Vonage Holdings Corp. Reports Third Quarter 2007 Results

HOLMDEL, N.J., Nov 08, 2007 /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, 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.