Vonage 2011 Annual Report Download - page 10

PART I
ITEM 1. Business
OVERVIEW
We are a leading provider of communications services con-
necting people through broadband devices worldwide. We rely
heavily on our network, which is a flexible, scalable Session Ini-
tiation Protocol (SIP) based Voice over Internet Protocol, or VoIP,
network. This platform enables a user via a single “identity,” either
a number or user name, to access and utilize services and features
regardless of how they are connected to the Internet, including
over 3G, 4G, Cable, or DSL broadband networks. This technology
enables us to offer our customers attractively priced voice and
messaging services and other features around the world.
In 2009, we shifted our primary emphasis from the domestic
home phone replacement market to the international long distance
market. With Vonage World we offer unlimited calling domestically
and to more than 60 countries, including India, Mexico, and China,
for a flat monthly rate. We believe the value and convenience pro-
vided by Vonage World is particularly appealing to international
long distance callers compared to offers from our competitors.
In addition to our landline telephony business, we are leverag-
ing our technology to offer services and applications for mobile
and other connected devices to address large existing markets.
We introduced our first mobile offering in late 2009 and have con-
tinued to build upon our mobile services strategy with two product
introductions in mid-2011. In early 2012, we introduced Vonage
Mobile, our all-in-one mobile application that provides free calling
and messaging between users who have the application, as well as
low-cost international calling to more than 200 countries to any
other phone. In addition, calls by users of the mobile application to
Vonage home or business lines are also free. This mobile applica-
tion works over WiFi, 3G and 4G and in more than 90 countries
worldwide. Vonage Mobile consolidates the best features of our
prior applications, while adding important functionality, better
value, and improved ease of use. Vonage Mobile users can
instantly add calling credit from within the application through
iTunes or the Android Market for calls to users without the applica-
tion. Vonage Mobile uses the phone’s existing mobile number and
contact list, eliminating the need for unique user names and dupli-
cate identities for contacts and allowing users to build a free global
calling and messaging network from their existing contacts using
the application’s multiple invitation system.
We have made significant financial progress over the past four
years providing a solid foundation for the future. We have managed
a significant strategic shift while transforming the cost structure in
our core business to drive significant improvements in profitability.
We enhanced the value of our product by investing in upgraded
systems, streamlined processes, and improved customer experi-
ence, which we believe have helped stabilize our subscriber base
while driving structural cost reductions throughout the company. In
addition to reducing ongoing costs, these structural improvements
enabled us to absorb incremental costs resulting from a growth in
international minutes as we added new customers to our Vonage
World plan. By lowering international termination costs, lowering
domestic calling rates, and reducing the cost of our devices by
nearly a third, we have significantly improved our profitability.
In 2011, our core business generated substantial net income
and cash flow on relatively flat service revenues, driven by an
aggressive focus on driving efficiencies throughout our oper-
ations. Through two refinancings in the past 14 months, we have
reduced our debt by over 50% and lowered interest rates from
highs of 20% to less than 4%, saving $43 million in annual inter-
est expense from the debt structure in place in 2010.
We had approximately 2.4 million subscriber lines for broad-
band telephone replacement services as of December 31, 2011.
We bill customers in the United States, Canada, and the United
Kingdom. Customers in the United States represented 94% of our
subscriber lines at December 31, 2011.
OUR VISION AND STRATEGY
Building on our solid financial foundation, we are focused on
growth in three primary areas that target substantial existing rev-
enue streams.
>International long distance calling. We are solidifying our core
business through continued penetration of international calling
segments. The markets for international long distance are
large and growing, and they allow us to leverage our VoIP
network by providing customers a low-cost and convenient
alternative to services offered by telecom and cable providers
and international calling cards. According to industry data, the
total outbound international long distance calling market is
estimated to be $80 billion, and approximately 10 to 15 per-
cent of all US households make international long distance
calls, using a mix of home and mobile phones. While our
primary emphasis remains the international long distance call-
ing market in the United States, the domestic calling market
continues to be attractive. Despite the shift to wireless and a
decline in usage, according to industry data there are approx-
imately 75 million households in the United States with land-
lines. This is a sizable market opportunity.
Our strategic focus on international segments has been
successful. Approximately 50 percent of our customers are now
on Vonage World, and approximately 35 percent are international
long distance callers, which we classify as customers who make
20 or more minutes of international long distance calls per month.
To increase the visibility of our Vonage World plan, we have
shifted an increasing portion of our marketing budget from broad
national advertising as we target attractive segments of the inter-
national long distance market. We have prioritized our marketing
and sales programs, and in the past year and a half, opened three
bilingual sales and service sites. As a result, our base of Hispanic
callers has grown by more than 50 percent in the past year.
We have direct sales channels where customers can sub-
scribe to our services on-line or through our toll-free number, as
well as a retail distribution channel through regional and national
retailers and localized street teams. In 2011, we doubled the
number of retail distribution outlets with the recent addition of
Best Buy, Kmart and Sears. Combined with our existing partners,
Walmart, Fry’s and Microcenter, we now have distribution
2VONAGE ANNUAL REPORT 2011