Third Quarter 2014 Earnings November 5, 2014
Safe Harbor Caution Concerning Forward-Looking Statements Various remarks that the Company makes about future expectations, plans and prospects, including concerning growth priorities, new products and related investment, sales and distribution channels, revenues, adjusted EBITDA, churn, net lines or accounts, cost of telephony services, the Company s repurchase plan, capital expenditures, and average revenue per user, constitute forward-looking statements for purposes of the safe harbor provisions under The Private Securities Litigation Reform Act of 1995. The 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: risks related to the integration of Telesphere into Vonage and the anticipated future benefits resulting from the acquisition of Telesphere; the competition we face; our ability to adapt to rapid changes in the market for voice and messaging services; our ability to retain customers and attract new customers; our ability to establish and expand strategic alliances; governmental regulation and related actions and taxes; increased market and competitive risks, including currency restrictions; risks related to the acquisition or integration of businesses or joint ventures; 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; intellectual property and other litigation that has been and may be brought against us; failure to protect our trademarks and internally developed software; security breaches and other compromises of information security; our dependence on third party facilities, equipment, systems and services; system disruptions or flaws in our technology and systems; uncertainties relating to regulation of VoIP services; liability under anti-corruption laws; results of regulatory inquiries into our business practices; fraudulent use of our name or services; our ability to maintain data security; our dependence upon key personnel; our dependence on our customers' existing broadband connections; differences between our service and traditional phone services; restrictions in our debt agreements that may limit our operating flexibility; our ability to obtain additional financing if required; any reinstatement of holdbacks by our vendors; our history of net losses and ability to achieve consistent profitability in the future; the Company's available capital resources and other financial and operational performance which may cause the Company not to make common stock repurchases as currently anticipated or to commence or suspend such repurchases from time to time without prior notice; 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, 2013, 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, the Company 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. Non-GAAP Financial Measures This presentation contains non-gaap financial measures (including adjusted earnings before interest, taxes, depreciation and amortization ( adjusted EBITDA ), adjusted EBITDA less capex, net income excluding adjustments, net debt (cash) and free cash flow, as defined in Regulation G adopted by the SEC. The Company provides a reconciliation of these non-gaap financial measures to the most directly comparable financial measure at the end of the presentation and in the Company's quarterly earnings releases, which can be found on the Vonage Investor Relations website at http://ir.vonage.com. 2
Welcome Alan Masarek New Vonage CEO effective November 6 th Twenty years of C-Level experience at technology-centric companies Joins Vonage from Google, Inc., where he was Director, Chrome & Apps Co-Founded Quickoffice, Inc.; served as CEO from July 2007 until acquired by Google in June 2012 Proven ability to develop breakthrough products and services that drive profitable growth Successful track record of building companies and demonstrating great strategic vision, innovation and execution Specific experience in mobile, SMB and consumer sectors 3
Telesphere Acquisition Cloud SMB UCaaS Spend <100 seats On-premise PBXreplacement Market <100 seats Addressable market for Telesphere larger given pie does not include: 100+ seat market MPLS market 2015 Market Opportunity North America $12.9B UCaaS Spend PBX Replacement Opportunity $2.0B Telesphere is an industry leading provider of UCaaS solutions Pro-forma Vonage small business, VBS and Telesphere combined revenues create 2nd largest industry player Combined revenue growth rate for 2015 higher than other leading UCaaS providers Builds scale and fortifies Vonage s market leadership in the dynamic UCaaS market Doubles Vonage s addressable market in the $15 billion+ North American market for UCaaS services Source: Frost & Sullivan 4
Transaction Details Vonage acquiring Telesphere for $114 million in cash and stock Moves Vonage up market, enabling it to service larger enterprises within SMB sector Highly complementary to current VBS UCaaS service offerings Offers Quality of Service and network monitoring with cloud services in one bundle Provides immediate scale in Indirect channel Telesphere leadership to join Vonage Accelerates Vonage s leadership position in the rapidly growing UCaaS sector 5
About Telesphere Business Facts Headquartered in Phoenix, AZ Commenced cloud PBX in 2006 ~$60+mm invested in cloud services and provisioning platform Focus on distributed, multi-location SMB enterprises ~$3,000 customer ARPU Average seat size more than 40 seats per customer Estimated 2014 revenues of ~$40 million Low revenue churn of <1% LTM 3 year contracts; More than $50 million of 2015 revenue already under contract 6
Telesphere provides a comprehensive suite of UCaaS products and services for larger SMB and enterprise customers Key UCaaS Solutions Virtual PBX Collaboration (Web, IM&P) Mobile office Contact center Call recording Multipoint HD video conferencing CRM Lync integration SMS text Services provisioned through a proprietary and scalable auto-provisioning and customer management platform highly valued for large scale installations QoS Management / Security MPLS Managed firewall SIP trunking Potential Future Services Virtual desktop Expanded CRM/IVR integration Lync hosting Cloud enterprise storage 7
Compelling Strategic Rationale Highly complementary to Vonage s existing UCaaS business - Vonage can now offer SMBs to larger enterprises a comprehensive range of UCaaS products and services tailored for their specific needs with robust auto-provisioning and monitoring tools all delivered with call quality SLAs Fortifies Vonage s UCaaS leadership and scale - Telesphere achieved upper quadrant designation in Gartner s 2014 UCaaS Magic Quadrant as well as #1 ranking in the Wainhouse Research North American Broadsoft provider list (2014) - Pro-forma Vonage small business, VBS and Telesphere combined revenues create 2nd largest industry player Improves Vonage s growth profile - Telesphere on track for market leading growth in 2015, with $50 million of 2015 revenue already contracted - Vonage aims to accelerate growth and enhance margins as successfully accomplished with Vocalocity More than doubles addressable market opportunity by moving Vonage into a much larger seat segment while also expanding services offered - Telesphere at ~$3,000 customer ARPU combined with < 1% monthly revenue churn; typical customer contract at 3 years - Average 40+ seats / customer with 50% of revenues from customers exceeding 100 seats Successfully addresses larger business needs for call QoS and security especially over multiple locations and supports delivery of additional cloud services in the future - MPLS enables Vonage to offer SLAs for call quality control and bandwidth optimization as is increasingly being demanded by larger businesses - Favorably positions Vonage as trusted vendor for provisioning UCaaS and related SaaS apps in the future - Telesphere s nationally available cloud platform facilitates one-stop solutions for businesses with multiple locations Provides immediate access to robust direct and indirect sales channels - 2/3 of YTD sales through nationwide network of value-added resellers and channel partners; and preferred UCaaS solution for several national master agents - Channelsphere provisioning tool voted Product of the Year (2014) by TMC and greatly facilitates customer sales management and tracking 8
Q3 Summary Solid quarter led by strong results from Vonage Business Solutions ( VBS ) Accelerated VBS revenue growth to 52% year-over-year Achieved strong adjusted EBITDA led by Consumer business Took actions which lowered consumer gross line additions as expected Launched enhanced Extensions app feature set to enable mobile inbound calling to multiple devices Continued to return value to shareholders through buyback 9
Telesphere Financial Details Purchase Price $114mm Implies an estimated 2015 revenue multiple 2x or less Financing $91mm cash $23mm (6.86M million shares) in VG stock Balance Sheet Cash portion to be paid from combination of cash on balance sheet and revolving credit facility Resulting net leverage 1.2x Capital Allocation Remain on track to complete $100 million stock repurchase authorization by YE 2014 Ability to invest in growth Strong Balance Sheet and Strategic Flexibility 10
Adjusted EBITDA 1 ($ in millions) Highest Adjusted EBITDA in six quarters $23 $29 $30 Sequential adjusted EBITDA increase due to lower Consumer sales and marketing and COTs offset by lower Consumer revenue 3Q '13 2Q '14 3Q '14 Year-over-year adjusted EBITDA increase due to lower COTS and lower Consumer sales and marketing offset by lower Consumer revenue 1) This is a non-gaap financial measure. Please refer to the end of the presentation for a reconciliation to GAAP income from operations. 11
Revenue ($ in millions) $204 $16 Consolidated Revenue $219 $215 3Q '13 2Q '14 3Q '14 Vonage Business Solutions $23 $24 52% Y/Y Consolidated Revenue declined sequentially due to lower consumer revenues partially offset by the acceleration of VBS revenue Revenue increased y/y due to the addition of VBS and its strong growth Vonage Business Solutions Revenue up 52% from prior year and 8% sequentially Revenue increase due to strong customer additions; reflects demand for cloud communications services in the SMB market 3Q '13 2Q '14 3Q '14 12
Direct Cost of Telephony Services (COTS) ($ in millions) Direct Cost of Telephony Services ($/line) $53 $52 $50 3Q '13 2Q '14 3Q '14 COTS Per Line Sequential improvements due to lower termination costs and USF fees despite additions of VBS termination costs Sequential COTS per line reduction primarily driven by lower termination costs and lower USF fees Direct margin increased sequentially and from a year ago Direct Margin 1 13% Y/Y 69% 72% 73% $7.48 $6.84 $6.54 3Q '13 2Q '14 3Q '14 3Q '13 2Q '14 3Q '14 1) Direct margin is defined as operating revenues less direct cost of telephony services and direct cost of goods sold as a percentage of operating revenues. 13
Subscriber Metrics (in thousands) Consolidated Gross Line Additions 175 172 160 3Q '13 2Q '14 3Q '14 VBS Customers 39 34 23 GLA declines reflect a full quarter of optimization of the assisted sales channel in Consumer Strong VBS customer growth primarily a result of increased productivity of direct sales team and addition of direct sales associates Number of churned accounts lower sequentially Consolidated Net Line Additions 2.6% 11 2.6% 2.7% Churn *Pro forma 3Q '13* 2Q '14 3Q '14 3Q '13 2Q '14 3Q '14 (7) (19) 14
Balance Sheet, Cash Flow and Buyback Cash Flow ($ in millions) Q3 2014 Adjusted EBITDA $30 Cash from operations $28 Capital expenditures and software ($7) Free cash flow $21 Cash 1 : $67 million Total debt: $106 million Net debt 2 : $42 million (Gross Debt less Unrestricted Cash and Marketable Securities) Net Debt/Adjusted EBITDA =.4x Stock Repurchase Program Repurchased 3.8 million shares for $13 million in Q3 2014 Repurchased 41 million shares for $121 million since August 2012 On track to complete $100 million buyback authorization by end of 2014 1) Includes $3 million of restricted cash and $5 million of Marketable Securities 2) This is a non-gaap measure. Please refer to the end of the presentation for a reconciliation to GAAP. 15
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