Vonage 2010 Annual Report Download - page 43

T
e
l
ep
h
ony serv
i
ces revenue
.
T
e
l
ep
h
on
y
serv
i
ces revenu
e
g
enerally has been flat on a quarterly basis with the exception o
f
t
he first and second
q
uarters of 2010. The increases in tele
p
h
-
ony services revenue in the first and second quarters of 2010
were related to fewer service credits due to pro
g
ram
s
i
m
p
lemented in 2010, lower bad debt due to im
p
roved collec
-
t
ions and fewer delinquent accounts, and sli
g
htly hi
g
her U
S
F
fees.
C
ustomer equipment and shippin
g
revenue.
C
ustomer
e
quipment and shippin
g
revenue was lower in the secon
d
throu
g
h
f
ourth quarters o
f
2009 due to the introduction o
f
ane
w
p
romotion in May 2009 that eliminated equipment and shippin
g
f
ees
f
or customers who si
g
ned up
f
or our residential unlimite
d
p
lan. In 2010, customer equipment and shippin
g
revenue was
lower than 2009 due to lower equipment recovery
f
ees
f
rom
f
ewer terminations. In addition, durin
g
the third quarter o
f
2010,
a
$1,500 reserve was made to cover
p
otential refunds in con-
nection with the
p
ro
p
osed settlement o
f
the consumer clas
s
a
ction liti
g
ation (See Item 3. Le
g
al Proceedin
g
s)
.
D
irect cost o
f
telephony services
.
D
irect cost o
f
telephon
y
services beginning in the
f
ourth quarter o
f
2009 through the
second quarter o
f
2010 increased as expected due call termi-
n
ation costs
f
rom higher international call volume
f
ollowing the
introduction o
f
our Vonage World plan. In the third and
f
ourth
q
uarters of 2010, these increases in call volumes have bee
n
partially offset by more favorable rates negotiated with our serv-
ice providers resulting in lower direct cost of telephony services.
D
irect cost o
f
goods sold
.
T
he change in direct cost o
f
g
oods sold expenses between the quarters was due to fluctua-
t
i
ons
i
nsu
b
scr
ib
er
li
ne a
ddi
t
i
ons.
I
n 2009 an
d
2010
,
t
h
e amor-
tization of deferred customer equipment costs has generall
y
d
iminished as historical amounts have been full
y
amortized an
d
have not been replaced with new deferred costs due to th
e
introduction of a new promotion in Ma
y
2009 that eliminate
d
a
ctivation fees and thus the corresponding cost deferral fo
r
c
ustomers who signed up for our residential unlimited plan or
o
ur
V
onage
W
or
ld
p
l
an
.
S
elling, general and administrative
.
S
elling, general an
d
ad
m
i
n
i
strat
i
ve expenses genera
ll
y
h
ave
d
ecrease
d
on a quarter
l
y
b
asis as a result of our cost management initiatives. In 2009
,
s
e
lli
ng, genera
l
an
d
a
d
m
i
n
i
strat
i
ve cost
d
ec
li
ne
d
pr
i
mar
il
y
d
ue t
o
a
decrease in professional fees and lower selling expenses du
e
to a reduction in the number of kiosk locations. The furthe
r
r
e
d
uct
i
on
i
nse
lli
ng, genera
l
an
d
a
d
m
i
n
i
strat
i
ve cost
i
n 2010 was
p
r
i
mar
ily d
ue to a
d
ecrease
i
n outsource
d
customer care cost
s
a
nd professional fees.
M
ar
k
et
i
ng
.
M
ar
k
et
i
ng expense
d
ec
li
ne
d
t
h
roug
h
out 2009 a
s
we comp
l
ete
d
t
h
e trans
i
t
i
on to our new agenc
i
es an
d
cont
i
nue
d
the development of new advertising and eliminated inefficien
t
non-me
di
a spen
di
n
g
.
I
n 2010, mar
k
et
i
n
g
expense was re
l
at
i
ve
l
y
f
lat as we allocated a fixed marketin
g
spend across channel
s
b
ased u
p
on
p
erformance as we continued to refine our market
-
in
g
strate
g
y
.
LIQUIDITY AND CAPITAL RESOURCES
O
vervie
w
The following table sets forth a summary of our cash flows for the periods indicated:
For the Years Ende
d
D
ecember 31
,
(
dollars in thousands
)
20
1
0 2009 2008
N
et cas
h
prov
id
e
db
y operat
i
ng act
i
v
i
t
i
e
s
$
194
,
212 $ 38
,
396 $ 3
,
55
5
N
et cash (used in) provided by investing activities
(
4,686) (50,565) 40,486
N
et cash used in
f
inancing activitie
s
(
143,762) (3,253) (68,370)
For the year ended December 31, 2010, we
g
enerated
i
ncome
f
rom operations and positive operatin
g
cash
f
low. We
expect to continue to balance e
ff
orts to
g
row our customer bas
e
while consistently achievin
g
operatin
g
pro
f
itability. To
g
row ou
r
customer base, we continue to make investments in marketin
g,
a
pp
lication develo
p
ment as we seek to launch new services,
network quality and expansion, and customer care. Althou
g
hw
e
b
elieve we will achieve consistent pro
f
itability in the
f
uture, w
e
ultimately may not be success
f
ul and we may never achieve
consistent operatin
g
pro
f
itability. We believe that cash
f
low
f
ro
m
o
p
erations and cash on hand will
f
und our o
p
erations
f
or at leas
t
the
n
e
xt tw
el
v
e
m
o
nt
hs.
D
ecem
b
er 2010
Fi
nanc
i
ng
O
n December 14, 2010, we entered into a credit agreemen
t
(the “Credit Facility”) consistin
g
of a
$
200,000 senior secured
t
erm loan. The co-borrowers under the
C
redit Facilit
y
are us an
d
Vona
g
e America Inc., our wholly owned subsidiary.
O
bli
g
ations
under the
C
redit Facility are
g
uaranteed, fully and uncondition
-
ally, by our other United
S
tates subsidiaries and are secured b
y
s
ubstantially all o
f
the assets o
f
each borrower and each o
f
th
e
g
uarantors. An a
ff
iliate o
f
the chairman o
f
our board o
f
directors
and one o
f
our
p
rinci
p
al stockholders is a lender under th
e
C
redit Facility.
Use of Proceed
s
We used the net proceeds of the Credit Facilit
y
of
$
194,000
(
$
200,000 principal amount less ori
g
inal discount of
$
6,000)
,
p
lus
$
102,090 of cash on hand, to (i) exercise our existin
g
ri
g
ht
t
o retire debt under our senior secured first lien credit facility
(
th
e
“First Lien
S
enior Facility”
)
for 100% of the contractual make
-
whole
p
rice,
(
ii
)
retire debt under our senior secured second lien
credit facility
(
the “
S
econd Lien
S
enior Facility”
)
at a more than
25% discount to the contractual make-whole
p
rice, an
d
(
iii
)
cause the conversion of all outstandin
g
third lien convertible
notes
(
the “
C
onvertible Notes”
)
into 8,276 shares of our com
-
mon stock. We also incurred
$
11,444 of debt related costs i
n
connection with the Credit Facility and repayment of our First
Lien Senior Facility and our Second Lien Senior Facility, an
d
conversion of our
C
onvertible Notes
.
36
VO
NA
G
E ANN
U
AL REP
O
RT 2010