Vonage 2012 Annual Report Download - page 2

Since the Company’s inception, Vonage has harnessed the power
of the Internet to provide consumers with increased freedom
and  exibility to communicate anywhere in the world. We’ve
eliminated the geographic boundaries associated with traditional
phone service, pioneered innovative new features and delivered
exceptional value to bring people closer together.
Now, in a world that has embraced mobility, we are innovating to
meet the communications needs of our customers once again.
And while the opportunity ahead of us is vast, our vision is clear:
to be a leading provider of communications services connecting
individuals through cloud-enabled broadband devices worldwide.
In 2012, our efforts brought us closer to realizing this vision. We
generated solid  nancial and operating results and achieved
key milestones in each of our three strategic growth initiatives.
Our strong performance is the result of the hard work and
dedication of our nearly 1,000 employees around the world. While
we have more work to do, I’m pleased with the substantial
progress that we’ve made.
Our Transformation
Over the past  ve years, we have fundamentally transformed
our strategy, our operations and our  nancial performance. These
changes have resulted in an increase of $182million in adjusted
EBITDA* and $214million in Free Cash Flow.*
Strategically, we shifted our primary focus to the rapidly growing
but underserved ethnic segments in the U.S. We improved
our value proposition by being the  rst to deliver  at-rate unlimited
calling to more than 60 countries with the launch of our Vonage
World service. And, we were the  rst to provide easy-to-use
enhanced features like voice-to-text translation and mobile
extension services at no extra cost. These strategic shifts have
resulted in new customers with a higher lifetime value and a
better churn pro le than those in the past.
Our focus on operations has resulted in a greatly improved cost
structure. Since 2008, we reduced network and domestic termination
costs by 63%; and, international long distance termination rates
are down 30%. In addition, we’ve reduced customer care costs
per line by 45%, resulting in $50million in annual savings. Perhaps
more importantly, we’ve been able to execute these structural
cost enhancements while signi cantly improving our call quality
and customer service performance.
We have also transformed our balance sheet. Two debt re nanc-
ings reduced annual interest expense from $49million in 2010
to less than $6million in 2012, and reduced interest rates from 20%
in 2009 to less than 4% today. Capitalizing on the low interest
rate environment and our strong  nancials, we completed a third
re nancing in February 2013, providing us with additional liquidity
and enhanced  exibility to invest in growth, while further reducing
our cost of borrowing.
In August 2012, as part of our balanced approach to capital
allocation, we initiated a $50million stock repurchase program.
By early 2013, we had repurchased 14million shares of common
stock. Re ecting our continued belief that buybacks can be
an effective use of capital to create shareholder value, our Board
of Directors authorized a new $100million share repurchase pro-
gram to be concluded by the end of 2014. The  nancial markets
have responded positively. Since announcing our initial repurchase
plan, Vonage stock has appreciated by 60%.
Having achieved  nancial and operational stability, our teams have
also rekindled the spirit of innovation that is our heritage. In 2012,
2.6%
3.1% 3.1%
2.4%
2.6%
Average Monthly
Customer Churn
Revenue
(IN MILLIONS)
$849
08
$900
09
$889
10
$885
11
$870
12
08
09
10 11 12
08 09 10 11 12
($34)
$3
$47
$99
$84
Net Income (Loss),
Ex-Adjustments*
(IN MILLIONS)
08 09 10 11 12
$54
$119
$156
$168
$135
$23
Adjusted EBITDA*
(IN MILLIONS)
Investment in growth initiatives
*Adjusted EBITDA, net income (loss) excluding adjustments and Free Cash Flow are non-GAAP nancial measures. We dene adjusted EBITDA as GAAP (loss) income from operations excluding depreciation and amortization,
loss from abandonment of software assets, and share-based expense. We dene net income (loss) excluding adjustments as GAAP net income (loss) excluding loss from abandonment of software assets, the change in fair value
of embedded features within notes payable and stock warrant, the loss (gain) on extinguishment of notes and income tax expense (benet). Vonage denes Free Cash Flow as net cash provided by operating activities minus
capital expenditures, intangible assets and acquisition and development of software assets.
Dear Shareholders,