Vonage Holdings Corp. Reports Fourth Quarter and Full Year 2007 Results

HOLMDEL, N.J., Feb. 13 /PRNewswire-FirstCall/ -- Vonage Holdings Corp. , a leading provider of broadband telephone service, today announced results for the quarter and year ended December 31, 2007.

Revenue for the fourth quarter 2007 grew to a record $216 million, up 19% from $181 million in the fourth quarter 2006, driven by an increase in subscriber lines.

For the fourth quarter of 2007, the Company reported a GAAP net loss of $11 million or $0.07 per share. Excluding certain charges(2), net loss narrowed to $9 million, or $0.06 per share, down from $65 million reported in the fourth quarter 2006. Adjusted operating income excluding certain charges(1) was $6 million in the quarter, a significant improvement from a loss of $53 million in the year-ago quarter.

Jeffrey Citron, Vonage Chairman, said, "Although 2007 was a difficult period marked by numerous legal challenges, Vonage maintained its focus on improving the business. We improved our marketing efficiency, reduced our cost structure and for the first time in our history, generated positive adjusted operating income in the fourth quarter. Looking to 2008, we are confident in our ability to grow the business profitably and provide customers innovative, feature-rich and cost-effective communications services."

Fourth Quarter 2007 Financial and Operating Highlights

Fourth quarter 2007 revenue grew to $216 million, an increase of 19% from $181 million in the year-ago quarter. The year-over-year increase was driven by growth in subscriber lines.

Average monthly revenue per line in the fourth quarter 2007 was $28.19, down from $28.25 in the year-ago quarter and $28.24 reported in the third quarter 2007. Average monthly telephony services revenue per line for the quarter increased to $27.42, in line with $27.41 reported a year ago and up from $27.32 sequentially.

In the fourth quarter 2007, direct cost of telephony services was $54 million, up from $52 million a year ago and in line with the third quarter 2007. On a per line basis, average direct cost of telephony services fell to $7.11, down from $8.13 in the year ago quarter and $7.30 sequentially as the Company continued to benefit from call routing efficiency and scale.

Direct cost of goods sold for the quarter was $17 million, up from $12 million in the year-ago quarter and in line with the prior quarter. Direct margin(3) increased to 67% of revenues from 65% in the year-ago quarter.

Selling, general and administrative ("SG&A") expense excluding certain charges(4) was $77 million, down from $82 million in the year-ago quarter, and $81 million sequentially.

Pre-marketing operating income excluding certain charges(1) was $81 million, up from $49 million in the year-ago quarter and $71 million sequentially.

Marketing expense for the quarter was $63 million, or 29% of revenue, down sharply from $96 million, or 53% of revenue a year ago. Marketing expense was up slightly from the third quarter 2007. Marketing cost per gross subscriber line addition ("SLAC") was $223 in the fourth quarter 2007. As expected, SLAC increased slightly from $206 in the third quarter due to seasonal costs of advertising. The Company expects the cost of acquisition will be within $225- $250 for 2008.

Vonage added 56,000 net subscriber lines during the quarter to end the year at nearly 2.6 million lines.

Excluding certain charges, adjusted income from operations(1) was $6 million in the fourth quarter 2007, up from a loss of $53 million in the year ago quarter and a loss of $1 million sequentially. The Company generated $3 million in adjusted operating income in the fourth quarter 2007. John Rego, Vonage CFO said, "This is a significant accomplishment for the Company and reflects our ability to grow while effectively managing costs. We reached this milestone ahead of plan, and did so in a turbulent year."

Average monthly customer churn remained flat sequentially at 3.0% in the fourth quarter 2007.

Current cash and marketable securities and restricted cash on December 31, 2007 was $190 million. This includes $39 million in restricted cash used as collateral for routine business operations. The change in cash from the prior quarter was driven by settlement payments of $202 million, capital expenditures of $9 million, cash provided from operations(5) of $15 million and an $8 million increase in restricted cash. This is the second consecutive quarter of positive cash generation from operations.

Year-End 2007 Results

Revenue for 2007 increased to $828 million, up 36% from $607 million in 2006. Adjusted loss from operations excluding certain charges(1) narrowed to $46 million from $238 million in 2006. Net loss excluding certain charges(2) in 2007 narrowed to $90 million from $286 million the prior year. GAAP net loss was $265 million or $1.70 per share in 2007.

Vonage added 356,000 net subscriber lines in 2007 and finished the year with nearly 2.6 million lines in service, 16% above the year-ago level of 2.2 million lines.

Convertible Debt Refinancing Update

Vonage has $253 million in convertible debt, which can be put to the Company in December 2008. The Company with its financial advisors is currently in discussions with several parties regarding a refinancing of the debt. While the result of such discussions cannot be predicted with certainty, Vonage believes that it will be able to resolve its financial issues and meet its obligations. There can be no assurance, however, that Vonage will be able to resolve these issues in the near term. Assuming the Company has no resolution by the time it files its annual report on Form 10-K, the Company expects that its auditors' report on its 2007 financial statements will include an explanatory paragraph regarding the Company's ability to continue as a going concern.

Restatement

Vonage announced today that the Company's management, in consultation with the Company's Audit Committee and independent registered public accounting firm, determined that it is necessary to restate the Company's financial statements for the second and third quarters of 2007 in order to correct the amount of non-cash stock compensation expenses recorded by the Company for those periods. Accordingly, the Company's financial statements for such periods should not be relied on. Due to the departure of the Company's former Chief Executive Officer, certain senior executives and personnel impacted by the Company's reduction in force during the second and third quarters of 2007, there was a corresponding forfeiture of a large number of stock awards, and the Company determined that actual forfeitures as a result of these actions exceeded previous estimates. As a result, non-cash stock compensation expense should have been reduced concurrent with the resignation of these employees and an adjustment of stock-based compensation as required by SFAS 123R should have been recorded at that time. This restatement will not result in a change in the Company's previously reported revenues, cash flow from operations or total cash and cash equivalents shown in the second and third quarter 2007 financial statements. Instead, the resulting reduction in non-cash stock compensation will effect a decrease in selling, general and administrative expense of approximately $10 million in the second quarter and approximately $4 million in the third quarter of 2007. In light of the restatement, the Company believes that a material weakness existed in the design of its internal control procedures relating to recording its stock-based compensation expense. Although the Company's procedures did detect in the fourth quarter that stock-based compensation was overstated in the second and third quarters of 2007, the control was not designed in a manner to provide this conclusion in a timely manner. The Company has remediated this material weakness and prospectively will adjust its estimated forfeitures to actual forfeitures on a quarterly basis.

(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. (5) This is a non-GAAP financial measure. Refer below to Table 7 for a reconciliation to GAAP net cash used in operating activities. VONAGE HOLDINGS CORP. TABLE 1. SUMMARY CONSOLIDATED FINANCIAL DATA (Dollars in thousands, except per share amounts) Three Months Ended For the Years Ended December 31, December 31, 2007 2006 2007 2006 (unaudited) Statement of Operations Data: Operating Revenues: Telephony services $209,961 $176,074 $803,522 $581,806 Customer equipment and shipping 5,891 5,389 24,706 25,591 215,852 181,463 828,228 607,397 Operating Expenses: Direct cost of telephony services (excluding depreciation and amortization of $4,871, $3,775, $17,487, and $12,715, respectively) 54,467 52,205 216,831 171,958 Royalty - 51,345 32,606 51,345 Total direct cost of telephony services 54,467 103,550 249,437 223,303 Direct cost of goods sold 17,484 12,169 59,117 62,730 Selling, general and administrative 78,835 81,790 461,768 272,826 Marketing 63,327 95,581 283,968 365,349 Depreciation and amortization 9,731 7,032 34,344 23,677 223,844 300,122 1,088,634 947,885 Loss from operations (7,992) (118,659) (260,406) (340,488) Other income (expense), net Interest income 2,516 7,030 17,582 21,472 Interest expense (4,407) (5,606) (20,107) (19,583) Other, net (1,543) (73) (1,612) (189) (3,434) 1,351 (4,137) 1,700 Loss before income tax expense (11,426) (117,308) (264,543) (338,788) Income tax expense 289 215 (182) 215 Net loss $(11,137) $(117,093) $(264,725) $(338,573) Net loss per common share: Basic and diluted $(0.07) $(0.76) $(1.70) $(3.59) Weighted-average common shares outstanding: Basic and diluted 155,923 154,962 155,593 94,207 VONAGE HOLDINGS CORP. TABLE 1. SUMMARY CONSOLIDATED FINANCIAL DATA (Continued) (Dollars in thousands, except per share amounts) Three Months Ended For the Years Ended December 31, December 31, 2007 2006 2007 2006 (unaudited) Statement of Cash Flow Data: Net cash provided by (used in) operating activities $(181,937) $(28,206) $(270,926) $(188,898) Net cash provided by (used in) investing activities 125,174 86,402 132,003 (210,798) Net cash provided by (used in) financing activities (229) (1,920) 245 477,429 December 31, December 31, 2007 2006 Balance Sheet Data (at period end): Cash, cash equivalents and marketable securities $151,484 $499,736 Restricted cash 38,928 8,042 Property and equipment, net of accumulated depreciation 118,666 128,247 Total assets 465,000 757,524 Convertible notes, net 253,320 253,430 Capital lease obligations 23,235 24,255 Total liabilities 537,424 574,323 Total stockholders' equity (deficit) (72,424) 183,201 VONAGE HOLDINGS CORP. TABLE 2. SUMMARY CONSOLIDATED OPERATING DATA (unaudited) Three Months Ended December September December 31, 2007 30, 2007 31, 2006 Gross subscriber line additions 283,907 299,978 312,094 Net subscriber line additions 56,016 77,763 166,267 Subscriber lines (at period end) 2,580,227 2,524,211 2,224,111 Average monthly customer churn 3.0% 3.0% 2.3% Average monthly revenue per line $28.19 $28.24 $28.25 Average monthly telephony services revenue per line $27.42 $27.32 $27.41 Average monthly total direct cost of telephony services per line $7.11 $8.80 $16.12 Marketing costs per gross subscriber line addition $223.06 $206.30 $306.26 Employees (excluding temporary help) (at period end) 1,543 1,559 1,790 CPE subsidy $40.83 $34.16 $21.72 Direct margin as a % of total revenue 66.7% 66.0% 64.5% For the Years Ended December 31, 2007 2006 Gross subscriber line additions 1,153,218 1,470,138 Net subscriber line additions 356,116 955,073 Subscriber lines (at period end) 2,580,227 2,224,111 Average monthly customer churn 2.8% 2.5% Average monthly revenue per line $28.73 $28.98 Average monthly telephony services revenue per line $27.87 $27.76 Average monthly total direct cost of telephony services per line $8.65 $10.65 Marketing costs per gross subscriber line addition $246.24 $248.51 Employees (excluding temporary help) (at period end) 1,543 1,790 CPE subsidy $29.84 $25.26 Direct margin as a % of total revenue 66.7% 61.4% VONAGE HOLDINGS CORP. TABLE 3. RECONCILIATION OF GAAP LOSS FROM OPERATIONS TO ADJUSTED INCOME (LOSS)

FROM OPERATIONS AND PRE-MARKETING OPERATING INCOME (LOSS),EXCLUDING CERTAIN

CHARGES (Dollars in thousands) (unaudited) Three Months Ended December September December 31, 2007 30, 2007 31, 2006 (restated) Income (loss) from operations $(7,992) $(156,712) $(118,659) Depreciation and amortization 9,731 8,563 7,032 Non-cash stock compensation 1,663 2,428 7,000 Adjusted income (loss) from operations 3,402 (145,721) (104,627) Marketing 63,327 61,885 95,581 Customer equipment and shipping (5,891) (6,810) (5,389) Direct cost of goods sold 17,484 17,057 12,169 Pre-marketing operating income (loss) $78,322 $(73,589) $(2,266) As a % of telephony services revenue 37.3% (36.1%) (1.3%) Adjusted income (loss) from operations $3,402 $(145,721) $(104,627) Royalty - 11,139 51,345 IP litigation 1,349 132,951 - Severance 885 533 - Adjusted income (loss) from operations excluding certain charges $5,636 $(1,098) $(53,282) Pre-marketing operating income (loss) $78,322 $(73,589) $(2,266) Royalty - 11,139 51,345 IP litigation 1,349 132,951 - Severance 885 533 - Pre-marketing operating income (loss) excluding certain charges $80,556 $71,034 $49,079 For the Years Ended December 31, 2007 2006 Income (loss) from operations $(260,406) $(340,488) Depreciation and amortization 34,344 23,677 Non-cash stock compensation 7,542 26,980 Adjusted income (loss) from operations (218,520) (289,831) Marketing 283,968 365,349 Customer equipment and shipping (24,706) (25,591) Direct cost of goods sold 59,117 62,730 Pre-marketing operating income (loss) $99,859 $112,657 As a % of telephony services revenue 12.4% 19.4% Adjusted income (loss) from operations $(218,520) $(289,831) Royalty 32,606 51,345 IP litigation 134,300 - Severance 5,242 - Adjusted income (loss) from operations excluding certain charges $(46,372) $(238,486) Pre-marketing operating income (loss) $99,859 $112,657 Royalty 32,606 51,345 IP litigation 134,300 - Severance 5,242 - Pre-marketing operating income (loss) excluding certain charges $272,007 $164,002 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 For the Years Ended December September December December 31, 31, 2007 30, 2007 31, 2006 2007 2006 (restated) Net loss $(11,137) $(158,028) $(117,093) $(264,725) $(338,573) Royalty - 11,139 51,345 32,606 51,345 Interest on royalty - 1,008 1,170 2,436 1,170 IP litigation 1,349 132,951 - 134,300 - Severance 885 533 - 5,242 - Net loss excluding certain charges $(8,903) $(12,397) $(64,578) $(90,141) $(286,058) Net loss per common share: Basic and diluted $(0.07) $(1.01) $(0.76) $(1.70) $(3.59) Net loss per common share, excluding certain charges: Basic and diluted $(0.06) $(0.08) $(0.42) $(0.58) $(3.04) Weighted-average common shares outstanding: Basic and diluted 155,923 155,784 154,962 155,593 94,207 VONAGE HOLDINGS CORP. TABLE 5. RECONCILIATION OF GAAP SG&A TO SG&A EXCLUDING CERTAIN CHARGES (Dollars in thousands) (unaudited) Three Months Ended For the Years Ended December September December December 31, 31, 2007 30, 2007 31, 2006 2007 2006 (restated) Selling, general and administrative $78,835 $214,139 $81,790 $461,768 $272,826 IP litigation (1,349) (132,951) - (134,300) - Severance (885) (533) - (5,242) - SG&A excluding certain charges $76,601 $80,655 $81,790 $322,226 $272,826 SG&A excluding certain charges as a % of revenue 35.5% 38.3% 45.1% 38.9% 44.9% VONAGE HOLDINGS CORP. TABLE 6. RECONCILIATION OF GAAP NET LOSS TO CASH NET LOSS EXCLUDING CERTAIN CHARGES (Dollars in thousands) (unaudited) Three Months Ended December September December 31, 2007 30, 2007 31, 2006 (restated) Net loss $(11,137) $(158,028) $(117,093) Royalty - 11,139 51,345 Interest on royalty - 1,008 1,170 IP litigation 1,349 132,951 - Severance 885 533 - Depreciation and amortization 9,731 8,563 7,032 Non-cash stock compensation 1,663 2,428 7,000 Other non-cash items in net loss 4,415 1,376 2,206 Cash net income (loss) excluding certain charges $6,906 $(30) $(48,340) For the Years Ended December 31, 2007 2006 Net loss $(264,725) $(338,573) Royalty 32,606 51,345 Interest on royalty 2,436 1,170 IP litigation 134,300 - Severance 5,242 - Depreciation and amortization 34,344 23,677 Non-cash stock compensation 7,542 26,980 Other non-cash items in net loss 9,182 8,011 Cash net income (loss) excluding certain charges $(39,073) $(227,390) VONAGE HOLDINGS CORP. TABLE 7. RECONCILIATION OF GAAP NET CASH PROVIDED BY (USED IN) OPERATIONS TO NET CASH PROVIDED BY (USED IN) OPERATIONS EXCLUDING CERTAIN CHARGES (Dollars in thousands) (unaudited) Three Months Ended December September December 31, 2007 30, 2007 31, 2006 Net cash provided by (used in) operating activities $(181,937) $22,461 $(28,206) Reversal of accrued IP litigation 191,325 - - Prepaid services per Sprint settlement 5,000 - - Payment per AT&T settlement 650 - - Net cash provided by (used in) operating activities excluding certain charges $15,038 $22,461 $(28,206) Use of Non-GAAP Financial Measures

This press release 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 net cash from operations 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. The Company believes that 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.

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. In addition, as we are currently growing both our revenue and customer base, we have chosen to invest significant amounts on our marketing activities to acquire and replace subscribers. 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 net cash from operations excluding certain charges as this provides an important measure of cash required to fund ongoing operations excluding 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, 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 net cash from operations excluding certain charges as net cash from operations less IP litigation and settlements.

Conference Call and Webcast

Management will host a webcast discussion of the quarter's and full year's results on Wednesday, February 13, 2008 at 10:00 AM Eastern Time. To participate, please dial (877) 548-7903 approximately ten minutes prior to the call. International callers should dial (719) 325-4896. A replay will be available approximately two hours after the conclusion of the call until midnight February 27, 2008, and may be accessed by dialing (888) 203-1112. International callers should dial (719) 457-0820. Replay Passcode: 1142438

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.

Safe Harbor Statement

This press release contains forward-looking statements regarding the Company's ability to grow profitably, ability to refinance its outstanding convertible notes and the Company's cost of acquisition for 2008. 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 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 is a leading provider of broadband telephone services with nearly 2.6 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.

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