vonage holdings corp
TRANSCRIPT
UNITED STATESSECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORTPursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): January 9, 2008
VONAGE HOLDINGS CORP.(Exact Name of Registrant as Specified in Charter)
Delaware 001-32887 11-3547680
(State or Other Jurisdictionof Incorporation)
(Commission File Number)
(IRS EmployerIdentification No.)
23 Main Street, Holmdel, NJ 07733
(Address of Principal Executive Offices) (Zip Code)
Registrant’s telephone number, including area code: (732) 528-2600
(Former Name or Former Address, if Changed Since Last Report)
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (seeGeneral Instruction A.2. below): ☐ Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
☐ Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
☐ Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
☐ Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))
Item 2.02. Results of Operations and Financial Condition.
As previously announced on January 7, 2008, Jeffrey A. Citron, Chairman and Chief Strategist of Vonage Holdings Corp. (the “Company”) will participate in the Citi 18th AnnualGlobal Entertainment, Media & Telecommunications Conference (the “Citi Conference”) on Wednesday, January 9, 2008. On January 9, 2008, the Company issued a press releaseannouncing certain unaudited preliminary financial results that will be discussed at the Citi Conference.
The full text of the press release issued in connection with the announcement is furnished as Exhibit 99.1 to this Current Report on Form 8-K and is incorporated by reference intothis Item 2.02. Item 7.01. Regulation FD Disclosure.
At the Citi Conference and in certain investor meetings, Mr. Citron will be using a slide presentation to provide an update on the Company. A copy of the slide presentation to bereferenced by Mr. Citron during the Citi Conference, which will be made available in advance of the call through the Company’s website, is furnished as Exhibit 99.2 to this CurrentReport on Form 8-K.
The information in this Form 8-K (including Exhibit 99.1 and Exhibit 99.2) shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, asamended (the “Exchange Act”), or otherwise subject to the liabilities of that section, nor shall it be deemed incorporated by reference in any filing under the Securities Act of 1933, asamended, or the Exchange Act, except as expressly set forth by specific reference in such a filing. Item 9.01. Financial Statements and Exhibits
(d) Exhibits
The following exhibit relating to Item 2.02 shall be deemed to be furnished, and not filed:
99.1 Press Release issued by Vonage Holdings Corp. on January 9, 2008.
The following exhibit relating to Item 7.01 shall be deemed to be furnished, and not filed:
99.2 Presentation dated January 9, 2008.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto dulyauthorized.
VONAGE HOLDINGS CORP.
Date: January 9, 2008 By: /s/ Sharon A. O’Leary
Sharon A. O’LearyExecutive Vice President, Chief Legal Officer and Secretary
Exhibit 99.1
Vonage Chairman and Chief Strategist to Speak at the Citi 18th Annual Global Entertainment, Media & Telecommunications Conference
HOLMDEL, N.J., January 9, 2008 - As previously announced on January 7, 2008, Jeffrey A. Citron, Chairman and Chief Strategist of Vonage Holdings Corp. (NYSE : VG) willparticipate in the Citi 18th Annual Global Entertainment, Media & Telecommunications Conference being held today. At the conference, Mr. Citron will announce thefollowing preliminary unaudited financial and operating information about Vonage’s recently completed quarter and year ended December 31, 2007:
• Vonage’s 2007 revenue will be more than $800 million
• Fourth quarter 2007 churn will show no meaningful change over the 3.0% reported the prior quarter
• Excluding payments made in connection with the settlement of intellectual property litigation which Vonage believes is not indicative of its core operating results for the quarter,Vonage expects to generate positive operating cash for the quarter ended December 31, 20071
• Vonage’s cash position at December 31, 2007 was $190 million, which includes $40 million in restricted cash
In addition, Mr. Citron will provide the following expectation for the Company:
• Vonage expects to generate positive adjusted income for 2008
Safe Harbor Statement
This press release contains statements regarding the Company's preliminary financial results and expectations for 2008. In addition, statements in this press release that are not historicalfacts 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/ormanagement'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. Importantfactors that could cause such differences include, but are not limited to, our damaging and disruptive intellectual property and other litigation; our customer churn; our history of netoperating losses and our need for cash to
1 Including the payments made in connection with the settlement of the intellectual property litigation, operating cash for the fourth quarter is expected to be negative.
finance our growth; the competition we face; our dependence on our customers' existing broadband connections; differences between our service and traditional phone services, includingour 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 factorsthat 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 andother 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 theseforward- 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 2.5 million subscriber lines. Our award-winning technology enables anyone to make and receivephone 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 anexperience 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, callforwarding 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. andTarget 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. Vonage Investor Contacts: Vonage Media Contact:
Keith [email protected]
Meghan [email protected]
(vg-f)
Citi’s 18th Annual Entertainment, Media andTelecommunications Conference
January 9, 2008
2
Safe Harbor
Caution Concerning Forward-Looking StatementsVarious remarks that we make about Vonage Holdings Corp. future expectations, plans andprospects constitute forward-looking statements for purposes of the safe harbor provisionsunder The Private Securities Litigation Reform Act of 1995. Any forward-lookingstatementsrepresent our views only as of today and should not be relied upon as representing our views asof any subsequent date. While we may elect to update these forward-looking statements atsome point in the future, we specifically disclaim any obligation to do so, even if our viewschange. Therefore, you should not rely on these forward-looking statements as representing ourviews as of any date subsequent to today. In addition, actual results may differ materially fromthose indicated by these forward-looking statements as a result of various important factors,including, but not limited to, our damaging and disruptive intellectual property and otherlitigation; our customer churn; our history of net operating losses and our need for cash tofinance our growth; the competition we face; our dependence on our customers' existingbroadband connections; differences between our service and traditional phone services,including our 911 service; uncertainties relating to regulation of VoIP services; systemdisruptions or flaws in our technology; the risk that VoIP does not gain broader acceptance; andother 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 endedDecember 31, 2006, as well as in our Quarterly Reports on Form 10-Q and Current Reports onForm 8-K.
Non-GAAP Financial MeasuresThis presentation contains non-GAAP financial measures (including adjusted loss fromoperations, adjusted SG&A, and pre-marketing operating income), as defined in Regulation Gadopted by the SEC. We provide a reconciliation of these non-GAAP financial measures to themost directly comparable financial measure at the end of the presentation and in our quarterlyearnings releases, which can be found on the Vonage Investor Relations website athttp://ir.vonage.com.
3
Positioned for Growth in 2008
A challenging 2007 but emerged stronger
Strong revenue growth
More efficient cost structure
Narrowing losses
Positive cash from operations
Growing product portfolio
Clear strategy to grow the business andreach profitability
4
(1) Fourth quarter excludes settlement payments.(2) Source: IDC market analysis September 2007
Generated positive operating cash in 3 and 4 quarter 2007Year-end 2007 cash position of $190 million which includes $40million in restricted cashFocused on refinancing existing $253 million debt facility
Improving CreditProfile
2007 revenue of more than $800 million2009 revenue projected to exceed $1 billion
Rapidly progressing towards profitabilityLow-cost, high margin, scaleable platformReducing cost of subscriber acquisition and G&A
Company expects to generate positive adjusted operating incomefor full year 2008
SignificantImprovements in
OperatingPerformance
Leading provider of VoIP to residential and small business customers inthe USMore than 2.5 million lines in serviceStrong value proposition
Starts low, stays low pricingFeature-rich service offering
Strong MarketPosition and
Attractive ValueProposition
62 million broadband users in US expected to grow to over 76million users by 201116 million VoIP users in the US projected to grow to more than 45 million by 2011
SignificantOpportunity for
Growth
A Leading Provider of VoIP Telephony
rd th
2
2
1
5
Strategic Roadmap
1. Fixbusiness
fundamentals
2. Builda strong
core
3. Growfrom the
core
Wave 3Grow from the core
Wave 2Build a strong core
Wave 1Fix business fundamentals
Q3 07 Q4 07 Q1 08 Q2 08 Q3 08 Q4 08
Wave 1 Wave 2 Wave 3
Marketing
Cost Management
Customer Experience
Segmentation
Strengthen ProductPortfolio
Customer lifetime value
Best-in-class operations
Geographic expansion
SMBs
Adjacencies
Bundles
6
Fixing the Fundamentals
Marketing
CostManagement
CustomerExperience
Shift from brand building to customer acquisition
Integrate marketing efforts across channels
Evaluate channel performance by cost per acquisition
Rollout local market strategy (LMS)
Streamline operations to enhance efficiencyIncrease number of CLEC partners to create further pricingcompetition for cost of telephony services
Resolved IP litigation reducing legal expense
Drive first call resolution, increase customer satisfactionand quality assurance
Develop effective hiring and training practices for agents
Re-engineer customer touch points to improve userexperience
Improve network reliability and audio quality
7
$120
$144$162
$181$196
$206 $211
$0
$50
$100
$150
$200
1Q06 2Q06 3Q06 4Q06 1Q07 2Q07 3Q07
Revenue
Revenue Growth
1,597
1,8532,058
2,2242,390 2,446 2,524
0
500
1,000
1,500
2,000
2,500
3,000
1Q06 2Q06 3Q06 4Q06 1Q07 2Q07 3Q07$0
$5
$10
$15
$20
$25
$30ARPUTotal Lines
30% year-over-year revenue growth
19 consecutive quarters of double-digit year-over-year revenuegrowth
22 consecutive quarters ofsequential revenue growth
ARPU
Positive net line additionsevery quarter since inception
Stable ARPU
Predictable, recurring revenuestream
Total lines
8
Direct Margin1
(1) Excludes royalty payment to Verizon. Direct margin is defined as operating revenues less direct cost of telephony services and direct cost of goods sold.
45%
50%
55%
60%
65%
70%
Direct Margin(% of revenue)
Direct margin of 66%, upfrom 64% a year ago
Aggressively managingdirect costs
Cost savings benefits fromsupplier management andtraffic flow optimization
1Q06 3Q062Q06 1Q074Q06 2Q07 3Q07
9
Co-location
Bandwidth
Interconnection
Taxes
Phone #s
Cost of Telephony Services1
$8.94
$7.72$7.06
$8.13 $8.03$7.21 $7.30
$0
$2
$4
$6
$8
$10
1Q06 2Q06 3Q06 4Q06 1Q07 2Q07 3Q07
Cost of Telephony Services Per Line COTS Breakout
100%
50%
0
(1) Excludes royalty payment to Verizon.
Termination
E911
Other
Variable
Fixed
10
SG&A declined as a percent ofrevenue and on an absolute basisfor two consecutive quarters
3Q07 delivered record level SG&Aas a percent of revenue of 40%
Approximately 60% of SG&A isrelatively fixed
Expect SG&A as a percent ofrevenue to continue to decline
Managing SG&A*
* Excludes 3Q07 litigation settlement expense of $133 million.
VariableFixed
$53
$66$72
$82$91 $88 $85
$0
$10
$20
$30
$40
$50
$60
$70
$80
$90
$100
1Q06 2Q06 3Q06 4Q06 1Q07 2Q07 3Q07
SG&A (% of Revenue)
SG&A ($ millions)
0%
10%
20%
30%
40%
50%
1Q06 2Q06 3Q06 4Q06 1Q07 2Q07 3Q07
11
Comp &Benefits
SG&A per line*
$12.30$12.77
$12.28$12.73
$13.15
$12.16
$11.40
$6
$8
$10
$12
$14
1Q06 2Q06 3Q06 4Q06 1Q07 2Q07 3Q07
SG&A per Line SG&A Breakout
100%
50%
* Excludes 3Q07 litigation settlement expense of $17.83 per line.
Variable
Other SG&A
Credit Card Chgs
50%
0IP Litigation
Fixed
Selling
12
Cash Cost per User
$0
$5
$10
$15
$20
$25
1Q06 2Q06 3Q06 4Q06 1Q07 2Q07 3Q07
Cash Cost per User
3Q07
100%
SG&A
COTS
50%
0
CCPU Breakout
Variable
Fixed
13
Pre-Marketing Operating Income1
$0
$5
$10
$15
1Q06 2Q06 3Q06 4Q06 1Q07 2Q07 3Q07
$0
$20
$40
$60
$80
1Q06 2Q06 3Q06 4Q06 1Q07 2Q07 3Q07
PMOI ($ millions)
PMOI per Line
3Q07 PMOI reached record high:
$9.53 per line
$15.93 incremental
Steady growth expected infuture years
1This is a non-GAAP financial measure that is defined as GAAP loss from operations excluding customer equipment and shipping revenue, direct cost ofgoods sold, D&A, marketing, non-cash stock compensation expense and certain charges.
Incremental PMOI per Line
$0
$5
$10
$15
1Q06 2Q06 3Q06 4Q06 1Q07 2Q07 3Q07
14
Marketing
-40%
-20%
0%
20%
40%
60%
80%
100%
1Q06 2Q06 3Q06 4Q06 1Q07 2Q07 3Q07
$88 $90 $91 $96 $91
$68$62
$0
$20
$40
$60
$80
$100
$120
1Q06 2Q06 3Q06 4Q06 1Q07 2Q07 3Q070%10%20%30%40%50%60%70%80%90%100% Delivered higher sequential net
and gross adds on lower spend in3Q07Cost of customer acquisition in3Q07 equaled $206 – the lowestlevel since 1Q05Expect cost of acquisition to be in$225-250 range in 2008
Revenue
Marketing
Revenue Growth OutpacingMarketing Growth
Marketing Spend As a % ofRevenue
Index
$0
$50
$100
$150
$200
$250
$300
$350
1Q06 2Q06 3Q06 4Q06 1Q07 2Q07 3Q07
Marketing Cost per Gross Line Addition
15
RAF, Agency
TelesalesAgents
Marketing Spend by Channel
$88 $90 $91$96
$91
$68$62
$0
$20
$40
$60
$80
$100
$120
1Q06 2Q06 3Q06 4Q06 1Q07 2Q07 3Q07
Marketing Spend($ Millions)
Online
Mail, Alt Media
Canada, UKSponsorships
100%
50%
0
Retail
TV
16
($80)
($60)
($40)
($20)
$01Q06 2Q06 3Q06 4Q06 1Q07 2Q07 3Q07
Progressing on the Path to Profitability
Declining Adjusted Loss from Operations1
Adjusted Lossfrom Operations¹
(millions)
Narrowing losses on ayear-over-year andsequential basis
3Q07 loss fell to ($1.1M)vs. ($53M) in 3Q06
1) Adjusted loss from operations is a non-GAAP financial measure that is defined as GAAP loss from operations excluding non-cash stock compensation and depreciation and amortization expenses. Excludes certain charges.
17
Generating Cash from Operations
Generated cash from operationsfor the first time in Companyhistory in Q307
Positive cash from ops in Q41
Capital expenditures required tosupport customer base are lowrelative to telecom peers
($75)
($44) ($42)
($28)
($59)($53)
$22
($80)
($60)
($40)
($20)
$0
$20
1Q06 2Q06 3Q06 4Q06 1Q07 2Q07 3Q07
Cash from Operations($ Millions)
(1) Excludes settlement payments.
18
Strategic Roadmap
1. Fixbusiness
fundamentals
2. Builda strong
core
3. Growfrom the
core
Wave 3Grow from the core
Wave 2Build a strong core
Wave 1Fix business fundamentals
Q3 07 Q4 07 Q1 08 Q2 08 Q3 08 Q4 08
Wave 1 Wave 2 Wave 3
Marketing
Cost Management
Customer Experience
Segmentation
Strengthen ProductPortfolio
Customer lifetime value
Best-in-class operations
Geographic expansion
SMBs
Adjacencies
Bundles
19
Improving the Customer Experience
Research shows > 70% of churn is driven by factors within our control
Call quality
Customer service
Installation problems
Company has implemented major initiatives to improve the customerexperience:
Improve network service quality - improve call clarity, reducedropped calls
Resolve customer issues the first time - improve agent productivity
Leverage technology - workforce management tools, global callrouting, speech enabled IVR and integrated customer care tools
Develop products and services to exceed customer expectations
• Launched V-Portal - new customer premise equipment
20
Tracking Churn Over Time
No Meaningful Change in Churn in 4Q07
0.0%
1.0%
2.0%
3.0%
1Q06 2Q06 3Q06 4Q06 1Q07 2Q07 3Q07
Churn has risen over the pastseveral quarters to 3% in 3Q07
Research shows customers aremost susceptible to churn in thefirst 3 months and at month 13
Initiatives to improve the customerexperience are helping but it willtake time to yield material results
Company expects churn to returnto low 2% level
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
4.0%
1 21 41 61 81 101 121 141 161
Churn
Months
Average Attrition Rate1
(1) Attrition defined as terminating customers per period/initial gross customer additions.
21
Strategic Roadmap
1. Fixbusiness
fundamentals
2. Builda strong
core
3. Growfrom the
core
Wave 3Grow from the core
Wave 2Build a strong core
Wave 1Fix business fundamentals
Q3 07 Q4 07 Q1 08 Q2 08 Q3 08 Q4 08
Wave 1 Wave 2 Wave 3
Marketing
Cost Management
Customer Experience
Segmentation
Strengthen ProductPortfolio
Customer lifetime value
Best-in-class operations
Geographic expansion
SMBs
Adjacencies
Bundles
22
Recently introduced international long distance plans to75 locations
Customers can still call France, Spain, Italy, Irelandand the UK free and other locations for 1 cent perminute
30,000+ subscriber lines signed up since Septemberlaunch
Plan and Feature Rollout Underway
23
Vonage Visual Voicemail
Transcribes Vonage voicemail messages totext and sends them to email or cell phone
Virtual phone numbers
Select the country, state, area code you like
Toll free plus
Family and friends anywhere in the US cancall you for free
Plan and Feature Rollout Underway
More than 200,000 customers using advanced features
24
Introduction of MyVonage
V-Portal
Vonage branded device that assists withinstallation, basic troubleshooting, andmuch more
Vonage Whole House Solution
Set up the three handsets for convenientuse throughout the house
Vonage Desk Mate
Plan and Feature Rollout Underway
25
Products and Features in Alpha
Vonage ContactBookManage all contacts in a centralized locationCustomized call message routingVoice activated dialingConference callingCall blast
Vonage FaxOutbound fax service from online account
Vonage Call MeOnline business card that family and friends toenter their number to contact you
Feature Pipeline
26
Strategic Roadmap
1. Fixbusiness
fundamentals
2. Builda strong
core
3. Growfrom the
coreGeographic expansion
SMBs
Adjacencies
Bundles
Wave 3Grow from the core
Wave 2Build a strong core
Wave 1Fix business fundamentals
Q3 07 Q4 07 Q1 08 Q2 08 Q3 08 Q4 08
Wave 1 Wave 2 Wave 3
Marketing
Cost Management
Customer Experience
Segmentation
Strengthen ProductPortfolio
Customer lifetime value
Best-in-class operations
27
Increase participation in business opportunity
Accelerate SMB push
Move beyond SOHOs into enterprise space
Bundle products and services throughpartnerships/ventures
Expand geographic presence beyond UK, Canada
Grow from the Core
28
Strong revenue growth
Improving cost structure
Narrowing losses
Positive cash from operations
Growing product portfolio
Clear strategy to grow the business andreach profitability
Positive adjusted operating incomeexpected for full year 2008
2007
Positioned for Growth in 2008
29
VONAGE HOLDINGS CORP.RECONCILIATION OF GAAP LOSS FROM OPERATIONS TO ADJUSTED
LOSS FROM OPERATIONS AND PRE-MARKETING OPERATING INCOME, EXCLUDING CERTAIN CHARGES(Dollars in thousands)
(unaudited)
Three Months EndedMar 31, Jun 30, Sep 30, Dec 31, Mar 31, Jun 30, Sep 30,
2006 2006 2006 2006 2007 2007 2007Reconciliation of Loss from Operations to Adjusted Loss
from Operations and Pre-Marketing Operating Income:Loss from operations............................................................ (82,403)$ (73,628)$ (65,798)$ (118,659)$ (73,075)$ (33,027)$ (160,512)$
Depreciation and amortization........................................... 4,959 5,740 5,946 7,032 7,859 8,191 8,563 Non-cash stock compensation........................................... 4,452 8,190 7,338 7,000 6,914 6,937 6,228
Adjusted loss from operations.............................................. (72,992) (59,698) (52,514) (104,627) (58,302) (17,899) (145,721) Marketing.......................................................................... 88,288 90,164 91,316 95,581 90,850 67,906 61,885 Customer equipment and shipping..................................... (7,225) (6,742) (6,235) (5,389) (6,573) (5,432) (6,810) Direct cost of goods sold................................................... 17,580 16,047 16,934 12,169 13,333 11,243 17,057
Pre-marketing operating income.......................................... 25,651$ 39,771$ 49,501$ (2,266)$ 39,308$ 55,818$ (73,589)$ As a % of telephony services revenue............................... 22.8% 28.9% 31.8% (1.3)% 20.8% 27.8% (36.1)%
Adjusted loss from operations.............................................. (72,992)$ (59,698)$ (52,514)$ (104,627)$ (58,302)$ (17,899)$ (145,721)$Royalty.............................................................................. - - - 51,345 10,415 11,052 11,139 IP Litigation....................................................................... - - - - - - 132,951 Severance.......................................................................... - - - - - 3,700 533
Adjusted loss from operations excluding certain charges..... (72,992)$ (59,698)$ (52,514)$ (53,282)$ (47,887)$ (3,147)$ (1,098)$
Pre-marketing operating income.......................................... 25,651$ 39,771$ 49,501$ (2,266)$ 39,308$ 55,818$ (73,589)$ Royalty.............................................................................. - - - 51,345 10,415 11,052 11,139 IP Litigation....................................................................... - - - - - - 132,951 Severance.......................................................................... - - - - - 3,700 533
Pre-marketing operating income excluding certain charges. 25,651$ 39,771$ 49,501$ 49,079$ 49,723$ 70,570$ 71,034$
Financials