Vonage 2013 Annual Report Download - page 35

29 VONAGE ANNUAL REPORT 2013
period requirement in certain instances, sustained improvements in
customer satisfaction and more effective retention processes. Our
average monthly customer churn also decreased sequentially from
2.6% for the three months ended September 30, 2013 to 2.5% for the
three months ended December 31, 2013 and was flat compared to the
three months ended December 31, 2012. We monitor churn on a daily
basis and use it as an indicator of the level of customer satisfaction.
Other companies may calculate churn differently, and their churn data
may not be directly comparable to ours. Customers who have been with
us for a year or more tend to have a lower churn rate than customers
who have not. In addition, our customers who are residential
international callers generally churn at a lower rate than residential
customers who are domestic callers. Customers with service period
requirements tend to have a lower churn rate than customers without
service period requirements. Similar trends are seen between
customers obtained through retail sales, which generally do not include
service period requirements, and those obtained through non-retail
channels, which generally do include such service period requirements.
In addition, business customers generally churn at a lower rate than
residential customers. Our churn will fluctuate over time due to
economic conditions, competitive pressures, marketplace perception of
our services, and our ability to provide high quality customer care and
network quality and add future innovative products and services.
Average monthly operating revenues per line. Average
monthly revenue per line for a particular period is calculated by dividing
our total revenue for that period by the simple average number of
subscriber lines for the period, and dividing the result by the number of
months in the period. The simple average number of subscriber lines
for the period is the number of subscriber lines on the first day of the
period, plus the number of subscriber lines on the last day of the period,
divided by two. Our average monthly revenue per line decreased to
$28.18 for 2013 compared to $29.89 for 2012. This decrease was due
primarily to rate plan mix and lower USF fees. The continued expansion
of lower priced plan offerings including BasicTalk to meet customer
segment needs may cause downward pressure on average monthly
revenues per line, offset by any selected pricing actions.
Average monthly direct cost of telephony services per
line. Average monthly direct cost of telephony services per line for a
particular period is calculated by dividing our direct cost of telephony
services for that period by the simple average number of subscriber
lines for the period, and dividing the result by the number of months in
the period. We use the average monthly direct cost of telephony services
per line to evaluate how effective we are at managing our costs of
providing service. Our average monthly direct cost of telephony services
per line decreased to $7.27 for 2013 compared to $8.16 for 2012, due
primarily to the decrease in termination costs driven by more favorable
rates negotiated with our service providers, the decrease in our network
costs and in our E-911 costs, and the decrease in regulatory fees.
Marketing cost per gross subscriber line addition. Marketing
cost per gross subscriber line addition is calculated by dividing our
marketing expense for a particular period by the number of gross
subscriber line additions during the period. Marketing expense does not
include the cost of certain customer acquisition activities, such as
rebates and promotions, which are accounted for as an offset to
revenues, or customer equipment subsidies, which are accounted for
as direct cost of goods sold. As a result, it does not represent the full
cost to us of obtaining a new customer. Our marketing cost per gross
subscriber line addition increased to $347.78 for 2013 from $325.61 in
2012, due primarily to our investment in BasicTalk including a portion
of costs that were fixed and not variable with subscriber line additions.
Employees. Employees represent the number of personnel
that are on our payroll and exclude temporary or outsourced labor.
OPERATING REVENUES
Revenues consist of telephony services revenue and
customer equipment and shipping revenue. Substantially all of our
revenues are telephony services revenue. In the United States, we offer
domestic and international rate plans to meet the needs of our
customers, including a variety of residential plans and mobile plans. The
“Vonage World” plan, available in the United States and Canada, offers
unlimited calling across the United States and Puerto Rico, unlimited
international calling to over 60 countries including India, Mexico, and
China, subject to certain restrictions, and free voicemail to text
messages with Vonage Visual Voicemail. Each of our unlimited plans
other than Vonage World offers unlimited domestic calling as well as
unlimited calling to Puerto Rico, Canada, and selected European
countries, subject to certain restrictions. Each of our basic plans offers
a limited number of domestic calling minutes per month. We offer similar
plans in Canada. Under our basic plans, we charge on a per minute
basis when the number of domestic calling minutes included in the plan
is exceeded for a particular month. International calls (except for calls
to Puerto Rico, Canada and certain European countries under our
unlimited plans and a variety of countries under international calling
plans and Vonage World) are charged on a per minute basis. These per
minute fees are not included in our monthly subscription fees. Through
our recent acquisition of Vocalocity, we offer SMB and SOHO customers
several service plans with different pricing structures under the Vonage
Business Solutions brand. The service plans include an array of basic
and enhanced features applicable to the needs of SMB and SOHO
customers. Customers also have the opportunity to purchase premium
features for additional fees.
We have begun to integrate the combined operations of
Vocalocity, now under the Vonage Business Solutions brand, with
Vonage, eliminating overlapping processes and integrating products
and sales efforts. We have also begun to optimize lead flow generated
by the Vonage brand, directing prospective business customers from
Vonage inbound telemarketing or websites to the Vonage Business
Solutions website and inbound telesales channels. We expect these
efforts to shift certain core gross subscriber line additions and revenue
from the Vonage brand to Vonage Business Solutions, leading to
subscriber additions with higher total lines and average monthly revenue
per line.
In addition to our landline telephony business, we are
leveraging 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 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 traditional paid international calling to any other
phone. This mobile application works over WiFi, 3G and 4G and in more
than 90 countries worldwide. The application consolidates the best
features of our prior applications, while adding important functionality,
value and ease of use including direct payment through iTunes.
We derive most of our telephony services revenue from
monthly subscription fees that we charge our customers under our
service plans. We also offer residential fax service, virtual phone
numbers, toll free numbers and other services, and charge an additional
monthly fee for each service. We automatically charge these fees to
our customers’ credit cards, debit cards, or electronic check payments
(“ECP”), monthly in advance. We also automatically charge the per
minute fees not included in our monthly subscription fees to our
customers’ credit cards, debit cards or ECP monthly in arrears unless
they exceed a certain dollar threshold, in which case they are charged
immediately.
By collecting monthly subscription fees in advance and
certain other charges immediately after they are incurred, we are able
to reduce the amount of accounts receivable that we have outstanding,
thus allowing us to have lower working capital requirements. Collecting
in this manner also helps us mitigate bad debt losses, which are recorded
as a reduction to revenue. If a customer’s credit card, debit card or ECP
is declined, we generally suspend international calling capabilities as
well as the customer’s ability to incur domestic usage charges in excess
of their plan minutes. Historically, in most cases, we are able to correct
the problem with the customer within the current monthly billing cycle.
If the customer’s credit card, debit card or ECP could not be successfully
processed during three billing cycles (i.e., the current and two
subsequent monthly billing cycles), we terminate the account.
In the United States, we charge regulatory, compliance,
E-911, and intellectual property-related recovery fees on a monthly basis
to defray costs, and to cover taxes that we are charged by the suppliers
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