Vonage Holdings Corp. Reports Third Quarter 2007 Results

- Third Quarter Revenues Grow 30% to $211 Million -

- Adjusted Loss from Operations Excluding Charges(1) Narrows to $1 Million

-

- Net Loss Excluding Charges(2) Narrows to $16 Million from $62 Million

Year-over-Year -

- Company Generates Positive Cash from Operations in the Third Quarter 2007

-

    HOLMDEL, N.J., Nov. 8 /PRNewswire-FirstCall/ -- Vonage Holdings Corp.
 ( VG), a leading provider of broadband telephone service, today
 announced results for the quarter ended September 30, 2007.
     Revenue for the third quarter 2007 grew to a record $211 million, a 30%
 increase from $162 million in the third quarter 2006, driven by customer
 line growth and an increase in average revenue per line.
     Adjusted loss from operations excluding certain charges(1) narrowed to
 $1 million, a 98% improvement from $53 million in the third quarter 2006
 and an improvement from $3 million sequentially. The Company expects to
 generate positive adjusted operating income for 2008.
     Net loss excluding certain charges(2) narrowed to $16 million, or $0.10
 per share, from $62 million or $0.40 per share reported in the third
 quarter 2006. Including these charges, third quarter 2007 GAAP net loss was
 $162 million.
     Jeffrey Citron, Vonage Chairman, said, "We are executing against our
 strategy to fix the fundamentals of our business. We are acquiring
 customers more effectively and running the business at an improved cost
 structure. While this has resulted in positive changes in our business, we
 have much more to do. Our primary focus today is to improve the customer
 experience to reduce churn. While this will take time, we believe the
 Company has the appropriate plan in place to improve customer satisfaction
 and build loyalty."
     Vonage added 78,000 net subscriber lines during the quarter, up 37%
 from 57,000 in the second quarter 2007, and finished with more than 2.5
 million lines in service.
     Third Quarter 2007 Financial and Operating Highlights
     Third quarter 2007 revenue grew to $211 million, up 30% from $162
 million in the year-ago quarter. The year-over-year increase was driven by
 growth in subscriber lines and an increase in average monthly revenue per
 line.
     Average monthly revenue per line in the third quarter 2007 was $28.24,
 a 2% increase from $27.59 in the year-ago quarter and down from $28.38
 reported in the second quarter 2007. Average monthly telephony services
 revenue per line for the quarter grew to $27.32, up 3% from $26.52 in the
 year-ago quarter.
     In the third quarter 2007, direct cost of telephony services was $55
 million, up from $41 million a year ago, and $52 million in the second
 quarter 2007. On a per line basis, average direct cost of telephony
 services was $7.30, up from $7.06 in the third quarter 2006 and $7.21
 sequentially.
     Direct cost of goods sold for the quarter was $17 million, in line with
 the year ago quarter and up from $11 million in the prior quarter. The
 sequential increase was driven by higher gross additions. Direct margin(3)
 increased to 66% of revenues from 64% in the year-ago quarter.
     Selling, general and administrative ("SG&A") expense excluding certain
 charges(4) was $84 million, up from $72 million in the year ago quarter,
 and flat sequentially.
     Marketing expense for the quarter was $62 million, or 29% of revenue,
 down from $91 million, or 56% a year ago. Marketing expense fell 9% from
 $68 million in the second quarter 2007. Marketing cost per gross subscriber
 line addition ("SLAC") was $206 in the third quarter 2007, the lowest cost
 of acquisition in two and a half years. The Company expects fourth quarter
 2007 SLAC to increase slightly due to seasonal factors, but fall within the
 $225- $250 range. Additionally, the Company expects its marketing spending
 to increase slightly from the third quarter.
     Pre-marketing operating income excluding certain charges(1) was $71
 million, up from $50 million in the year ago quarter and flat sequentially.
     Average monthly customer churn was 3.0% in the third quarter 2007. This
 is an increase from 2.5% in the prior quarter, which would have been 2.7%
 absent the extension of the customer grace period.
     Current cash, marketable securities and current restricted cash at
 quarter end was $356 million, up $12 million from last quarter. This
 includes $78 million of current restricted cash used as collateral for the
 Verizon bond and first escrow payment. The change in cash from the prior
 quarter was driven by cash provided by operations of $22 million and
 capital expenditures of $10 million.
     The Company's cash requirements in the fourth quarter increased due to
 the release of $78 million of restricted cash to Verizon, an additional $2
 million to Verizon, $40 million placed into escrow and reported as current
 restricted cash until the Verizon appeal is decided, $80 million to Sprint
 and $2 million in other IP litigation settlements.
     Based on these actions, cash has been reduced from $356 million to $194
 million, which is comprised of $154 million in free cash and $40 million in
 restricted cash.
     AT&T
     The Company reached an agreement in principle with AT&T to settle the
 IP litigation suit which was filed on October 17, 2007. Specifically, AT&T
 filed suit against Vonage in the District Court, Western District of
 Wisconsin, concerning Patent No. 6,487,200 (the "Fraser Patent"), entitled
 "Packet Telephone System."
     The parties will work diligently to finalize the specific terms of the
 settlement agreement. The general terms being discussed by the parties
 would require Vonage to pay $39 million over five years. AT&T would agree
 to dismiss the lawsuit against Vonage, and Vonage would agree to dismiss a
 case against AT&T which is also outstanding. If negotiations of a
 definitive settlement agreement fail, then Vonage intends to vigorously
 defend itself in this matter.
     (1) This is a non-GAAP financial measure.  Refer below to Table 3 for a
         reconciliation to GAAP loss from operations.
     (2) This is a non-GAAP financial measure.  Refer below to Table 4 for a
         reconciliation to GAAP net loss.
     (3) Direct margin is defined as operating revenues less direct cost of
         telephony services and direct cost of goods sold.
     (4) This is a non-GAAP financial measure.  Refer below to Table 5 for a
         reconciliation to SG&A.
 
 
 
                             VONAGE HOLDINGS CORP.
                 TABLE 1. SUMMARY CONSOLIDATED FINANCIAL DATA
               (Dollars in thousands, except per share amounts)
 
 
                                Three Months Ended    Nine Months Ended
                                   September 30,        September 30,
                                  2007       2006      2007       2006
     Statement of Operations
      Data:                         (unaudited)          (unaudited)
     Operating Revenues:
        Telephony services       $203,724  $155,611   $593,561   $405,732
        Customer equipment and
         shipping                   6,810     6,235     18,815     20,202
                                  210,534   161,846    612,376    425,934
 
     Operating Expenses:
        Direct cost of telephony
         services (excluding
         depreciation and
         amortization of $4,312,
         $3,022, $12,616, $8,707,
         respectively)             54,463    41,396    162,364    119,753
        Royalty                    11,139         -     32,606          -
           Total direct cost of
            telephony services     65,602    41,396    194,970    119,753
        Direct cost of goods sold  17,057    16,934     41,633     50,561
        Selling, general and
         administrative           217,939    72,052    397,133    191,036
        Marketing                  61,885    91,316    220,641    269,768
        Depreciation and
         amortization               8,563     5,946     24,613     16,645
                                  371,046   227,644    878,990    647,763
 
     Loss from operations        (160,512)  (65,798)  (266,614)  (221,829)
 
     Other income (expense), net
        Interest income             4,238     7,721     15,066     14,442
        Interest expense           (5,424)   (3,999)   (15,700)   (13,977)
        Other, net                    (36)     (108)       (69)      (116)
                                   (1,222)    3,614       (703)       349
 
     Loss before income tax
      expense                    (161,734)  (62,184)  (267,317)  (221,480)
 
     Income tax expense               (94)        -       (471)         -
 
     Net loss                   $(161,828) $(62,184) $(267,788) $(221,480)
 
     Net loss per common share:
        Basic and diluted          $(1.04)   $(0.40)    $(1.72)    $(2.99)
 
     Weighted-average common
      shares outstanding:
        Basic and diluted         155,784   154,775    155,482     73,955
 
 
 
                             VONAGE HOLDINGS CORP.
            TABLE 1. SUMMARY CONSOLIDATED FINANCIAL DATA (Continued)
                (Dollars in thousands, except per share amounts)
 
                                 Three Months Ended   Nine Months Ended
                                    September 30,        September 30,
                                   2007      2006       2007       2006
                                    (unaudited)          (unaudited)
     Statement of Cash Flow
      Data:
     Net cash provided by (used
      in) operating activities    $22,461  $(42,360)  $(88,989) $(160,692)
     Net cash provided by (used
      in) investing activities    (38,605) (109,722)     6,829   (297,200)
     Net cash provided by (used
      in) financing activities        176    (6,082)       474    479,349
 
 
                               September 30,  December 31,
                                   2007          2006
     Balance Sheet Data (at
      period end):
     Cash, cash equivalents,
      marketable securities and
      current restricted cash    $355,890      $499,736
     Property and equipment,
      net of accumulated
      depreciation                127,856       128,247
     Total assets                 665,762       757,524
     Convertible notes, net       253,310       253,430
     Capital lease obligations     23,501        24,255
     Total liabilities            728,691       574,323
     Total stockholders' equity
      (deficit)                   (62,929)      183,201
 
 
 
                             VONAGE HOLDINGS CORP.
                  TABLE 2. SUMMARY CONSOLIDATED OPERATING DATA
                                  (unaudited)
 
                                                   Three Months Ended
                                             Sept. 30,    June 30,   Sept. 30,
                                               2007        2007        2006
     Operating and Other Data:
     Gross subscriber line additions          299,978     236,840     359,148
     Net subscriber line additions             77,763      56,691     204,591
     Subscriber lines (at period end)       2,524,211   2,446,448   2,057,844
     Average monthly customer churn              3.0%        2.5%        2.6%
     Average monthly revenue per line          $28.24      $28.38      $27.59
     Average monthly telephony services
      revenue per line                         $27.32      $27.63      $26.52
     Average monthly total direct cost of
      telephony services per line               $8.80       $8.74       $7.06
     Marketing costs per gross subscriber
      line addition                           $206.30     $286.72     $254.26
     Employees (excluding temporary help)
      (at period end)                           1,559       1,421       1,675
     CPE subsidy                               $34.16      $24.54      $29.79
     Direct margin as a % of total revenue      66.0%       69.1%       64.0%
 
 
 
                             VONAGE HOLDINGS CORP.
       TABLE 3.  RECONCILIATION OF GAAP LOSS FROM OPERATIONS TO ADJUSTED
        LOSS FROM OPERATIONS AND PRE-MARKETING OPERATING INCOME (LOSS),
                           EXCLUDING CERTAIN CHARGES
                             (Dollars in thousands)
                                  (unaudited)
 
                                                Three Months Ended
                                            Sept. 30,  June 30, Sept. 30,
                                              2007      2007      2006
     Reconciliation of Loss from Operations
      to Adjusted Loss from Operations and
      Pre-Marketing Operating Income (Loss):
     Loss from operations                  $(160,512) $(33,027) $(65,798)
        Depreciation and amortization          8,563     8,191     5,946
        Non-cash stock compensation            6,228     6,937     7,338
     Adjusted loss from operations          (145,721)  (17,899)  (52,514)
        Marketing                             61,885    67,906    91,316
        Customer equipment and shipping       (6,810)   (5,432)   (6,235)
        Direct cost of goods sold             17,057    11,243    16,934
     Pre-marketing operating income (loss)  $(73,589)  $55,818   $49,501
        As a % of telephony services revenue   (36.1%)    27.8%     31.8%
 
     Adjusted loss from operations         $(145,721) $(17,899) $(52,514)
        Royalty                               11,139    11,052         -
        IP Litigation                        132,951         -         -
        Severance                                533     3,700         -
     Adjusted loss from operations
      excluding certain charges              $(1,098)  $(3,147) $(52,514)
 
 
     Pre-marketing operating income (loss)  $(73,589)  $55,818   $49,501
        Royalty                               11,139    11,052         -
        IP Litigation                        132,951         -         -
        Severance                                533     3,700         -
     Pre-marketing operating income
      excluding certain charges              $71,034   $70,570   $49,501
 
 
 
                             VONAGE HOLDINGS CORP.
             TABLE 4.  RECONCILIATION OF GAAP NET LOSS TO NET LOSS
                           EXCLUDING CERTAIN CHARGES
                (Dollars in thousands, except per share amounts)
                                  (unaudited)
 
                                                Three Months Ended
                                            Sept. 30,  June 30, Sept. 30,
                                              2007      2007      2006
     Reconciliation of Net Loss to Net Loss
      Excluding Certain Charges:
     Net loss                              $(161,828) $(33,626) $(62,184)
        Royalty                               11,139    11,052         -
        Interest on royalty                    1,008       707         -
        IP Litigation                        132,951         -         -
        Severance                                533     3,700         -
     Net loss excluding certain charges     $(16,197) $(18,167) $(62,184)
 
     Net loss per common share:
        Basic and diluted                     $(1.04)   $(0.22)   $(0.40)
 
     Net loss per common share,
      excluding certain charges:
        Basic and diluted                     $(0.10)   $(0.12)   $(0.40)
 
     Weighted-average common shares
      outstanding:
        Basic and diluted                    155,784   155,506   154,775
 
 
 
                             VONAGE HOLDINGS CORP.
                 TABLE 5.  RECONCILIATION OF GAAP SG&A TO SG&A
                            EXCLUDING CERTAIN CHARGES
                             (Dollars in thousands)
                                  (unaudited)
 
                                                Three Months Ended
                                            Sept. 30,  June 30, Sept. 30,
                                              2007      2007      2006
     Reconciliation of SG&A to SG&A
      Excluding Certain Charges:
     Selling, general and
      administrative                        $217,939   $88,202   $72,052
        IP Litigation                       (132,951)        -         -
        Severance                               (533)   (3,700)        -
     SG&A excluding certain charges          $84,455   $84,502   $72,052
     SG&A excluding certain charges
      as a % of revenue                         40.1%     41.0%     44.5%
 
 
 
                             VONAGE HOLDINGS CORP.
           TABLE 6.  RECONCILIATION OF GAAP NET LOSS TO CASH NET LOSS
                           EXCLUDING CERTAIN CHARGES
                (Dollars in thousands, except per share amounts)
                                  (unaudited)
 
                                                 Three Months Ended
                                            Sept. 30,  June 30, Sept. 30,
                                              2007      2007      2006
     Reconciliation of Net Loss to Cash
      Net Loss Excluding Certain Charges:
     Net loss                              $(161,828) $(33,626) $(62,184)
        Royalty                               11,139    11,052         -
        Interest on royalty                    1,008       707         -
        IP Litigation                        132,951         -         -
        Severance                                533     3,700         -
        Depreciation and amortization          8,563     8,191     5,946
        Stock option compensation              6,228     6,937     7,338
 
        Other non-cash items in net loss       1,376     1,914       218
     Cash net loss excluding certain charges    $(30)  $(1,125) $(48,682)
     Use of Non-GAAP Financial Measures
     This press release, including the selected financial information to
 follow, includes the following measures defined as non-GAAP financial
 measures by the Securities and Exchange Commission: net loss excluding
 certain charges, adjusted loss from operations, adjusted loss from
 operations excluding certain charges, pre-marketing operating income,
 pre-marketing operating income excluding certain charges, SG&A excluding
 certain charges and cash net loss excluding certain charges.
     The Company has excluded the royalty, IP litigation settlements with
 Verizon, Sprint, AT&T and others and associated interest and severance
 expense from certain GAAP and non-GAAP financial measures to enable better
 comparisons to prior periods. For example, the Company has excluded the
 royalty, IP litigation settlements and severance expense from adjusted loss
 from operations. Excluding these items will assist investors in evaluating
 the Company's operating performance and in understanding its results of
 operations on a comparative basis.
     Vonage uses net loss excluding certain charges, cash net loss excluding
 certain charges, adjusted loss from operations and pre-marketing operating
 income as principal indicators of the operating performance of its
 business. We believe that adjusted loss from operations permits a
 comparative assessment of our operating performance, relative to our
 performance based on our 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 non-cash stock
 compensation expense, which is a non-cash expense that also varies from
 period to period. In addition, as we are currently growing both our revenue
 and customer base while maintaining an emphasis on brand, we have chosen to
 invest significant amounts on our marketing activities to acquire and
 replace subscribers.
     Given that our strategy currently results in operating losses, we
 believe 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. We provide
 information relating to our adjusted loss from operations and pre-marketing
 operating income so that investors have the same data that we employ in
 assessing our overall operations. We believe that trends in our adjusted
 loss from operations and pre-marketing operating income are valuable
 indicators of the operating performance of our company on a consolidated
 basis and of our ability to produce operating cash flow to fund working
 capital needs, to service debt obligations and to fund capital
 expenditures.
     We use cash net loss excluding certain charges as this provides an
 important measure of cash required to fund ongoing operations by excluding
 the changes in working capital and the impact of certain charges.
     The non-GAAP financial measures used by us 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 loss from operations as GAAP loss from
 operations excluding depreciation and amortization and non-cash stock
 compensation expense.
     Vonage defines adjusted loss from operations excluding certain charges
 as GAAP loss from operations excluding depreciation and amortization,
 non-cash stock compensation expense, royalty, IP litigation settlements and
 severance expense.
     Vonage defines pre-marketing operating income as GAAP loss from
 operations excluding customer equipment and shipping revenue, direct cost
 of goods sold, depreciation and amortization, marketing and non-cash stock
 compensation expense.
     Vonage defines pre-marketing operating income excluding certain charges
 as GAAP loss from operations excluding customer equipment and shipping
 revenue, direct cost of goods sold, depreciation and amortization,
 marketing and non- cash stock compensation expense and royalty, IP
 litigation settlements and severance expense.
     Vonage defines net loss excluding certain charges as GAAP net loss
 excluding royalty, IP litigation settlements and associated interest and
 severance expense.
     Vonage defines SG&A excluding certain charges as GAAP SG&A less IP
 litigation settlements and severance expense.
     Vonage defines cash net loss excluding certain items as GAAP net loss
 excluding royalty, IP litigation settlements and associated interest,
 severance expense, non-cash stock compensation expense, depreciation and
 amortization and other adjustments to reconcile net loss to net cash.
     Conference Call and Webcast
     Management will host a webcast discussion of the quarter's results on
 Thursday, November 8, 2007 at 10:00 AM Eastern Time. To participate, please
 dial (800) 289-0544 approximately ten minutes prior to the call.
 International callers should dial (913) 312-1294. A replay will be
 available approximately two hours after the conclusion of the call until
 midnight November 22, 2007, and may be accessed by dialing (888) 203-1112.
 International callers should dial (719) 457-0820. Replay Passcode: 3966043
     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 and will be available for two weeks.
     Safe Harbor Statement
     This press release contains forward-looking statements regarding the
 Company's fourth quarter marketing cost per gross subscriber line addition
 and marketing spend and ability to achieve positive adjusted operating
 income. In addition, 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, our damaging and disruptive intellectual property and
 other litigation; our efforts to design around third-party intellectual
 property and implement such design arounds; our history of net operating
 losses and our need for cash to finance our growth; the competition we
 face; our dependence on our customers' existing broadband connections;
 differences between our service and traditional phone services, including
 our 911 service; uncertainties relating to regulation of VoIP services;
 system disruptions or flaws in our technology; the risk that VoIP does not
 gain broader acceptance; and other factors that are set forth in the "Risk
 Factors" section, the "Legal Proceedings" section, the "Management's
 Discussion and Analysis of Results of Operations and Financial Condition"
 section and other sections of Vonage's Annual Report on Form 10-K for the
 year ended December 31, 2006, as well as in our Quarterly Reports on Form
 10-Q and Current Reports on Form 8-K. While we may elect to update
 forward-looking statements at some point in the future, we specifically
 disclaim any obligation to do so, and therefore, you should not rely on
 these forward- looking statements as representing our views as of any date
 subsequent to today.
     About Vonage
     Vonage ( VG) is a leading provider of broadband telephone services
 with 2.5 million subscriber lines. Our award-winning technology enables
 anyone to make and receive phone calls with a touch tone telephone almost
 anywhere a broadband Internet connection is available. We offer
 feature-rich and cost- effective communication services that offer users an
 experience similar to traditional telephone services.
     Our Residential Premium Unlimited and Small Business Unlimited calling
 plans offer consumers unlimited local and long distance calling, and
 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
 national retailers including Best Buy, Circuit City, Wal-Mart Stores Inc.
 and Target 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(R) is a registered trademark of Vonage Marketing Inc., a subsidiary
 of Vonage Holdings Corp.
     (vg-f)
 
 

SOURCE Vonage