Rule 10b5-1 of the Securities Exchange Act of 1934. The timing and amount of repurchases will be determined by Vonage's management, based on its evaluation of market conditions, the trading price of the stock and other factors. The Company intends to use available cash balances to fund the share repurchase program. 

2012 Outlook

Consistent with its prior guidance for 2012, the Company expects to achieve adjusted EBITDA of $30-35 million per quarter, and $120-140 million for the year, reflecting the additional investment of $5-10 million per quarter in strategic growth initiatives. 

Updated Guidance:  The Company lowered its expectations for 2012 capital and software expenditures to "less than $35 million", down from its previous guidance of "$40-45 million."

Recent Developments

IT Transformation and Write-Down of Software Assets

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.  While significant progress has been made overall, as previously disclosed, the Company has encountered delays and incremental costs during the development and implementation of the Amdocs billing and order management system. Based upon discussions with Amdocs, and after consideration of the progress made improving the Company's IT infrastructure, the incremental time and costs to implement the Amdocs system, as well as the expected reduction in capital expenditures, Vonage and Amdocs determined that it was in the best interest of both parties to terminate their previously 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. While 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 in the future.

Intellectual Property

The Company has filed a record number of patent applications during the past 18 months to protect the innovative technologies it is developing to better serve the needs of its customers and support its growth initiatives.  As previously reported, the Company has been granted three new patents since June by the United States Patent and Trademark Office.

(1)     This is a non-GAAP financial measure. Refer below to Table 3 for a reconciliation to GAAP income (loss) from operations.
(2)     This is a non-GAAP financial measure.  Refer below to Table 4 for a reconciliation to GAAP net income (loss).
(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 below to Table 5 for a reconciliation to GAAP cash provided by operating activities.

 

VONAGE HOLDINGS CORP.

TABLE 1. CONSOLIDATED FINANCIAL DATA

(Dollars in thousands, except per share amounts)

 


 

Three Months Ended


 

Six Months Ended


 

June 30,


 

March 31,


 

June 30,


 

June 30,


 

2012


 

2012


 

2011


 

2012


 

2011


 

(unaudited)


 

(unaudited)

Statement of Operations Data:


 

 

 

 

 

 

 

 

 

Revenues

$

211,916


 

 

$

215,903


 

 

$

218,285


 

 

$

427,819


 

 

$

438,126


 

 

 

 

 

 

 

 

 

 

 

Operating Expenses:


 

 

 

 

 

 

 

 

 

Direct cost of telephony services (excluding depreciation and amortization of $3,929, $3,930, $3,867, $7,859 and $7,991, respectively)

58,195


 

 

61,623


 

 

57,883


 

 

119,818


 

 

118,072


 

Direct cost of goods sold

9,275


 

 

9,846


 

 

9,865


 

 

19,121


 

 

20,920


 

Selling, general and administrative

58,396


 

 

61,835


 

 

58,481


 

 

120,231


 

 

116,724


 

Marketing

54,956


 

 

53,422


 

 

52,211


 

 

108,378


 

 

101,615


 

Depreciation and amortization

8,518


 

 

8,644


 

 

8,664


 

 

17,162


 

 

19,730


 

Loss from abandonment of software assets

25,262


 

 


 

 


 

 

25,262


 

 


 

 

214,602


 

 

195,370


 

 

187,104


 

 

409,972


 

 

377,061


 

(Loss) income from operations

(2,686)


 

 

20,533


 

 

31,181


 

 

17,847


 

 

61,065


 

Other income (expense):


 

 

 

 

 

 

 

 

 

Interest income

30


 

 

20


 

 

37


 

 

50


 

 

79


 

Interest expense

(1,566)


 

 

(1,751)


 

 

(5,588)


 

 

(3,317)


 

 

(12,190)


 

Change in fair value of stock warrant


 

 


 

 


 

 


 

 

(950)


 

Loss on extinguishment of notes


 

 


 

 

(3,228)


 

 


 

 

(3,821)


 

Other income (expense), net

(65)


 

 

42


 

 

44


 

 

(23)


 

 

42


 

 

(1,601)


 

 

(1,689)


 

 

(8,735)


 

 

(3,290)


 

 

(16,840)


 

(Loss) income before income tax benefit (expense)

(4,287)


 

 

18,844


 

 

22,446


 

 

14,557


 

 

44,225


 

Income tax benefit (expense)

947


 

 

(4,923)


 

 

(698)


 

 

(3,976)


 

 

(1,364)


 

Net (loss) income

$

(3,340)


 

 

$

13,921


 

 

$

21,748


 

 

$

10,581


 

 

$

42,861


 

Net (loss) income per common share:


 

 

 

 

 

 

 

 

 

Basic

$

(0.01)


 

 

$

0.06


 

 

$

0.10


 

 

$

0.05


 

 

$

0.19


 

Diluted

$

(0.01)


 

 

$

0.06


 

 

$

0.09


 

 

$

0.05


 

 

$

0.18


 

Weighted-average common shares outstanding:


 

 

 

 

 

 

 

 

 

Basic

226,429


 

 

225,732


 

 

224,233


 

 

226,081


 

 

223,203


 

Diluted

226,429


 

 

236,036


 

 

244,590


 

 

234,219


 

 

242,481


 

 


 

Three Months Ended


 

Six Months Ended


 

June 30,


 

March 31,


 

June 30,


 

June 30,


 

2012


 

2012


 

2011


 

2012


 

2011


 

(unaudited)


 

(unaudited)

Statement of Cash Flow Data:


 

 

 

 

 

 

 

 

 

Net cash provided by operating activities

$

29,521


 

 

$

11,119


 

 

$

45,151


 

 

$

40,640


 

 

$

62,608


 

Net cash used in investing activities

(4,307)


 

 

(8,034)


 

 

(8,573)


 

 

(12,341)


 

 

(12,417)


 

Net cash used in financing activities

(7,531)


 

 

(7,084)


 

 

(53,201)


 

 

(14,615)


 

 

(66,908)


 

Capital expenditures, intangible asset purchases and development of software assets

(4,306)


 

 

(9,033)


 

 

(8,573)


 

 

(13,339)


 

 

(13,464)


 

 

 

VONAGE HOLDINGS CORP.

TABLE 1. SUMMARY CONSOLIDATED FINANCIAL DATA - (Continued)

(Dollars in thousands, except per share amounts)

 


 

 

June 30,


 

December 31,


 

 

2012


 

2011


 

 

(unaudited)


 

(audited)

Balance Sheet Data (at period end):


 

 

 

 

Cash and cash equivalents


 

$

72,382


 

 

$

58,863


 

Restricted cash


 

5,932


 

 

6,929


 

Accounts receivable, net of allowance


 

19,320


 

 

17,862


 

Inventory, net of allowance


 

9,747


 

 

6,715


 

Prepaid expenses and other current assets


 

20,906


 

 

16,820


 

Deferred customer acquisition costs


 

5,433


 

 

5,685


 

Property and equipment, net


 

60,683


 

 

67,978


 

Software, net


 

17,907


 

 

45,661


 

Debt related costs, net


 

1,318


 

 

2,007


 

Intangible assets, net


 

7,868


 

 

9,056


 

Total deferred tax assets, including current portion, net


 

322,452


 

 

325,601


 

Other assets


 

3,690


 

 

3,038


 

Total assets


 

$

547,638


 

 

$

566,215


 

Accounts payable and accrued expenses


 

$

117,909


 

 

$

135,740


 

Deferred revenue


 

37,825


 

 

39,981


 

Total notes payable, including current portion


 

56,666


 

 

70,833


 

Capital lease obligations


 

16,659


 

 

17,665


 

Other liabilities


 

2,480


 

 

2,429


 

Total liabilities


 

$

231,539


 

 

$

266,648


 

Total stockholders' equity


 

$

316,099


 

 

$

299,567


 


 

 

 

VONAGE HOLDINGS CORP.

TABLE 2. SUMMARY CONSOLIDATED OPERATING DATA

(unaudited)

 


 

Three Months Ended


 

Six Months Ended


 

June 30,


 

March 31,


 

June 30,


 

June 30,


 

2012


 

2012


 

2011


 

2012


 

2011

Gross subscriber line additions

163,349


 

 

165,454


 

 

158,004


 

 

328,803


 

 

333,392


 

Change in net subscriber lines

(64)


 

 

(18,739)


 

 

(10,568)


 

 

(18,803)


 

 

(7,223)


 

Subscriber lines (at period end)

2,356,084


 

 

2,356,148


 

 

2,397,660


 

 

2,356,084


 

 

2,397,660


 

Average monthly customer churn

2.5

%


 

2.8

%


 

2.5

%


 

2.7

%


 

2.5

%

Average monthly operating revenue per line

$

29.98


 

 

$

30.42


 

 

$

30.28


 

 

$

30.14


 

 

$

30.41


 

Average monthly direct cost of telephony services per line

$

8.23


 

 

$

8.68


 

 

$

8.03


 

 

$

8.44


 

 

$

8.20


 

Marketing costs per gross subscriber line addition

$

336


 

 

$

323


 

 

$

330


 

 

$

330


 

 

$

305


 

Employees (excluding temporary help) (at period end)

988


 

 

1,004


 

 

1,059


 

 

988


 

 

1,059


 

Direct margin as a % of revenues

68.2

%


 

66.9

%


 

69.0

%


 

67.5

%


 

68.3

%

 


 

VONAGE HOLDINGS CORP.

TABLE 3. RECONCILIATION OF GAAP (LOSS) INCOME FROM OPERATIONS TO ADJUSTED

EBITDA AND PRE-MARKETING OPERATING INCOME

(Dollars in thousands)

(unaudited)

 


 

Three Months Ended


 

Six Months Ended


 

June 30,


 

March 31,


 

June 30,


 

June 30,


 

2012


 

2012


 

2011


 

2012


 

2011

(Loss) income from operations

$

(2,686)


 

 

$

20,533


 

 

$

31,181


 

 

$

17,847


 

 

$

61,065


 

Depreciation and amortization

8,518


 

 

8,644


 

 

8,664


 

 

17,162


 

 

19,730


 

Loss from abandonment of software assets

25,262


 

 


 

 


 

 

25,262


 

 


 

Share-based expense

3,505


 

 

2,623


 

 

3,854


 

 

6,128


 

 

6,329


 

Adjusted EBITDA

34,599


 

 

31,800


 

 

43,699


 

 

66,399


 

 

87,124


 

Marketing

54,956


 

 

53,422


 

 

52,211


 

 

108,378


 

 

101,615


 

Customer equipment and shipping

(510)


 

 

(498)


 

 

(997)


 

 

(1,008)


 

 

(2,608)


 

Direct cost of goods sold

9,275


 

 

9,846


 

 

9,865


 

 

19,121


 

 

20,920


 

Pre-marketing operating income

$

98,320


 

 

$

94,570


 

 

$

104,778


 

 

$

192,890


 

 

$

207,051


 


 

 

 

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

 


 

Three Months Ended


 

Six Months Ended


 

June 30,


 

March 31,


 

June 30,


 

June 30,


 

2012


 

2012


 

2011


 

2012


 

2011

Net (loss) income

$

(3,340)


 

 

$

13,921


 

 

$

21,748


 

 

$

10,581


 

 

$

42,861


 

Loss from abandonment of software assets

25,262


 

 


 

 


 

 

25,262


 

 


 

Change in fair value of stock warrant


 

 


 

 


 

 


 

 

950


 

Income tax (benefit) expense

(947)


 

 

4,923


 

 

698