Vonage 2013 Annual Report Download - page 36

30 VONAGE ANNUAL REPORT 2013
of telecommunications services. In addition, we recognize revenue on
a gross basis for contributions to the Federal Universal Service Fund
(“USF”) and related fees. All other taxes are recorded on a net basis.
In addition, historically, we charged a disconnect fee for
customers who terminated their service plan within the first twelve
months of service. Disconnect fees are recorded as revenue and are
recognized at the time the customer terminates service. Beginning in
September 2010, we eliminated the disconnect fee for new customers.
In February of 2012 we re-introduced service agreements as an option
for new customers.
Telephony services revenue is offset by the cost of certain
customer acquisition activities, such as rebates and promotions.
Customer equipment and shipping revenue consists of
revenue from sales of customer equipment to our wholesalers or directly
to customers and retailers. In addition, customer equipment and
shipping revenues include revenues from the sale of VoIP telephones
in order to access our small and medium business services on a net
basis rather than a gross basis as we act as an agent, rather than a
principal. Customer equipment and shipping revenue also includes the
fees, when collected, that we charge our customers for shipping any
equipment to them.
OPERATING EXPENSES
Operating expenses consists of direct cost of telephony
services, royalties, direct cost of goods sold, selling, general and
administrative expense, marketing expense, depreciation and
amortization, and loss from abandonment of software.
Direct cost of telephony services. Direct cost of telephony
services primarily consists of fees that we pay to third parties on an
ongoing basis in order to provide our services. These fees include:
> Access charges that we pay to other telephone companies
to terminate domestic and international calls on the public
switched telephone network. These costs represented
approximately 52% and 49% of our total direct cost of
telephony services for 2013 and 2012, respectively, with a
portion of these payments ultimately being made to
incumbent telephone companies. When a Vonage subscriber
calls another Vonage subscriber, we do not pay an access
charge.
> The cost of leasing Internet transit services from multiple
Internet service providers. This Internet connectivity is used
to carry VoIP session initiation signaling and packetized audio
media between our subscribers and our regional data centers.
> The cost of leasing from other telephone companies the
telephone numbers that we provide to our customers. We
lease these telephone numbers on a monthly basis.
> The cost of co-locating our regional data connection point
equipment in third-party facilities owned by other telephone
companies, Internet service providers or collocation facility
providers.
> The cost of providing local number portability, which allows
customers to move their existing telephone numbers from
another provider to our service. Only regulated
telecommunications providers have access to the centralized
number databases that facilitate this process. Because we
are not a regulated telecommunications provider, we must
pay other telecommunications providers to process our local
number portability requests.
> The cost of complying with the FCC regulations regarding
VoIP emergency services, which require us to provide
enhanced emergency dialing capabilities to transmit 911 calls
for all of our customers.
> Taxes that we pay on our purchase of telecommunications
services from our suppliers or imposed by government
agencies such as Federal USF and related fees.
> License fees for use of third party intellectual property.
Direct cost of goods sold. Direct cost of goods sold primarily
consists of costs that we incur when a customer first subscribes to our
service. These costs include:
> The cost of the equipment that we provide to customers who
subscribe to our service through our direct sales channel in
excess of activation fees when an activation fee is collected.
The remaining cost of customer equipment is deferred up to
the activation fee collected and amortized over the estimated
average customer life.
> The cost of the equipment that we sell directly to retailers.
> The cost of shipping and handling for customer equipment,
together with the installation manual, that we ship to
customers.
> The cost of certain products or services that we give
customers as promotions.
Selling, general and administrative expense. Selling, general
and administrative expense includes:
> Compensation and benefit costs for all employees, which is
the largest component of selling, general and administrative
expense and includes customer care, research and
development, network engineering and operations, sales and
marketing, executive, legal, finance, and human resources
personnel.
> Share-based expense related to share-based awards to
employees, directors, and consultants.
> Outsourced labor related to customer care, kiosk and
community based events teams, and retail in-store support
activities.
> Product awareness advertising.
> Transaction fees paid to credit card, debit card, and ECP
companies and other third party billers such as iTunes, which
may include a per transaction charge in addition to a percent
of billings charge.
> Rent and related expenses.
> Professional fees for legal, accounting, tax, public relations,
lobbying, and development activities.
> Acquisition related transaction and integration costs.
> Litigation settlements.
Marketing expense. Marketing expense consists of:
> Advertising costs, which comprise a majority of our marketing
expense and include online, television, direct mail, alternative
media, promotions, sponsorships, and inbound and outbound
telemarketing.
> Creative and production costs.
> The costs to serve and track our online advertising.
> Certain amounts we pay to retailers for activation
commissions.
> The cost associated with our customer referral program.
Depreciation and amortization expenses. Depreciation and
amortization expenses include:
> Depreciation of our network equipment, furniture and fixtures,
and employee computer equipment.
> Amortization of leasehold improvements and purchased and
developed software.
> Amortization of intangible assets (developed technology,
customer relationships, non-compete agreements, patents,
trademarks and trade names).
> Loss on disposal or impairment of property and equipment.
Loss from abandonment of software assets. Loss from
abandonment of software assets include:
> Impairment of investment in software assets.
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