Vonage 8-K Vonage Holdings Corp. Reports Second Quarter 2011 Results

EXHIBIT 99.1

Vonage Holdings Corp. Reports Second Quarter 2011 Results

— Company Announces Debt Refinancing —

— Record High Net Income of $22 Million or $0.10 per Share —

— Record High Adjusted EBITDA¹ of $44 Million —

— Revenue of $218 Million —

— Launched New Mobile Products: Extensions™ and Time to Call™ —

— Doubling Retail Presence to 6,000 Store Locations —

Holmdel, NJ, August 3, 2011 – Vonage Holdings Corp. (NYSE: VG), a leading provider of communications services connecting individuals through broadband devices worldwide, announced results for the second quarter ended June 30, 2011.

The Company reported record high net income of $22 million and record high adjusted earnings before interest, taxes, depreciation and amortization (“EBITDA”)¹ of $44 million.

Consistent with Vonage’s strategic focus on mobile and international markets, the Company announced two new products during the past week, Extensions^™ and Time to Call^™. In addition, the Company entered into a distribution agreement to promote its services and announced plans to double its retail presence through agreements with three leading nationwide retailers.

The Company also announced completion of a debt refinancing which reduced interest rates to LIBOR plus 3.5%, resulting in annual savings of $43 million from 2010.

Marc Lefar, Vonage Chief Executive Officer, said, “We generated record high financial results while improving our core value proposition and laying the foundation for future growth.”

“The launches of Extensions^™ and Time to Call^™ enhance our domestic and global service offerings for landline and mobile customers. Beyond this, we’ve expanded the availability of our service through agreements with TracFone, Best Buy, Kmart and Sears. And, as a result of our strong financial performance, we have refinanced our debt for the second time in eight months. These are meaningful steps.”

Second Quarter Financial and Operating Results

Vonage generated record high adjusted EBITDA of $44 million, up from $41 million in the year ago quarter and $43 million sequentially. Income from operations increased to $31 million from $24 million in the year ago quarter and $30 million sequentially.

Net income increased to a record high $22 million or $0.10 per share, up from a net loss of $1 million or $0.00 per share in the year ago quarter, which included $12 million in charges relating to the Company’s prior debt. This increase was driven by a $7 million increase in income from operations and a $7 million reduction in interest expense. Net income increased from $21 million or $0.10 per share sequentially.

Revenue was $218 million, down from $225 million in the year ago quarter due to a $3 million decline in deferred revenues related to discontinuation of activation fees and lower customer equipment and shipping revenue. Revenue declined from $220 million sequentially, primarily due to lower activation revenue and Universal Service Fund (“USF”) fees. These factors contributed to a decline in average revenue per user (“ARPU”) to $30.28, down from $31.21 in the prior year and $30.45 sequentially.

Telephony services ARPU was $30.14, down from $30.71 a year ago due primarily to impacts from lower deferred activation revenue. Telephony services ARPU decreased sequentially from $30.23 due to lower deferred activation revenue and USF fees.

Direct cost of telephony services (“COTS”) declined to $58 million from $63 million in the year ago quarter driven by lower costs of domestic termination and usage, which more than offset the anticipated increase from international termination resulting from more international callers on Vonage World. On a per line basis, the cost of telephony services was reduced to $8.03 from $8.72 in the year ago quarter and $8.34 sequentially.

Direct cost of goods sold was $10 million, down from $14 million in the year ago quarter and $11 million sequentially. Direct margin² increased to 69% from 66% in the year ago quarter and 68% sequentially.

Selling, general and administrative (“SG&A”) expense was $58 million, down from $61 million in the year ago quarter and flat sequentially.

Pre-marketing operating income (“PMOI”)¹, which represents cash generated from the Company’s existing customer base, was $105 million, up from $100 million in the year ago quarter and up from $102 million sequentially. PMOI per line was $14.53, up from $13.89 in the second quarter of 2010 and $14.17 sequentially.

Marketing expense was $52 million, up from $49 million in the year ago quarter and sequentially as the Company increased its marketing spend to offset seasonally higher

advertising costs. Subscriber line acquisition cost (“SLAC”) increased to $330 from $318 in the prior year and $282 sequentially.

Gross line additions increased to 158,000 from 155,000 the prior year and decreased from 175,000 sequentially. The Company reported a net loss of 11,000 lines, compared to a loss of 5,000 lines in the year-ago quarter and 3,000 net line additions sequentially.

Churn increased to 2.5% from 2.3% in the year ago quarter and was flat sequentially.

Balance Sheet and Debt Refinancing

As of June 30, 2011, cash, cash equivalents and restricted cash totaled $70 million. Unrestricted cash was $63 million. Capital expenditures for the quarter were $9 million. Free cash flow³ was $37 million, up from $13 million sequentially.

Leveraging continued progress generating strong cash flow, the Company successfully executed on its two-part strategy to prepay and refinance its debt. During the second quarter, Vonage prepaid $50 million, which, combined with $10 million of prepayments in the first quarter and $10 million of scheduled amortization, reduced debt outstanding to $130 million. The Company achieved this targeted debt level approximately five months ahead of plan as a result of strong cash generated from operations, which totaled $63 million in the first half of 2011.

On July 29, 2011, the Company completed the refinancing of its term loan, entering into a $120 million credit facility including an $85 million, three-year loan and a $35 million revolver bearing interest at LIBOR plus 3.5%. This debt replaces the prior $200 million facility which carried interest of LIBOR plus 8% with a 1.75% LIBOR floor.

Growth Initiatives

Executing on its growth initiatives in international long distance, mobile, and geographic expansion, Vonage announced two new products during the past week. Extensions^™, a free enhancement to the Company’s flat rate, unlimited international calling plan, addresses the needs of international long distance callers by extending the value provided by Vonage’s home service plans to additional phone numbers and devices including smartphones and feature phones.

Time to Call^™ provides low-cost, easy to use international calling on smartphones around the world. It is the first downloadable mobile application that allows pay-per-call international dialing to more than 190 countries. To promote its global launch, the Company is providing a free international call to everyone that downloads the application. This mobile application, designed for iPhones, allows consumers to make international calls of up to 15 minutes while avoiding high prices and roaming fees charged by traditional telecommunications carriers. The service is available in 87 countries around the world. Time to Call^™ provides direct payment through iTunes, requires far less effort than calling card services and other international calling plan options, and delivers substantial savings versus major mobile carriers.

The Company also expanded its marketing and distribution capabilities as it partnered with three national big-box retailers which will double to 6,000 its retail presence across the United States and signed a distribution agreement with TracFone to market Vonage services.

2011 Outlook

The Company expects to achieve adjusted EBITDA of at least $165 million and report higher gross line additions in 2011 than in 2010. Churn in 2011 is expected to be stable in the mid two percent range.

(1) This is a non-GAAP financial measure. Refer below to Table 3 for a reconciliation to GAAP income from operations.

(2) Direct margin is defined as operating revenues less direct cost of telephony services and direct cost of goods sold as a percentage of revenues.

(3) This is a non-GAAP financial measure. Refer to Table 5 for a reconciliation to GAAP net cash provided by operating activities.

VONAGE HOLDINGS CORP.

TABLE 1. CONSOLIDATED FINANCIAL DATA

(Dollars in thousands, except per share amounts)

	Three Months Ended June 30,						Six Months Ended June 30,
	2011			2010			2011			2010
	(unaudited)						(unaudited)
Statement of Operations Data:
Operating Revenues:
Telephony services	$	217,288		$	221,704		$	435,518		$	446,231
Customer equipment and shipping		997			3,637			2,608			7,061
		218,285			225,341			438,126			453,292
Operating Expenses:
Direct cost of telephony services (excluding depreciation and amortization of $3,867, $4,959, $7,991 and $9,940, respectively)		57,883			62,969			118,072			125,464
Direct cost of goods sold		9,865			14,053			20,920			30,700
Selling, general and administrative		58,481			60,768			116,724			121,555
Marketing		52,211			49,324			101,615			98,564
Depreciation and amortization		8,664			13,929			19,730			27,697
		187,104			201,043			377,061			403,980
Income from operations		31,181			24,298			61,065			49,312
Other Income (Expense):
Interest income		37			173			79			226
Interest expense		(5,588	)		(12,423	)		(12,190	)		(25,634	)
Change in fair value of embedded features within notes payable and stock warrant		0			(8,241	)		(950	)		(7,406	)
Loss on extinguishment of notes		(3,228	)		(3,985	)		(3,821	)		(2,947	)
Other income (expense), net		44			(43	)		42			60
		(8,735	)		(24,519	)		(16,840	)		(35,701	)
Income (loss) before income tax expense		22,446			(221	)		44,225			13,611
Income tax expense		(698	)		(341	)		(1,364	)		(205	)
Net Income (loss)	$	21,748		$	(562	)	$	42,861		$	13,406
Net Income (loss) per common share:
Basic	$	0.10		$	(0.00	)	$	0.19		$	0.06
Diluted	$	0.09		$	(0.00	)	$	0.18		$	0.06
Weighted-average common shares outstanding:
Basic		224,233			211,305			223,203			206,342
Diluted		244,590			211,305			242,481			208,062

VONAGE HOLDINGS CORP.

TABLE 1. SUMMARY CONSOLIDATED FINANCIAL DATA — (Continued)

(Dollars in thousands, except per share amounts)

	Three Months Ended June 30,						Six Months Ended June 30,
	2011			2010			2011			2010
	(unaudited)						(unaudited)
Statement of Cash Flow Data:
Net cash provided by operating activities	$	45,151		$	93,270		$	62,608		$	144,518
Net cash used in (provided by) investing activities		(8,573	)		5,056			(12,417	)		(26,042	)
Net cash used in financing activities		(53,201	)		(23,837	)		(66,908	)		(24,484	)
Capital expenditures, intangible asset purchases and development of software assets		(8,573	)		(12,106	)		(13,464	)		(16,106	)

	June 30, 2011			December 31, 2010
	(unaudited)
Balance Sheet Data (at period end):
Cash and cash equivalents	$	63,161		$	78,934
Restricted cash		6,934			7,978
Accounts receivable, net of allowance		17,797			15,207
Inventory, net of allowance		5,172			6,143
Prepaid expenses and other current assets		19,164			17,231
Deferred customer acquisition costs		5,462			7,574
Property and equipment, net		72,143			79,050
Software, net		36,742			35,516
Debt related costs, net		3,082			5,372
Intangible assets, net		3,614			4,186
Other assets		2,636			3,201
Total assets	$	235,907		$	260,392
Accounts payable and accrued expenses	$	122,071		$	126,535
Deferred revenue		42,924			45,181
Total notes payable, including current portion, net of discount		125,987			193,004
Capital lease obligations		18,597			19,448
Other liabilities		1,281			5,871
Total liabilities	$	310,860		$	390,039
Total stockholders’ deficit	$	(74,953	)	$	(129,647	)

VONAGE HOLDINGS CORP.

TABLE 2. SUMMARY CONSOLIDATED OPERATING DATA

(unaudited)

	Three Months Ended									Six Months Ended
	June 30,			March 31,			June 30,			June 30,
	2011			2011			2010			2011			2010
Gross subscriber line additions		158,004			175,388			154,997			333,392			309,715
Change in net subscriber lines		(10,568	)		3,345			(5,236	)		(7,223	)		(31,015	)
Subscriber lines (at period end)		2,397,660			2,408,228			2,403,881			2,397,660			2,403,881
Average monthly customer churn		2.5	%		2.5	%		2.3	%		2.5	%		2.5	%
Average monthly revenue per line	$	30.28		$	30.45		$	31.21		$	30.41		$	31.23
Average monthly telephony services revenue per line	$	30.14		$	30.23		$	30.71		$	30.23		$	30.74
Average monthly direct cost of telephony services per line	$	8.03		$	8.34		$	8.72		$	8.20		$	8.64
Marketing costs per gross subscriber line addition	$	330		$	282		$	318		$	305		$	318
Employees (excluding temporary help) (at period end)		1,059			1,126			1,158			1,059			1,158
Direct margin as a % of total revenue		69.0	%		67.6	%		65.8	%		68.3	%		65.5	%

VONAGE HOLDINGS CORP.

TABLE 3. RECONCILIATION OF GAAP INCOME FROM OPERATIONS TO ADJUSTED

EBITDA AND PRE-MARKETING OPERATING INCOME

(Dollars in thousands)

(unaudited)

	Three Months Ended									Six Months Ended
	June 30,			March 31,			June 30,			June 30,
	2011			2011			2010			2011			2010
Income from operations	$	31,181		$	29,884		$	24,298		$	61,065		$	49,312
Depreciation and amortization		8,664			11,066			13,929			19,730			27,697
Share-based expense		3,854			2,475			2,330			6,329			3,348
Adjusted EBITDA		43,699			43,425			40,557			87,124			80,357
Marketing		52,211			49,404			49,324			101,615			98,564
Customer equipment and shipping		(997	)		(1,611	)		(3,637	)		(2,608	)		(7,061	)
Direct cost of goods sold		9,865			11,055			14,053			20,920			30,700
Pre-marketing operating income	$	104,778		$	102,273		$	100,297		$	207,051		$	202,560
As a % of telephony services revenue		48.2	%		46.9	%		45.2	%		47.5	%		45.4	%

VONAGE HOLDINGS CORP.

TABLE 4. RECONCILIATION OF GAAP NET INCOME (LOSS) TO

NET INCOME EXCLUDING ADJUSTMENTS

(Dollars in thousands, except per share amounts)

(unaudited)

	Three Months Ended							Six Months Ended
	June 30,		March 31,		June 30,			June 30,
	2011		2011		2010			2011		2010
Net income (loss)	$	21,748	$	21,113	$	(562	)	$	42,861	$	13,406
Change in fair value of embedded features within notes payable and stock warrant		0		950		8,241			950		7,406
Loss on extinguishment of notes		3,228		593		3,985			3,821		2,947
Net income excluding adjustments	$	24,976	$	22,656	$	11,664		$	47,632	$	23,759
Net income (loss) per common share:
Basic	$	0.10	$	0.10	$	(0.00	)	$	0.19	$	0.06
Diluted	$	0.09	$	0.09	$	(0.00	)	$	0.18	$	0.06
Weighted-average common shares outstanding:
Basic		224,233		222,162		211,305			223,203		206,342
Diluted		244,590		240,340		211,305			242,481		208,062
Net income per common share, excluding adjustments:
Basic	$	0.11	$	0.10	$	0.06		$	0.21	$	0.12
Diluted	$	0.10	$	0.09	$	0.05		$	0.20	$	0.11
Weighted-average common shares outstanding:
Basic		224,233		222,162		211,305			223,203		206,342
Diluted		244,590		240,596		224,969			242,611		221,825

VONAGE HOLDINGS CORP.

TABLE 5. FREE CASH FLOW

(Dollars in thousands)

(unaudited)

	Three Months Ended									Six Months Ended
	June 30,			March 31,			June 30,			June 30,
	2011			2011			2010			2011			2010
Net cash provided by operating activities	$	45,151		$	17,457		$	93,270		$	62,608		$	144,518
Less:
Capital expenditures		(3,869	)		(1,298	)		(5,407	)		(5,167	)		(7,366	)
Acquisition and development of software assets		(4,704	)		(3,593	)		(6,699	)		(8,297	)		(8,740	)
Free cash flow	$	36,578		$	12,566		$	81,164		$	49,144		$	128,412

About Vonage

Vonage (NYSE: VG) is a leading provider of communications services connecting individuals through broadband devices worldwide. Our technology serves approximately 2.4 million subscribers. We provide feature-rich, affordable communication solutions that offer flexibility, portability and ease-of-use.

Our Vonage World plan offers unlimited calling to more than 60 countries with popular features like call waiting, call forwarding and voicemail — for one low, flat monthly rate.

Vonage’s service is sold on the web and through regional and national retailers including Wal-Mart Stores Inc. and is available to customers in the U.S., Canada and the United Kingdom. For more information about Vonage’s products and services, please visit http://www.vonage.com.

Vonage Holdings Corp. is headquartered in Holmdel, New Jersey. Vonage^® is a registered trademark of Vonage Marketing Inc., a subsidiary of Vonage Holdings Corp.

Vonage Investor Contact:	Vonage Media Contact:
Leslie Arena 732.203.7372 leslie.arena@vonage.com	Jen Holzapfel 732.444.2585 jennifer.holzapfel@vonage.com

Use of Non-GAAP Financial Measures

This press release includes the following measures defined as non-GAAP financial measures by the Securities and Exchange Commission: adjusted earnings before interest, taxes, depreciation and amortization (“adjusted EBITDA”), pre-marketing operating income, net income (loss) excluding adjustments, and free cash flow.

Vonage uses adjusted EBITDA and pre-marketing operating income as principal indicators of the operating performance of its business.

Vonage believes that adjusted EBITDA permits a comparative assessment of its operating performance, relative to its performance based on its GAAP results, while isolating the effects of depreciation and amortization, which may vary from period to period without any correlation to underlying operating performance, and of share-based expense, which is a non-cash expense that also varies from period to period.

Vonage believes that pre-marketing operating income is an important metric to evaluate the profitability of the existing customer base to justify the level of continued investment in growing that customer base. In addition, as the Company is focused on growing both its revenue and customer base, the Company has chosen to invest significant amounts on its marketing activities to acquire and replace subscribers.

The Company provides information relating to its adjusted EBITDA and pre-marketing operating income so that investors have the same data that the Company employs in assessing its overall operations. The Company believes that trends in its adjusted EBITDA and pre-marketing operating income are valuable indicators of the operating performance of the Company on a consolidated basis and of its ability to produce operating cash flow to fund working capital needs, to service debt obligations, and to fund capital expenditures.

The Company has also excluded from its net income (loss) the change in fair value of embedded features within notes payable and stock warrant and gain (loss) on extinguishment of notes. The Company believes that excluding these items will assist investors in evaluating the Company’s operating performance and in better understanding its results of operations when these events occurred on a comparative basis.

Vonage considers free cash flow to be a liquidity measure that provides useful information to management about the amount of cash generated by the business that, after the acquisition of equipment and software, can be used by Vonage for debt service and strategic opportunities. Free cash flow is not a measure of cash available for discretionary expenditures since the Company has certain non-discretionary obligations such as debt service that are not deducted from the measure.

The non-GAAP financial measures used by Vonage may not be directly comparable to similarly titled measures reported by other companies due to differences in accounting policies and items excluded or included in the adjustments, which limits its usefulness as a comparative measure. These non-GAAP financial measures should be considered in addition to results prepared in accordance with GAAP, but should not be considered a substitute for, or superior to, GAAP results.

Vonage defines adjusted EBITDA as GAAP income from operations excluding depreciation and amortization and share-based expense.

Vonage defines pre-marketing operating income as GAAP income from operations excluding customer equipment and shipping revenue, direct cost of goods sold, depreciation and amortization, marketing and share-based expense.

Vonage defines net income (loss) excluding adjustments, as GAAP net income (loss) excluding the change in fair value of embedded features within notes payable and stock warrant and the gain (loss) on extinguishment of notes.

Vonage defines free cash flow as net cash provided by operating activities minus capital expenditures and acquisition and development of software assets.

Conference Call and Webcast

Management will host a webcast discussion of the quarter’s results on Wednesday, August 3, 2011 at 10:00 AM Eastern Time. To participate, please dial (877) 359-9508 approximately ten minutes prior to the call. International callers should dial (224) 357-2393. A replay will be available approximately two hours after the conclusion of the call until midnight August 16, 2011, and may be accessed by dialing (855) 859-2056. International callers should dial (404) 537-3406. The replay passcode is: 83177750.

The webcast will be broadcast live through Vonage’s Investor Relations website athttp://ir.vonage.com. Windows Media Player or RealPlayer is required to listen to this webcast. A replay will be available shortly after the live webcast.

Safe Harbor Statement

This press release contains forward-looking statements regarding growth strategy, financial results, subscriber line additions and churn. In addition, other statements in this press release that are not historical facts or information may be forward-looking statements. The forward-looking statements in this release are based on information available at the time the statements are made and/or management’s belief as of that time with respect to future events and involve risks and uncertainties that could cause actual results and outcomes to be materially different. Important factors that could cause such differences include but are not limited to: the competition the Company faces; the Company’s ability to adapt to rapid changes in the market for voice and messaging services; the Company’s ability to retain customers and attract new customers; results of pending litigation and intellectual property and other litigation that may be brought against the Company; failure to protect the Company’s trademarks and internally developed software; the Company’s ability to obtain or maintain relevant intellectual property licenses; the Company’s dependence on third party facilities, equipment, systems, and services; system disruptions or flaws in the Company’s technology; fraudulent use of the Company’s name or services; the Company’s ability to maintain data security; results of regulatory inquiries into the Company’s business practices; the Company’s ability to obtain additional financing if required; restrictions in the Company’s debt agreements that may limit the Company’s operating flexibility; any reinstatement of holdbacks by the Company’s vendors; the Company’s dependence on the Company’s customers’ existing broadband connections; uncertainties relating to regulation of VoIP services; increased governmental regulation, currency restrictions, and other restraints and burdensome taxes and risks incident to foreign operations; differences between the Company’s service and traditional phone services, including the Company’s 911 service; the Company’s dependence upon key personnel; the Company’s history of net losses and ability to achieve consistent profitability in the future; and other factors that are set forth in the “Risk Factors” section and other sections of Vonage’s Annual Report on Form 10-K for the year ended December 31, 2010, as well as in the Company’s Quarterly Reports on Form 10-Q and Current Reports on Form 8-K. While the Company may elect to update forward-looking statements at some point in the future, it specifically disclaims any obligation to do so, and therefore, you should not rely on these forward-looking statements as representing the Company’s views as of any date subsequent to today.