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Aug. 6, 2019, 4:15 p.m. EDT

10-Q: VONAGE HOLDINGS CORP

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(EDGAR Online via COMTEX) -- Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

You should read the following discussion together with our condensed consolidated financial statements and the related notes included elsewhere in this Form 10-Q and our audited financial statements included in our Annual Report on Form 10-K. This discussion contains forward-looking statements. These forward-looking statements 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 we face; the expansion of competition in the cloud communications market; risks related to the acquisition or integration of businesses we have acquired; our ability to adapt to rapid changes in the cloud communications market; the nascent state of the cloud communications for business market; our ability to retain customers and attract new customers cost-effectively; the risk associated with developing and maintaining effective internal sales teams and effective distribution channels; security breaches and other compromises of information security; risks associated with sales of our services to medium-sized and enterprise customers; our reliance on third-party hardware and software; our dependence on third-party facilities, equipment, systems and services; system disruptions or flaws in our technology and systems; our ability to comply with data privacy and related regulatory matters; our ability to scale our business and grow efficiently; our dependence on third party vendors; the impact of fluctuations in economic conditions, particularly on our small and medium business customers; our ability to obtain or maintain relevant intellectual property licenses or to protect our trademarks and internally developed software; restrictions in our debt agreements that may limit our operating flexibility; our ability to obtain additional financing if required; our ability to raise funds necessary to settle conversion of the 2024 convertible senior notes; conditional conversion features of the convertible senior notes; the cash settlement of the convertible senior notes; the effects of the capped call transactions in connection with the convertible senior notes; fraudulent use of our name or services; intellectual property and other litigation that have been and may be brought against us; reliance on third parties for our 911 services; uncertainties relating to regulation of business services; risks associated with legislative, regulatory or judicial actions regarding our business products; risks associated with operating abroad; risks associated with the taxation of our business; governmental regulation and taxes in our international operations; liability under anti-corruption laws or from governmental export controls or economic sanctions; our dependence on our customers' unimpeded access to broadband connections; foreign currency exchange risk; our history of net losses and ability to achieve consistent profitability in the future; our ability to fully realize the benefits of our net operating loss carry-forwards if an ownership change occurs; certain provisions of our charter documents and other factors that are set forth in the "Risk Factors" in our Annual Report on Form 10-K and in our Quarterly Reports on Form 10-Q. While we may elect to update forward-looking statements at some point in the future, we specifically disclaim any obligation to do so, and therefore, you should not rely on these forward-looking statements as representing our views as of any date subsequent to the date this Form 10-Q is filed with the Securities and Exchange Commission. Financial Information Presentation

Segment Overview

Regulation. Our business has developed in a lightly regulated environment. See the discussion under "Regulation" in Note 10 to our financial statements for a discussion of regulatory issues that impact us.







        Key Operating Data
        The table below includes key operating data that our management uses to measure
        the growth and operating performance of the Business segment:
         Business                         Three Months Ended          Six Months Ended
                                               June 30,                   June 30,
                                          2019           2018         2019         2018
        Service revenue per customer   $    440       $    348     $    416       $ 338
        Business revenue churn              1.0 %          1.2 %        1.0 %       1.2 %
        


Service Revenue per Customer. Service revenues per customer for a particular period is calculated by dividing the average monthly service revenues for the period by the average number of customers over the number of months in the period. The average number of customers is the number of customers on the first day of the period, plus the number of customers on the last day of the period, divided by two. Service revenues excludes revenues from trading and auction customers. Service revenue per customer increased from $348 for the three months ended June 30, 2018 to $440 for the three months ended June 30, 2019 primarily driven by the Company's successful efforts to attract larger business customers and to expand services provided to our existing business customers along with the acquisition of NewVoiceMedia and TokBox during the second half of 2018. Service revenue per customer increased from $338 for the six months ended June 30, 2018 to $416 for the six months ended June 30, 2019 primarily driven by the Company's successful efforts to attract larger business customers and to expand services provided to our existing business customers along with the acquisition of NewVoiceMedia and TokBox during the second half of 2018. Business Revenue Churn. Business revenue churn is calculated by dividing the revenue from customers or customer locations that have been confirmed to be foregone during a period by the simple average of the total revenue from all customers in that period. Revenue for purposes of determining Business revenue churn is service revenue excluding revenue from our trading and auction customers, and usage in excess of a customer's contracted service plan, regulatory fees charged to customers, and credits. The simple average of total revenue from all customers during the period is the total revenue as defined herein on the first day of the period, plus the total revenue as defined herein on the last day of the period, divided by two. Terminations, as used in the calculation of churn statistics, do not include customers terminated during the period if termination occurred within the first month after activation. Other companies may calculate business revenue churn differently, and their business revenue churn data may not be directly comparable to ours. Business revenue churn decreased from 1.2% for the three and six months ended June 30, 2018 to 1.0% for the three and six months ended June 30, 2019, respectively. Our revenue churn may fluctuate over time due to economic conditions, seasonality in certain customer's operations, loss of customers who are acquired, and competitive pressures including promotional pricing. We are continuing to invest in our overall quality of service which includes customer care headcount and systems, billing systems, on-boarding processes and self-service options to ensure we scale our processes to our growth and continue to improve the overall customer experience.







        Consumer                                      Three Months Ended                 Six Months Ended
                                                           June 30,                          June 30,
                                                     2019             2018             2019            2018
        Average monthly revenues per
        subscriber line                         $      26.89      $     26.37     $      26.62     $     26.45
        Subscriber lines (at period end)           1,185,835        1,393,131        1,185,835       1,393,131
        Customer churn                                   1.7 %            1.7 %            1.8 %           1.8 %
        


Average Monthly Revenues per Subscriber Line. Average monthly revenues per subscriber line for a particular period is calculated by dividing our revenues 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 revenues per subscriber line increased from $26.37 for the three months ended June 30, 2018 to $26.89 for the three months ended June 30, 2019 due primarily to the Company's ability to retain its more tenured customers. Our average monthly revenues per subscriber line increased from $26.45 for the six months ended June 30, 2018 to $26.62 for the six months ended June 30, 2019 due primarily to the Company's ability to retain its more tenured customers.

REVENUE

OPERATING EXPENSES







        Results of Operations
        The following table sets forth, as a percentage of total revenues, our condensed
        consolidated statements of operations for the periods indicated:
                                                        Three Months Ended             Six Months Ended
                                                             June 30,                      June 30,
                                                       2019            2018           2019           2018
        Total revenues                                  100  %           100  %        100  %          100  %
        Operating Expenses:
        Cost of revenues (exclusive of
        depreciation and amortization)                   43               41            42              41
        Sales and marketing                              32               30            33              30
        Engineering and development                       6                4             6               4
        General and administrative                       12               13            12              12
        Depreciation and amortization                     7                7             7               7
        Total operating expenses                        100               95           100              94
        (Loss) income from operations                     -                5             -               6
        Other Income (Expense):
        Interest expense                                 (3 )             (1 )          (3 )            (1 )
        Other income (expense), net                       -                -             -               -
        Total other income (expense), net                (3 )             (1 )          (3 )            (1 )
        (Loss) income before income taxes                (3 )              4            (3 )             5
        Income tax benefit (expense)                      5               (1 )           4               1
        Net income                                        2  %             3  %          1  %            6  %
        


Management's Discussion of the Results of Operations for the Three and Six Months Ended June 30, 2019 and 2018

We calculate gross margin as total revenues less cost of revenues, which primarily consists of fees that we pay to third parties on an ongoing basis in order to provide our services and costs incurred when a customer first subscribes to our service. The following table presents consolidated revenues, cost of revenues and the composition of gross margin for the three and six months ended June 30, 2019 and 2018:







        (in thousands,
        except
        percentages)                       Three Months Ended                                     Six Months Ended
                                                June 30,                                              June 30,
                                                         Dollar      Percent                                   Dollar      Percent
                              2019          2018         Change       Change        2019          2018         Change       Change
        Total revenues     $ 297,584     $ 259,875     $ 37,709         15 %     $ 577,125     $ 513,448     $ 63,677         12 %
        Cost of
        revenues (1)         128,221       107,204       21,017         20 %       241,632       210,771       30,861         15 %
        Gross margin       $ 169,363     $ 152,671     $ 16,692         11 %     $ 335,493     $ 302,677     $ 32,816         11 %
        


(1) Excludes depreciation and amortization of $9,144 and $6,226 for the three months ended June 30, 2019 and 2018, respectively and $18,562 and $12,660 for the six months ended June 30, 2019 and 2018, respectively. Total revenues and cost of revenues were impacted by the following trends and uncertainties:

Aug 06, 2019

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