Vonage Holdings Corp., a provider of communications services connecting consumers and businesses through cloud-connected devices, announced results for the fourth quarter and full year ended December 31, 2013.
In a release on February 12, Vonage Holdings noted that for 2013, the Company reported a positive swing of nearly 25,000 net line additions compared to the prior year, aided by the addition of subscribers to BasicTalk, an increased focus on in-person selling channels and the fourth quarter acquisition of Vocalocity, which has been renamed Vonage Business Solutions. Improvements in the customer experience contributed to a reduction in churn to 2.5 percent from 2.6 percent a year ago. Reflecting the Company's planned investment in growth initiatives, including the national launch of BasicTalk, adjusted EBITDA was $110 million, down from $135 million inthe prior year.
For the quarter, Vonage reported solid core business results including positive net line additions for the third consecutive quarter due to improved churn, which declined 10 basis points sequentially to 2.5 percent. Vonage's consumer business and Vocalocity both achieved positive net line additions in the quarter. EBITDA for the fourth quarter increased by $2 million sequentially to $25 million, and declined from $34 million in the prior year due to investments in growth priorities.
"In 2013, we made important progress against each of our growth priorities," said Marc Lefar, Vonage Chief Executive Officer. "We grew our base of BasicTalk customers. We laid the foundation for our business in Brazil, and are on track for a phased market entry early in the second quarter of 2014. We increased the penetration rate of our mobile Extensions app and attracted new users to our Vonage Mobile app. And, we ended the year on a high note with the closing of our transformative acquisition of Vocalocity, a leading provider of hosted CaaS-based communications for small and medium businesses (SMBs). Based on our progress across our growth priorities, we expect to grow consolidated pro forma revenue by 1-2 percent in 2014."
Vonage repurchased $12 million of stock in the quarter and $56 million during 2013. The Company has repurchased $51 million worth of Vonage stock under its current $100 million authorization and remains on target to complete that authorization by the end of 2014. Since beginning its repurchase program in August of 2012, the Company has repurchased 31 million shares of Vonage stock for $84 million.
Fourth Quarter Financial and Operating Results
Results for the quarter and the year reflect continued planned investments in growth priorities in BasicTalk, international long distance, mobile, international expansion and SMB, and include Vocalocity results from November 15, 2013.
Vonage reported adjusted earnings before interest, taxes, depreciation and amortization ("EBITDA")1 of $25 million, up from $23 million sequentially, and down from $34 million in the year ago quarter. Income from operations was $7 million, down from $9 million sequentially and down from $24 million in the year ago quarter reflecting the increase in the Company's assisted sales channels and brand-building costs for BasicTalk.
GAAP net income was $4 million or $0.02 per share, flat sequentially, and down from $13 million or $0.06 per share in the year ago quarter. Net income excluding adjustments2 was $10 million or $0.05 per share, up from $9 million or $0.04 per share sequentially, and down from $23 million or $0.10 per share in the year ago quarter.
Revenue totaled $211 million, up from $204 million sequentially, benefitting from the impact of the acquisition of Vocalocity. Revenue was down $3 million compared to the year ago quarter primarily due to lower customer acquisitions on premium plans and lower Universal Service Fund ("USF") fees, which are a pass- through. Average revenue per user ("ARPU") was $28.72, down from $28.87 sequentially due to lower customer acquisitions on premium plans. ARPU was down from $30.15 in the year ago quarter due to plan mix and lower USF fees.
Direct cost of telephony services ("COTS") was $52 million, down from $53 million sequentially primarily due to lower international termination costs and lower network and colocation costs. COTS declined from $57 million in the year ago quarter due to lower termination and interconnection costs and lower USF fees. On a per line basis, COTS was $7.09, down from $7.48 sequentially and down from $8.02 in the fourth quarter of last year.
Direct cost of goods sold was $10 million, flat sequentially and year-over-year. Direct margin3 was 71 percent, up from 69 percent sequentially and year-over-year due to lower network and termination costs.
Selling, general and administrative ("SG&A") expense was $73 million, up from $65 million sequentially, and up from $62 million in the year ago quarter. The sequential increase was driven by higher assisted selling expense, acquisition-related costs associated with Vocalocity and the absence of a one-time insurance reimbursement benefit in the third quarter. SG&A increased from the year-ago quarter due to an increase in assisted selling expense, and other acquisition-related costs. Offsetting a portion of these increases were declines in customer care costs per line, which were reduced by 7 percent sequentially and 14 percent from the year ago quarter, excluding Vocalocity.
Marketing expense was $58 million, down from $59 million in third quarter, and up from $53 million in the year ago quarter. Subscriber line acquisition cost ("SLAC") was $331, down from $339 sequentially and $347 in the year ago quarter.
Vonage reported gross line additions ("GLAs") of 175,000, flat sequentially, as Vocalocity line additions were offset by a reduction in GLAs on Vonage premium domestic plans. GLAs increased from 152,000 in the year-ago quarter due primarily to BasicTalk and line additions from Vocalocity. Customer churn was 2.5 percent,an improvementfrom 2.6 percent sequentially and flat versus the year- ago quarter. Net line additions were 9,000, an improvement from a loss of 6,000 net lines a year ago, and the third consecutive quarter of positive net line additions. Net lines declined from 11,000 net line additions sequentially.
As of December 31, 2013, cash and cash equivalents, including $4 million in restricted cash, totaled $89 million. Capital expenditures for the quarter were $6 million. Free cash flow4 was $30 million, up from $20 million in the third quarter primarily due to changes in working capital.
Full Year 2013 Financial and Operating Results
Vonage reported adjusted EBITDA of $110 million, down from $135 million the prior year, reflecting the Company's continued investment in growth initiatives, including the national launch of BasicTalk. The Company generated income from operations of $52 million, down from $65 million in the prior year.
GAAP net income was $28 million or $0.13 per share, a decrease from $37 million or $0.16 per share in 2012. Net income, excluding adjustments, was $52 million or $0.24 per share, down from $84 million or $0.37 per share excluding adjustments in the prior year.
Revenue was $829 million, down from $849 million the prior year primarily due to plan mix and lower USF fees, partially offset by Vocalocity. A decline in USF fees, which are a pass-through, accounted for 39 percent of this reduction.Churn was 2.5 percent, an improvement from 2.6 percent in 2012. The Company reported its first year of positive net line additions since 2008 with net lines of 9,000, a positive swing of nearly 25,000 lines from the prior year.
Cash generated from operations was $88 million, down from $120 million in 2012, and capital expenditures totaled $22 million, down from $27 million in the prior year. The resulting free cash flow4 was $66 million.
Vocalocity serves 25,000 business customers and is among the fastest growing providers in the SMB market, with pro forma revenue of $17 million in the fourth quarter of 2013, up 40 percent from the year ago quarter, and $62 million for the full year, up 38 percent from the prior year, excluding the deferred revenue reduction required by purchase accounting. Shortly after close of the acquisition, Vocalocity fully interconnected to Vonage's intelligent call routing platform, delivering cost synergies in domestic and international cost of telephony services. The combination of new marketing initiatives and the brand recognition and lead generation capacity of Vonage is expected to accelerate the growth of Vocalocity.
BasicTalk, the Company's low-end domestic calling product, launched in the second quarter of 2013 and has performed well, validating a retail-oriented distribution strategy and contributing to positive net line additions for the year. The Company expects to continue to invest and grow this segment through expanded distribution, enhanced product features and continued expansion across marketing channels.
Mobile has become an essential component of the Company's core service through Extensions and the standalone Vonage Mobile app. Approximately 87 percent of the Company's home phone customers who call internationally have an Extension, and 28 percent of Vonage customers' international calls made over the Vonage network are made from a mobile phone. Enhanced features such as video calling and video voicemail have helped to attract new users to Vonage Mobile.
Vonage has made strong progress building the foundation to deliver communication services in Brazil and is on track for a phased launch early in the second quarter of 2014. The Company has completed development of the core components of the service and is currently performing integrated production testing. Vonage has an experienced local management team in place and has established customer care centers in preparation for the launch. The Company's joint venture partner in Brazil, Datora, has been a strong operating partner in preparation for launch. In late 2013, Datora was unable to meet certain of its capital call obligations. As a result, Vonage's ownership in the joint venture will increase to approximately 90 percent. Vonage does not expect this funding issue to increase risk to the planned market entry. Datora continues to be Vonage's operating partner and maintains an equity position in the Brazil venture.
In 2013,Vonage continued to execute on its strategy to develop and protect its valuable intellectual property. The Company more than doubled the size of its patent portfolio, which grew from 18 to 37 issued U.S. patents, and with the filing of 99 U.S. patent applications, now has over 210 pending U.S. patent applications. The Company also owns over 50 patents and over 110 patent applications in foreign jurisdictions.
For 2014, the Company expects revenues to increase in the range of 1-2 percent, assuming Vonage had owned Vocalocity for all of 2013. On a reported basis, the Company expects total revenue in 2014 to increase in the range of 7-9 percent. The Company expects 2014 capital expenditures and software of approximately $30 million.
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