Vonage

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Vonage Holdings Corp. Reports Third Quarter 2006 Results

-Revenue More Than Doubles to $161 Million From a Year Ago-
-Eighteenth Consecutive Quarter of Sequential Double-Digit Revenue Growth-
-GAAP Net Loss Narrows Year-over-Year to $62 Million-

HOLMDEL, N.J., Oct 31, 2006 /PRNewswire-FirstCall via COMTEX News Network/ -- Vonage Holdings Corp. (NYSE: VG), a leading provider of broadband telephone service, today announced results for the quarter ended September 30, 2006. Revenue for the quarter was a record $161 million, up 12% sequentially, and up 118% from the year-ago quarter. Non-GAAP adjusted loss from operations(1) was $53 million in the quarter, down 12% from the prior quarter and down 18% from the year-ago quarter. Net loss for the quarter was $62 million, or $0.40 per share, an improvement of 16% from a net loss of $74 million, or $1.16 per share, in the prior quarter and from $66 million last year.

Vonage added nearly one million net subscriber lines over the past twelve months, including 204,591 in the third quarter. This marks the seventh consecutive quarter of more than 200,000 net subscriber line additions. Vonage finished the quarter with 2,057,844 lines in service, an increase of 11% sequentially and 94% above the year-ago level.

Mike Snyder, Vonage CEO, said, "Our results this quarter provide further evidence of our continued progress toward achieving profitability. For the first time in Vonage's history, GAAP net loss narrowed year-over-year. In addition, for the second consecutive quarter, we narrowed our net loss by aggressively managing direct costs and achieving scale benefits due to growth in our subscriber base. Direct margin(2) percentage improved to a record 64% and adjusted loss from operations(1) declined 12% from the prior quarter even as we continued to invest in customer care and marketing to achieve strong growth."

"Over the recent months, our highest priority has been to achieve meaningful and sustainable improvements in customer care. We dedicated significant financial and human resources to enhancing processes, adding staff and improving training methodologies. As a result, we have seen marked improvements in most service metrics, including call abandonment rates, first call resolution and overall customer satisfaction. While churn was higher in the third quarter, as anticipated, improvements in customer care performance led to an improvement in churn to 2.4% for the month of September."

Mr. Snyder added, "We are clearly making progress against many of the goals we outlined last quarter and continue to focus on achieving profitable growth and operating efficiencies. Based on our current outlook, we continue to anticipate that we will generate adjusted operating profits as early as the first quarter 2008."

Third Quarter 2006 Financial and Operating Highlights

Third quarter 2006 revenue grew to $161 million, a 12% increase from $143 million in the second quarter 2006 and up 118% from $74 million in the year- ago quarter. The sequential growth was driven primarily by the growth in subscriber lines while year-over-year revenue growth resulted from subscriber line growth and increases in average monthly revenue per line.

Total subscriber lines were 2,057,844 at September 30, 2006, versus 1,853,253 at June 30, 2006 and 1,061,786 at September 30, 2005.

Average monthly telephony services revenue per line for the quarter was flat sequentially at $26.33 and up $1.49 from the third quarter 2005. On a year-over-year basis, positive shifts in customer mix to premium calling plans and the introduction of an Emergency 911 Cost Recovery fee contributed to a 6% net improvement in average monthly telephony services revenue per line.

The Company continues to improve its operating leverage and benefit from scale. Direct margin(2) as a percentage of revenues increased to 64% in the third quarter 2006 versus 62% in the second quarter 2006 and 54% in the year- ago quarter. Direct cost of telephony services fell $0.66 sequentially to $6.86 on a per line basis and declined $1.70 from $8.56 in the year-ago quarter. Adjusted selling, general and administrative expense ("adjusted SG&A")(3) remained flat quarter over quarter at 40% of revenues, even as the Company invested in customer care and recorded legal costs related to litigation. On a year-over-year basis, adjusted SG&A declined significantly from 61% of revenue in the third quarter 2005.

During the third quarter 2006, the Company continued to pursue its strategy of investing in marketing for customer acquisition, retention and brand building. Total marketing costs were 57% of revenues, or $91 million, in the third quarter 2006 versus 63% of revenues, or $90 million, in the second quarter 2006 and 80% of revenues, or $59 million, in the year-ago quarter. Marketing costs per gross subscriber line addition were $254 for the third quarter 2006, an increase of 6% from the second quarter 2006.

Average monthly customer churn increased to 2.6%, up from 2.3% in both the second quarter 2006 and the year-ago quarter. The increase is attributable in part to the rapid growth in subscriber lines throughout 2006 and resulting impact on customer care.

Pre-marketing operating income(1), which is a measure of the cash flow from the Company's existing customer base, was $50 million in the third quarter 2006, up from $40 million sequentially and $2 million in the third quarter 2005.

GAAP net loss for the third quarter 2006 was $62 million, or $0.40 per share, down from $74 million, or $1.16 per share, in the second quarter and from $66 million last year. This is the second consecutive quarter of narrowing losses and the first ever on a year-over-year basis for the Company.

Adjusted loss from operations(1) was $53 million in the third quarter 2006 versus $60 million in the second quarter and $64 million in the third quarter 2005.

    Guidance

    The Company is reaffirming guidance on the following metrics:
     -- Fiscal Year 2006 Total Revenue (in millions):            $600 to $615
     -- Fiscal Year 2006 Marketing Expense (in millions):        $360 to $380
     -- Second Half 2006 Direct Margin(2) (% of Total Revenue):   62% to 65%
     -- Second Half 2006 Adjusted SG&A(3) (% of Total Revenue):   39% to 41%
     -- Positive Adjusted Operating Income(1)                     As early as
                                                                 First Quarter
                                                                     2008

    The Company is updating subscriber line guidance:
     -- Fiscal Year 2006 Ending Subscriber Lines (in millions):  2.2 to 2.3

    (1) This is a non-GAAP financial measure.  Refer below to Table 3,
        Reconciliation of GAAP Loss from Operations to Adjusted Loss from
        Operations and Pre-Marketing Operating Income.
    (2) Direct margin is defined as operating revenues less direct costs.
    (3) This is a non-GAAP financial measure.  Refer below to Table 4,
        Reconciliation of GAAP SG&A to Adjusted SG&A.

    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: adjusted SG&A, adjusted loss from operations and pre-marketing operating income.

Vonage uses adjusted loss from operations, pre-marketing operating income and adjusted SG&A as principal indicators of the operating performance of our 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. Further, non-cash stock compensation is included in our results of operations for periods beginning January 1, 2006 but is excluded from prior periods, which makes comparisons with prior periods more difficult. In addition, as we are currently growing both our revenue and customer base and enhancing the awareness of our brand, we have chosen to invest significant amounts on our marketing activities, and we intend to continue to do so. A portion of our marketing expense, however, is necessary to retain our existing subscriber base due to churn. Adjusted SG&A permits a comparative assessment of our SG&A expenses by excluding non-cash stock compensation expense.

Given that this 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 total 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.

Adjusted loss from operations, pre-marketing operating income and adjusted SG&A as 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 SG&A as GAAP selling, general and administrative expense less non-cash stock compensation expense.

Vonage defines adjusted loss from operations as GAAP loss from operations less depreciation and amortization and non-cash stock compensation expense.

Vonage defines pre-marketing operating income as GAAP loss from operations excluding customer equipment and shipping revenue less direct cost of goods sold, depreciation and amortization, marketing and non-cash stock compensation expense.

Conference Call and Webcast

Vonage will hold a conference call on October 31, 2006 at 10:00 AM ET to discuss operating and financial results. The call will be simultaneously webcast and accessible via Vonage's Investor Relations website at http://ir.vonage.com. Afterwards, a replay of the call will be available on Vonage's Investor Relations website shortly following the webcast for two weeks and will then be archived.


                              VONAGE HOLDINGS CORP.
                  TABLE 1. SUMMARY CONSOLIDATED FINANCIAL DATA
                    (In thousands, except per share amounts)


                                      Three Months Ended  Nine Months Ended
                                         September 30,      September 30,
                                         2006     2005      2006      2005
    Statement of Operations Data:                   (unaudited)
    Operating Revenues:
      Telephony services               $154,487  $71,158  $402,781  $167,280
      Customer equipment and shipping     6,235    2,713    20,202     6,736
                                        160,722   73,871   422,983   174,016

    Operating Expenses:
      Direct cost of telephony services
       (excluding depreciation and
       amortization of $3,022, $2,025,
       $8,707 and $4,405, respectively)  40,272   24,514   116,802    54,341
      Direct cost of goods sold          16,934    9,622    50,561    30,451
      Selling, general and
       administrative                    72,052   45,030   191,036    98,808
      Marketing                          91,316   58,906   269,768   176,279
      Depreciation and amortization       5,946    3,150    16,645     7,026
                                        226,520  141,222   644,812   366,905

    Loss from operations                (65,798) (67,351) (221,829) (192,889)

    Other Income (Expense)                3,614    1,356       349     3,269

    Loss before income tax benefit      (62,184) (65,995) (221,480) (189,620)

    Net loss                           $(62,184)$(65,995)$(221,480)$(189,620)

    Net loss per common share:
      Basic and diluted                  $(0.40) $(47.79)   $(2.99) $(138.11)

    Weighted-average common shares
     outstanding:
      Basic and diluted                 154,775    1,381    73,955     1,373



    Statement of Cash Flow Data:
    Net cash used in operating
     activities                                          $(160,692)$(131,155)
    Net cash used in investing
     activities                                           (297,200)  (64,914)
    Net cash provided by financing
     activities                                            479,349   195,994


                                                           Sep 30,   Dec 31,
                                                             2006     2005
                                                         (unaudited)

    Balance Sheet Data (at period end):
    Cash, cash equivalents and
     marketable securities                                $544,330   $266,379
    Property and equipment, net of
     accumulated depreciation                              123,523   103,638
    Total assets                                           788,911   446,882
    Convertible notes, net                                 253,420   247,958
    Capital lease obligations                               24,489    22,431
    Total liabilities                                      495,927   426,940
    Total redeemable preferred stock                             -   388,427
    Total stockholders' equity (deficit)                   292,984  (368,485)



                              VONAGE HOLDINGS CORP.
                       TABLE 2. SUMMARY CONSOLIDATED FINANCIAL DATA

                                     Three Months Ended    Nine Months Ended
                                       September 30,         September 30,
                                      2006       2005       2006       2005
                                                  (unaudited)
    Operating and Other Data:
    Gross subscriber line
     additions                       359,148    282,176  1,158,044    824,609
    Net subscriber line additions    204,591    213,937    788,806    671,220
    Subscriber lines (at period
     end)                          2,057,844  1,061,786  2,057,844  1,061,786
    Average monthly customer churn      2.6%       2.3%       2.4%       2.1%
    Average monthly revenue per
     line                             $27.40     $25.79     $28.25     $26.63
    Average monthly telephony
     services revenue per line        $26.33     $24.84     $26.90     $25.60
    Average monthly direct cost of
     telephony services per line       $6.86      $8.56      $7.80      $8.31
    Marketing costs per gross
     subscriber line addition        $254.26    $208.76    $232.95    $213.77
    Employees (excluding temporary
     help) (at period end)             1,675      1,393      1,675      1,393
    CPE Subsidy                       $29.79     $24.48     $26.22     $28.76
    Direct margin as a % of total
     revenue                           64.4%      53.8%      60.4%      51.3%
    Adjusted SG&A as a % of total
     revenue                           40.3%      61.0%      40.4%      56.8%




                            VONAGE HOLDINGS CORP.
       TABLE 3. RECONCILIATION OF GAAP LOSS FROM OPERATIONS TO ADJUSTED
           LOSS FROM OPERATIONS AND PRE-MARKETING OPERATING INCOME
                            (Dollars in thousands)

                            Three Months Ended           Nine Months Ended
                        September 30,        June 30,       September 30,
                      2006         2005        2006       2006        2005

    Reconciliation of
     Loss from
     Operations to
     Adjusted Loss
     from Operations
     and Pre-Marketing
     Operating Income:
    Loss from
     operations     $(65,798)   $(67,351)   $(73,628)  $(221,829)  $(192,889)
      Depreciation and
       amortization    5,946       3,150       5,740      16,645       7,026
      Non-cash stock
       compensation    7,338           -       8,190      19,980           -
    Adjusted loss
     from operations (52,514)    (64,201)    (59,698)   (185,204)   (185,863)
      Marketing       91,316      58,906      90,164     269,768     176,279
      Customer
       equipment and
       shipping       (6,235)     (2,713)     (6,742)    (20,202)     (6,736)
      Direct cost of
       goods sold     16,934       9,622      16,047      50,561      30,451
    Pre-marketing
     operating
     income          $49,501      $1,614     $39,771    $114,923     $14,131
      As a % of
       telephony
       services
       revenue         32.0%        2.3%       29.1%       28.5%        8.4%



                            VONAGE HOLDINGS CORP.
            TABLE 4.  RECONCILIATION OF GAAP SG&A TO ADJUSTED SG&A
                            (Dollars in thousands)

                                Three Months Ended      Nine Months Ended
                              September 30,   June 30,    September 30,
                              2006     2005     2006      2006     2005

    Reconciliation of SG&A
     to Adjusted SG&A:
    Selling, General and
     Administrative          $72,052  $45,030  $66,109  $191,036  $98,808
    Non-cash stock
     compensation             (7,338)       -   (8,190)  (19,980)       -
    Adjusted SG&A            $64,714  $45,030  $57,919  $171,056  $98,808
    Adjusted SG&A as a %
     of total revenue           40.3%    61.0%    40.4%     40.4%    56.8%


    Safe Harbor Statement

This press release contains forward-looking statements on subscriber lines, total revenue, marketing expense, direct margin, adjusted SG&A and 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 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; our ability to manage our growth; the risk that VoIP does not gain broader acceptance; and other factors described in the "Risk Factors" section of our registration statement on Form S-1, as amended, and in our subsequent periodic reports filed with the SEC. 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 (NYSE: VG) is a leading provider of broadband telephone services with over two 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 www.vonage.com.

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

    (vg-f)


SOURCE Vonage Holdings Corp.

Vonage Investors: Craig Streem +1-732-203-7887, craig.streem@vonage.com, or Vonage
Media: Mitchell Slepian, +1-732-528-2677, mitchell.slepian@vonage.com
http://www.vonage.com

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