Vonage 2010 Annual Report Download - page 36

r
evenues. The amortization of deferred retailer commissions is
r
ecorded as marketin
g
expense. This customer li
f
e is solely use
d
to amortize deferred activation fees collected, which we have
waived for almost all new customers since May 2009, includin
g
those si
g
nin
g
up
f
or our Vona
g
e World plan, alon
g
with the related
incremental customer acquisition costs. Customers si
g
nin
g
up fo
r
our
V
onage
W
or
ld
p
l
an current
l
yc
h
urn at
l
ower rates t
h
an ot
h
e
r
customers, and there
f
ore appear to have a longer customer li
f
e
.
Because these customers have not
p
aid an activation
f
ee, thi
s
does not impact the customer life used in determinin
g
the amor-
tization period. The customer life is 38 months for 2010 and wa
s
44 months in 2009. For 2011, the customer li
f
e will remain at 3
8
months based on consistent historical trends. The im
p
act o
f
these
changes to the customer life was not material to the consolidated
r
esults o
f
operations
.
In the United
S
tates, we char
g
ere
g
ulatory recovery fees on a
monthly basis to defray the costs associated with regulator
y
consultin
g
and compliance as well as related liti
g
ation, E-91
1
compliance, and to cover taxes that we are char
g
ed by th
e
s
uppliers of telecommunications services. In addition, we recog
-
nize revenue on a gross basis
f
or contributions to the Federal
U
niversal Service Fund, or USF, and related fees. All other taxes
a
r
e
r
eco
r
ded o
n
a
n
e
t
basis
.
In addition, in some cases we char
g
e a disconnect
f
ee
f
o
r
customers who terminate their service
p
lan within the
f
irst twelv
e
months of service. Disconnect fees are recorded as revenue and
are recogn
i
ze
d
at t
h
et
i
me t
h
e customer term
i
nates serv
i
ce.
Be
g
innin
g
in September 2010, we eliminated the disconnect fee
f
o
rn
e
w
cus
t
o
m
e
r
s
.
T
elephony services revenue is o
ff
set by the cost o
f
certain
customer acqu
i
s
i
t
i
on act
i
v
i
t
i
es, suc
h
as re
b
ates an
d
promot
i
ons.
C
ustomer equipment and shippin
g
revenue
.
Customer
e
quipment and shippin
g
revenue consists o
f
revenue
f
rom sales
o
f customer equipment to our wholesalers or directl
y
to custom
-
e
rs an
d
reta
il
ers.
I
na
ddi
t
i
on, customer equ
i
pment an
d
s
hi
pp
i
n
g
r
evenue includes the
f
ees, when collected, that we char
g
eou
r
c
ustomers for shippin
g
any equipment to them. In addition, in
s
ome cases we charge an equipment recovery fee for customer
s
w
ho terminate their service
p
lan within the
f
irst twelve months o
f
s
ervice. Equipment recovery
f
ees are recorded as revenue and ar
e
r
ecogn
i
ze
d
at t
h
et
i
me t
h
e customer term
i
nates serv
i
ce.
B
eg
i
nn
i
ng
in September 2010, we eliminated the equipment recover
y
fee fo
r
n
e
w
cus
t
o
m
e
r
s.
OPERATING EXPENSES
O
peratin
g
expenses consist of direct cost of telephony serv
-
i
ces, royalties, direct cost o
fg
oods sold, sellin
g
,
g
eneral and
administrative expense, marketin
g
expense, and depreciation an
d
a
m
o
rtiz
a
ti
o
n
.
Total direct cost o
f
telephon
y
services
.
To
t
a
l
d
ir
ec
t
cos
t
of
t
elephony services primarily consists o
ff
ees that we pay to thir
d
p
arties on an on
g
oin
g
basis in order to provide our services
.
T
h
ese fees
in
c
l
ude:
>
A
ccess char
g
es that we pay to other telephone companies to
terminate domestic and international calls on the
p
ublic
s
witched tele
p
hone network. These costs re
p
resented
a
pproximately 49
%
and 44
%
o
f
our total direct cost o
f
telephony services
f
or 2010 and 2009, respectively, with a
p
ortion o
f
these payments ultimately bein
g
made to
incumbent telephone companies. When a Vona
g
e subscribe
r
c
alls another Vona
g
e subscriber, we do not pay an acces
s
c
har
g
e
.
>
The cost o
f
leasin
g
Internet transit services
f
rom multiple inter-
net service providers. This Internet connectivity is used t
o
c
arry VoIP session initiation si
g
nalin
g
and packetized audi
o
media between our subscribers and our re
g
ional data cen-
t
e
r
s
.
>
The cost o
f
leasin
gf
rom other telephone companies the tele
-
p
hone numbers that we
p
rovide to our customers. We lease
t
h
ese te
l
ep
h
one num
b
ers on a mont
hl
y
b
as
i
s.
>
The cost o
f
co-locatin
g
our re
g
ional data connection poin
t
e
quipment in third-party
f
acilities owned by other telephon
e
c
ompanies, Internet service providers or collocation
f
acilit
y
p
rov
id
ers.
>
The cost o
f
providing local number portability, which allow
s
c
ustomers to move their existing telephone numbers
f
rom
a
nother provider to our service. Only regulated tele
-
c
ommun
i
cat
i
ons prov
id
ers
h
ave access to t
h
e centra
li
ze
d
number databases that facilitate this process. Because w
e
a
re not a regu
l
ate
d
te
l
ecommun
i
cat
i
ons prov
id
er, we must
p
a
y
ot
h
er te
l
ecommun
i
cat
i
ons prov
id
ers to process our
l
oca
l
num
b
er porta
bili
t
y
requests
.
>
The cost of complying with the F
CC
regulations regardin
g
V
o
IP
emergency serv
i
ces, w
hi
c
h
requ
i
re us to prov
ide
e
n
h
ance
d
emergency
di
a
li
ng capa
bili
t
i
es to transm
i
t 911 ca
lls
f
or all of our customers
.
>
Taxes that we pa
y
on our purchase of telecommunication
s
s
ervices from our suppliers or imposed by government agen-
c
ies such as Federal
US
F and related fees.
>
R
o
y
alties for use of third-part
y
intellectual propert
y.
Direct cost o
f
goods sold
.
D
irect cost o
f
goods sold primarily
consists o
f
costs that we incur when a customer
f
irst subscribe
s
t
o our serv
i
ce.
Th
ese costs
i
nc
l
u
d
e:
>
T
he cost o
f
the e
q
ui
p
ment that we
p
rovide to customers wh
o
s
ubscribe to our service throu
g
h our direct sales channel i
n
e
x
cess of ac
tiv
a
ti
o
n
fees
wh
e
n
a
n
ac
tiv
a
ti
o
n
fee
i
sco
ll
ec
t
ed.
T
he remainin
g
cost o
f
customer equipment is de
f
erred up t
o
th
eac
tiv
a
ti
o
n
fee co
ll
ec
t
ed a
n
da
m
o
rtiz
ed o
v
e
rth
ees
tim
a
t
ed
avera
g
e customer li
f
e.
>
T
he cost o
f
the equipment that we sell directly to retailers.
>
T
he cost o
f
shippin
g
and handlin
gf
or customer equipment,
toget
h
er w
i
t
h
t
h
e
i
nsta
ll
at
i
on manua
l
,t
h
at we s
hi
p to custom-
ers
.
>
T
he cost o
f
certain products or services that we give custom-
ers as promot
i
ons.
S
ellin
g
,
g
eneral and administrative expense. Sellin
g
,
g
enera
l
a
nd administrative ex
p
ense includes
:
>
C
ompensation and benefit costs for all emplo
y
ees, which is
t
he lar
g
est component of sellin
g
,
g
eneral and administrativ
e
ex
p
ense and includes customer care, research and develo
p
-
m
ent, network en
g
ineerin
g
and operations, sales and market
-
i
n
g
, executive, le
g
al, finance, and human resource
s
p
ersonnel
.
>
S
hare-based ex
p
ense related to share-based awards to
employees, directors, and consultants
.
>
O
utsourced labor related to customer care and retail in-store
su
pp
ort activities
.
>
T
ransaction fees
p
aid to credit card, debit card, and ECP
companies, which include a per transaction char
g
e in addi
-
t
ion to a percent o
f
billin
g
s char
g
e.
2
9