Vonage 2010 Annual Report Download - page 33

ITEM
7.
M
anagement’s Discussion and Analysis o
f
Financia
l
Condition and Results of Operation
s
You should read the following discussion together wit
h
“
S
elected Financial Data” and our consolidated financial state
-
m
ents an
d
t
h
ere
l
ate
d
notes
i
nc
l
u
d
e
d
e
l
sew
h
ere
i
nt
hi
s
A
nnua
l
R
eport on Form 10-K. This discussion contains forward-lookin
g
statements
,
which involve risks and uncertainties.
O
ur actual
r
esults may differ materially from those we currently anticipate as
a
result of many factors, including the factors we describe under
“I
tem 1
A
—
Ri
s
kF
actors,
”
an
d
e
l
sew
h
ere
i
nt
hi
s
A
nnua
lR
eport on
F
orm 10-
K.
OVERVIEW
We are a leadin
g
provider o
f
low-cost communications serv-
i
ces connectin
g
people throu
g
h broadband devices worldwide
.
We rely heavily on our network, which is a flexible, scalable Ses
-
s
ion Initiation Protocol
(
SIP
)
based Voice over Internet Protocol,
or VoIP, network that rides on to
p
o
f
the Internet. This
p
lat
f
orm
enables a user via a sin
g
le “identity,” either a number or use
r
name, to access and utilize services and
f
eatures re
g
ardless o
f
how they are connected to the Internet, includin
g
over 3G, 4G
,
C
able, or DSL broadband networks. This technolo
g
y enables us
t
oo
ff
er attractivel
y
priced services that provide our customers
with access to Vonage voice, messaging, and
f
eatures, regard
-
l
ess o
f
location
,
device
,
or their
f
orm o
f
Internet access
.
O
ur customers include both domestic and internationa
l
l
ong distance callers, which we classi
f
y as customers who that
make 20 or more minutes o
f
international long distance calls pe
r
month within their plan.
O
ur primary product offering is Vonag
e
W
or
ld
, a res
id
ent
i
a
l
p
l
an w
i
t
h
un
li
m
i
te
d
ca
lli
ng
d
omest
i
ca
ll
yan
d
t
o more than 60 countries, including India, Mexico, and
C
hina
,
for a flat monthl
y
rate
.
W
e introduced our first mobile offering in late 2009, an
outbound long distance calling application, and Vonage Mobil
e
for Facebook in Au
g
ust 2010, enablin
g
inbound and outbound
callin
g
to a user’s Facebook friends. We anticipate levera
g
in
g
our technolo
g
y to offer additional applications for mobile and
other connected devices to address lar
g
e existin
g
markets
.
I
n December 2010, we completed the re
f
inancing o
f
our out
-
s
tanding notes payable. The terms of the new loan include sig
-
n
ificantl
y
lower interest rates and less restrictive covenants than the
prior debt. We believe this refinancing helps to de-risk the busines
s
by simplifying the complex covenant structure and it gives u
s
g
reater flexibility to deploy the cash generated by our business.
We serviced approximatel
y
2.4 million subscriber lines as of
December 31, 2010.
S
ubscribers can sign-up through our direc
t
s
ales channel, as represented b
y
web-sites and toll free num
-
b
ers, or purc
h
ase
d
ev
i
ces at our reg
i
ona
l
an
d
nat
i
ona
l
reta
il
ers,
i
ncluding Walmart and Fry’s Electronics.
O
ur primary source o
f
r
evenue is subscription fees that we charge customers for our
s
erv
i
ce p
l
ans, pr
i
mar
il
y on a mont
hl
y
b
as
i
s.
W
ea
l
so generat
e
r
evenue from call usage that is not included in customers’ serv
-
i
ce plans and for additional features that customers add to their
s
ervice plans. We bill customers in the United
S
tates,
C
anada,
and the United Kingdom.
C
ustomers in the United
S
tates repre
-
s
ented 94% of our subscriber lines at December 31
,
2010.
T
rends in Our Industry and Key Operating Data A number o
f
trends in our industry have a si
g
ni
f
icant e
ff
ect on our results o
f
operations and are important to an understandin
g
o
f
our
f
inancial statements. The table below includes key operatin
g
data that ou
r
mana
g
ement uses to measure the
g
rowth and operatin
g
per
f
ormance o
f
our business
:
F
or t
h
e
Y
ears
E
n
d
e
dD
ecem
b
er
3
1
,
2
0
1
0
2
009
2
008
G
ross subscriber line additions
640
,
20
57
48
,
681 9
5
2
,
014
C
han
g
e in net subscriber line
s
(
30,013
)(
155,458
)
26,92
9
S
ubscriber lines
(
at
p
eriod end
)
2
,
404
,
883 2
,
434
,
896 2
,
60
7,
1
5
6
A
vera
g
e monthly customer churn 2.4
%
3.1
%
3.1
%
A
vera
g
e monthly revenue per lin
e
$
30.48
$
29.49
$
28.9
2
A
vera
g
e monthly telephony services revenue per line
$
30.06
$
28.68
$
27.82
A
vera
g
e monthly direct cost of telephony services per line
$
8.40
$
7.08
$
7.27
Marketin
g
costs per
g
ross subscriber line addition
$
309.54
$
304.52
$
266.1
4
Employees
(
excludin
g
temporary help
)(
at period end
)
1,140 1,225 1,491
B
roa
db
an
d
a
d
opt
i
on
.
The number of United
S
tates house
-
holds with broadband Internet access has grown significantly.
O
n March 16
,
2010
,
the Federal
C
ommunications
C
ommissio
n
(
“F
CC
”
)
released its National Broadband Plan, which seeks
,
th
roug
h
support
i
ng
b
roa
db
an
dd
ep
l
oyment an
d
programs, t
o
encourage broadband adoption for the approximatel
y
1
00 million United
S
tates residents who do not have broadban
d
at home. We expect the trend of greater broadband adoption to
continue. We benefit from this trend because our servic
e
r
equ
i
res a
b
roa
db
an
dI
nternet connect
i
on an
d
our potent
i
a
l
a
dd
ressa
bl
e mar
k
et
i
ncreases as
b
roa
db
an
d
a
d
opt
i
o
n
i
ncreases.
C
ompetitive landscape
.
W
e face intense competition from
t
ra
di
t
i
ona
l
te
l
ep
h
one compan
i
es, w
i
re
l
ess compan
i
es, ca
bl
e
compan
i
es, an
d
a
l
ternat
i
ve vo
i
ce commun
i
cat
i
on prov
id
ers
.
2
6
VO
NA
G
E ANN
U
AL REP
O
RT 2010