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.
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.
SOURCE Vonage Holdings Corp.
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