10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended June 30, 2014

or

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Transition Period From __________  to __________                    

Commission File Number 001-32887

VONAGE HOLDINGS CORP.

(Exact name of registrant as specified in its charter)

Delaware	11-3547680
(State or other jurisdiction of incorporation or organization)	(IRS Employer Identification No.)
23 Main Street, Holmdel, NJ	07733
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number, including area code: (732) 528-2600

(Former name, former address and former fiscal year, if changed since last report): Not Applicable

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x  No  o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. Check one:

Large accelerated filer	o	Accelerated filer	x
Non-accelerated filer	o  (Do not check if a smaller reporting company)	Smaller reporting company	o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  o  No  x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Class	Outstanding at		July 30, 2014
Common Stock, par value $0.001		209,052,038		shares

VONAGE HOLDINGS CORP.

INDEX

Part I. Financial Information
		Page
Item 1.	Financial Statements
	A) Consolidated Balance Sheets as of June 30, 2014 (Unaudited) and December 31, 2013	3
	B) Unaudited Consolidated Statements of Income for the Three and Six Months Ended June 30, 2014 and 2013	4
	C) Unaudited Consolidated Statement of Comprehensive Income for the Three and Six Months Ended June 30, 2014 and 2013	5
	D) Unaudited Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2014 and 2013	6
	E) Unaudited Consolidated Statement of Stockholders’ Equity and Redeemable Noncontrolling Interest for the Six Months Ended June 30, 2014	7
	F) Notes to Unaudited Consolidated Financial Statements	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	28
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	41
Item 4	Controls and Procedures	42
Part II. Other Information
Item 1.	Legal Proceedings	43
Item 1A.	Risk Factors	43
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	43
Item 3.	Defaults Upon Senior Securities	43
Item 4.	Mine Safety Disclosures	44
Item 5.	Other Information	44
Item 6.	Exhibits	45
	Signature	46

Financial Information Presentation

For the financial information discussed in this Quarterly Report on Form 10-Q, other than per share and per line amounts, dollar amounts are presented in thousands, except where noted.

2

Part I – Financial Information

Item 1. Financial Statements

VONAGE HOLDINGS CORP.

CONSOLIDATED BALANCE SHEETS

(In thousands, except par value)

	June 30, 2014			December 31, 2013
Assets	(unaudited)
Assets
Current assets:
Cash and cash equivalents	$	54,962		$	84,663
Accounts receivable, net of allowance of $699 and $683, respectively	21,705			19,649
Inventory, net of allowance of $115 and $229, respectively	7,266			10,584
Deferred customer acquisition costs, current	4,318			4,991
Deferred tax assets, current	18,361			18,361
Prepaid expenses and other current assets	23,523			16,892
Total current assets	130,135			155,140
Property and equipment, net	44,830			52,243
Goodwill	83,627			83,627
Software, net	22,068			20,557
Deferred customer acquisition costs, non-current	144			193
Debt related costs, net	769			1,313
Restricted cash	3,411			4,405
Intangible assets, net	68,207			76,850
Deferred tax assets, non-current	238,004			246,539
Other assets	1,450			1,882
Total assets	$	592,645		$	642,749
Liabilities and Stockholders’ Equity
Liabilities
Current liabilities:
Accounts payable	$	40,684		$	49,867
Accrued expenses	76,406			81,127
Deferred revenue, current portion	35,666			36,899
Current maturities of capital lease obligations	3,119			2,889
Current portion of notes payables	23,333			23,333
Total current liabilities	179,208			194,115
Indebtedness under revolving credit facility	55,000			75,000
Notes payable, net of current portion	11,667			23,333
Deferred revenue, net of current portion	797			436
Capital lease obligations, net of current maturities	8,585			10,201
Other liabilities, net of current portion in accrued expenses	1,660			1,628
Total liabilities	256,917			304,713
Commitments and Contingencies	—			—
Redeemable noncontrolling interest	(587		)	(38		)
Stockholders’ Equity
Common stock, par value $0.001 per share; 596,950 shares authorized at June 30, 2014 and December 31, 2013; 250,994 and 246,741 shares issued at June 30, 2014 and December 31, 2013, respectively; 210,101 and 212,339 shares outstanding at June 30, 2014 and December 31, 2013, respectively	253			247
Additional paid-in capital	1,151,033			1,136,289
Accumulated deficit	(687,835		)	(697,941		)
Treasury stock, at cost, 40,893 shares at June 30, 2014 and 34,402 shares at December 31, 2013	(126,597		)	(101,040		)
Accumulated other comprehensive (loss) income	(539		)	519
Total stockholders’ equity	336,315			338,074
Total liabilities, redeemable noncontrolling interest, and stockholders’ equity	$	592,645		$	642,749

The accompanying notes are an integral part of the consolidated financial statements.

3

VONAGE HOLDINGS CORP.

CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except per share amounts)

(Unaudited)

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2014			2013			2014			2013
Revenues	$	218,882		$	204,776		$	439,615		$	413,863
Operating Expenses:
Direct cost of telephony services (excluding depreciation and amortization of $5,098, $3,510, $10,252, and $6,962, respectively)	52,385			53,527			105,002			108,708
Direct cost of goods sold	9,450			9,217			19,189			18,095
Selling, general and administrative	73,569			61,481			152,022			124,391
Marketing	59,003			58,330			116,267			109,999
Depreciation and amortization	12,459			8,205			24,797			16,180
	206,866			190,760			417,277			377,373
Income from operations	12,016			14,016			22,338			36,490
Other Income (Expense):
Interest income	31			74			122			111
Interest expense	(1,434		)	(1,732		)	(3,511		)	(3,189		)
Other income (expense), net	36			(17		)	23			(56		)
	(1,367		)	(1,675		)	(3,366		)	(3,134		)
Income before income tax expense	10,649			12,341			18,972			33,356
Income tax expense	(5,266		)	(4,894		)	(9,384		)	(12,862		)
Net income	$	5,383		$	7,447		$	9,588		$	20,494
Plus: Net loss attributable to noncontrolling interest	135			—			518			—
Net income attributable to Vonage	$	5,518		$	7,447		$	10,106		$	20,494
Net income attributable to Vonage per common share:
Basic	$	0.03		$	0.04		$	0.05		$	0.10
Diluted	$	0.02		$	0.03		$	0.05		$	0.09
Weighted-average common shares outstanding:
Basic	211,390			212,169			211,790			213,404
Diluted	221,002			219,837			221,310			222,331

The accompanying notes are an integral part of the consolidated financial statements.

4

VONAGE HOLDINGS CORP.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands)

(Unaudited)

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2014			2013			2014			2013
Net income	$	5,383		$	7,447		$	9,588		$	20,494
Other comprehensive income (loss):
Foreign currency translation adjustment	397			(1,063		)	(1,089		)	(1,687		)
Total other comprehensive income (loss)	397			(1,063		)	(1,089		)	(1,687		)
Comprehensive income	5,780			6,384			8,499			18,807
Comprehensive loss attributable to noncontrolling interest:
Add: Net loss	(135		)	—			(518		)	—
Foreign currency translation adjustment	(12		)	—			(31		)	—
Total comprehensive loss attributable to noncontrolling interest	(147		)	—			(549		)	—
Comprehensive income attributable to Vonage	$	5,927		$	6,384		$	9,048		$	18,807

The accompanying notes are an integral part of the consolidated financial statements.

5

VONAGE HOLDINGS CORP.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

	Six Months Ended
	June 30,
	2014			2013
Cash flows from operating activities:
Net income	$	9,588		$	20,494
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization and impairment charges	16,154			14,993
Amortization of intangibles	8,643			1,187
Deferred tax expense	8,409			12,469
Allowance for doubtful accounts	(183		)	(100		)
Allowance for obsolete inventory	216			230
Amortization of debt related costs	544			783
Share-based expense	11,114			8,401
Changes in operating assets and liabilities:
Accounts receivable	(1,814		)	(2,823		)
Inventory	3,100			(5,118		)
Prepaid expenses and other current assets	(6,794		)	(8,229		)
Deferred customer acquisition costs	729			(1,009		)
Other assets	432			1,668
Accounts payable	(9,266		)	(30,397		)
Accrued expenses	(6,543		)	16,490
Deferred revenue	(892		)	(466		)
Other liabilities	32			31
Net cash provided by operating activities	33,469			28,604
Cash flows from investing activities:
Capital expenditures	(3,099		)	(5,803		)
Acquisition and development of software assets	(7,031		)	(6,197		)
Decrease in restricted cash	998			1,256
Net cash used in investing activities	(9,132		)	(10,744		)
Cash flows from financing activities:
Principal payments on capital lease obligations	(1,386		)	(1,184		)
Principal payments on notes and revolving credit facility	(31,666		)	(11,667		)
Proceeds received from issuance of notes payable	—			27,500
Debt related costs	—			(2,009		)
Common stock repurchases	(23,525		)	(30,066		)
Proceeds from exercise of stock options, net of stock cancellation payment	3,615			2,505
Net cash used in by financing activities	(52,962		)	(14,921		)
Effect of exchange rate changes on cash	(1,076		)	(1,501		)
Net change in cash and cash equivalents	(29,701		)	1,438
Cash and cash equivalents, beginning of period	84,663			97,110
Cash and cash equivalents, end of period	$	54,962		$	98,548
Supplemental disclosures of cash flow information:
Cash paid during the periods for:
Interest	$	2,690		$	2,032
Income taxes	$	1,145		$	1,448
Non-cash financing transactions during the periods for:
Common stock repurchases	$	558		$	629

The accompanying notes are an integral part of the consolidated financial statements.

6

VONAGE HOLDINGS CORP.

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY AND

REDEEMABLE NONCONTROLLING INTEREST

(In thousands)

(Unaudited)

	Common Stock		Additional Paid-in Capital		Accumulated Deficit			Treasury Stock			Accumulated Other Comprehensive Income (Loss)			Total			Redeemable non-controlling interest			Net Income
Balance at December 31, 2013	$	247	$	1,136,289	$	(697,941	)	$	(101,040	)	$	519		$	338,074		$	(38	)
Stock option exercises	6		3,609											3,615
Share-based expense			11,114											11,114
Share-based award activity								(1,976		)				(1,976		)
Common stock repurchases								(23,347		)				(23,347		)
Other			21					(234		)				(213		)
Foreign currency translation adjustment											(1,058		)	(1,058		)	(31		)
Net income (loss)					10,106									10,106			(518		)	$	9,588
Balance at June 30, 2014	$	253	$	1,151,033	$	(687,835	)	$	(126,597	)	$	(539	)	$	336,315		$	(587	)

The accompanying notes are an integral part of the consolidated financial statements.

7

VONAGE HOLDINGS CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share amounts)

(Unaudited)

Note 1.    Basis of Presentation and Significant Accounting Policies

Nature of Operations

Vonage Holdings Corp. (“Vonage”, “Company”, “we”, “our”, “us”) is incorporated as a Delaware corporation. We are a leading provider of communications services connecting consumers and businesses through cloud-connected devices worldwide. Customers in the United States represented 94% of our subscriber lines for our broadband telephone replacement services at June 30, 2014, with the balance primarily in Canada and the United Kingdom.

Unaudited Interim Financial Information

The accompanying unaudited interim consolidated financial statements and information have been prepared in accordance with accounting principles generally accepted in the United States and in accordance with the instructions for Form 10-Q. Accordingly, they do not include all of the information and disclosures required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, these financial statements contain all normal and recurring adjustments considered necessary to present fairly the financial position, results of operations, cash flows, and statement of stockholders’ equity for the periods presented. The results for the three and six months ended June 30, 2014 are not necessarily indicative of the results to be expected for the full year.

These unaudited interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements and related notes included in our Annual Report on Form 10-K for the year ended December 31, 2013 filed with the Securities and Exchange Commission on February 13, 2014.

Significant Accounting Policies

Principles of Consolidation

The consolidated financial statements include the accounts of Vonage and its wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. We also consolidate a majority-owned entity in Brazil where we have the ability to exercise controlling influence. The ownership interest of the noncontrolling party is presented as redeemable noncontrolling interest.

Use of Estimates

Our consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States, which require management to make estimates and assumptions that affect the amounts reported and disclosed in the consolidated financial statements and the accompanying notes. Actual results could differ materially from these estimates.

On an ongoing basis, we evaluate our estimates, including the following:

• the useful lives of property and equipment, software costs, and intangible assets;

• assumptions used for the purpose of determining share-based compensation using the Black-Scholes option pricing model and Monte Carlo simulation model (“Models”), and various other assumptions that we believe to be reasonable; the key inputs for these Models include our stock price at valuation date, exercise price, the dividend yield, risk-free interest rate, life in years, and historical volatility of our common stock; and

• assumptions used in determining the need for, and amount of, a valuation allowance on net deferred tax assets.

We base our estimates on historical experience, available market information, appropriate valuation methodologies, and on various other assumptions that we believe to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities.

Revenue Recognition

Operating revenues consist of telephony services revenues and customer equipment (which enables our telephony services) and shipping revenues. The point in time at which revenues are recognized is determined in accordance with Securities and Exchange Commission Staff Accounting Bulletin No. 104, Revenue Recognition, and Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 605, Revenue Recognition.

8

VONAGE HOLDINGS CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share amounts)

(Unaudited)

At the time a customer signs up for our telephony services, there are the following deliverables:

• Providing equipment, if any, to the customer that enables our telephony services; and

• Providing telephony services.

The equipment is generally provided free of charge to our customers and in most instances there are no fees collected at sign-up. We record the fees collected for shipping the equipment to the customer, if any, as shipping and handling revenue at the time of shipment.

Telephony Services Revenue

Substantially all of our revenues are telephony services revenues, which are derived primarily from monthly subscription fees that customers are charged under our service plans. We also derive telephony services revenues from per minute fees for international calls if not covered under a plan, including calls made via applications for mobile devices and other stand-alone products, and for any calling minutes in excess of a customer’s monthly plan limits. Monthly subscription fees are automatically charged to customers’ credit cards, debit cards or electronic check payments ("ECP"), in advance and are recognized over the following month when services are provided. Revenues generated from international calls and from customers exceeding allocated call minutes under limited minute plans are recognized as services are provided, that is, as minutes are used, and are billed to a customer's credit cards, debit cards or ECP in arrears. As a result of multiple billing cycles each month, we estimate the amount of revenues earned from international calls and from customers exceeding allocated call minutes under limited minute plans but not billed from the end of each billing cycle to the end of each reporting period and record these amounts as accounts receivable. These estimates are based primarily upon historical minutes and have been consistent with our actual results.

We also provide rebates to customers who purchase their customer equipment from retailers and satisfy minimum service period requirements. These rebates in excess of activation fees are recorded as a reduction of revenues over the service period based upon the estimated number of customers that will ultimately earn and claim the rebates.

In the United States, we charge regulatory, compliance, E-911, and intellectual property-related fees on a monthly basis to defray costs, and to cover taxes that we are charged by the suppliers of telecommunications services. In addition, we charge customers Federal Universal Service Fund (“USF”) fees. We recognize revenue on a gross basis for USF and related fees. We record these fees as revenue when billed. All other taxes are recorded on a net basis.

Customer Equipment and Shipping Revenue

Customer equipment and shipping revenues consist of revenues from sales of customer equipment to wholesalers or directly to customers for replacement devices, or for upgrading their device at the time of customer sign-up for which we charge an additional fee. 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. Customer equipment and shipping revenues also include the fees that customers are charged for shipping their customer equipment to them. Customer equipment and shipping revenues include sales to our retailers, who subsequently resell this customer equipment to customers. Revenues are reduced for payments to retailers and rebates to customers, who purchased their customer equipment through these retailers, to the extent of customer equipment and shipping revenues.

Direct Cost of Telephony Services

Direct cost of telephony services consists primarily of direct costs that we pay to third parties in order to provide telephony services. These costs include access and interconnection charges that we pay to other telephone companies to terminate domestic and international phone calls on the public switched telephone network. In addition, these costs include the cost to lease phone numbers, to co-locate in other telephone companies’ facilities, to provide enhanced emergency dialing capabilities to transmit 911 calls, and to provide local number portability. These costs also include taxes that we pay on telecommunications services from our suppliers or are imposed by government agencies such as Federal USF and royalties for use of third parties’ intellectual property. These costs do not include indirect costs such as depreciation and amortization, payroll, and facilities costs. Our presentation of direct cost of telephony services may not be comparable to other similar companies.

9

VONAGE HOLDINGS CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share amounts)

(Unaudited)

Direct Cost of Goods Sold

Direct cost of goods sold consists primarily of costs that we incur when a customer signs up for our service. These costs include the cost of customer equipment for customers who subscribe through the direct sales channel in excess of activation fees. In addition, these costs include the amortization of deferred customer equipment, the cost of shipping and handling for customer equipment, the installation manual that accompanies the customer equipment, and the cost of certain promotions.

Development Expenses

Costs for research, including predevelopment efforts prior to establishing technological feasibility of software expected to be marketed, are expensed as incurred. Development costs are capitalized when technological feasibility has been established and anticipated future revenues support the recoverability of the capitalized amounts. Capitalization stops when the product is available for general release to customers. Due to the short time period between achieving technological feasibility and product release and the insignificant amount of costs incurred during such periods, we have not capitalized any software development, and have expensed these costs as incurred. These costs are included in selling, general and administrative expense.

Cash and Cash Equivalents

We maintain cash with several investment grade financial institutions. Highly liquid investments, which are readily convertible into cash, with original maturities of three months or less, are recorded as cash equivalents.

Certain Risks and Concentrations

Financial instruments that potentially subject us to concentrations of credit risk consist principally of cash equivalents and accounts receivable. They are subject to fluctuations in both market value and yield based upon changes in market conditions, including interest rates, liquidity, general economic conditions, and conditions specific to the issuers. Accounts receivable are typically unsecured and are derived from revenues earned from customers primarily located in the United States. A portion of our accounts receivable represents the timing difference between when a customer’s credit card is billed and the subsequent settlement of that transaction with our credit card processors. This timing difference is generally three days for substantially all of our credit card receivables. We have never experienced any accounts receivable write-offs due to this timing difference. In addition, we collect subscription fees in advance, minimizing our accounts receivable and bad debt exposure. If a customer’s credit card, debit card or ECP is declined, we generally suspend international calling capabilities as well as their ability to incur domestic usage charges in excess of their plan minutes. If the customer’s credit card, debit card or ECP could not be successfully processed during three billing cycles (i.e., the current and two subsequent monthly billing cycles), we terminate the account. In addition, we automatically charge any per minute fees to our customers’ credit card, debit card or ECP monthly in arrears. To further mitigate our bad debt exposure, a customer’s credit card, debit card or ECP will be charged in advance of their monthly billing if their international calling or overage charges exceed a certain dollar threshold.

Inventory

Inventory consists of the cost of customer equipment and is stated at the lower of cost or market, with cost determined using the average cost method. We provide an inventory allowance for customer equipment that has been returned by customers but may not be able to be reissued to new customers or returned to the manufacturer for credit.

Property and Equipment

Property and equipment includes acquired assets and those accounted for under capital leases and consist principally of network equipment and computer hardware, furniture, software, and leasehold improvements. In addition, the lease of our corporate headquarters has been accounted for as a capital lease and is included in property and equipment. Network equipment and computer hardware and furniture are stated at cost with depreciation provided using the straight-line method over the estimated useful lives of the related assets, which range from three to five years. Leasehold improvements are amortized over their estimated useful life of the related assets or the life of the lease, whichever is shorter. The cost of renewals and substantial improvements is capitalized while the cost of maintenance and repairs is charged to operating expenses as incurred.

Our network equipment and computer hardware, which consists of routers, gateways, and servers that enable our telephony services, is subject to technological risks and rapid market changes due to new products and services and changing customer demand. These changes may result in future adjustments to the estimated useful lives or the carrying value of these assets, or both.

10

VONAGE HOLDINGS CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share amounts)

(Unaudited)

Software Costs

We capitalize certain costs, such as purchased software and internally developed software that we use for customer acquisition and customer care automation tools, in accordance with FASB ASC 350-40, “Internal-Use Software”. Computer software is stated at cost less accumulated amortization and the estimated useful life is two to five years.

Goodwill and Purchased-Intangible Assets

Goodwill acquired in acquisition of a business is accounted for based upon the excess fair value of consideration transferred over the fair value of net assets acquired in the business combination. Goodwill is tested for impairment on an annual basis on October 1st and, when specific circumstances dictate, between annual tests. When impaired, the carrying value of goodwill is written down to fair value. The goodwill impairment test involves a two-step process. The first step, identifying a potential impairment, compares the fair value of a reporting unit with its carrying amount, including goodwill. If the carrying value of the reporting unit exceeds its fair value, the second step would need to be conducted; otherwise, no further steps are necessary as no potential impairment exists. The second step, measuring the impairment loss, compares the implied fair value of the reporting unit goodwill with the carrying amount of that goodwill. Any excess of the reporting unit goodwill carrying value over the respective implied fair value is recognized as an impairment loss.

Purchased-intangible assets are accounted for based upon the fair value of assets received. Purchased-intangible assets are amortized on a straight-line or accelerated basis over the periods of benefit, ranging from two to ten years. We perform a review of purchased-intangible assets whenever events or changes in circumstances indicate that the useful life is shorter than we had originally estimated or that the carrying amount of assets may not be recoverable. If such facts and circumstances exist, we assess the recoverability of purchased-intangible assets by comparing the projected undiscounted net cash flows associated with the related asset or group of assets over their remaining lives against their respective carrying amounts. Impairments, if any, are based on the excess of the carrying amount over the fair value of those assets. If the useful life of the asset is shorter than originally estimated, we accelerate the rate of amortization and amortize the remaining carrying value over the new shorter useful life. There was no impairment of purchased-intangible assets identified for the three and six months ended June 30, 2014.

Intangible Assets

Intangible assets acquired in the settlement of litigation or by direct purchase are accounted for based upon the fair value of assets received.

Patents and Patent Licenses

Patent rights acquired in the settlement of litigation or by direct purchase are accounted for based upon the fair value of assets received.

Long-Lived Assets

We evaluate impairment losses on long-lived assets used in operations when events and changes in circumstances indicate that the assets might be impaired. If our review indicates that the carrying value of an asset will not be recoverable, based on a comparison of the carrying value of the asset to the undiscounted future cash flows, the impairment will be measured by comparing the carrying value of the asset to its fair value. Fair value will be determined based on quoted market values, discounted cash flows or appraisals. Impairments are recorded in the statement of operations as part of depreciation expense.

Debt Related Costs

Costs incurred in raising debt are deferred and amortized as interest expense using the effective interest method over the life of the debt.

Redeemable Noncontrolling Interest

We consolidate a majority-owned entity where we have the ability to exercise controlling influence. The ownership interest of the noncontrolling party is presented as noncontrolling interest. If we are required to repurchase the noncontrolling interest at fair value, subject to adjustment, under a put option or other contractual redemption requirement, we will report the noncontrolling interest as redeemable in the Consolidated Balance Sheets between liabilities and equity. We adjust the redeemable noncontrolling interest to the redemption values on each balance sheet date with changes recognized as an adjustment to retained earnings, or in

11

VONAGE HOLDINGS CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share amounts)

(Unaudited)

the absence of retained earnings, as an adjustment to additional paid-in capital when it becomes probable the noncontrolling interest will become redeemable.

Derivatives

We do not hold or issue derivative instruments for trading purposes. However, in accordance with FASB ASC 815, “Derivatives and Hedging” (“FASB ASC 815”), we review our contractual obligations to determine whether there are terms that possess the characteristics of derivative financial instruments that must be accounted for separately from the financial instrument in which they are embedded. We recognize these features as liabilities in our consolidated balance sheet at fair value each period and recognize any change in the fair value in our statement of operations in the period of change. We estimate the fair value of these liabilities using available market information and appropriate valuation methodologies.

Income Taxes

We recognize deferred tax assets and liabilities at enacted income tax rates for the temporary differences between the financial reporting bases and the tax bases of our assets and liabilities. Any effects of changes in income tax rates or tax laws are included in the provision for income taxes in the period of enactment. Our net deferred tax assets primarily consist of net operating loss carry forwards (“NOLs”). We are required to record a valuation allowance against our net deferred tax assets if we conclude that it is more likely than not that taxable income generated in the future will be insufficient to utilize the future income tax benefit from our net deferred tax assets (namely, the NOLs) prior to expiration. We periodically review this conclusion, which requires significant management judgment. If we are able to conclude in a future period that a future income tax benefit from our net deferred tax assets has a greater than 50 percent likelihood of being realized, we are required in that period to reduce the related valuation allowance with a corresponding decrease in income tax expense. This would result in a non-cash benefit to our net income in the period of the determination. In the fourth quarter of 2011, we released $325,601 of valuation allowance. In subsequent periods, we would expect to recognize income tax expense equal to our pre-tax income multiplied by our effective income tax rate, an expense that was not recognized prior to the reduction of the valuation allowance. Our effective rate may differ from the federal statutory rate due, in part, to our foreign operations and certain discrete period items. The 2014 estimated annual effective tax rate is expected to approximate 49%, but may fluctuate due to the timing of other discrete period transactions.

We file income tax returns in the U.S. on a federal basis and in U.S. state and foreign jurisdictions. Our federal tax return remains subject to examination by the Internal Revenue Service from 2010 to present, our New Jersey tax returns remain open from 2008 to present, our Canada tax return remains open from 2009 to present, and other domestic and foreign tax returns remain open for all periods to which those filings relate. We recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate resolution.

We have not had any unrecognized tax benefits. We recognize interest and penalties accrued related to unrecognized tax benefits as components of our income tax provision. We have not had any interest and penalties accrued related to unrecognized tax benefits.

Business Combinations

We account for business combinations using the acquisition method of accounting. The acquisition method of accounting requires that the purchase price, including the fair value of contingent consideration, of the acquisition be allocated to the assets acquired and liabilities assumed using the fair values determined by management as of the acquisition date. Goodwill as of the acquisition date is measured as the excess of consideration transferred over the net of the acquisition date fair values of assets acquired and the liabilities assumed. While the Company uses its best estimates and assumptions as part of the purchase price allocation process to accurately value assets acquired and liabilities assumed at the acquisition date, the Company’s estimates are inherently uncertain and subject to refinement. As a result, during the measurement period, which may be up to one year from the acquisition date, the Company records adjustments to the assets acquired and liabilities assumed, with the corresponding offset to goodwill to the extent the Company identifies adjustments to the preliminary purchase price allocation. Upon the conclusion of the measurement period or final determination of the values of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recorded to the consolidated statements of operations. We will include the results of all acquisitions in our Consolidated Financial Statements from the date of acquisition.

12

VONAGE HOLDINGS CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share amounts)

(Unaudited)

In connection with the acquisition of Vocalocity, Inc. on November 15, 2013, we recorded preliminary estimates primarily related to income, sales, excise, and ad valorem taxes. As such, the provisional measurements of fair value are subject to change.

Acquisition related transaction costs, such as banking, legal, accounting and other costs incurred in connection with an acquisition, are expensed as incurred in selling, general and administrative expense.

Acquisition related integration costs include costs associated with exit or disposal activities, which do not meet the criteria of discontinued operations, including costs for employee, lease, and contract terminations, facility closing or other exit activities. Additionally, these costs include expenses directly related to integrating and reorganizing acquired businesses and include items such as employee retention costs, recruiting costs, certain moving costs, certain duplicative costs during integration and asset impairments. These costs are expensed as incurred in selling, general and administrative expense.

Foreign Currency

Generally, the functional currency of our non-United States subsidiaries is the local currency. The financial statements of these subsidiaries are translated to United States dollars using month-end rates of exchange for assets and liabilities, and average rates of exchange for revenues, costs, and expenses. Translation gains and losses are deferred and recorded in accumulated other comprehensive income as a component of stockholders’ equity.

Share-Based Compensation

We account for share-based compensation in accordance with FASB ASC 718, “Compensation-Stock Compensation”. Under the fair value recognition provisions of this pronouncement, share-based compensation cost is measured at the grant date based on the fair value of the award, reduced as appropriate based on estimated forfeitures, and is recognized as expense over the applicable vesting period of the stock award using the accelerated method. The excess tax benefit associated with stock compensation deductions have not been recorded in additional paid-in capital. When evaluating whether an excess tax benefit has been realized, share based compensation deductions are not considered realized until NOLs are no longer sufficient to offset taxable income. Such excess tax benefits will be recorded when realized.

Earnings per Share

Net income per share has been computed according to FASB ASC 260, “Earnings per Share”, which requires a dual presentation of basic and diluted earnings per share (“EPS”). Basic EPS represents net income divided by the weighted average number of common shares outstanding during a reporting period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock, including stock options and restricted stock units under our 2001 Stock Incentive Plan and 2006 Incentive Plan, were exercised or converted into common stock. The dilutive effect of outstanding stock options and restricted stock units is reflected in diluted earnings per share by application of the treasury stock method. In applying the treasury stock method for stock-based compensation arrangements, the assumed proceeds are computed as the sum of the amount the employee must pay upon exercise and the amounts of average unrecognized compensation cost attributed to future services.

13

VONAGE HOLDINGS CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share amounts)

(Unaudited)

The following table sets forth the computation for basic and diluted net income per share for the three and six months ended June 30, 2014 and 2013:

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2014		2013		2014		2013
Numerator
Numerator for basic earnings per share-net income attributable to Vonage	$	5,518	$	7,447	$	10,106	$	20,494
Numerator for diluted earnings per share-net income attributable to Vonage	$	5,518	$	7,447	$	10,106	$	20,494
Denominator
Basic weighted average common shares outstanding	211,390		212,169		211,790		213,404
Dilutive effect of stock options and restricted stock units	9,612		7,668		9,520		8,927
Diluted weighted average common shares outstanding	221,002		219,837		221,310		222,331
Basic net income per share
Basic net income per share	$	0.03	$	0.04	$	0.05	$	0.10
Diluted net income per share
Diluted net income per share	$	0.02	$	0.03	$	0.05	$	0.09

For the three and six months ended June 30, 2014 and 2013, the following were excluded from the calculation of diluted earnings per common share because of their anti-dilutive effects:

	Three Months Ended		Six Months Ended
	June 30,		June 30,
	2014	2013	2014	2013
Restricted stock units	5,486	2,171	5,477	2,357
Stock options	22,447	27,796	22,548	26,349
	27,933	29,967	28,025	28,706

Comprehensive Income (Loss)

Comprehensive income (loss) consists of net income and other comprehensive items. Other comprehensive items include foreign currency translation adjustments.

Recent Accounting Pronouncements

In May 2014, Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update ("ASU") 2014-09, "Revenue from Contracts with Customers". This ASU is a comprehensive new revenue recognition model that requires a company to recognize revenue to depict the transfer of good or services to a customer at an amount that reflects the consideration it expects to receive in exchange for those goods or services. This ASU is effective for annual reporting periods beginning after December 15, 2016 and early adoption is not permitted. Accordingly, we will adopt this ASU on January 1, 2017. Companies may use either a full retrospective or modified retrospective approach to adopt this ASU and our management is currently evaluating which transition approach to use. We are currently evaluating the impact of adopting ASU 2014-09 on our consolidated financial statements and related disclosures.

Reclassifications

Certain reclassifications have been made to prior years’ financial statements in order to conform to the current year’s presentation. The reclassifications had no impact on net earnings previously reported.

14

VONAGE HOLDINGS CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share amounts)

(Unaudited)

Note 2.    Supplemental Balance Sheet Account Information

Prepaid expenses and other current assets

	June 30, 2014		December 31, 2013
Nontrade receivables	$	9,039	$	7,402
Services	9,825		7,084
Telecommunications	493		479
Insurance	954		757
Marketing	1,205		312
Other prepaids	2,007		858
Prepaid expenses and other current assets	$	23,523	$	16,892

Property and equipment, net

	June 30, 2014			December 31, 2013
Building (under capital lease)	$	25,709		$	25,709
Network equipment and computer hardware	75,598			78,312
Leasehold improvements	44,900			44,141
Furniture	1,422			812
Vehicles	92			109
	147,721			149,083
Less: accumulated depreciation and amortization	(102,891		)	(96,840		)
Property and equipment, net	$	44,830		$	52,243

Software, net

	June 30, 2014			December 31, 2013
Purchased	$	51,117		$	45,178
Licensed	909			909
Internally developed	36,088			36,088
	88,114			82,175
Less: accumulated amortization	(66,046		)	(61,618		)
Software, net	$	22,068		$	20,557

Debt related costs, net

	June 30, 2014			December 31, 2013
Senior secured term loan	$	4,706		$	4,706
Less: accumulated amortization	(3,937		)	(3,393		)
Debt related costs, net	$	769		$	1,313

15

VONAGE HOLDINGS CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share amounts)

(Unaudited)

Restricted cash

	June 30, 2014		December 31, 2013
Letter of credit-lease deposits	$	3,308	$	4,306
Cash reserves	103		99
Restricted cash	$	3,411	$	4,405

Intangible assets, net

	June 30, 2014			December 31, 2013
Customer relationships	$	39,100		$	39,100
Developed technology	35,200			35,200
Patents and patent licenses	12,764			18,264
Trademark	560			560
Trade names	500			500
Non-compete agreements	200			200
	88,324			93,824
Less: accumulated amortization	(20,117		)	(16,974		)
Intangible assets, net	$	68,207		$	76,850

Accrued expenses

	June 30, 2014		December 31, 2013
Compensation and related taxes and temporary labor	$	15,600	$	20,276
Marketing	26,071		23,277
Taxes and fees	16,486		18,207
Litigation and settlements	339		89
Telecommunications	8,373		7,942
Other accruals	4,335		6,063
Customer credits	1,542		1,719
Professional fees	3,120		2,490
Accrued interest	10		12
Inventory	216		769
Credit card fees	314		283
Accrued expenses	$	76,406	$	81,127

16

VONAGE HOLDINGS CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share amounts)

(Unaudited)

Note 3.    Supplemental Income Statement Account Information

Amounts included in revenues

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2014		2013		2014		2013
USF fees	$	18,396	$	17,125	$	37,032	$	35,230
Disconnect fees	$	906	$	1,066	$	1,679	$	2,306
Initial activation fees	$	273	$	319	$	587	$	673
Customer equipment fees	$	174	$	12	$	585	$	170
Equipment recovery fees	$	19	$	26	$	39	$	55
Shipping and handling fees	$	545	$	322	$	924	$	690

Amount included in direct cost of telephony services

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2014		2013		2014		2013
USF costs	$	18,396	$	17,125	$	37,089	$	35,230

Amount included in direct cost of goods sold

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2014		2013		2014		2013
Shipping and handling cost	$	1,580	$	1,436	$	3,137	$	2,844

Amount included in selling, general and administrative expense

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2014		2013		2014		2013
Advertising costs	$	213	$	100	$	325	$	188
Acquisition related costs	$	—	$	—	$	20	$	—
Acquisition integration cost	$	4	$	—	$	98	$	—

17

VONAGE HOLDINGS CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share amounts)

(Unaudited)

Amount included in marketing

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2014		2013		2014		2013
Advertising costs	$	37,122	$	36,089	$	71,696	$	67,815

Depreciation and amortization expense

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2014		2013		2014		2013
Network equipment and computer hardware	$	3,602	$	3,339	$	7,211	$	6,647
Software	2,833		2,659		5,548		5,149
Capital leases	550		549		1,100		1,098
Other leasehold improvements	1,081		1,032		2,154		2,036
Furniture	35		29		69		56
Vehicles	6		3		7		8
Patents	505		576		1,081		1,152
Trademarks	18		18		36		36
Customer relationship	2,134		—		4,268		—
Acquired technology	1,574		—		3,148		—
Trade names	50		—		100		—
Non-compete agreements	4		—		8		—
	12,392		8,205		24,730		16,182
Property and equipment impairments	2		—		2		(2		)
Software impairments	65		—		65		—
Depreciation and amortization expense	$	12,459	$	8,205	$	24,797	$	16,180

Amount included in interest expense

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2014		2013		2014		2013
Debt related costs amortization	$	255	$	395	$	544	$	783

Amount included in other income (expense), net

	Three Months Ended					Six Months Ended
	June 30,					June 30,
	2014		2013			2014		2013
Net income (loss) resulting from foreign exchange transactions	$	37	$	(22	)	$	22	$	(62	)

18

VONAGE HOLDINGS CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share amounts)

(Unaudited)

Note 4.    Long-Term Debt and Revolving Credit Facility

A schedule of long-term debt at June 30, 2014 and December 31, 2013 is as follows:

	June 30, 2014		December 31, 2013
3.125-3.625% Credit Facility - due 2016	$	11,667	$	23,333
3.125-3.625% Revolving Credit Facility - due 2016	55,000		75,000

At June 30, 2014, future payments under long-term debt obligations over each of the next five years and thereafter were as follows:

	Credit Facility
2014	$	11,667
2015	23,333
2016	55,000
Minimum future payments of principal	90,000
Less: current portion	23,333
Long-term portion	$	66,667

2013 Financing

On February 11, 2013 we entered into Amendment No. 1 to the 2011 Credit Agreement (as further amended by Amendment No. 2 to our 2011 Credit Facility, the "2013 Credit Facility"). The 2013 Credit Facility consists of a $70,000 senior secured term loan and a $75,000 revolving credit facility. The co-borrowers under the 2013 Credit Facility are our wholly owned subsidiary, Vonage America Inc., and us. Obligations under the 2013 Credit Facility are guaranteed, fully and unconditionally, by our other United States subsidiaries and are secured by substantially all of the assets of each borrower and each of the guarantors. On July 26, 2013 we entered into Amendment No. 2 to our 2011 Credit Agreement, which amends our financial covenant related to our consolidated fixed charge coverage ratio by increasing the amount of restricted payments excluded from such calculation from $50,000 to $80,000.

Use of Proceeds

The net proceeds received of $27,500 from the senior secured term loan and the undrawn revolving credit facility under the 2013 Credit Facility will be used for general corporate purposes. We also incurred $2,009 of fees in connection with the 2013 Credit Facility, which is amortized, along with the unamortized fees of $670 in connection with the 2011 Credit Facility, to interest expense over the life of the debt using the effective interest method. We used $75,000 from the 2013 revolving credit facility in connection with the acquisition of Vocalocity on November 15, 2013.

2013 Credit Facility Terms

The following description summarizes the material terms of the 2013 Credit Facility:

The loans under the 2013 Credit Facility mature in February 2016. Principal amounts under the 2013 Credit Facility are repayable in quarterly installments of $5,833 per quarter for the senior secured term loan. The unused portion of our revolving credit facility incurs a 0.45% commitment fee.

Outstanding amounts under the 2013 Credit Facility, at our option, will bear interest at:

• LIBOR (applicable to one-, two-, three- or six-month periods) plus an applicable margin equal to 3.125% if our consolidated leverage ratio is less than 0.75 to 1.00, 3.375% if our consolidated leverage ratio is greater than or equal to 0.75 to 1.00 and less than 1.50 to 1.00, and 3.625% if our consolidated leverage ratio is greater than or equal to

19

VONAGE HOLDINGS CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share amounts)

(Unaudited)

1.50 to 1.00, payable on the last day of each relevant interest period or, if the interest period is longer than 3 months, each day that is three months after the first day of the interest period, or

• the base rate determined by reference to the highest of (a) the federal funds effective rate from time to time plus 0.50%, (b) the prime rate of JPMorgan Chase Bank, N.A., and (c) the LIBOR rate applicable to one month interest periods plus 1.00%, plus an applicable margin equal to 2.125% if our consolidated leverage ratio is less than 0.75 to 1.00, 2.275% if our consolidated leverage ratio is greater than or equal to 0.75 to 1.00 and less than 1.50 to 1.00, and 2.625% if our consolidated leverage ratio is greater than or equal to 1.50 to 1.00, payable on the last business day of each March, June, September, and December and the maturity date of the 2013 Credit Facility.

The 2013 Credit Facility provides greater flexibility to us in funding acquisitions and restricted payments, such as stock buybacks, than the 2011 Credit Facility.

We may prepay the 2013 Credit Facility at our option at any time without premium or penalty. The 2013 Credit Facility is subject to mandatory prepayments in amounts equal to:

• 100% of the net cash proceeds from any non-ordinary course sale or other disposition of our property and assets for consideration in excess of a certain amount subject to customary reinvestment provisions and certain other exceptions and

• 100% of the net cash proceeds received in connection with other non-ordinary course transactions, including insurance proceeds not otherwise applied to the relevant insurance loss.

Subject to certain restrictions and exceptions, the 2013 Credit Facility permits us to obtain one or more incremental term loans and/or revolving credit facilities in an aggregate principal amount of up to $60,000 plus an amount equal to repayments of the senior secured term loan upon providing documentation reasonably satisfactory to the administrative agent, without the consent of the existing lenders under the 2013 Credit Facility. The 2013 Credit Facility includes customary representations and warranties and affirmative covenants of the borrowers. In addition, the 2013 Credit Facility contains customary negative covenants, including, among other things, restrictions on the ability of us and our subsidiaries to consolidate or merge, create liens, incur additional indebtedness, dispose of assets, consummate acquisitions, make investments, and pay dividends and other distributions. We must also comply with the following financial covenants:

• a consolidated leverage ratio of no greater than 2.00 to 1.00;

• a consolidated fixed coverage charge ratio of no less than 1.75 to 1.00 subject to adjustment to exclude up to $80,000 in specified restricted payments;

• minimum cash of $25,000 including the unused portion of the revolving credit facility or $35,000 in the event of certain specified corporate actions; and

• maximum capital expenditures not to exceed $55,000 during any fiscal year, provided that the unused amount of any permitted capital expenditures in any fiscal year may be carried forward to the next following fiscal year; in addition, annual excess cash flow up to $8,000 increases permitted capital expenditures.

As of June 30, 2014, we were in compliance with all covenants, including financial covenants, for the 2013 Credit Facility.

The 2013 Credit Facility contains customary events of default that may permit acceleration of the debt. During the continuance of a payment default, interest will accrue at a default interest rate of 2% above the interest rate which would otherwise be applicable, in the case of loans, and at a rate equal to the rate applicable to base rate loans plus 2%, in the case of all other amounts.

Note 5.    Common Stock

Net Operating Loss Rights Agreement

On June 7, 2012, we entered into a Tax Benefits Preservation Plan ("Preservation Plan") designed to preserve stockholder value and tax assets. Our ability to use our tax attributes to offset tax on U.S. taxable income would be substantially limited if there were an "ownership change" as defined under Section 382 of the U.S. Internal Revenue Code. In general, an ownership change would occur if one or more "5-percent shareholders," as defined under Section 382, collectively increase their ownership in us by more than 50 percent over a rolling three-year period.

In connection with the adoption of the Preservation Plan, our board of directors declared a dividend of one preferred share purchase right for each outstanding share of the Company’s common stock. The preferred share purchase rights were distributed

20

VONAGE HOLDINGS CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share amounts)

(Unaudited)

to stockholders of record as of June 18, 2012, as well as to holders of the Company's common stock issued after that date, but will only be activated if certain triggering events under the Preservation Plan occur.

Under the Preservation Plan, preferred share purchase rights will work to impose significant dilution upon any person or group which acquires beneficial ownership of 4.9% or more of the outstanding common stock, without the approval of our board of directors, from and after June 7, 2012. Stockholders that own 4.9% or more of the outstanding common stock as of the opening of business on June 7, 2012, will not trigger the preferred share purchase rights so long as they do not (i) acquire additional shares of common stock or (ii) fall under 4.9% ownership of common stock and then re-acquire shares that in the aggregate equal 4.9% or more of the common stock.

The Preservation Plan was set to expire no later than the close of business June 7, 2013, unless extended by our board of directors. On April 4, 2013, after consultation with our advisors, our board of directors determined to extend the Preservation Plan through June 7, 2015, subject to ratification of the extension by stockholders at the Vonage 2013 annual meeting of stockholders. On June 6, 2013, at the Vonage 2013 annual meeting of stockholders, stockholders ratified the extension of the Preservation Plan through June 7, 2015.

Common Stock Repurchases

On July 25, 2012, our board of directors authorized a program to repurchase up to $50,000 of Vonage common stock (the "$50,000 repurchase program") through December 31, 2013. The specific timing and amount of repurchases would vary based on available capital resources and other financial and operational performance, market conditions, securities law limitations, and other factors. The repurchases would be made using our cash resources.

We repurchased the following shares of common stock with cash resources under the $50,000 repurchase program during the three and six months ended June 30, 2013:

	Three Months Ended			Six Months Ended
	June 30,			June 30,
		2013			2013
Shares of common stock repurchased		—			2,189
Value of common stock repurchased		$	—		$	5,374

On February 7, 2013, our board of directors discontinued the remainder of our existing $50,000 repurchase program effective at the close of business on February 12, 2013 with $16,682 of availability remaining, and authorized a new program to repurchase up to $100,000 of Vonage common stock (the "$100,000 repurchase program") by December 31, 2014. The specific timing and amount of repurchases will vary based on available capital resources and other financial and operational performance, market conditions, securities law limitations, and other factors. The repurchases will be made using our cash resources. The $100,000 repurchase program may be suspended or discontinued at any time without prior notice.

We repurchased the following shares of common stock with cash resources under the $100,000 repurchase program during the three and six months ended June 30, 2014 and 2013:

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2014 (1)		2013 (2)		2014 (1)		2013 (2)
Shares of common stock repurchased	3,523		4,756		5,970		8,795
Value of common stock repurchased	$	13,244	$	13,451	$	23,287	$	24,458

(1) including 147 shares, or $556, of common stock repurchases settled in July 2014; excluding commission of $1.

(2) including 220 shares, or $625, of common stock repurchases settled in July 2013; excluding commission of $4.

As of June 30, 2014, approximately $26,060 remained of our $100,000 repurchase program. The repurchase program expires on December 31, 2014 but may be suspended or discontinued at any time without notice.

In any period under either repurchase program, cash used in financing activities related to common stock repurchases may differ from the comparable change in stockholders' equity, reflecting timing differences between the recognition of share repurchase transactions and their settlement for cash.

21

VONAGE HOLDINGS CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share amounts)

(Unaudited)

Stock Option Cancellation

As part of our strategy to build shareholder value and to facilitate our goal of reducing the number of shares of common stock outstanding, on February 19, 2013, we entered into an agreement with our Chief Executive Officer to cancel a total of 4,500 of his vested stock options for $5,463. The payment reflects a discount, in favor of the Company, from the closing price of the common stock on the New York Stock Exchange on February 19, 2013.

Note 6.    Commitments and Contingencies

Litigation

IP Matters

Bear Creek Technologies, Inc. On February 22, 2011, Bear Creek Technologies, Inc. (“Bear Creek”) filed a lawsuit against Vonage Holdings Corp., Vonage America, Inc., Vonage Marketing LLC, and Aptela Inc. (a subsidiary of Vocalocity, Inc., a wholly-owned subsidiary of the Company which was acquired on November 15, 2013 pursuant to an Agreement and Plan of Merger dated October 9, 2013) in the United States District Court for the Eastern District of Virginia (Norfolk Division) alleging that Vonage’s and Aptela’s products and services are covered by United States Patent No. 7,889,722, entitled “System for Interconnecting Standard Telephony Communications Equipment to Internet Protocol Networks” (the “722 Patent”). The suit also named numerous other defendants, including Verizon Communications, Inc., Comcast Corporation, Time-Warner Cable, Inc., AT&T, Inc., and T-Mobile USA Inc. On August 17, 2011, the Court dismissed Bear Creek’s case against the Vonage entities and Aptela, as well as all the other defendants, except for one defendant. Later, on August 17, 2011, Bear Creek re-filed its complaint concerning the ‘722 Patent in the United States District Court for the District of Delaware against the same Vonage entities; and also re-filed a separate complaint concerning the ‘722 Patent in the United States District Court for the Eastern District of Virginia against Aptela. In each complaint, Bear Creek alleges that Vonage and Aptela, respectively, are infringing one or more claims of the ‘722 Patent. In addition, Bear Creek alleges that each party is contributing to and inducing infringement of one or more claims of the ‘722 Patent. On January 25, 2012, Bear Creek filed a motion with the United States Judicial Panel on Multidistrict Litigation seeking to transfer and consolidate its litigations against Vonage and Aptela with twelve other separate actions Bear Creek filed in the U.S. District Courts for Delaware and the Eastern District of Virginia. On May 2, 2012, the Multidistrict Litigation Panel granted Bear Creek’s motion and ordered the coordination or consolidation for pretrial proceedings of all fourteen actions in the U.S. District Court for the District of Delaware. On October 11, 2012, Vonage filed an answer to Bear Creek’s complaint, including counterclaims of non-infringement and invalidity of the ‘722 patent. Aptela, which filed a motion to dismiss Bear Creek’s complaint on September 27, 2011, has not yet answered, as its motion remains pending and awaiting disposition by the court. On November 5, 2012, Bear Creek filed an answer to Vonage’s counterclaims. On March 1, 2013, several defendants including Vonage moved the Court to stay the case pending resolution of the reexamination of the ‘722 patent requested by Cisco Systems, Inc. (“Cisco”) as described below; the motion was granted on July 17, 2013, and the case is now stayed pending the resolution of the reexamination. On November 8, 2013, the Court granted Bear Creek’s request to terminate and substitute counsel representing it in the litigation.

A request for reexamination of the ‘722 Patent was filed on September 12, 2012 by Cisco, challenging the validity of the ‘722 Patent. Cisco’s request was granted by the USPTO on November 28, 2012. On March 24, 2014, the Patent Office issued an Action Closing Prosecution, confirming its rejection of all claims of the ‘722 patent on multiple independent grounds. Bear Creek filed comments to the Action Closing Prosecution on April 24, 2014. Cisco filed responsive comments on May 22, 2014.

OpinionLab, Inc. On July 18, 2012, OpinionLab, Inc. (“OpinionLab”) filed a lawsuit against IPerceptions, Inc. and IPerceptions US, Inc. (collectively, “IPerceptions”) in the United States District Court for the Northern District of Illinois (Eastern Division) alleging claims of patent infringement, breach of contract, misappropriation of trade secrets, and tortious interference with business expectancy. On August 16, 2012, OpinionLab filed an amended complaint, adding Vonage Marketing LLC and Vonage Holdings Corp. as defendants, and alleging that Vonage’s products and services are covered by United States Patent Nos. 6,421,724, 6,606,581, 6,928,392, 7,085,820, 7,370,285, 8,024,668, and 8,041,805. OpinionLab alleged direct, indirect and willful infringement by Vonage. IPerceptions, the supplier to Vonage of the accused product in this lawsuit, has agreed to fully defend and indemnify Vonage in this lawsuit. On September 11, 2012, IPerceptions and Vonage each moved to dismiss OpinionLab’s indirect and willful patent infringement claims. The motions were denied on November 8, 2012. Vonage answered the complaint on December 7, 2012. On July 11, 2013, the Court issued an order setting the case schedule. On September 6, 2013, OpinionLab filed a second amended complaint, which defendants answered on September 23, 2013. On October 14, 2013, OpinionLab made an unopposed motion to consolidate the case for pre-trial purposes with Case No. 13-CV-1574, OpinionLab, Inc. v. Qualtrics Labs, Inc., currently pending in the United States District Court for the Northern District of Illinois. The motion was granted October

22

VONAGE HOLDINGS CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share amounts)

(Unaudited)

17, 2013. On February 14, 2014, defendants Vonage and iPerceptions moved to stay the case pending inter partes reviews requested by Qualtrics as to the ‘724, ‘581, ’820, ‘285, ‘668 and ‘805 patents.

RPost Holdings, Inc. On August 24, 2012, RPost Holdings, Inc., RPost Communications Limited, and RMail Limited (collectively, “RPost”) filed a lawsuit against StrongMail Systems, Inc. (“StrongMail”) in the United States District Court for the Eastern District of Texas (Marshall Division) alleging that StrongMail’s products and services, including its electronic mail marketing services, are covered by United States Patent Nos. 8,224,913, 8,209,389, 8,161,104, 7,966,372, and 6,182,219. On January 16, 2013, StrongMail moved the Court to transfer the venue of the lawsuit to the Northern District of California. That motion was denied by the Court on August 19, 2013. On February 11, 2013, RPost filed an amended complaint, adding 27 new defendants, including Vonage America Inc. RPost’s amended complaint alleges willful infringement of the RPost patents by Vonage and each of the other new defendants because they are customers of StrongMail. StrongMail has agreed to fully defend and indemnify Vonage in this lawsuit. Vonage answered the complaint on May 7, 2013. On January 30, 2014, RPost informed the Court that it is ready for a scheduling conference; the Court has not yet scheduled a conference.

Straight Path IP Group Inc. On November 4, 2013, Straight Path IP Group Inc. (“Straight Path”), a subsidiary of Straight Path Communications Inc., filed a lawsuit against Vonage Holdings Corp., Vonage America, Inc., and Vonage Marketing LLC in the U.S. District Court for the Eastern District of Virginia (Norfolk Division) alleging that Vonage’s products and services are covered by United States Patent Nos. 6,009,469, 6,131,121, 6,513,066, and 6,701,365. Straight Path alleged direct and indirect infringement by Vonage. On December 20, 2013, Vonage moved to transfer the case to the District of New Jersey and that motion was granted by the court on January 17, 2014. On December 30, 2013, Vonage answered the complaint and filed a motion to dismiss Straight Path’s claims for induced and contributory infringement. In response, Straight Path amended its complaint on January 7, 2014. On February 7, 2014, Vonage answered the amended complaint and moved to dismiss Straight Path's claims for indirect infringement. On March 26, 2014, the Court granted Vonage’s motion to dismiss in its entirety, dismissing Straight Path’s induced and contributory infringement claims without prejudice. Straight Path filed a second amended complaint on April 23, 2014. Vonage answered the second amended complaint on May 27, 2014 and again moved to dismiss Straight Path’s amended claims for indirect infringement. On July 7, 2014, the Court granted Vonage’s motion to dismiss in its entirety, this time dismissing Straight Path’s induced and contributory infringement claims with prejudice.

Previously, on August 2, 2013, Straight Path filed a lawsuit against Vocalocity, Inc. in the U.S. District Court for the Eastern District of Virginia (Richmond Division) alleging that Vocalocity’s products and services are covered by the ‘066 and ‘365 patents. On September 11, 2013, the lawsuit was ordered consolidated with two other lawsuits by Straight Path filed in early August 2013 against Bandwidth.com, Inc. and Telesphere Networks Ltd., relating to the same patents. Pursuant to a settlement agreement entered between Straight Path and Vocalocity, on June 19, 2014, the parties filed a joint motion to dismiss with prejudice all claims and counterclaims asserted in the case. The Court granted the joint motion on July 2, 2014, dismissing the case in its entirety. The costs associated with the litigation, including the settlement, are fully-indemnified under the terms of the acquisition of Vocalocity.

AIP Acquisition LLC. On January 3, 2014, AIP Acquisition LLC (“AIP”), filed a lawsuit against Vonage Holdings Corp., Vonage America, Inc., and Vonage Marketing LLC in the U.S. District Court for the District of Delaware (Norfolk Division) alleging that Vonage’s products and services are covered by United States Patent No. 7,269,247. Vonage filed an answer and counterclaims on February 25, 2014. AIP filed an amended complaint on March 18, 2014, which Vonage answered on April 4, 2014. On April 8, 2014, the Court ordered a stay of the case pending final resolution of non-party Level 3’s inter partes review request of United States Patent No. 7,724,879, which is a continuation of the ‘247 patent.

Spansion. On April 28, 2014, Spansion LLC (“Spansion”), filed a lawsuit against Vonage Holdings Corp., Vonage America, Inc., Vonage Marketing LLC, and 20 other defendants in the U.S. District Court for the Northern District of California alleging that Macronix’s flash memory chips and products containing those chips, including Vonage analog telephone adapter products, each are covered by one or more Spansion patents. On April 29, 2014, Spansion filed a complaint at the International Trade Commission containing substantially similar allegations, requesting that the ITC institute an investigation pursuant to Section 337 of the Tariff Act of 1930 against the respondents, including Vonage. Spansion’s complaints allege that Vonage’s telephone adapters are covered by United States Patent No. 6,246,611. Macronix has agreed to fully defend and indemnify Vonage in the district court and ITC proceedings. On June 25, 2014, the Northern District granted the parties’ joint motion to stay the district court proceedings pending the resolution of the ITC case. On June 30, 2014, Vonage responded to the ITC complaint.

Commercial Litigation

Merkin & Smith, et als.  On September 27, 2013, Arthur Merkin and James Smith filed a putative class action lawsuit against Vonage America, Inc. in the Superior Court of the State of California, County of Los Angeles, alleging that Vonage violated California’s Unfair Competition Law by charging its customers fictitious 911 taxes and fees. On October 30, 2013, Vonage filed a notice removing the case to the United States District Court for the Central District of California. On October 30, 2013 the case

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VONAGE HOLDINGS CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share amounts)

(Unaudited)

was assigned to a United States District Judge and a Magistrate Judge. On November 26, 2013, Vonage filed its Answer to the Complaint.  On December 4, 2013, Vonage filed a Motion to Compel Arbitration. On February 4, 2014, the Court denied Vonage’s Motion to Compel Arbitration. On March 5, 2014, Vonage filed an appeal with the United States Court of Appeals for the Ninth Circuit of the decision denying Vonage’s Motion to Compel Arbitration.  On March 6, 2014, Vonage moved to stay the district court proceedings pending its appeal; the Court granted Vonage’s stay motion on March 26, 2014.  Vonage’s appellate brief is due on September 24, 2014.

From time to time, in addition to those identified above, we are subject to legal proceedings, claims, investigations, and proceedings in the ordinary course of business, including claims of alleged infringement of third-party patents and other intellectual property rights, commercial, employment, and other matters. From time to time we receive letters or other communications from third parties inviting us to obtain patent licenses that might be relevant to our business or alleging that our services infringe upon third party patents or other intellectual property. In accordance with generally accepted accounting principles, we make a provision for a liability when it is both probable that a liability has been incurred and the amount of the loss or range of loss can be reasonably estimated. These provisions, if any, are reviewed at least quarterly and adjusted to reflect the impacts of negotiations, settlements, rulings, advice of legal counsel, and other information and events pertaining to a particular case. Litigation is inherently unpredictable. We believe that we have valid defenses with respect to the legal matters pending against us and are vigorously defending these matters. Given the uncertainty surrounding litigation and our inability to assess the likelihood of a favorable or unfavorable outcome in the above noted matters and our inability to reasonably estimate the amount of loss or range of loss, it is possible that the resolution of one or more of these matters could have a material adverse effect on our consolidated financial position, cash flows or results of operations.

Regulation

Telephony services are subject to a broad spectrum of state and federal regulations. Because of the uncertainty over whether Voice over Internet Protocol (“VoIP”) should be treated as a telecommunications or information service, we have been involved in a substantial amount of state and federal regulatory activity. Implementation and interpretation of the existing laws and regulations is ongoing and is subject to litigation by various federal and state agencies and courts. Due to the uncertainty over the regulatory classification of VoIP service, there can be no assurance that we will not be subject to new regulations or existing regulations under new interpretations, and that such change would not introduce material additional costs to our business.

Federal - Net Neutrality

Clear and enforceable net neutrality rules would make it more difficult for broadband Internet service providers to block or discriminate against Vonage service. Also explicitly applying net neutrality rules to wireless broadband Internet service could create greater opportunities for VoIP applications that run on wireless broadband Internet service. In October 2009, the FCC proposed the adoption of enforceable net neutrality rules for both wired and wireless broadband Internet service providers. The proposed rules would prohibit wired and wireless broadband Internet service providers from blocking or hindering lawful content, applications, or services and from unreasonably discriminating when transmitting lawful network traffic. In addition, broadband Internet service providers would have to publicly disclose certain information about their network management practices. In December 2010, the FCC adopted enforceable net neutrality rules based on its October 2009 proposal. All of the proposed rules in the October 2009 proposal applied to wired broadband Internet providers. The FCC applied some but not all of the proposed rules to wireless broadband service. Wireless broadband Internet services providers are prohibited from blocking or hindering voice or video applications that compete with the broadband Internet service provider's voice or video services. Wireless providers are also subject to transparency requirements, but they are not subject to the prohibition on unreasonable discrimination that applies to wired broadband Internet services providers. A number of parties filed appeals of the rules. On January 14, 2014, the D.C. Circuit vacated the anti-blocking and the unreasonable discrimination provisions of the rules. The D.C. Circuit decision did not foreclose the FCC from adopting anti-blocking or non-discrimination rules. On February 19, 2014, FCC Chairman Tom Wheeler announced that the FCC would not appeal the D.C. Circuit decision, electing to pursue restoration of the vacated provisions using the authority that the FCC has over broadband services, as recognized by the D.C. Circuit. The FCC adopted a new Notice of Proposed Rulemaking (“NPRM”) on net neutrality rules at its May 15, 2014 meeting. Opening comments on the NPRM were due July 18, 2014 and reply comments are due September 10, 2014.

Federal - Intercarrier Compensation

On February 9, 2011, the FCC released a Notice of Proposed Rulemaking on reforming universal service and the intercarrier compensation (“ICC”) system that governs payments between telecommunications carriers primarily for terminating traffic. In particular, the FCC indicated that it has never determined the ICC obligations for VoIP service and sought comment on a number of proposals for how VoIP should be treated in the ICC system. The FCC's adoption of an ICC proposal will impact Vonage's costs

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VONAGE HOLDINGS CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share amounts)

(Unaudited)

for telecommunications services. On October 27, 2011, the FCC adopted an order reforming universal service and ICC. The FCC order provides that VoIP originated calls will be subject to interstate access charges for long distance calls and reciprocal compensation for local calls that terminate to the public switched telephone network (“PSTN”). It also subjected PSTN originated traffic directed to VoIP subscribers to similar ICC obligations. The termination charges for all traffic, including VoIP originated traffic, will transition over several years to a bill and keep arrangement (i.e., no termination charges). Numerous parties filed appeals of the FCC order in multiple federal circuit courts of appeal. The 10th Circuit Court of Appeals was selected by lottery to decide the appeals. On May 23, 2014, the 10th Circuit upheld the FCC’s order.

Federal - Universal Service Contribution Reform

On April 30, 2012, the FCC released a Further Notice of Proposed Rulemaking on reforming federal universal service fund (“USF”) contributions. Currently USF contributions are assessed on the interstate and international revenue of traditional telephone carriers and interconnected VoIP providers like Vonage. The level of USF assessments on these providers has been going up over time because of decreases in the revenue subject to assessment due to substitution of non-assessable services such as non-interconnected VoIP services. If the FCC does reform USF contributions, it is likely that Vonage's contribution burden will decline.

Federal - Rural Call Completion Issues

On February 7, 2013, the FCC released a Notice of Proposed Rulemaking on rural call completion issues. The Notice of Proposed Rulemaking (NPRM) proposed new detailed reporting requirements to gauge rural call completion performance. Rural carriers have argued that VoIP provider call completion performance to rural areas is generally poor. On October 28, 2013, the FCC adopted an order on rural call completion that imposes new reporting obligations and restricts certain call signaling practices. The call signaling rules went into effect on January 31, 2014.  We filed for extensions that the FCC granted on January 30, 2014 and February 28, 2014 and as of April 17, 2014, we are compliant with the new FCC call signaling rules.  We could be subject to an FCC enforcement action in the future in the event the FCC took the position that our rural call completion performance is inadequate or we were not compliant with the FCC’s order.

Federal - Numbering Rights

On April 18, 2013, the FCC issued a Notice of Proposed Rulemaking (NPRM) that proposing to modify FCC rules to allow VoIP providers to directly access telephone numbers. In addition, the FCC granted a waiver from its existing rules to allow Vonage to conduct a trial of direct access to telephone numbers. The trial would allow the FCC to obtain real-world data on direct access to telephone numbers by VoIP providers to inform consideration of the NPRM. Direct access to telephone numbers would facilitate IP to IP interconnection, which may allow VoIP providers to provide higher quality, lower cost services, promote the deployment of innovative new voice services, and experience reductions in the cost of telephony services. Vonage successfully completed the trial in certain markets and filed the required reports on the trial with the FCC. On January 31, 2014, the FCC Wireline Competition Bureau issued a positive report on the trial, concluding that Vonage's successful trial confirmed the technical feasibility of interconnected VoIP providers obtaining telephone numbers directly from the numbering administrators. Given the positive report, the FCC may adopt its proposed rule to allow VoIP providers to directly access telephone numbers.

Pakistan Termination Rate Increase

On October 1, 2012, Pakistani carriers formed the International Clearing House (ICH). This cartel subsequently took action to increase the cost to terminate international calls to Pakistan by approximately 500 percent. As a result of the implementation of higher termination costs, Vonage was forced to remove Pakistan from unlimited calling in its Vonage World plan. Vonage filed a petition at the FCC, shortly after the ICH rates became effective, seeking an order prohibiting U.S. carriers from paying the new higher ICH rates. On March 5, 2013, the FCC issued an order that prohibits U.S. carriers from paying more than the prevailing termination rate prior to the implementation of the ICH rates. In addition to the Vonage challenge in the U.S., a Pakistani carrier challenged the ICH action under Pakistani competition law. After the trial court found that the ICH violated Pakistani competition law, the Supreme Court of Pakistan overturned the trial court decision and remanded the case to the Competition Commission of Pakistan (CCP). On April 30, 2013, the CCP issued an order that holds that the ICH violates Pakistani competition law. On May 9, 2013, the Sindh High Court temporarily suspended the CCP order while the court considers constitutional challenges to the order made by several Pakistani carriers. On June 17, 2014, the Pakistan Ministry of Information Technology withdrew its policy directing formation of the ICH as of August 1, 2014. Pakistani carriers challenged the Ministry’s order at the Sindh High Court and obtained a temporary injunction against the Ministry’s order. Despite favorable action by both U.S. and Pakistani authorities, it is currently unclear whether, or with what timing, international termination rates in Pakistan will return to a more competitive level.

25

VONAGE HOLDINGS CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share amounts)

(Unaudited)

State Telecommunications Regulation

In general, the focus of interconnected VoIP telecommunications regulation is at the federal level. On November 12, 2004, the FCC issued a declaratory ruling providing that our service is subject to federal regulation and preempted the Minnesota Public Utilities Commission from imposing certain of its regulations on us. The FCC's decision was based on its conclusion that our service is interstate in nature and cannot be separated into interstate and intrastate components. On March 21, 2007, the United States Court of Appeals for the 8th Circuit affirmed the FCC's declaratory ruling preempting state regulation of our service. The 8th Circuit found that it is impossible for us to separate our interstate traffic from our intrastate traffic because of the nomadic nature of the service. As a result, the 8th Circuit held that it was reasonable for the FCC to preempt state regulation of our service. The 8th Circuit was clear, however, that the preemptive effect of the FCC's declaratory ruling may be reexamined if technological advances allow for the separation of interstate and intrastate components of the nomadic VoIP service. Therefore, the preemption of state authority over our service under this ruling generally hinges on the inability to separate the interstate and intrastate components of the service.

While this ruling does not exempt us from all state oversight of our service, it effectively prevents state telecommunications regulators from imposing certain burdensome and inconsistent market entry requirements and certain other state utility rules and regulations on our service. State regulators continue to probe the limits of federal preemption in their attempts to apply state telecommunications regulation to interconnected VoIP service. On July 16, 2009, the Nebraska Public Service Commission and the Kansas Corporation Commission filed a petition with the FCC seeking a declaratory ruling or, alternatively, adoption of a rule declaring that state authorities may apply universal service funding requirements to nomadic VoIP providers. We participated in the FCC proceedings on the petition. On November 5, 2010, the FCC issued a declaratory ruling that allowed states to assess state USF on nomadic VoIP providers on a going forward basis provided that the states comply with certain conditions to ensure that imposing state USF does not conflict with federal law or policy. We expect that state public utility commissions and state legislators will continue their attempts to apply state telecommunications regulations to nomadic VoIP service.

Stand-by Letters of Credit

We had stand-by letters of credit totaling $3,308 and $4,306, as of June 30, 2014 and December 31, 2013, respectively.

End-User Commitments

We are obligated to provide telephone services to our registered end-users. The costs related to the potential utilization of minutes sold are expensed as incurred. Our obligation to provide this service is dependent on the proper functioning of systems controlled by third-party service providers. We do not have a contractual service relationship with some of these providers.

Vendor Commitments

We have committed to purchase software licenses. We have committed to pay approximately $500 in 2014, $1,000 in 2015 and 2016, and $100 in 2017.

We have committed to lease office space from a vendor. We have committed to pay this vendor approximately $100 in 2014, $900 in 2015, $1,500 in 2016 through 2019, and $1,100 in 2020.

State and Municipal Taxes

In accordance with generally accepted accounting principles, we make a provision for a liability for taxes when it is both probable that a liability has been incurred and the amount of the liability or range of liability can be reasonably estimated. These provisions are reviewed at least quarterly and adjusted to reflect the impacts of negotiations, settlements, rulings, advice of legal counsel, and other information and events pertaining to a particular case. For a period of time, we did not collect or remit state or municipal taxes (such as sales, excise, utility, use, and ad valorem taxes), fees or surcharges (“Taxes”) on the charges to our customers for our services, except that we historically complied with the New Jersey sales tax. We have received inquiries or demands from a number of state and municipal taxing and 911 agencies seeking payment of Taxes that are applied to or collected from customers of providers of traditional public switched telephone network services. Although we have consistently maintained that these Taxes do not apply to our service for a variety of reasons depending on the statute or rule that establishes such obligations, we are now collecting and remitting sales taxes in certain of those states including a number of states that have changed their statutes to expressly include VoIP. In addition, many states address how VoIP providers should contribute to support public safety agencies, and in those states we remit fees to the appropriate state agencies. We could also be contacted by state or municipal taxing and 911 agencies regarding Taxes that do explicitly apply to VoIP and these agencies could seek retroactive payment of

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VONAGE HOLDINGS CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share amounts)

(Unaudited)

Taxes. As such, we have a reserve of $5,708 as of June 30, 2014 as our best estimate of the potential tax exposure for any retroactive assessment. We believe the maximum estimated exposure for retroactive assessments is approximately $7,000 as of June 30, 2014.

Note 7.    Redeemable Noncontrolling Interest

In the third quarter of 2013, we formed a consolidated foreign subsidiary in Brazil in connection with our previously announced joint venture in Brazil, creating a redeemable noncontrolling interest. The redeemable noncontrolling interest consists of the 30.0% interest in this subsidiary held by our joint venture partner.

Pursuant to the stockholder agreement governing the joint venture, we have the right to purchase this noncontrolling interest (“call right”) from the joint venture partner and our joint venture partner has the right to sell the noncontrolling interest (“put right”) to us subject to certain triggering events. The amounts at which the call right can be exercised are based on appraised value as prescribed by the stockholder agreement, subject to certain adjustments ranging from 50% to 150%, multiplied by the noncontrolling interest holder’s percentage ownership of the subsidiary that is subject to the triggering event. The amounts at which the put right can be exercised are based on appraised value as prescribed by the stockholder agreement, subject to certain adjustments ranging from 50% to 120%, multiplied by the noncontrolling interest holder’s percentage ownership of the subsidiary that is subject to the triggering event. We adjust the redeemable noncontrolling interest to the redemption values at the end of each reporting period should it become probable that the noncontrolling interest will be redeemable. At that time the changes in the noncontrolling interest will be recognized as an adjustment to retained earnings, or in the absence of retained earnings, as an adjustment to additional paid-in capital.

On December 3, 2013, we extended a loan of $545 to our consolidated foreign subsidiary in Brazil pursuant to the shareholder agreement to meet the capital call requirement of our joint venture partner. The loan bore interest at a rate equal to 105% of rate of the Sistema Especial de Liquidação e Custódia (SELIC) (“SELIC Rate”).

In February 2014, pursuant to the shareholder agreement, we notified our joint venture partner that we are exercising our dilution rights as our joint venture partner did not meet a second successive capital call on December 17, 2013. As such, the loan that was provided in December will be converted to equity and we will make the second missed capital call of $503 . The dilution process was completed at the end of March 2014, increasing our ownership interest to 91% .

We have provided our joint venture partner with an opportunity to repurchase their diluted equity by making the first capital call in 2014, which is expected to be completed in August 2014, in addition to the two previously missed capital calls. Pursuant to the shareholder agreement, the price to be paid by our joint venture partner in order to repurchase their diluted equity is equal to (i) the loan principal amount adjusted from its disbursement date until the date of the repurchase, at a rate equal to 105% of the rate of the SELIC Rate pro rata; plus (ii) $503, adjusted from December 17, 2013 to the date of the repurchase, at a rate equal to 107% of the SELIC Rate pro rata; and (iii) their share of joint venture losses for diluted equity from the dilution date through the repurchase date.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

You should read the following discussion together with our 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; 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” in our Annual Report on Form 10-K, in our Quarterly Reports on Form 10-Q and in our Current Reports on Form 8-K. 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

For the financial information discussed in this Quarterly Report on Form 10-Q, other than per share and per line amounts, dollar amounts are presented in thousands, except where noted. All trademarks are the property of their owners.

Overview

We are a leading provider of communications services connecting consumers and businesses through cloud-connected devices worldwide. We rely heavily on our network, which is a flexible, scalable Session Initiation Protocol (SIP) based Voice over Internet Protocol, or VoIP, network. This platform enables a user via a single “identity,” either a number or user name, to access and utilize services and features regardless of how they are connected to the Internet, including over 3G, 4G, Cable, or DSL broadband networks. This technology enables us to offer our customers attractively priced voice and messaging services and other features around the world on a variety of devices.

Since its inception, Vonage has used IP technology to disrupt large existing markets by offering high-value, low cost communications services. From its start-up roots, the Company has evolved into a leader in the VoIP services market, with 2.5 million customer lines serving residential and small and medium business customers. Customers using our core Vonage landline replacement service are located in the United States (94% of lines), Canada and the UK. Our mobile applications serve customers around the world.

Key to the Company's evolution was our strategic, operational and financial transformation, which was largely completed in 2012. This transformation resulted in a dramatic swing to profitability enabled by significant cost reductions, a meaningful lowering of customer defections, and the successful restructuring of our balance sheet. This transformation positioned the Company to pursue our current growth strategy.

Strategically, we shifted our primary focus in our domestic markets to serving the rapidly growing but under-served ethnic segments in the United States with international calling needs. We improved the customer value proposition by being the first to deliver flat-rate, unlimited calling to over 60 countries with the launch of our Vonage World service, and we differentiated our service by providing enhanced features, including our mobile Extensions service, at no extra cost. These strategic shifts have resulted in new customers with a higher average lifetime value and a better churn profile than those in the past.

Our focus on operations during this period has resulted in a significantly improved cost structure. We have implemented operational efficiencies throughout our business and have reduced domestic and international termination costs per minute, and

28

customer care costs. Importantly, we have enabled structural cost reductions while significantly improving network call quality and customer service performance. Improvements in the overall customer experience have contributed to lower churn, which has remained in the mid 2% range for six consecutive quarters.

Through debt refinancings in December 2010, July 2011, and February 2013, we have fundamentally improved our balance sheet, reducing interest rates from as high as 20% in 2009 to less than 4%.

In part as a result of our operational and financial stability, and our disciplined approach to cash management, we established our share repurchase program which was first instituted in August of 2012. The Company currently has a $100,000 repurchase authorization in place which expires on December 31, 2014. We believe our repurchase program reflects our balanced approach to capital allocation as we invest for growth through our growth priorities and deliver value to shareholders without compromising our ongoing operational needs.

Having achieved operational and financial stability, we are focused on driving revenue through three major growth priorities. The first of these is continued penetration of our core North American markets, where we will continue to provide value in international long distance and target under-served ethnic segments, where we have entered the low-end domestic market with our flanker brand, BasicTalk, a low-priced home phone service offering unlimited calling throughout the United States, and where we have expanded our offering to small and medium business (SMB) and small office, home office (SOHO) customers through the acquisition of Vocalocity, Inc, which has been re-branded Vonage Business Solutions ("VBS"). Our second growth priority is international expansion outside of North America through strategic partnerships. Finally, our third growth priority is mobile services, which we view as a strategic enabler of the Company's entire product offering.

We had approximately 2.5 million subscriber lines for broadband telephone replacement services as of June 30, 2014. We bill customers in the United States, Canada, and the United Kingdom. Customers in the United States represented 94% of our subscriber lines at June 30, 2014.

Trends and Key Operating Data

A number of trends in our industry have a significant effect on our results of operations and are important to an understanding of our financial statements.

Competitive landscape. We face intense competition from traditional telephone companies, wireless companies, cable companies, and alternative communication providers. Most traditional wireline and wireless telephone service providers and cable companies are substantially larger and better capitalized than we are and have the advantage of a large existing customer base. In addition, because our competitors provide other services, they often choose to offer VoIP services or other voice services as part of a bundle that includes other products, such as video, high speed Internet access, and wireless telephone service, which we do not offer. In addition, such competitors may in the future require new customers or existing customers making changes to their service to purchase voice services when purchasing high speed Internet access. Further, as wireless providers offer more minutes at lower prices, better coverage, and companion landline alternative services, their services have become more attractive to households as a replacement for wireline service. We also compete against alternative communication providers, such as magicJack, Skype, and Google Voice. Some of these service providers have chosen to sacrifice telephony revenue in order to gain market share and have offered their services at low prices or for free. As we continue to introduce applications that integrate different forms of voice and messaging services over multiple devices, we are facing competition from emerging competitors focused on similar integration, as well as from alternative voice communication providers. In addition, our competitors have partnered and may in the future partner with other competitors to offer products and services, leveraging their collective competitive positions. We also are subject to the risk of future disruptive technologies. In connection with our increasing emphasis on the international long distance market in the United States, we face competition from low-cost international calling cards and VoIP providers in addition to traditional telephone companies, cable companies, and wireless companies.

Broadband adoption. The number of United States households with broadband Internet access has grown significantly. On March 16, 2010, the Federal Communications Commission (“FCC”) released its National Broadband Plan, which seeks, through supporting broadband deployment and programs, to encourage broadband adoption for the approximately 100 million United States residents who do not have broadband at home. We expect the trend of greater broadband adoption to continue. We benefit from this trend because our service requires a broadband Internet connection and our potential addressable market increases as broadband adoption increases.

Regulation. Our business has developed in a relatively lightly regulated environment. The United States and other countries, however, are examining how VoIP services should be regulated. A November 2010 order by the FCC that permits states to impose state universal service fund obligations on VoIP service, discussed in Note 10 to our financial statements, is an example of efforts by regulators to determine how VoIP service fits into the telecommunications regulatory landscape. In addition to regulatory matters that directly address VoIP, a number of other regulatory initiatives could impact our business. One such regulatory initiative is net neutrality. In December 2010, the FCC adopted a revised set of net neutrality rules for broadband Internet service providers.

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These rules made it more difficult for broadband Internet service providers to block or discriminate against Vonage service. On January 14, 2014, the D.C. Circuit Court of Appeals vacated the anti-blocking and the unreasonable discrimination provisions of the rules. The D.C. Circuit decision did not foreclose the FCC from adopting anti-blocking or non-discrimination rules. On February 19, 2014, FCC Chairman Tom Wheeler announced that the FCC would not appeal the D.C. Circuit decision, electing to pursue restoration of the vacated provisions using the authority that the FCC has over broadband services, as recognized by the D.C. Circuit. The FCC adopted a new Notice of Proposed Rulemaking (“NPRM”) on net neutrality rules at its May 15, 2014 meeting. Opening comments on the NPRM were due July 18, 2014 and reply comments are due September 10, 2014. In addition, on February 9, 2011, the FCC released a Notice of Proposed Rulemaking on reforming universal service and the intercarrier compensation (“ICC”) system that governs payments between telecommunications carriers primarily for terminating traffic. The FCC's adoption of an ICC proposal will impact Vonage's costs for telecommunications services. On October 27, 2011, the FCC adopted an order reforming universal service and ICC. The FCC order provides that VoIP originated calls will be subject to interstate access charges for long distance calls and reciprocal compensation for local calls that terminate to the public switched telephone network (“PSTN”). The termination charges for all traffic, including VoIP originated traffic, will transition over several years to a bill and keep arrangement (i.e., no termination charges). On May 23, 2014, the 10th Circuit upheld the FCC’s order. We believe that the order will positively impact our costs over time.

The table below includes key operating data that our management uses to measure the growth and operating performance of our business:

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2014			2013			2014			2013
Gross subscriber line additions	172,346			155,412			363,759			303,415
Change in net subscriber lines	(6,695		)	2,541			5,808			(9,859		)
Subscriber lines (at period end)	2,548,734			2,349,957			2,548,734			2,349,957
Average monthly customer churn	2.6		%	2.4		%	2.6		%	2.5		%
Average monthly operating revenues per line	$	28.59		$	29.06		$	28.78		$	29.29
Average monthly direct cost of telephony services per line	$	6.84		$	7.60		$	6.87		$	7.69
Marketing costs per gross subscriber line addition	$	342		$	375		$	320		$	363
Employees (excluding temporary help) (at period end)	1,279			946			1,279			946

Gross subscriber line additions. Gross subscriber line additions for a particular period are calculated by taking the net subscriber line additions during that particular period and adding to that the number of subscriber lines that terminated during that period. This number does not include subscriber lines both added and terminated during the period, where termination occurred within the first 30 days after activation. The number does include, however, subscriber lines added during the period that are terminated within 30 days of activation but after the end of the period.

Net subscriber line additions. Net subscriber line additions for a particular period reflect the number of subscriber lines at the end of the period, less the number of subscriber lines at the beginning of the period.

Subscriber lines. Our subscriber lines include, as of a particular date, all paid subscriber lines from which a customer can make an outbound telephone call on that date. Our subscriber lines include fax lines, including fax lines bundled with subscriber lines in our small office home office calling plans and soft phones, but do not include our virtual phone numbers or toll free numbers, which only allow inbound telephone calls to customers. Subscriber lines increased from 2,349,957 as of June 30, 2013 to 2,548,734 as of June 30, 2014, which includes lines at acquisition from VBS. For the six months ended June 30, 2014, we added 5,808 subscriber lines.

Average monthly customer churn. Average monthly customer churn for a particular period is calculated by dividing the number of customers that terminated during that period by the simple average number of customers during the period, and dividing the result by the number of months in the period. The simple average number of customers during the period 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. Terminations, as used in the calculation of churn statistics, do not include customers terminated during the period if termination occurred within the first 30 days after activation. Our average monthly customer churn was 2.6% for the three months ended June 30, 2014 and the three months ended March 312014, compared to 2.4% for the three months ended June 30, 2013. Our average monthly customer churn increased to 2.6% for the six months ended June 30, 2014 from 2.5% for the six months ended June 30, 2013. The increases were due primarily to the higher early life churn rate of customers acquired through retail channels without a minimum service requirement, including assisted selling and community sales channels, which have increased as a percentage of our total customer base. We monitor churn on a daily basis and use it as an indicator of the level of customer satisfaction. Other companies

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may calculate churn differently, and their churn data may not be directly comparable to ours. Customers who have been with us for a year or more tend to have a lower churn rate than customers who have not. In addition, our customers who are international callers generally churn at a lower rate than customers who are domestic callers. Our churn will fluctuate over time due to economic conditions, competitive pressures, marketplace perception of our services, and our ability to provide high quality customer care and network quality and add future innovative products and services.

Average monthly revenues per line. Average monthly revenues per 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 line decreased slightly to $28.59 for the three months ended June 30, 2014 compared to $29.06 for the three months ended June 30, 2013 due primarily to rate plan mix. The continued expansion of lower priced plan offerings including BasicTalk to meet customer needs may cause downward pressure on average monthly revenues per line, offset by any selected pricing actions.

Average monthly direct cost of telephony services per line. Average monthly direct cost of telephony services per line for a particular period is calculated by dividing our direct cost of telephony services 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. We use the average monthly direct cost of telephony services per line to evaluate how effective we are at managing our costs of providing service. Our average monthly direct cost of telephony services per line decreased to $6.84 for the three months ended June 30, 2014 compared to $7.60 for the three months ended June 30, 2013, due primarily to the decrease in termination costs driven by more favorable rates negotiated with our service providers and the decrease in our network costs and in our E-911 costs.

Marketing cost per gross subscriber line addition. Marketing cost per gross subscriber line addition is calculated by dividing our marketing expense for a particular period by the number of gross subscriber line additions during the period. Marketing expense does not include the cost of certain customer acquisition activities, such as rebates and promotions, which are accounted for as an offset to revenues, or customer equipment subsidies, which are accounted for as direct cost of goods sold. As a result, it does not represent the full cost to us of obtaining a new customer. Our marketing cost per gross subscriber line addition was lower at $342 for the three months ended June 30, 2014 compared to $375 for the three months ended June 30, 2013 as a result of lower marketing cost per gross subscriber line addition attributable to VBS.

Employees. Employees represent the number of personnel that are on our payroll and exclude temporary or outsourced labor.

Revenues

Revenues consist of telephony services revenue and customer equipment and shipping revenue. Substantially all of our revenues are telephony services revenue. In the United States, we offer domestic and international rate plans to meet the needs of our customers, including a variety of residential plans and mobile plans. The “Vonage World” plan, available in the United States and Canada, offers unlimited calling across the United States and Puerto Rico, unlimited international calling to over 60 countries including India, Mexico, and China, subject to certain restrictions, and voicemail to text messages with Vonage Visual Voicemail. Each of our unlimited plans other than Vonage World offers unlimited domestic calling as well as unlimited calling to Puerto Rico, Canada, and selected European countries, subject to certain restrictions. Each of our basic plans offers a limited number of domestic calling minutes per month. We offer similar plans in Canada. Under our basic plans, we charge on a per minute basis when the number of domestic calling minutes included in the plan is exceeded for a particular month. International calls (except for calls to Puerto Rico, Canada and certain European countries under our unlimited plans and a variety of countries under international calling plans and Vonage World) are charged on a per minute basis. These per minute fees are not included in our monthly subscription fees. Through our recent acquisition of Vocalocity, we offer SMB and SOHO customers several service plans with different pricing structures under the Vonage Business Solutions brand. The service plans include an array of basic and enhanced features applicable to the needs of SMB and SOHO customers. Customers also have the opportunity to purchase premium features for additional fees.

We are integrating the combined operations of Vocalocity, now under the VBS brand, with Vonage, eliminating overlapping processes and integrating products and sales efforts. We are also optimizing lead flow generated by the Vonage brand, directing prospective business customers from Vonage inbound telemarketing or websites to the VBS website and inbound telesales channels. We expect these efforts to shift certain core gross subscriber line additions and revenue from the Vonage consumer business to VBS, leading to subscriber additions with higher total lines and average monthly revenue per line.

In addition to our landline telephony business, we are leveraging our technology to offer services and applications for mobile and other connected devices to address large existing markets. We introduced our first mobile offering in late 2009 and in early 2012 we introduced Vonage Mobile, our all-in-one mobile application that provides free calling and messaging between users who have the application, as well as traditional paid international calling to any other phone. This mobile application works over

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WiFi, 3G and 4G and in more than 90 countries worldwide. The application consolidates the best features of our prior applications, while adding important functionality, value and ease of use, including direct payment through iTunes.

We derive most of our telephony services revenue from monthly subscription fees that we charge our customers under our service plans. We also offer fax service, virtual phone numbers, toll free numbers and other services, and charge an additional monthly fee for each service. We automatically charge these fees to our customers’ credit cards, debit cards, or electronic check payments (“ECP”), monthly in advance. We also automatically charge the per minute fees not included in our monthly subscription fees to our customers’ credit cards, debit cards or ECP monthly in arrears unless they exceed a certain dollar threshold, in which case they are charged immediately.

By collecting monthly subscription fees in advance and certain other charges immediately after they are incurred, we are able to reduce the amount of accounts receivable that we have outstanding, thus allowing us to have lower working capital requirements. Collecting in this manner also helps us mitigate bad debt losses, which are recorded as a reduction to revenue. If a customer’s credit card, debit card or ECP is declined, we generally suspend international calling capabilities as well as the customer’s ability to incur domestic usage charges in excess of their plan minutes. Historically, in most cases, we are able to correct the problem with the customer within the current monthly billing cycle. If the customer’s credit card, debit card or ECP could not be successfully processed during three billing cycles (i.e., the current and two subsequent monthly billing cycles), we terminate the account.

In the United States, we charge regulatory, compliance, E-911, and intellectual property-related recovery fees on a monthly basis to defray costs, and to cover taxes that we are charged by the suppliers 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 consist of direct cost of telephony services, direct cost of goods sold, selling, general and administrative expense, marketing expense, and depreciation and amortization.

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 49% and 51% of our total direct cost of telephony services for the three months ended June 30, 2014 and 2013, 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

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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 FCC regulations regarding VoIP emergency services, which require us to provide enhanced emergency dialing capabilities to transmit 911 calls for 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 residential customers who subscribe to our service through our direct sales channel in excess of activation fees when an activation fee is collected. Business customers' purchased equipment is recorded on a net basis. 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 events sales teams, and retail 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 includes:

• 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.

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Other Income (Expense)

Other Income (Expense) includes:

• Interest income on cash and cash equivalents.

• Interest expense on notes payable, patent litigation judgments and settlements and capital leases.

• Amortization of debt related costs.

• Realized and unrealized gains (losses) on foreign currency.

Results of Operations

The following table sets forth, as a percentage of consolidated operating revenues, our consolidated statement of operations for the periods indicated:

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2014		2013		2014		2013
Revenues	100	%	100	%	100	%	100	%
Operating Expenses:
Direct cost of telephony services (excluding depreciation and amortization)	24		26		24		26
Direct cost of goods sold	4		5		4		4
Selling, general and administrative	34		30		35		30
Marketing	27		28		26		27
Depreciation and amortization	6		4		6		4
	95		93		95		91
Income from operations	5		7		5		9
Other Income (Expense):
Interest income	—		—		—		—
Interest expense	(1	)	(1	)	(1	)	(1	)
Other income (expense), net	—		—		—		—
	(1	)	(1	)	(1	)	(1	)
Income before income tax expense	4		6		4		8
Income tax expense	(2	)	(2	)	(2	)	(3	)
Net income	2	%	4	%	2	%	5	%
Plus: Net loss attributable to noncontrolling interest	—	%	—	%	—	%	—	%
Net income attributable to Vonage	2	%	4	%	2	%	5	%

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Summary of Results for the Three and Six Months Ended June 30, 2014 and June 30, 2013

Revenues, Direct Cost of Telephony Services and Direct Cost of Goods Sold

(in thousands, except percentages)	Three Months Ended									Six Months Ended
	June 30,									June 30,
	2014		2013		Dollar Change			Percent Change		2014		2013		Dollar Change			Percent Change
Revenues	$	218,882	$	204,776	$	14,106		7	%	$	439,615	$	413,863	$	25,752		6	%
Direct cost of telephony services(1)	52,385		53,527		(1,142		)	(2	)%	105,002		108,708		(3,706		)	(3	)%
Direct cost of goods sold	9,450		9,217		233			3	%	19,189		18,095		1,094			6	%
	157,047		142,032		15,015			11	%	315,424		287,060		28,364			10	%

(1) Excludes depreciation and amortization of $5,098, $3,510, $10,252, and $6,962, respectively.

Three Months EndedJune 30, 2014 compared to Three Months EndedJune 30, 2013

Revenues. The increase in revenues of $14,106, or 7%, was driven by an increase of $13,304 in monthly subscription fees primarily due to revenue of $18,246 from VBS, partially offset by rate plan mix and lower customer acquisitions on premium plans of $4,942. There was an increase in our regulatory fee revenue of $154, which included an increase of $2,784 from VBS. There was an increase of $1,272 in USF fees, which included an increase of $711 from VBS. There was also a decrease in credits issued to subscribers of $1,135, an increase in equipment and shipping revenue of $379, and an increase in overage in plan minutes of $595, which included $575 from VBS. These increases were offset by a decrease in international minutes of use revenue of $1,570 and an increase in bad debt of $777. There was also a decrease in additional features revenue of $139 and a decrease in fees that we charged for disconnecting our service of $160.

Direct cost of telephony services. The decrease in direct cost of telephony services of $1,142, or 2%, was primarily driven by a decrease in international usage of $1,667, a decrease in our network costs of $1,094, which includes costs for co-locating in other carriers’ facilities, leasing phone numbers, routing calls on the Internet, E-911 costs, and transferring calls to and from the Internet to the public switched telephone network. These decreases were offset by an increase in domestic termination costs of $388, which are costs that we pay other phone companies for terminating phone calls and an increase of USF and related fees imposed by government agencies of $1,274.

Direct cost of goods sold. The increase in direct cost of goods sold of $233, or 3%, was primarily due to an increase in customer equipment costs of $1,319 driven by VBS, which was offset by a decrease in waived activation fees for new customers of $918 and a decrease in shipping costs of $105.

Six Months EndedJune 30, 2014 compared to Six Months EndedJune 30, 2013

Revenues. The increase in revenues of $25,752, or 6%, was driven by an increase of $25,619 in monthly subscription fees primarily due to revenue of $34,585 from VBS, partially offset by rate plan mix and lower customer acquisitions on premium plans of $8,966. There was an increase in USF fees of $1,802, which included an increase of $1,304 from VBS. There was also a decrease in credits issued to subscribers of $1,567, an increase in equipment and shipping revenue of $634, and an increase in overage in plan minutes of $1,359, which included $1,156 from VBS. These increases were offset by a decrease in international minutes of use revenue of $2,620, an increase in bad debt of $1,418, a decrease in additional features revenue of $365, and a decrease in fees that we charged for disconnecting our service of $628. There was also a decrease in regulatory recovery fees of $102, which included an increase of $4,781 from VBS.

Direct cost of telephony services. The decrease in direct cost of telephony services of $3,706, or 3%, was primarily driven by a decrease in international usage of $4,288, a decrease in our network costs of $1,818, which includes costs for co-locating in other carriers’ facilities, leasing phone numbers, routing calls on the Internet, E-911 costs, and transferring calls to and from the Internet to the public switched telephone network. These decreases were offset by an increase in domestic termination costs of $528, which are costs that we pay other phone companies for terminating phone calls and an increase of USF and related fees imposed by government agencies of $1,864.

Direct cost of goods sold. The increase in direct cost of goods sold of $1,094, or 6%, was primarily due to an increase in customer equipment costs of $3,576 driven by VBS and from additional customers from our retail expansion, which was offset by a decrease in waived activation fees for new customers of $2,145, a decrease in shipping costs of $209, and a decrease in equipment amortization of $129.

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Selling, General and Administrative

(in thousands, except percentages)	Three Months Ended								Six Months Ended
	June 30,								June 30,
	2014		2013		Dollar Change		Percent Change		2014		2013		Dollar Change		Percent Change
Selling, general and administrative	$	73,569	$	61,481	$	12,088	20	%	$	152,022	$	124,391	$	27,631	22	%

Three Months EndedJune 30, 2014 compared to Three Months EndedJune 30, 2013

Selling, general and administrative. Selling expense increased by $2,572, including $2,027 due to an increase in the number of retail stores with assisted selling, an increase of commissions paid to retailers of $662, and an increase of $194 related to calling card launch, offset by a decrease of $311 in community sales teams. General and administrative expense increased by $9,516 due to an increase in compensation and employee related expense of $5,170 and in customer care costs of $1,269, mainly from inclusion of VBS, and higher share based cost of $400. There was also a change in settlement expense of $2,022 as last year included resolution of an insurance claim for prior period legal fees and settlement expenses of $2,300. There was also an increase in professional fees of $820, credit card and ECP fees of $330, and facility expense of $334. These increases were partially offset by a decrease in state and municipal taxes of $997.

Six Months EndedJune 30, 2014 compared to Six Months EndedJune 30, 2013

Selling, general and administrative. Selling expense increased by $6,209, including $262 due to the expansion of the number of community sales teams in the beginning of the year, $4,624 due to an increase in the number of retail stores with assisted selling, and commissions paid to retailers of $1,256. General and administrative expense increased by $21,422 due to an increase in compensation and employee related expense of $10,827 and in customer care costs of $2,588 mainly from inclusion of VBS, and higher share based cost of $2,712. There was also a change in settlement expense of $2,172 as last year included resolution of an insurance claim for prior period legal fees and settlement expenses of $2,300. There was also an increase in credit card and ECP fees of $510, professional fees of $1,137, telecommunications expense of $251, acquisition related costs of $118 in connection with the acquisition of Vocalocity, primarily related to professional fees, facility expense of $995, and state and municipal taxes of $356.

Marketing

(in thousands, except percentages)	Three Months Ended								Six Months Ended
	June 30,								June 30,
	2014		2013		Dollar Change		Percent Change		2014		2013		Dollar Change		Percent Change
Marketing	$	59,003	$	58,330	$	673	1	%	$	116,267	$	109,999	$	6,268	6	%

Three Months EndedJune 30, 2014 compared to Three Months EndedJune 30, 2013

Marketing. The increase in marketing expense of $673, or 1%, primarily resulted from our investment to grow VBS partially offset by lower television advertising as we have adjusted our media investment to optimize efficiency.

Six Months EndedJune 30, 2014 compared to Six Months EndedJune 30, 2013

Marketing. The increase in marketing expense of $6,268, or 6%, primarily resulted from our investment to grow VBS partially offset by lower television advertising as we have adjusted our media investment to optimize efficiency.

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Depreciation and Amortization

(in thousands, except percentages)	Three Months Ended								Six Months Ended
	June 30,								June 30,
	2014		2013		Dollar Change		Percent Change		2014		2013		Dollar Change		Percent Change
Depreciation and amortization	$	12,459	$	8,205	$	4,254	52	%	$	24,797	$	16,180	$	8,617	53	%

Three Months EndedJune 30, 2014 compared to Three Months EndedJune 30, 2013

Depreciation and amortization. The increase in depreciation and amortization of $4,254, or 52%, was primarily due to the amortization of acquisition-related intangibles of $3,694, an increase in software amortization of $239, and an increase in depreciation of network equipment, computer hardware, and furniture of $321.

Six Months EndedJune 30, 2014 compared to Six Months EndedJune 30, 2013

Depreciation and amortization. The increase in depreciation and amortization of $8,617, or 53%, was primarily due to the amortization of acquisition-related intangibles of $7,456, an increase in software amortization of $464, and an increase in depreciation of network equipment, computer hardware, and furniture of $697.

Other Income (Expense)

(in thousands, except percentages)	Three Months Ended											Six Months Ended
	June 30,											June 30,
	2014			2013			Dollar Change			Percent Change		2014			2013			Dollar Change			Percent Change
Interest income	$	31		$	74		$	(43	)	(58	)%	$	122		$	111		$	11		10	%
Interest expense	(1,434		)	(1,732		)	298			17	%	(3,511		)	(3,189		)	(322		)	(10	)%
Other income (expense), net	36			(17		)	53			312	%	23			(56		)	79			141	%
	$	(1,367	)	$	(1,675	)	$	308				$	(3,366	)	$	(3,134	)	$	(232	)

Three Months EndedJune 30, 2014 compared to Three Months EndedJune 30, 2013

Interest expense. The increase in interest expense of $298, or 17%, was due mainly to the funds we borrowed from the 2013 Revolving Credit Facility in November 2013 in connection with the acquisition of Vocalocity.

Six Months EndedJune 30, 2014 compared to Six Months EndedJune 30, 2013

Interest expense. The increase in interest expense of $322, or 10%, was due mainly to the funds we borrowed from the 2013 Revolving Credit Facility in November 2013 in connection with the acquisition of Vocalocity.

Provision for Income Taxes

(in thousands, except percentages)	Three Months Ended											Six Months Ended
	June 30,											June 30,
	2014			2013			Dollar Change			Percent Change		2014			2013			Dollar Change		Percent Change
Income tax expense	$	(5,266	)	$	(4,894	)	$	(372	)	(8	)%	$	(9,384	)	$	(12,862	)	$	3,478	27	%
Effective tax rate	49.5		%	39.7		%						49.5		%	38.6		%

We recognize income tax expense equal to pre-tax income multiplied by our effective income tax rate, an expense that had not been recognized prior to the reduction of the valuation allowance in the fourth quarter of 2011. In addition, adjustments are recorded for discrete period items related to stock compensation and changes to our state effective tax rate.

The provision also includes the federal alternative minimum tax and state and local income taxes.

The effective tax rate is calculated by dividing income tax expense by income before income tax expense. The 2014 estimated annual effective tax rate is expected to approximate 49%, but may fluctuate each quarter due to our foreign operations and certain discrete period transactions. In 2014, our effective tax rate will be impacted by the effect of losses incurred in certain foreign

37

jurisdictions for which we may not realize a tax benefit. The losses reduce our pre-tax income without a corresponding reduction in our tax expense, and therefore increase our effective tax rate.

Net Income

(in thousands, except percentages)	Three Months Ended									Six Months Ended
	June 30,									June 30,
	2014		2013		Dollar Change			Percent Change		2014		2013		Dollar Change			Percent Change
Net income	$	5,383	$	7,447	$	(2,064	)	(28	)%	$	9,588	$	20,494	$	(10,906	)	(53	)%

Three Months EndedJune 30, 2014 compared to Three Months EndedJune 30, 2013

Net income. Based on the explanations described above, net income decreased by $2,064, or 28%.

Six Months EndedJune 30, 2014 compared to Six Months EndedJune 30, 2013

Net income. Based on the explanations described above, net income decreased by $10,906, or 53%.

Net Loss Attributable to Noncontrolling Interest

(in thousands, except percentages)	Three Months Ended								Six Months Ended
	June 30,								June 30,
	2014		2013		Dollar Change		Percent Change		2014		2013
Net loss attributable to noncontrolling interest	$	135	$	—	$	135	—	%	$	518	$	—	$	518	—	%

Three Months EndedJune 30, 2014 compared to Three Months EndedJune 30, 2013

Net loss attributable to noncontrolling interest. The net loss attributable to noncontrolling interest of $135 represented 9% of the net loss of a consolidated subsidiary in Brazil.

Six Months EndedJune 30, 2014 compared to Six Months EndedJune 30, 2013

Net loss attributable to noncontrolling interest. The net loss attributable to noncontrolling interest of $518 represented 9% for the three months ended June 30, 2014 and 30% of the net loss of a consolidated subsidiary in Brazil for the three months ended March 31, 2014.

Net Income Attributable to Vonage

(in thousands, except percentages)	Three Months Ended									Six Months Ended
	June 30,									June 30,
	2014		2013		Dollar Change			Percent Change		2014		2013		Dollar Change			Percent Change
Net income attributable to Vonage	$	5,518	$	7,447	$	(1,929	)	(26	)%	$	10,106	$	20,494	$	(10,388	)	(51	)%

Three Months EndedJune 30, 2014 compared to Three Months EndedJune 30, 2013

Net income attributable to Vonage. Based on the explanations described above, net income attributable to Vonage decreased by $1,929, or 26%.

Six Months EndedJune 30, 2014 compared to Six Months EndedJune 30, 2013

Net income attributable to Vonage. Based on the explanations described above, net income attributable to Vonage decreased by $10,388, or 51%.

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Liquidity and Capital Resources

Overview

The following table sets forth a summary of our cash flows for the periods indicated:

	Six Months Ended
	June 30,
	2014			2013
	(in thousands)
Net cash provided by operating activities	$	33,469		$	28,604
Net cash used in investing activities	(9,132		)	(10,744		)
Net cash used in financing activities	(52,962		)	(14,921		)

Operating Activities

Cash provided by operating activities increased to $33,469 for the six months endedJune 30, 2014 compared to $28,604 for the six months endedJune 30, 2013, primarily due to changes in working capital.

Changes in working capital requirements include changes in accounts receivable, inventory, prepaid and other assets, accounts payable, accrued and other liabilities, and deferred revenue and costs. Cash used for working capital requirements decreased by $8,837 during the six months endedJune 30, 2014 compared to the prior year period, primarily due to timing of payments.

Investing Activities

Cash used in investing activities for the six months endedJune 30, 2014 of $9,132 was attributable to capital expenditures of $3,099 and development of software assets of $7,031, offset by a decrease in restricted cash of $998 due to the return of part of the security deposit on our leased office property in Holmdel, New Jersey.

Cash used in investing activities for the six months ended June 30, 2013 of $10,744 was attributable to capital expenditures of $5,803 and development of software assets of $6,197, offset by a decrease in restricted cash of $1,256 due primarily to the return of part of the security deposit of $1,000 on our leased office property in Holmdel, New Jersey and the release of our letter of credit from our energy purchase plan of $256.

Financing Activities

Cash used in financing activities for the six months endedJune 30, 2014 of $52,962 was primarily attributable to $31,666 in 2013 Credit Facility and 2013 Revolving Credit Facility principal payments, $1,386 in capital lease payments, $23,525 in common stock repurchases, offset by $3,615 in proceeds received from the exercise of stock options.

Cash used in financing activities for the six months ended June 30, 2013 of $14,921 was primarily attributable to $11,667 in 2013 Credit Facility principal payments, $1,184 in capital lease payments, $30,066 in common stock repurchases, and $2,009 in 2013 Credit Facility debt related costs, partially offset by $27,500 in net proceeds received from our 2013 Credit Facility, and $7,968 in proceeds received from the exercise of stock options offset by $5,463 in proceeds paid in connection with the stock option cancellation.

For the six months endedJune 30, 2014, we generated income from operations. We expect to continue to balance efforts to grow our revenue while consistently achieving operating profitability. To grow our revenue, we continue to make investments in growth initiatives, marketing, application development, network quality and expansion, and customer care. Although we believe we will achieve consistent profitability in the future, we ultimately may not be successful and we may not achieve consistent profitability. We believe that cash flow from operations and cash on hand will fund our operations for at least the next twelve months.

Acquisition of Vocalocity

Vocalocity was acquired for $130,000 adjusted for $2,869 of excess cash as of the closing date and the increase in value of the 7,983 shares of Vonage common stock from the signing date to the closing date of $1,298, resulting in a total acquisition cost of $134,167. We financed the transaction through $32,981 of cash and $75,000 from our credit facility. The acquisition of Vocalocity immediately positioned Vonage as a leader in the SMB hosted VoIP market. SMB and SOHO services are offered under the Vonage Business Solutions brand.

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2013 Financing

On February 11, 2013 we entered into Amendment No. 1 to our July 2011 Credit Agreement (as further amended by Amendment No. 2 to our 2011 Credit Facility, the "2013 Credit Facility"). The 2013 Credit Facility consists of a $70,000 senior secured term loan and a $75,000 revolving credit facility. The co-borrowers under the 2013 Credit Facility are our wholly owned subsidiary, Vonage America Inc., and us. Obligations under the 2013 Credit Facility are guaranteed, fully and unconditionally, by our other United States subsidiaries and are secured by substantially all of the assets of each borrower and each of the guarantors. On July 26, 2013 we entered into Amendment No. 2 to our 2011 Credit Agreement, which amends our financial covenant related to our consolidated fixed charge coverage ratio by increasing the amount of restricted payments excluded from such calculation from $50,000 to $80,000.

Use of Proceeds

We used $42,500 of the net available proceeds of the 2013 Credit Facility to retire all of the debt under our 2011 Credit Facility. Remaining net proceeds of $27,500 from the senior secured term loan and the undrawn revolving credit facility under the 2013 Credit Facility will be used for general corporate purposes. We used $75,000 from the 2013 revolving credit facility in connection with the acquisition of Vocalocity on November 15, 2013. We also incurred $2,009 of fees in connection with the 2013 Credit Facility, which is amortized, along with the unamortized fees of $670 in connection with the 2011 Credit Facility, to interest expense over the life of the debt using the effective interest method.

2013 Credit Facility Terms

The following description summarizes the material terms of the 2013 Credit Facility:

The loans under the 2013 Credit Facility mature in February 2016. Principal amounts under the 2013 Credit Facility are repayable in quarterly installments of $5,833 per quarter for the senior secured term loan. The unused portion of our revolving credit facility incurs a 0.45% commitment fee.

Outstanding amounts under the 2013 Credit Facility, at our option, will bear interest at:

• LIBOR (applicable to one-, two-, three- or six-month periods) plus an applicable margin equal to 3.125% if our consolidated leverage ratio is less than 0.75 to 1.00, 3.375% if our consolidated leverage ratio is greater than or equal to 0.75 to 1.00 and less than 1.50 to 1.00, and 3.625% if our consolidated leverage ratio is greater than or equal to 1.50 to 1.00, payable on the last day of each relevant interest period or, if the interest period is longer than three months, each day that is three months after the first day of the interest period, or

• the base rate determined by reference to the highest of (a) the federal funds effective rate from time to time plus 0.50%, (b) the prime rate of JPMorgan Chase Bank, N.A., and (c) the LIBOR rate applicable to one month interest periods plus 1.00%, plus an applicable margin equal to 2.125% if our consolidated leverage ratio is less than 0.75 to 1.00, 2.275% if our consolidated leverage ratio is greater than or equal to 0.75 to 1.00 and less than 1.50 to 1.00, and 2.625% if our consolidated leverage ratio is greater than or equal to 1.50 to 1.00, payable on the last business day of each March, June, September, and December and the maturity date of the 2013 Credit Facility.

The 2013 Credit Facility provides greater flexibility to us in funding acquisitions and restricted payments, such as stock buybacks, than the 2011 Credit Facility.

We may prepay the 2013 Credit Facility at our option at any time without premium or penalty. The 2013 Credit Facility is subject to mandatory prepayments in amounts equal to:

• 100% of the net cash proceeds from any non-ordinary course sale or other disposition of our property and assets for consideration in excess of a certain amount subject to customary reinvestment provisions and certain other exceptions and

• 100% of the net cash proceeds received in connection with other non-ordinary course transactions, including insurance proceeds not otherwise applied to the relevant insurance loss.

Subject to certain restrictions and exceptions, the 2013 Credit Facility permits us to obtain one or more incremental term loans and/or revolving credit facilities in an aggregate principal amount of up to $60,000 plus an amount equal to repayments of the senior secured term loan upon providing documentation reasonably satisfactory to the administrative agent, without the consent of the existing lenders under the 2013 Credit Facility. The 2013 Credit Facility includes customary representations and warranties and affirmative covenants of the borrowers. In addition, the 2013 Credit Facility contains customary negative covenants, including, among other things, restrictions on the ability of us and our subsidiaries to consolidate or merge, create liens, incur additional indebtedness, dispose of assets, consummate acquisitions, make investments, and pay dividends and other distributions. We must also comply with the following financial covenants:

• a consolidated leverage ratio of no greater than 2.00 to 1.00;

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• a consolidated fixed coverage charge ratio of no less than 1.75 to 1.00 subject to adjustment to exclude up to $80,000 in specified restricted payments;

• minimum cash of $25,000 including the unused portion of the revolving credit facility or $35,000 in the event of certain specified corporate actions; and

• maximum capital expenditures not to exceed $55,000 during any fiscal year, provided that the unused amount of any permitted capital expenditures in any fiscal year may be carried forward to the next following fiscal year; in addition, annual excess cash flow up to $8,000 increases permitted capital expenditures.

As of June 30, 2014, we were in compliance with all covenants, including financial covenants, for the 2013 Credit Facility.

The 2013 Credit Facility contains customary events of default that may permit acceleration of the debt. During the continuance of a payment default, interest will accrue at a default interest rate of 2% above the interest rate which would otherwise be applicable, in the case of loans, and at a rate equal to the rate applicable to base rate loans plus 2%, in the case of all other amounts.

State and Local Sales Taxes

We also have contingent liabilities for state and local sales taxes. As of June 30, 2014, we had a reserve of $5,708. If our ultimate liability exceeds this amount, it could affect our liquidity unfavorably. However, we do not believe it will significantly impair our liquidity.

Capital Expenditures

For the six months endedJune 30, 2014, capital expenditures were primarily for the implementation of software solutions and purchase of network equipment as we continue to expand our network. Our capital expenditures for the six months endedJune 30, 2014 were $10,130, of which $7,031 was for software acquisition and development. The majority of these expenditures are comprised of investments in information technology and systems infrastructure, including an electronic data warehouse, online customer service, and customer management platforms. For 2014, we believe our capital and software expenditures will be no greater than $30,000.

Common Stock Repurchases

On July 25, 2012, our board of directors approved a plan to buy back up to $50,000 of Vonage common stock through December 31, 2013. The specific timing and amount of repurchases would vary based on available capital resources and other financial and operational performance, market conditions, securities law limitations, and other factors. The repurchases would be made using our cash resources. The repurchase program was subject to suspension or discontinuation at any time without prior notice. For the period from January 1, 2013 to February 12, 2013, we repurchased $5,374, or 2,189 shares of Vonage common stock under the $50,000 repurchase program.

On February 7, 2013, Vonage's Board of Directors discontinued the remainder of our existing $50,000 repurchase program effective at the close of business on February 12, 2013 with $16,682 remaining, and authorized a new program to repurchase up to $100,000 of the Company's outstanding shares by December 31, 2014. The specific timing and amount of repurchases would vary based on available capital resources and other financial and operational performance, market conditions, securities law limitations, and other factors. The repurchases will be made using our cash resources. The repurchase program may be suspended or discontinued at any time without prior notice. For the three months ended June 30, 2014, we repurchased $13,244, or 3,523 shares of Vonage common stock under the $100,000 repurchase program.

In any period under either repurchase program, cash used in financing activities related to common stock repurchases may differ from the comparable change in stockholders' equity, reflecting timing differences between the recognition of share repurchase transactions and their settlement for cash.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

We are exposed to financial market risks, including changes in currency exchange rates and interest rates.

Foreign Exchange Risk

We sell our products and services in the United States, Canada, and the United Kingdom. Changes in currency exchange rates affect the valuation in our financial statements of the assets and liabilities of these operations. We also have a portion of our sales denominated in Euros, the Canadian dollar, and the British Pound, which are also affected by changes in currency exchange

41

rates. Our financial results could be affected by changes in foreign currency exchange rates, although foreign exchange risks have not been material to our financial position or results of operations to date.

Interest Rate and Debt Risk

Our exposure to market risk for changes in interest rates primarily relates to our long-term debt.

On February 11, 2013, we entered into Amendment No. 1 to the 2011 Credit Agreement. We are exposed to interest rate risk since amounts payable under the 2013 Credit Facility, at our option, bear interest at:

• LIBOR (applicable to one-, two-, three- or six-month periods) plus an applicable margin equal to 3.125% if our consolidated leverage ratio is less than 0.75 to 1.00, 3.375% if our consolidated leverage ratio is greater than or equal to 0.75 to 1.00 and less than 1.50 to 1.00, and 3.625% if our consolidated leverage ratio is greater than or equal to 1.50 to 1.00, payable on the last day of each relevant interest period or, if the interest period is longer than three months, each day that is three months after the first day of the interest period, or

• the base rate determined by reference to the highest of (a) the federal funds effective rate from time to time plus 0.50%, (b) the prime rate of JPMorgan Chase Bank, N.A., and (c) the LIBOR rate applicable to one month interest periods plus 1.00%, plus an applicable margin equal to 2.125% if our consolidated leverage ratio is less than 0.75 to 1.00, 2.275% if our consolidated leverage ratio is greater than or equal to 0.75 to 1.00 and less than 1.50 to 1.00, and 2.625% if our consolidated leverage ratio is greater than or equal to 1.50 to 1.00, payable on the last business day of each March, June, September, and December and the maturity date of the 2013 Credit Facility.

If the interest rate on our variable rate debt changed by 1%, our annual debt service payment would change by approximately $900.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures. Based on the evaluation of our disclosure controls and procedures (as defined in Securities Exchange Act of 1934 Rules 13a-15(e) and 15d-15(e)) required by Securities Exchange Act Rules 13a-15(b) or 15d-15(b), our Chief Executive Officer and our Chief Financial Officer have concluded that as of the end of the period covered by this report, our disclosure controls and procedures were effective.

Changes in Internal Controls. There were no changes in our internal control over financial reporting that occurred during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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Part II—Other Information

Item 1. Legal Proceedings

We are subject to a number of lawsuits, government investigations and claims arising out of the conduct of our business. See a discussion of our litigation matters in Note 6 of Notes to our Consolidated Financial Statements, which is incorporated herein by reference.

Item 1A. Risk Factors

There have been no material changes from the risk factors previously disclosed in Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2013.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Item 2(a) and (b) are not applicable.

(c) Common stock repurchases (in thousands, except per share value):

Period	(a) Total Number of Shares Purchased	(b) Average Price Paid per Share		(c) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	(d) Approximate Dollar Value of Shares that May Yet be Purchased under the Plans or Program
April 1, 2014 - April 30, 2014 (1)	1,177	$	3.99	1,177	$	34,604
May 1, 2014 - May 31, 2014 (2)	1,167	$	3.72	1,167	$	30,265
June 1, 2014 - June 31, 2014 (3)	1,179	$	3.57	1,179	$	26,060
	3,523			3,523

(1) including 125 shares, or $465, of common stock repurchases settled in May 2014; excluding commission of $1.

(2) including 157 shares, or $581, of common stock repurchases settled in June 2014; excluding commission of $2.

(3) including 147 shares, or $556, of common stock repurchases settled in July 2014; excluding commission of $1.

On February 7, 2013, Vonage's Board of Directors discontinued the remainder of the $50,000 repurchase program, which was announced on July 25, 2012, effective at the close of business on February 12, 2013, with $16,682 remaining, and authorized a new program to repurchase up to $100,000 of the Company's outstanding shares. The $100,000 repurchase program expires on December 31, 2014 but may be suspended or discontinued at any time without notice. The specific timing and amount of repurchases will vary based on available capital resources and other financial and operational performance, market conditions, securities law limitations, and other factors. The repurchases will be made using our cash resources. In any period, cash used in financing activities related to common stock repurchases may differ from the comparable change in stockholders' equity, reflecting timing differences between the recognition of share repurchase transactions and their settlement for cash.

During the three months endedJune 30, 2014, we repurchased 3,523 shares of Vonage Holdings Corp. common stock for $13,244 using cash resources pursuant to the $100,000 repurchase program. The repurchases occurred in the open market and pursuant to a trading plan under Rule 10b5-1 of the Securities Exchange Act of 1934. As of June 30, 2014, approximately $26,060 remained of our $100,000 repurchase program.

Item 3. Defaults Upon Senior Securities

None.

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Item 4. Mine Safety Disclosures

None.

Item 5. Other Information

None.

44

Item 6. Exhibits

10.1	Second Amended and Restated Employment Agreement dated April 3, 2014 between Vonage Holdings Corp. and Marc P. Lefar(1)*
31.1	Certification of the Company’s Chief Executive Officer pursuant to Securities Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002(1)
31.2	Certification of the Company’s Chief Financial Officer pursuant to Securities Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002(1)
32.1	Certification of the Company’s Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002(1)
101	The following financial statements from Vonage Holdings Corp.’s Quarterly Report on Form 10-Q for the three and six months ended June 30, 2014, filed with the Securities and Exchange Commission on July 31, 2014, formatted in XBRL (eXtensible Business Reporting Language): (i) the Consolidated Balance Sheets; (ii) the Consolidated Statements of Operations; (iii) the Consolidated Statements of Comprehensive Income; (iv) the Consolidated Statements of Cash Flows; (v) the Consolidated Statements of Stockholders’ Deficit; and (vi) the Notes to Consolidated Financial Statements.

(1) Filed herewith.

* Management contract or compensatory plan or arrangement.

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SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

		VONAGE HOLDINGS CORP.
Dated:	July 31, 2014	By:	/s/ David T. Pearson
			David T. Pearson Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer and Duly Authorized Officer)

46

EXHIBIT INDEX

10.1	Second Amended and Restated Employment Agreement dated April 3, 2014 between Vonage Holdings Corp. and Marc P. Lefar(1)*
31.1	Certification of the Company’s Chief Executive Officer pursuant to Securities Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002(1)
31.2	Certification of the Company’s Chief Financial Officer pursuant to Securities Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002(1)
32.1	Certification of the Company’s Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002(1)
101	The following financial statements from Vonage Holdings Corp.’s Quarterly Report on Form 10-Q for the three and six months ended June 30, 2014, filed with the Securities and Exchange Commission on July 31, 2014, formatted in XBRL (eXtensible Business Reporting Language): (i) the Consolidated Balance Sheets; (ii) the Consolidated Statements of Operations; (iii) the Consolidated Statements of Comprehensive Income; (iv) the Consolidated Statements of Cash Flows; (v) the Consolidated Statements of Stockholders’ Deficit; and (vi) the Notes to Consolidated Financial Statements.

(1) Filed herewith.

* Management contract or compensatory plan or arrangement.

47

EX-10.1

Exhibit 10.1

SECOND AMENDED AND RESTATED EMPLOYMENT AGREEMENT

SECOND AMENDED AND RESTATED EMPLOYMENT AGREEMENT (“Agreement”), dated April 3, 2014, by and between VONAGE HOLDINGS CORP., a Delaware corporation (the “Company”), and Marc P. Lefar (the “Executive”).

WHEREAS, the Executive and the Company previously entered into an Employment Agreement, dated July 29, 2008 (the “Original Agreement”);

WHEREAS, the Executive and the Company entered into an Amended and Restated Employment Agreement, dated November 5, 2009 (the “First Amended and Restated Agreement”);

WHEREAS, the Executive intends to retire from the Company by December 31, 2014, and the Executive and the Company desire to provide for an orderly transition; and

WHEREAS, in furtherance of this, the Executive and the Company desire to amend and restate the First Amended and Restated Agreement on the terms and conditions set forth below;

NOW, THEREFORE, in consideration of the covenants and agreements hereinafter set forth, the parties agree as follows:

1.Employment and Duties.

(a)General. While the Executive is employed during the Term, the Executive shall serve as Chief Executive Officer of the Company, reporting directly to the Company’s Board of Directors (the “Board”). The Board shall nominate the Executive for re-election as a member of the Board at the Company’s 2014 annual meeting of stockholders. The Executive shall have the duties, responsibilities, and authority customarily held by the chief executive officer of a public corporation. All employees of the Company shall report to the Executive or one of his designees. The Executive shall also perform such other duties as the Board may from time to time require, consistent with the general level and type of duties and responsibilities customarily associated with such position. The Executive’s principal place of employment shall be the principal offices of the Company, currently located in the Holmdel, New Jersey area; provided, however, that the Executive understands and agrees that he shall be required to travel from time to time for business reasons.

(b)Exclusive Services. For so long as the Executive is employed by the Company, the Executive shall devote his full- time working time to his duties hereunder, shall conform to and use his good faith efforts to comply with the lawful and good faith directions and instructions given to him by the Board and shall use his good faith efforts to promote and serve the interests of the Company. Further, the Executive shall not, directly or indirectly, render services to any other person or organization without the consent of the Board or otherwise engage in activities that would interfere significantly with the faithful performance of his duties hereunder. Notwithstanding the foregoing, the Executive may serve on (i) corporate boards, with the

Board’s prior consent, or (ii) civic or charitable boards or engage in charitable activities without remuneration therefor. Additionally, notwithstanding the foregoing, the Executive may manage his personal investments, and serve as an executor, trustee, or in a similar fiduciary capacity in connection therewith, provided that such activities do not contravene the first sentence of this Section 1(b).

2.Term of Employment. The term of employment under this Agreement (the “Term”) commenced as of July 29, 2008 (the “Effective Date”) and, unless the parties hereto mutually agree in writing to extend the Term of this Agreement, shall terminate on December 31, 2014, unless terminated prior to that date by the Company or the Executive in accordance with the provisions hereof (the actual date of termination, the “End Date”).

3.Compensation and Other Benefits. Subject to the provisions of this Agreement, the Company shall pay and provide the following compensation and other benefits to the Executive while the Executive is employed during the Term as compensation for services rendered hereunder:

(a)Base Salary. The Company shall pay to the Executive a base salary (the “Base Salary”) at the annual rate of $975,000, payable in substantially equal installments at such intervals as may be determined by the Company in accordance with its ordinary payroll practices as applicable to senior executives as established from time to time.

(b)[Intentionally omitted.]

(c)Equity Awards. The Executive was previously granted nonqualified stock options to purchase shares of common stock of the Company (the “Options”) under the Vonage Holdings Corp, 2006 Incentive Plan, as amended and restated from time to time (the “Equity Plan”) pursuant to award agreements between the Executive and the Company dated as of July 29, 2008, September 1, 2009, December 1, 2009, April 1, 2010, April 1, 2011, April 2, 2012, and April 1, 2013 (collectively, the “Option Awards”) and restricted stock units settleable in shares of common stock of the Company (the “RSUs”) under the Equity Plan pursuant to award agreements between the Executive and the Company dated as of April 1, 2011, April 2, 2012, December 11, 2012, and April 1, 2013 (collectively, the “RSU Awards” and, together with the Option Awards, the “Equity Awards”). No Options or RSUs shall vest after the date of this Agreement (except to the extent the Agreement is extended by mutual agreement of the parties pursuant to Section 2) other than those certain restricted stock units covering 408,163 shares of common stock of the Company granted pursuant to the December 11, 2012 RSU Award (the “December RSUs”) that shall vest on December 11, 2014, subject to the Executive’s continued employment on that date, except as otherwise provided in Sections 4(b) and 4(c) below; provided, however, that upon a Change of Control (as defined in the Equity Plan) on or prior to the End Date, all then outstanding Options and RSUs shall become fully vested and, with respect to all such Options, exercisable, immediately prior to such Change of Control. All Options that are vested and outstanding as of the End Date shall remain exercisable for 360 days following the End Date, but in no event after the tenth anniversary of the original grant date of such Option. This Section 3(c) and Section 4(b) below together set forth the Executive’s complete right and entitlement to any vesting in respect of the Options and RSUs in connection with the Executive’s employment and termination of employment with the Company and notwithstanding anything to

the contrary herein or in the Equity Awards, except as expressly provided in this Section 3(c) or Section 4(b), the Executive shall not be entitled to any vesting of the Equity Awards as a result of, in connection with, or following, the termination of Executive’s employment for any reason. If and to the extent that the Company’s contractual arrangement with Fidelity Stock Plan Services, LLC (“Fidelity”) permits the Executive to utilize Fidelity’s group trading platform and benefit from the negotiated rates relating thereto, such benefit shall be made available to the Executive.

(d)Annual Cash Bonus. Subject to compliance with Section 4(b)(iii) below, the Executive shall be eligible to receive a lump sum performance-based bonus for fiscal year 2014 targeted at 150% of Base Salary in accordance with the Company’s current annual bonus program applicable to senior executives (the “2014 Bonus”). The amount, if any, of the 2014 Bonus shall be determined by the Board, based on the Company’s actual performance against applicable targets, as adjusted up or down on the same basis as all participants, and paid in 2015 prior to March 15th. If the Executive’s employment with the Company is terminated by the Company for Cause or the Executive resigns from his employment prior to December 31, 2014 without Good Reason, the Executive shall not receive any portion of such bonus.

(e)Employee Benefit Plans. The Executive shall be entitled to participate in all employee welfare, pension, and fringe benefit plans, programs and arrangements of the Company, in accordance with their respective terms, as may be amended from time to time, and on a basis no less favorable than that made available to other senior executives of the Company.

(f)Expenses. The Company shall reimburse the Executive for reasonable travel and other business-related expenses incurred by the Executive in the fulfillment of his duties hereunder, upon presentation of written documentation thereof, in accordance with the applicable expense reimbursement policies and procedures of the Company as in effect from time to time. Permitted business expenses shall include first-class airplane travel for Company business trips. The reimbursement of all expenses under this Section 3(f) shall be subject to Section 4(d)(vii) of this Agreement.

(g)Vacation. The Executive shall be entitled to 20 days paid time off for each fiscal year during the Term. If the Executive does not use any portion of the allotted paid time off in any fiscal year, the Executive shall be entitled to add any and all unused paid time off to the paid time off permitted under this Agreement for the following fiscal year.

(h)Housing and Relocation Benefits. Except as otherwise provided in Section 4(b) below, while the Executive is employed during the Term, the Company shall pay, or reimburse the Executive for, the cost during the Term of housing (i.e., furnished housing, including utilities) for the Executive while the Executive is at the Company’s principal offices, to be paid, if reimbursed, to the Executive monthly in arrears subject to the submission of reasonable documentation. The Company shall gross up for tax purposes any income arising from such payment or reimbursement that is treated as nondeductible taxable income to the Executive so that the economic benefit is the same to the Executive as if such payment or benefits were provided on a non-taxable basis to the Executive. The Executive shall also be entitled to relocation benefits customarily made available to a chief executive officer. For the avoidance of

doubt, the Company shall use commercially reasonable efforts to renew the existing lease to the current housing made available to the Executive located near the Company’s principal offices in a manner such that the lease shall continue, and the Executive shall be permitted to utilize such housing, during the Term and as otherwise provided in Section 4(b) below. The payment or reimbursement of all expenses under this Section 3(h) shall be subject to Section 4(d)(vii) of this Agreement.

(i)Travel Benefits. While the Executive is employed during the Term, the Company shall promptly pay, or reimburse the Executive for, the Executive’s commercial air and car transport between his residence in Atlanta, Georgia and the Company’s principal offices. The Company shall also promptly pay, or reimburse the Executive for, the costs of his private air travel from and to the Company’s principal offices in Holmdel, New Jersey (subject to the submission of reasonable documentation) in (a) an annual amount up to a maximum of $600,000, plus (b) an amount equal to the cost of commercial air travel for each trip (i.e., the cost of a first-class, fully refundable, direct flight booked one week prior to travel) while employed during the Term. The Company shall gross up for tax purposes any income arising from such payment or reimbursement of commuting expenses that is treated as nondeductible taxable income to the Executive so that the economic benefit is the same to the Executive as if such payment or benefits were provided on a non-taxable basis to the Executive. If requested by the Company, the Executive will participate in agreements from time to time to reasonably allocate costs of such travel among himself and other employees who are passengers on such flights. The payment or reimbursement of all expenses under this Section 3(i) shall be subject to Section 4(d)(vii) of this Agreement.

(j)Legal Fees. Upon presentation of appropriate documentation, the Company shall pay the Executive’s reasonable counsel fees incurred in connection with the negotiation and documentation of this Agreement, up to a maximum of $15,000, and to the extent such amount is taxable to the Executive, the Company shall gross up for tax purposes any income arising from such fees so that the economic benefit is the same to the Executive as if such payment was provided on a non-taxable basis to the Executive. The reimbursement of all expenses under this Section 3(j) shall be subject to Section 4 (d)(vii) of this Agreement.

(k)Other Benefits and Perquisites. The Executive shall be entitled to such other benefits and perquisites as may be available generally to other senior executives of the Company. The reimbursement of all expenses under this Section 3(k) shall be subject to Section 4(d)(vii) of this Agreement.

4.Termination of Employment.

(a)Termination for Cause; Resignation without Good Reason

(i)If the Company terminates the Executive’s employment for Cause, or if the Executive resigns from his employment hereunder other than for Good Reason, the Executive shall only be entitled to payment of any unpaid Base Salary through and including the date of termination or resignation, any unpaid expense reimbursement or tax gross ups, any accrued but unused vacation, and any other amounts or benefits required to be paid under

this Agreement through the date of termination or resignation, including but not limited to those under Sections 3(f), 3(h), 3(i) and 3(j) hereof (in each case only to the extent earned or accrued prior to such date of termination or resignation), or provided by law or under any plan, program, policy or practice of the Company (the “Other Accrued Compensation and Benefits”). The Executive shall have no further right under this Agreement to receive any other compensation or benefits after such termination or resignation of employment.

(ii)For purposes of this Agreement, “Cause” shall mean: (A) any act or omission that constitutes a material breach by the Executive of his obligations under this Agreement; (B) the willful and continued failure or refusal of the Executive (not as a consequence of illness, accident or other incapacity) to perform the duties reasonably required of him hereunder; (C) the Executive’s conviction of, or plea of nolo contendere to, (x) any felony or (y) another willful crime involving dishonesty or moral turpitude or which reflects negatively upon the Company in a material manner or otherwise materially impairs or impedes its operations; (D) the Executive’s engaging in any willful misconduct, gross negligence or act of dishonesty with regard to the Company or his material duties, which conduct is injurious to the Company and its subsidiaries or affiliates (collectively, the “ Company Group”); (E) the Executive’s material breach of either a material written policy of the Company or, to the extent the Executive is aware of such rules or has been informed by the Company’s counsel, the relevant rules of any governmental or regulatory body applicable to the Company; or (F) the Executive’s refusal to follow the lawful directions of the Board; provided, however, that no event or condition described in clauses (A), (B), (E) or (F) shall constitute Cause unless (i) the Company first gives the Executive written notice of its intention to terminate his employment for Cause and the grounds for such termination, and (ii) such grounds for termination (if susceptible to correction) are not corrected by the Executive within 30 days of his receipt of such notice (or, in the event that such grounds cannot be corrected within such 30-day period, the Executive has not taken all reasonable steps within such 30-day period to correct such grounds as promptly as practicable thereafter).

(iii)For purposes of this Agreement, “Good Reason” shall mean the occurrence of any of the following events without the Executive’s prior written consent: (A) a material diminution in the Executive’s Base Salary or target bonus percentage for the 2014 Bonus; (B) a material diminution of the authority, duties or responsibilities of the Executive from those set forth in this Agreement, including, without limitation, ceasing to be the chief executive officer of the Company (or its ultimate parent following a Change of Control), but excluding the assignment, in accordance with discussion with and agreement of the Executive, to another individual of the direct supervision and/or management of various functions of the Company so long as such individual continues to report to the Executive; or (C) the Executive ceasing to report directly to the Board; provided, however, that no event or condition described in clauses (A) through (C) shall constitute Good Reason unless (x) the Executive gives the Company within 60 days of the occurrence of the Good Reason event, written notice of his intention to terminate his employment for Good Reason and the grounds for such termination, and (y) such grounds for termination (if susceptible to correction) are not corrected by the Company within 30 days of its receipt of such notice (or, in the event that such grounds cannot be corrected within such 30 day period, the Company has not taken

all reasonable steps within such 30 day period to correct such grounds as promptly as practicable thereafter). Such termination for Good Reason by the Executive must occur within 120 days of the occurrence of the Good Reason event.

(b)Expiration of the Term; Termination by the Company Without Cause; Resignation for Good Reason

(i)If the Executive’s employment terminates (other than for Cause) due to expiration of the Term on December 31, 2014, or if, prior to December 31, 2014, the Executive’s employment is terminated by the Company without Cause or by the Executive for Good Reason, subject to Section 4(d) below, the Executive shall be entitled to the following: (A) Base Salary for the remainder of the period through December 31, 2014 (if any), which amount shall be payable in lump sum 60 days following the End Date; (B) the 2014 Bonus (if any), which amount shall be payable in 2015 prior to March 15th; (C) the December RSUs shall vest 60 days following the End Date if and to the extent the December RSUs remain unvested as of the End Date; (D) access to (1) the Executive’s executive assistant as of the End Date (or a substitute assistant with reasonable experience) on at least a half-time basis and (2) a full-time office located at the Company’s offices in Atlanta, Georgia for 120 days following the End Date; (E) continued entitlement to the housing benefits set forth in Section 3(h) with respect to costs incurred during the 30 day period following the End Date, which amounts shall be paid or reimbursed 60 days following the End Date; and (F) the Other Accrued Compensation and Benefits; provided, that in the case of the compensation and other benefits described in clauses (A), (B), (C), (D) and (E), the Executive shall comply with subsections (iii) and (iv) below. The Executive shall have no further rights under this Agreement to receive any other compensation or benefits after such termination of employment, except as otherwise provided in subsection (ii) below.

(ii)Except as otherwise provided in Section 4(a) above, after the End Date, subject to the Executive’s timely election of COBRA continuation coverage, (A) the Company shall pay the Executive on a monthly basis the group medical, dental and vision continuation coverage premiums for the Executive and his dependents under COBRA in excess of the amount the Executive would have paid if he were an active employee for the COBRA continuation coverage period, provided that the Executive or his dependents are eligible and remain eligible for COBRA coverage; and (B) Executive and, to the extent applicable, his eligible dependents shall be entitled to continued participation in the medical, dental, and vision insurance plans of the Company as in effect from time to time for a period commencing on the 18 month anniversary of the End Date and ending on the 36 month anniversary of the End Date, so long as the Executive pays to the Company, at such time or times as COBRA premiums would ordinarily be due, an amount equal to the fair market value (as reasonably determined by the Company) of the cost of coverage applicable to the Executive and, to the extent applicable, his eligible dependents under the Company’s medical, dental and vision plans; provided, however, that the Company may elect to provide any of the benefits coverages described above under a separate insurance policy offering substantially comparable benefits. Notwithstanding anything to the contrary herein, in the event that the Executive receives group health coverage from another employer of him (in

which event the Executive shall promptly notify the Company in writing), such continuation of coverage by the Company under this Section 4(b)(ii) shall immediately cease. For purposes of this Agreement, “COBRA” shall mean the requirements of (1) Part 6 of Subtitle B of Title I of the Employee Retirement Income Security Act of 1974, as amended, and (2) Section 4980B of the Internal Revenue Code of 1986, as amended (the “Code”).

(iii)The Company shall not be required to make the payments and provide the benefits (including accelerated vesting of the December RSUs) provided for under either clauses (A), (B), (C), and (E) of subsection (i) above or subsection (ii) above, or continue to provide the benefits under clause (D) of subsection (i) above, unless the Executive executes and delivers to the Company a release in substantially the form attached hereto as Exhibit A, and the release has become effective and irrevocable in its entirety.

(iv)If, following a termination of employment without Cause, the Executive materially breaches provisions of (A) the Confidentiality Agreement (defined below), (B) Sections 5 or 7 hereof, or (C) the Non-Compete Agreement (defined below), the Executive shall not be eligible, as of the date of such material breach, for the payments and benefits described in Sections 4(b)(i) and Section 4(b)(ii), and any and all obligations and agreements of the Company with respect to such payments and benefits shall thereupon cease (and the Company shall be entitled to recoup any and all such payments and benefits previously paid or awarded to the Executive), provided, however, that no event or condition described in the Confidentiality Agreement, Sections 5 or 7 hereof, or the Non-Compete Agreement shall constitute a breach unless (i) the Company first gives the Executive written notice of its intention to terminate his payments and benefits described in Sections 4(b)(i) and 4(b)(ii) and the grounds for such loss of eligibility for payments and benefits, and (ii) such grounds for termination of payments and benefits (if susceptible to correction) are not corrected by the Executive within 30 days of his receipt of such notice (or, in the event that such grounds cannot be corrected within such 30-day period, the Executive has not taken all reasonable steps within such 30-day period to correct such grounds as promptly as practicable thereafter).

(c)Termination Due to Death or Disability. The Executive’s employment with the Company shall terminate automatically on the Executive’s death. In the event of the Executive’s disability, the Company shall be entitled to terminate his employment. In the event of termination of the Executive’s employment by reason of the Executive’s death or disability, (i) the Company shall pay and provide to the Executive (or his estate, as applicable), subject to Section 4(d) below, the compensation and benefits set forth in Section 4(b)(i) (other than clauses (D) and (E) thereof) and Section 4(b)(ii) above, and (ii) one-half of the number of December RSUs then outstanding and unvested shall vest, subject, in each case, to compliance by the Executive’s estate with the requirements of Section 4(b)(iii) above, provided that such amounts (other than the Other Accrued Compensation and Benefits) shall be reduced (but in no event to an amount below zero) by the projected tax adjusted amount of disability payments, excluding any supplemental disability benefits funded through employee contributions, to be received by the Executive during the six (6) month period following such termination of employment. For purposes of this Agreement, “disability” means that the Executive has been unable to engage in

any substantial gainful activity by reason of any medically determinable physical or mental impairment for 180 days in any one year period. Notwithstanding the foregoing, in the event that as a result of absence because of mental or physical incapacity the Executive incurs a “separation from service” within the meaning of such term under Section 409A of the Code and the regulations and guidance issued thereunder (“Section 409A”), the Executive shall on such date automatically be terminated from employment as a disability termination.

(d)Payments Subject to Section 409A.

(i)The intent of the parties is that payments and benefits under this Agreement comply with Section 409A (except to the extent exempt as short-term deferrals or otherwise) and, accordingly, to the maximum extent permitted, this Agreement shall be interpreted to be in compliance therewith. If the Executive notifies the Company (with specificity as to the reason therefor) that the Executive believes that any provision of this Agreement (or of any award of compensation, including equity compensation or benefits) would cause the Executive to incur any additional tax or interest under Section 409A or the Company independently makes such determination, the Company shall, after consulting with the Executive, reform such provision to attempt to comply with Section 409A through good faith modifications to the minimum extent reasonably appropriate to conform with Section 409A. To the extent that any provision hereof is modified in order to comply with Section 409A, such modification shall be made in good faith and shall, to the maximum extent reasonably possible, maintain the original intent and economic benefit to the Executive and the Company of the applicable provision without violating the provisions of Section 409A. If the Executive notifies the Company (with specificity as to the reason therefor) that the Executive believes that any of the Company’s plans, programs or payroll practices would cause the Executive to incur any additional tax or interest under Section 409A, the Company shall in good faith discuss with the Executive any proposed modifications to such plans, programs or payroll practices that are reasonably necessary to comply with Section 409A.

(ii)Subject to this Section 4(d), payments or benefits under Sections 4(b) or 4(c) shall begin only upon the date the Executive incurs a “separation from service” within the meaning of such term under Section 409A. For purposes of any such provision of this Agreement, references to a “termination,” “termination of employment” or like terms shall mean “separation from service.” The provisions under this Section 4(d) shall apply with respect to distribution of the payments and benefits, if any, to be provided to the Executive under Sections 4(b) and 4(c), as applicable.

(iii)It is intended that each installment, if any, of the payments and benefits provided under Sections 4(b) and 4 (c) shall be treated as a separate “payment” for purposes of Section 409A. Neither the Company nor the Executive shall have the right to accelerate or defer the delivery of any such payments or benefits except to the extent specifically permitted or required by Section 409A.

(iv)Each installment of the payments and benefits due under Sections 4(b) or 4(c) that, in accordance with the dates and terms set forth herein, will in all circumstances, regardless of when the separation from service occurs, be paid within the Short-Term

Deferral Period (as hereinafter defined) shall be treated as a short-term deferral within the meaning of Treasury Regulation Section 1.409A-1(b)(4) to the maximum extent permissible under Section 409A. For purposes of this Agreement, the “Short-Term Deferral Period” means the period ending on the later of the 15th day of the third month following the end of the Executive’s tax year in which the separation from service occurs and the 15th day of the third month following the end of the Company’s tax year in which the separation from service occurs; and

(v)If, as of the date of the “separation from service” of the Executive from the Company, the Executive is a “specified employee” (within the meaning of that term under Section 409A(a)(2)(B), then with regard to any payment or the provision of any benefit that is specified herein as subject to this Section or is otherwise considered “deferred compensation” under Section 409A (whether under this Agreement, any other plan, program, payroll practice or any equity grant) and is payable upon the Executive’s separation from service, such payment or benefit shall not be made or provided until the date which is the earlier of (A) the expiration of the six (6)-month-and-one-day period measured from the date of such “separation from service” of the Executive, and (B) the date of the Executive’s death (the “Delay Period”) and this Agreement and each such plan, program, payroll practice or equity grant shall hereby be deemed amended accordingly. Upon the expiration of the Delay Period, all payments and benefits delayed pursuant to this Section (whether they would have otherwise been payable in a single sum or in installments in the absence of such delay) shall be paid or reimbursed to the Executive in a lump sum with interest at the prime rate as published in the Wall Street Journal on the first business day of the Delay Period (provided that any payment measured by a change in value that continues during the Delay Period shall not be credited with interest for the Delay Period), and any remaining payments and benefits due under this Agreement shall be paid or provided in accordance with the normal payment dates specified for them herein.

(vi)The determination of whether and when a separation from service of the Executive from the Company has occurred shall be made in a manner consistent with, and based on the presumptions set forth in, Treasury Regulation Section 1.409A-1(h). Solely for purposes of this Section 4(d)(vi), “Company” shall include all persons with whom the Company would be considered a single employer under Sections 414(b) and 414(c) of the Code.

(vii)All reimbursements and in-kind benefits provided under this Agreement shall be made or provided in accordance with the requirements of Section 409A to the extent that such reimbursements or in-kind benefits are subject to Section 409A. All expenses or other reimbursements paid pursuant herewith that are taxable income to the Executive shall in no event be paid later than the end of the calendar year next following the calendar year in which the Executive incurs such expense or pays such related tax. With regard to any provision herein that provides for reimbursement of costs and expenses or in-kind benefits, except as permitted by Section 409A, the right to reimbursement or in-kind benefits shall not be subject to liquidation or exchange for another benefit, the amount of expenses eligible for reimbursement, of in-kind benefits, provided during any taxable year shall not affect the

expenses eligible for reimbursement, or in-kind benefits to be provided, in any other taxable year, provided that the foregoing clause shall not be violated without regard to expenses reimbursed under any arrangement covered by Section 105(b) of the Code solely because such expenses are subject to a limit related to the period the arrangement is in effect and such payments shall be made on or before the last day of the Executive’s taxable year following the taxable year in which the expense occurred. Any tax gross-up shall be made no later than the end of the calendar year next following the calendar year in which the Executive remits the related tax.

(viii)Whenever a payment under this Agreement specifies a payment period with reference to a number of days (e.g., “payment shall be made within thirty (30) days following the date of termination”), the actual date of payment within the specified period shall be within the sole discretion of the Company.

(e)Notice of Termination. Any termination of employment by the Company or the Executive shall be communicated by a written “Notice of Termination” to the other party hereto given in accordance with Section 22 of this Agreement. In the event of a termination by the Company for Cause or resignation by the Executive for Good Reason, the Notice of Termination shall (i) indicate the specific termination provision in this Agreement relied upon, (ii) set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive’s employment under the provision so indicated and (iii) specify the date of termination, which date shall not be more than 30 days after the giving of such notice. The failure by the Executive or the Company to set forth in the Notice of Termination any fact or circumstance which contributes to a showing of Good Reason or Cause shall not waive any right of the Executive or the Company, respectively, hereunder or preclude the Executive or the Company, respectively, from asserting such fact or circumstance in enforcing the Executive’s or the Company’s rights hereunder to the extent that such fact or circumstance is on the same asserted basis within the definition for the termination. In the event of a termination by the Company without Cause, or resignation by the Executive other than for Good Reason, the Notice of Termination shall specify the date of termination, which date (in the case of notice provided by the Executive to the Company) shall not be less than 30 days after the giving of such notice.

(f)Resignation from Directorships and Officerships. The termination of the Executive’s employment for any reason or no reason shall constitute the Executive’s resignation from (i) any director, officer, or employee position the Executive has with members of the Company Group, and (ii) all fiduciary positions (including as a trustee) the Executive holds with respect to any employee benefit plans or trusts established by the Company. The Executive agrees that this Agreement shall serve as written notice of resignation in this circumstance.

5.Confidentiality.

(a)Confidential Information. The Executive has entered into and is subject to the Company’s Employee Confidentiality and Innovations Agreement substantially in the form attached hereto as Exhibit B (the “Confidentiality Agreement”).

(b)Exclusive Property. The Executive confirms that all Confidential Information (as defined in the Confidentiality Agreement) is and shall remain the exclusive property of the Company Group. All business records, papers and documents kept or made by the Executive relating to the business of the Company Group shall be and remain the property of the Company Group. Upon the request and at the expense of the Company Group, the Executive shall promptly make all disclosures, execute all instruments and papers, and perform all acts reasonably necessary to vest and confirm in the Company Group, fully and completely, all rights created or contemplated by this Section 5(b). Notwithstanding the foregoing, subject to Sections 5 through 7 hereof, Executive shall maintain ownership and use of his rolodex and other address books and the Company shall cooperate and reasonably assist Executive in the transfer to Executive of his personal files and contacts as well as any cell phone and mobile device numbers used by Executive if such numbers are registered in the Company’s name.

6.Noncompetition. The Executive has entered into and is subject to a Non-Compete Agreement with the Company substantially in the form attached hereto as Exhibit C (the “Non-Compete Agreement”).

7.Non-Solicitation and Non-Hire. The Executive has agreed and now confirms that for a period commencing on the Effective Date and ending 12 months following the End Date (the “Restricted Period”), other than in the good faith performance of his duties to the Company as chief executive officer, the Executive shall not, directly or indirectly: (a) interfere with or attempt to interfere with the relationship between any person who is, or was during the then-most recent 12-month period, an employee, officer, representative or agent of the Company Group, or solicit or induce or attempt to solicit or induce any of them to leave the employ of any member of the Company Group or violate the terms of their respective contracts, or any employment arrangements, with such entities; or (b) hire, recruit or attempt to hire any person who was employed by any member of the Company Group at any time during the then-most recent 12-month period; provided, that this clause (b) shall not apply to the recruitment or hiring of any individual whose employment with any member of the Company Group has been terminated for a period of six months or longer; or (c) induce or attempt to induce any customer, client, supplier, licensee or other business relation of any member of the Company Group to cease doing business with any member of the Company Group, or in any way interfere with the relationship between any member of the Company Group and any customer, client, supplier, licensee or other business relation of any member of the Company Group, provided the foregoing clause (c) shall not apply to consumers. Nothing in this Section 7 shall be violated by the Executive serving upon request as a reference, so long as he does not have a business relationship with the person to whom the reference is being given, and nothing in this Section 7 shall be violated by the Executive engaging in general advertising that is not specifically targeted at the persons referred to in clauses (a), (b) and (c) that have a relationship with a member of the Company Group. As used herein, the term “indirectly” shall include, without limitation, the Executive’s authorizing the use of the Executive’s name by any competitor of any member of the Company Group to induce or interfere with any employee or business relationship of any member of the Company Group.

8.Certain Remedies.

(a)Injunctive Relief. Without intending to limit the remedies available to either party hereto, including, but not limited to, those set forth in Section 12 hereof, each of the parties hereto agrees that a breach of any of the covenants contained in Sections 5, 6, 7 or 10 of this Agreement may result in material and irreparable injury to the other party for which there is no adequate remedy at law, that it shall not be possible to measure damages for such injuries precisely and that, in the event of such a breach or threat thereof, any non-breaching party shall be entitled to seek a temporary restraining order or a preliminary or permanent injunction, or both, without bond or other security, restraining the breaching party from engaging in activities prohibited by the covenants contained in Sections 5, 6, 7 or 10 of this Agreement or such other relief as may be required specifically to enforce any of the covenants contained in this Agreement. Such injunctive relief in any court shall be available to the non-breaching party in lieu of, or prior to or pending determination in, any arbitration proceeding.

(b)Extension of Restricted Period. In addition to the remedies the Company may seek and obtain pursuant to Section 12 hereof, the Restricted Period may, in the court’s discretion, be extended by any and all periods during which the Executive shall be found by a court possessing personal jurisdiction over him to have been in violation of the covenants contained in Sections 5 through 7 of this Agreement.

9.Cooperation; Defense of Claims. The Executive agrees that, during the Term and thereafter, upon request from the Company, the Executive shall reasonably cooperate with the Company in connection with any matters the Executive worked on during his employment with the Company and any related transitional matters (including, without limitation, assisting in the search process for a new Chief Executive Officer to succeed the Executive and the transition of Executive’s duties and responsibilities to such new Chief Executive Officer). In addition, the Executive agrees to reasonably cooperate with the Company in the defense of any claims or actions that may be made by or against the Company Group arising out of or relating to matters in which the Executive was involved on or prior to the End Date, except if the Executive’s reasonable interests are adverse to the Company Group in such claim or action. Such cooperation shall include, but not be limited to, being reasonably available for conferences and interviews, cooperating with the Company and its affiliates in the defense of any claims or actions that are made and/or may be made by or against the Company or any of its affiliates arising out of or relating to matters in which the Executive was involved on or prior to the End Date, and, in general, providing the Company and its affiliates and their respective counsel with the full benefit of Executive's knowledge with respect to any such matter; provided, that, the Company agrees to promptly reimburse the Executive for all of the Executive’s reasonable travel and other direct expenses incurred, or to be reasonably incurred, to comply with the Executive’s obligations under this Section 9.

10.Nondisparagement. Each of the Company and the Executive agrees during the Term hereof and for one year thereafter not to make, directly or indirectly (with the intent to damage the other), any derogatory, negative or disparaging public statement about the other party hereto (or, as applicable, any other member of the Company Group, any current or former officers, directors, or employees thereof). Notwithstanding anything to the contrary contained herein, nothing in this Agreement shall prohibit or restrict the Executive or the Company from, truthfully

and in good faith: (i) disclosing that the Executive is no longer employed by the Company; (ii) making any disclosure of information required by law; (iii) providing information to, or testifying or otherwise assisting in any investigation or proceeding brought by, any federal regulatory or law enforcement agency or legislative body, any self-regulatory organization, or the Company’s designated legal, compliance or human resources officers; (iv) filing, testifying, participating in or otherwise assisting in a proceeding relating to an alleged violation of any federal, state or municipal law relating to fraud, or any rule or regulation of the Securities and Exchange Commission or any self-regulatory organization; or (v) making statements (in the case of the Executive) in the good faith performance of his duties to the Company.

11.Source of Payments. All payments provided under this Agreement, other than payments made pursuant to a plan which provides otherwise, shall be paid in cash from the general funds of the Company, and no special or separate fund shall be established, and no other segregation of assets shall be made, to assure payment. The Executive shall have no right, title or interest whatsoever in or to any investments which the Company may make to aid the Company in meeting its obligations hereunder. To the extent that any person acquires a right to receive payments from the Company hereunder, such right shall be no greater than the right of an unsecured creditor of the Company.

12.Arbitration. Any dispute or controversy arising under or in connection with this Agreement or otherwise in connection with the Executive’s employment by the Company that cannot be mutually resolved by the parties to this Agreement and their respective advisors and representatives shall be settled exclusively by arbitration in New Jersey in accordance with the rules of the American Arbitration Association before one arbitrator of exemplary qualifications and stature, who shall be selected jointly by an individual to be designated by the Company and an individual to be selected by the Executive, or if such two individuals cannot promptly agree on the selection of the arbitrator, who shall be selected by the American Arbitration Association. Notwithstanding anything to the contrary contained herein, the arbitrator shall allow for discovery sufficient to adequately arbitrate any claims, including access to essential documents and witnesses. The award of the arbitrator with respect to such dispute or controversy shall be in writing with sufficient explanation to allow for such meaningful judicial review as is permitted by law, and that such decision shall be enforceable in any court of competent jurisdiction and shall be binding on the parties hereto. The remedies available in arbitration shall be identical to those allowed at law. The arbitrator shall be entitled to award to the prevailing party in any arbitration or judicial action under this Agreement reasonable attorneys’ fees and any costs of the arbitration payable by such party, consistent with applicable law, provided that no such award shall be made against the Executive unless the arbitrator finds the Executive’s positions in such arbitration or dispute to have been frivolous or taken in bad faith.

13.Nonassignability; Binding Agreement.

(a)By the Executive. This Agreement and any and all of the Executive’s rights, duties, obligations or interests hereunder shall not be assignable or delegable by the Executive.

(b)By the Company. This Agreement and any and all of the Company’s rights, duties, obligations or interests hereunder shall not be assignable by the Company, except as incident to a

reorganization, merger or consolidation, or transfer of all or substantially all of the Company’s assets and then only if the Company’s obligations hereunder are assumed by the assignee.

(c)Binding Effect. This Agreement shall be binding upon, and inure to the benefit of, the parties hereto, any successors to or permitted assigns of the Company, and the Executive’s heirs and the personal representatives of the Executive’s estate.

14.Withholding. Any payments made or benefits provided to the Executive under this Agreement shall be reduced by any applicable withholding taxes or other amounts required to be withheld by law or contract.

15.Excise Tax.

(a)In the event it shall be determined that any payment, benefit or distribution (or combination thereof) by the Company, any of the Company’s affiliates, one or more trusts established by the Company for the benefit of its employees, or any other person or entity, to or for the benefit of the Executive (whether paid or payable or distributed or distributable pursuant to the terms of this Agreement, or otherwise pursuant to or by reason of any other agreement, policy, plan, program or arrangement, including without limitation any stock option, stock appreciation right, phantom equity awards or similar right, or the lapse or termination of any restriction on the vesting or exercisability of any of the foregoing) (a “Payment”) would be subject to the excise tax imposed by Section 4999 of the Code by reason of being “contingent on a change in ownership or control” of the Company, within the meaning of Section 280G of the Code (or any successor provision thereto) or any interest or penalties are incurred by the Executive with respect to such excise tax (such excise tax, together with any such interest and penalties, hereinafter collectively referred to as the “Excise Tax”), then the Executive shall be entitled to receive an additional payment or payments (a “Gross-Up Payment”) in an amount such that after payment by the Executive of all taxes (including any interest or penalties imposed with respect to such taxes), including, without limitation, any income taxes (and any interest and penalties imposed with respect thereto) and the Excise Tax imposed upon the Gross-Up Payment, the Executive retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Payments.

(b)Subject to the provisions of Section 15(a) hereof, all determinations required to be made under this Section 15, including whether and when a Gross-Up Payment is required and the amount of such Gross-Up Payment and the assumptions to be utilized in arriving at such determination, shall be made by a nationally recognized certified public accounting firm as may be designated by the Company, and reasonably satisfactory to the Executive (the “AccountingFirm”), which shall provide detailed supporting calculations both to the Company and the Executive within fifteen (15) business days of the closing of the change in ownership or control of the Company, or such earlier time as is requested by the Company. All fees and expenses of the Accounting Firm shall be borne solely by the Company. Any Gross-Up Payment, as determined pursuant to this Section 15, shall be paid by the Company to the Executive (or to the appropriate taxing authority on the Executive’s behalf) when due immediately prior to the date the Executive is required to make payment of any Excise Tax or other taxes. If the Accounting Firm determines that no Excise Tax is payable by the Executive, it shall so indicate to the

Executive in writing. Any determination by the Accounting Firm shall be binding upon the Company and the Executive absent a contrary determination by the Internal Revenue Service or a court of competent jurisdiction; provided, however, that no such determination shall eliminate or reduce the Company’s obligation to provide any Gross-Up Payment that shall be due as a result of such contrary determination. As a result of the uncertainty in the application of Section 4999 of the Code (or any successor provision thereto) and the possibility of similar uncertainty regarding state or local tax law at the time of any determination by the Accounting Firm hereunder, it is possible that the amount of the Gross-Up Payment determined by the Accounting Firm to be due to (or on behalf of) the Executive is lower than the amount actually due (“Underpayment”). In the event that the Company exhausts its remedies pursuant to Section 15(c) and the Executive thereafter is required to make a payment of any Excise Tax, the Accounting Firm shall determine the amount of the Underpayment that has occurred as promptly as possible and notify the Company and the Executive of such calculations, and any such Underpayment (including the Gross-Up Payment to the Executive) shall be promptly paid by the Company to or for the benefit of the Executive within five (5) business days after receipt of such determination and calculations.

(c)The Executive shall notify the Company in writing of any claim by the Internal Revenue Service that, if successful, would require the payment by the Company of any Gross-Up Payment. Such notification shall be given as soon as practicable but no later than ten (10) business days after the Executive is informed in writing of such claim and shall apprise the Company of the nature of such claim and the date on which such claim is requested to be paid. The Executive shall not pay such claim prior to the expiration of the thirty (30) day period following the date on which he gives such notice to the Company (or such shorter period ending on the date that any payment of taxes with respect to such claim is due). If the Company notifies the Executive in writing prior to the expiration of such period that it desires to contest such claim, the Executive shall (i) give the Company any information which is in the Executive’s possession reasonably requested by the Company relating to such claim, (ii) take such action in connection with contesting such claim as the Company shall reasonably request in writing from time to time, including, without limitation, accepting legal representation with respect to such claim by an attorney reasonably selected by the Company, (iii) cooperate with the Company in good faith in order to effectively contest such claim, and (iv) permit the Company to participate in any proceedings relating to such claim; provided, however, that the Company shall bear and pay directly all costs and expenses (including additional interest and penalties) incurred in connection with such contest and shall indemnify and hold the Executive harmless, on an after-tax basis, for any Excise Tax or income tax (including interest and penalties with respect thereto) imposed as a result of such representation and payment of costs and expenses. Without limitation on the foregoing provisions of this Section 15(c), the Company shall control all proceedings taken in connection with such contest and, at its sole option, may pursue or forego any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim and may, at its sole option, either direct the Executive to pay the tax claimed and sue for a refund or contest the claim in any permissible manner, and the Executive agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Company shall determine; provided, further, that if the Company directs the Executive to pay such claim and sue for a

refund, the Company shall pay the amount of such claim to the Executive, and shall indemnify and hold the Executive harmless, on an after-tax basis, from any Excise Tax or income tax (including interest or penalties with respect thereto) imposed with respect to such payment or with respect to any imputed income with respect to such payment (including the applicable Gross-Up Payment); provided, further, that if the Executive is required to extend the statute of limitations to enable the Company to contest such claim, the Executive may limit this extension solely to such contested amount. The Company’s control of the contest shall be limited to issues with respect to which a Gross-Up Payment would be payable hereunder and the Executive shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority. The reimbursement of expenses incurred by the Executive due to a tax contest or litigation addressing the existence or amount of an Excise Tax liability shall be reimbursed promptly, but in no event be made later than the end of the calendar year next following the calendar year in which the taxes that are subject of the contest or litigation are remitted to the taxing authority (or if no taxes are remitted as a result of such audit or litigation, the end of the calendar year next following the calendar year in which the audit is completed or there is a final and nonappealable settlement or other resolution of the litigation). In addition, without extending the time of any obligation in this Section 15, any tax Gross-Up Payment shall be made no later than the end of the calendar year next following the calendar year in which the Executive remits the related tax.

(d)If, after the receipt by the Executive of an amount paid by the Company pursuant to this Section 15, the Executive becomes entitled to receive any refund with respect to a Gross-Up Payment, the Executive shall promptly pay to the Company the amount of such refund received (together with any interest paid or credited thereon after taxes applicable thereto). Notwithstanding the foregoing, in the event that the obligation to refund any amount shall be a violation of the Sarbanes-Oxley Act of 2002, such obligation to refund shall be null and void.

(e)To the extent that the applicable regulations under Code Section 280G permits a later recalculation by the Company, or requires a later recalculation, of whether the Payments are subject to the Excise Tax, the provisions of this Section 15 shall again be applied based upon such recalculation.

16.Amendment; Waiver. This Agreement may not be modified, amended or waived in any manner, except by an instrument in writing signed by both parties hereto. The waiver by either party of compliance with any provision of this Agreement by the other party shall not operate or be construed as a waiver of any other provision of this Agreement, or of any subsequent breach by such party of a provision of this Agreement.

17.Governing Law. All matters affecting this Agreement, including the validity thereof, are to be governed by, and interpreted and construed in accordance with, the laws of the State of New Jersey applicable to contracts executed in and to be performed in that State.

18.Survival of Certain Provisions. The rights and obligations set forth in Sections 3(c), 3(d), 4(a), 4(b), 4(c) and 4(d), Sections 5 through 12 and Section 15 hereof shall survive any termination or expiration of this Agreement.

19.Entire Agreement; Supersedes Previous Agreements. This Agreement, together with the (i) Employee Confidentiality and Innovations Agreement, (ii) Non-Compete Agreement, (iii) Equity Awards, and (iv) Indemnification Agreement, dated as of July 29, 2008, between the Company and the Executive, each as amended from time to time, contains the entire agreement and understanding of the parties hereto with respect to the matters covered herein and supersedes all prior or contemporaneous negotiations, commitments, agreements and writings with respect to the subject matter hereof, all such other negotiations, commitments, agreements and writings shall have no further force or effect, and the parties to any such other negotiation, commitment, agreement or writing shall have no further rights or obligations thereunder. The parties hereto confirm that the First Amended and Restated Agreement and the Non-Compete Agreement, dated July 29, 2008, between the Executive and the Company are hereby terminated and are of no further force or effect.

20.Counterparts. This Agreement may be executed by either of the parties hereto in counterparts, each of which shall be deemed to be an original, but all such counterparts shall together constitute one and the same instrument.

21.Headings. The headings of sections herein are included solely for convenience of reference and shall not control the meaning or interpretation of any of the provisions of this Agreement.

22.Notices. All notices or communications hereunder shall be in writing, addressed as follows:

To the Company:

23 Main Street

Holmdel, N.J. 07733

Attention: Chief Legal Officer

To the Executive:

Marc P. Lefar

At the last address on record with the Company

All such notices shall be conclusively deemed to be received and shall be effective (i) if sent by hand delivery, upon receipt, or (ii) if sent by electronic mail or facsimile, upon confirmation of receipt by the sender of such transmission, or (iii) if sent by courier or certified or registered U.S. mail, upon receipt.

23.Severability. In the event that any court having jurisdiction shall determine that any restrictive covenant or other provision contained in this Agreement shall be unreasonable or unenforceable in any respect, then such covenant or other provision shall be deemed limited to the extent that such other court deems it reasonable or enforceable, and as so limited shall remain in full force and effect. In the event that such court shall deem any such covenant or other provision wholly unenforceable, the remaining covenants and other provisions of this Agreement shall nevertheless remain in full force and effect.

24.Press Release. The Company shall consult with the Executive in good faith in connection with the preparation of press releases, investor relations communications and internal employee communications relating to the Executive’s termination of employment with the Company (collectively, the “Communications”) and shall provide to the Executive copies of all Communications for his review and comment within a reasonable time prior to the Company’s publication and/or distribution of such Communications.

25.[Signature Page Follows]

IN WITNESS WHEREOF, the Company has caused this Agreement to be signed by its officer pursuant to the authority of its Board, and the Executive has executed this Agreement, as of the day and year first written above.

VONAGE HOLDINGS CORP.

By:    /s/ Michael A. Krupka                

Name: Michael A. Krupka

Title: Lead Independent Director

AGREED AND ACCEPTED:

Marc P. Lefar        

Marc P. Lefar

Date:    April 3, 2014    

[Signature Page to Second Amended and Restated Employment Agreement]

Exhibit A

CONFIDENTIAL SEPARATION AGREEMENT AND GENERAL RELEASE

This CONFIDENTIAL SEPARATION AGREEMENT and GENERAL RELEASE (hereinafter referred to as this “Agreement”) is made and entered into by and between Marc P. Lefar (“Executive”) and Vonage Holdings Corp. (defined herein to include its affiliates, subsidiaries, predecessors and successors and hereinafter referred to as “Vonage” or the “Company”), effective as of [] (the “Effective Date”). Executive and Vonage are hereafter referred to as the “Parties.”

WHEREAS, Executive was employed by Vonage as its Chief Executive Officer;

WHEREAS, Executive and Vonage entered into an Employment Agreement, dated as of July 29, 2008, as amended and restated pursuant to that Amended and Restated Employment Agreement, dated November 5, 2009 and most recently amended and restated pursuant to that certain Second Amended and Restated Employment Agreement, dated as of April 3, 2014 (the “Employment Agreement”);

WHEREAS, [description of nature of termination];

WHEREAS, Vonage and Executive have read this Agreement and have had the opportunity to review it with their respective legal counsel; and

WHEREAS, Vonage and Executive desire to resolve any and all issues and claims between them, including without limitation Executive’s employment and his separation therefrom, as well as any and all issues and claims arising from or relating to the Employment Agreement, and to reach an amicable accord and settlement concerning their future relationship.

NOW, THEREFORE, in consideration of the premises and mutual promises herein contained, it is agreed as follows:

1.Separation and Post-Employment Benefits. Executive ceased performing duties for Vonage on [] (the “Termination Date”), and Executive’s services on any and all boards of directors, boards of trustees and executive and/or management committees of Vonage of which he was a member ended on such date. The terms of Executive’s separation from Vonage are now being agreed to, as described herein.

2.Salary. Executive agrees that Vonage has no obligation to make, and will not make, any additional salary payments to Executive that have not already been paid, except for any and all earned, accrued or owed amounts, but not yet paid, to which Executive is entitled up to and including the Termination Date, including any unpaid expense reimbursement or tax gross ups, any accrued but unused vacation and any other amounts or benefits required to be paid under the Employment Agreement or provided by law or under any plan, program, policy or practice of Vonage (“Other Accrued Compensation and Benefits”), payable in a lump sum within five (5) days after the revocation period described in Paragraph 18(d) below. Any further entitlement that Executive may have to compensation shall be governed by the terms of this Agreement.

1

3.Non-Admission. It is specifically understood and agreed that this Agreement does not constitute and is not to be construed as an admission or evidence of (a) any violation by Vonage or Executive, of any federal, state or municipal law, statute or regulation, or principle of common law or equity, (b) the commission by Executive or Vonage of any other actionable wrong, or (c) any wrongdoing of any kind whatsoever on the part of Executive or Vonage, and shall not be offered, argued or used for that purpose.

4.General Release.

(a) In exchange for the consideration provided in this Agreement, and as a material inducement for both Parties entering into this Agreement, Executive for himself, his heirs, executors, administrators, trustees, legal representatives, successors and assigns (hereinafter collectively referred to for purposes of this Paragraph 4 as “Executive”) hereby irrevocably and unconditionally waives, releases and forever discharges Vonage and its past, present and future affiliates and related entities, parent and subsidiary corporations, divisions, shareholders, predecessors, future officers, directors, trustees, fiduciaries, administrators, executives, agents, representatives, successors and assigns (hereinafter collectively referred to for purposes of this Paragraph 4 as “Vonage”) for any and all waivable claims, charges, demands, sums of money, actions, rights, promises, agreements, causes of action, obligations and liabilities of any kind or nature whatsoever, at law or in equity, whether known or unknown, existing or contingent, suspected or unsuspected, apparent or concealed, foreign or domestic (hereinafter collectively referred to as “claims”) which he has now or in the future may claim to have against Vonage based upon or arising out of any facts, acts, conduct, omissions, transactions, occurrences, contracts, claims, events, causes, matters or things of any conceivable kind or character existing or occurring or claimed to exist or to have occurred prior to the Effective Date in any way whatsoever relating to or arising out of Executive’s employment with Vonage. Such claims include, but are not limited to, claims arising under the Age Discrimination in Employment Act, 29 U.S.C. § 621 etseq.; Title VII of the Civil Rights Act of 1964, 42 U.S.C. § 2000e etseq.; the Americans with Disabilities Act of 1990, 42 U.S.C. § 12101 etseq.; the Family and Medical Leave Act of 1993, 29 U.S.C. § 2601 etseq.; the Employee Retirement Income Security Act of 1974, 29 U.S.C. § 1001 etseq.; the Equal Pay Act of 1963, 29 U.S.C. § 206(d); Section 806 of the Corporate and Criminal Fraud Accountability Act of 2002, 18 U.S.C. § 1681 et seq.; the Fair Credit Reporting Act, 15 U.S.C. §1681 etseq.; any other federal, state or local statutory laws including, but not limited to, the New Jersey Law Against Discrimination, the Conscientious Employee Protection Act, the New Jersey Wage Payment Law, the New Jersey Family Leave Act, all as amended; the common law of the State of New Jersey; any claim under any local ordinance, including, but not limited to, any ordinance addressing fair employment practices; any common law claims, including but not limited to actions in tort, defamation and breach of contract; any claim or damage arising out of Executive’s employment with or separation from Vonage (including a claim for retaliation) under any common law theory or any federal, state or local statute or ordinance not expressly referenced above; and any and all claims for counsel fees and costs.

(b) To the fullest extent permitted by law, and subject to the provisions of Paragraphs 4(d) and 4(e) below, Executive represents and affirms that he has not filed or caused to be filed on his

behalf any claim for relief against Vonage or any releasee and, to the best of his knowledge and belief, no outstanding claims for relief have been filed or asserted against Vonage or any releasee on his behalf.

(c) In waiving and releasing any and all waivable claims whether or not now known, Executive understands that this means that, if he later discovers facts different from or in addition to those facts currently known by him, or believed by him to be true, the waivers and releases of this Agreement will remain effective in all respects — despite such different or additional facts and his later discovery of such facts, even if he would not have agreed to this Agreement if he had prior knowledge of such facts.

(d) Nothing in this Paragraph, or elsewhere in this Agreement, prevents or prohibits Executive from filing a claim with a government agency, such as the U.S. Equal Employment Opportunity Commission, that is responsible for enforcing a law on behalf of the government. However, Executive understands that, because Executive is waiving and releasing, among other things, any and all claims for monetary damages and any other form of personal relief (per Paragraph 4(a) above), Executive may only seek and receive non-monetary forms of relief through any such claim.

(e) Nothing in this Paragraph, or elsewhere in this Agreement, is intended as, or shall be deemed or operate as, a release by Executive of his rights under the Parties’ Indemnification Agreement, dated as of July 29, 2008, as amended from time to time (the “Indemnification Agreement”), or any other rights to indemnification relating to his performance of services as an officer and/or director of Vonage, including but not limited to those rights to indemnification set forth in Vonage’s Certificate of Incorporation as in effect on the date hereof (the “Certificate of Incorporation”). Notwithstanding the foregoing, the provisions of this Paragraph 4(e) are intended as recitals only and are not intended to provide Executive with any additional contractual rights beyond those contained in the Indemnification Agreement or the Certificate of Incorporation. Furthermore, nothing herein shall affect Executive’s rights to Other Accrued Compensation and Benefits and Vested Equity in accordance with the terms of this Agreement or as provided in Section 6 hereof.

5.Consideration and Post-Employment Benefits.

(a) Vonage, for and in consideration of the undertakings of Executive set forth herein and pursuant to Paragraph 4(b)(i) of the Employment Agreement, and intending to be legally bound, and provided that Executive does not revoke this Agreement pursuant to Paragraph 18(d) below, agrees that the Executive shall be entitled to the following, subject to Section 4(d) of the Employment Agreement: (1) Base Salary for the remainder of the period through December 31, 2014, which amount shall be payable in lump sum 60 days following the Termination Date; (2) the 2014 Bonus (as defined in Section 3(d) of the Employment Agreement), if any, which amount shall be payable in 2015 prior to March 15th; (3) the December RSUs (as defined in Section 3(c) of the Employment Agreement) shall vest 60 days following the Termination Date, if and to the extent the December RSUs have not yet vested as of the Termination Date; (4) access to (x) the Executive’s executive assistant as of the Termination Date (or a substitute assistant with reasonable experience) on at least a half-time basis and (y) a full-time office

located at the Company’s offices in Atlanta, Georgia for 120 days following the Termination Date; and (5) continued entitlement to the housing benefits set forth in Section 3(h) of the Employment Agreement with respect to costs incurred during the 30 day period following the Termination Date, which amounts shall be paid or reimbursed 60 days following the Termination Date. All payments are subject to applicable tax withholding. Executive shall be solely responsible for all taxes on the payments under this Agreement. Additionally,subject to the Executive’s timely election of COBRA continuation coverage, (A) Vonage shall pay the Executive on a monthly basis the group medical, dental and vision continuation coverage premiums for the Executive and his dependents under COBRA in excess of the amount the Executive would have paid if he were an active employee for the COBRA continuation coverage period, provided that the Executive or his dependents are eligible and remain eligible for COBRA coverage; and (B) Executive and, to the extent applicable, his eligible dependents shall be entitled to continued participation in the medical, dental, and vision insurance plans of Vonage as in effect from time to time for a period commencing on the 18 month anniversary of the Termination Date and ending on the 36 month anniversary of the Termination Date, so long as the Executive pays to Vonage, at such time or times as COBRA premiums would ordinarily be due, an amount equal to the fair market value (as reasonably determined by Vonage) of the cost of coverage applicable to the Executive and, to the extent applicable, his eligible dependents under Vonage’s medical, dental and vision plans; provided, however, that the Company may elect to provide any of the benefits coverages described above under a separate insurance policy offering substantially comparable benefits. Notwithstanding anything to the contrary herein, in the event that the Executive receives group health coverage from another employer of him (in which event the Executive shall promptly notify the Company in writing), such continuation of coverage by Vonage hereunder shall immediately cease. For purposes of this Agreement, “COBRA” shall mean the requirements of (1) Part 6 of Subtitle B of Title I of the Employee Retirement Income Security Act of 1974, as amended, and (2) Section 4980B of the Internal Revenue Code of 1986, as amended.

(b) Notwithstanding anything to the contrary herein, if Executive materially breaches the provisions of (i) Vonage’s Employee Confidentiality and Innovations Agreement, dated as of July 29, 2008 (the “Confidentiality Agreement”), (ii) the Non-Compete Agreement, dated as of April 3, 2014 (the “Non-Compete Agreement”), or (iii) Section 5 or 7 of the Employment Agreement, Executive shall not be eligible, as of the date of such material breach, for the payments and benefits described in Paragraph 5(a) above, and any and all obligations and agreements of Vonage with respect to such payments shall thereupon cease (and Vonage shall be entitled to recoup any and all such payments and benefits previously paid or awarded to Executive), provided, however, that no event or condition described in the Confidentiality Agreement, Non-Compete Agreement, or Section 5 or 7 of the Employment Agreement shall constitute a breach unless (x) Vonage first gives Executive written notice of its intention to terminate his payments and benefits described in Paragraph 5(a) above and the grounds for such loss of eligibility for payments and benefits, and (y) such grounds for termination of payments and benefits (if susceptible to correction) are not corrected by Executive within 30 days of his receipt of such notice (or, in the event that such grounds cannot be corrected within such 30-day period, Executive has not taken all reasonable steps within such 30-day period to correct such grounds as promptly as practicable thereafter).

(c) In accordance with the provisions of Section 3(c) of the Employment Agreement, the Parties’ Nonqualified Stock Option Agreements dated as of July 29, 2008, September 1, 2009, December 1, 2009, April 1, 2010, April 1, 2011, April 2, 2012, and April 1, 2013 (collectively, the “Option Awards”), and the Parties’ Restricted Stock Unit Agreements dated as of April 1, 2011, April 2, 2012, December 11, 2012, and April 1, 2013 (collectively, the “RSU Awards” and, together with the Option Awards, the “Equity Awards”), the Parties agree that [describe Executive’s equity] are vested (including, without limitation, any accelerated vesting in respect of the December RSUs) with respect to [] shares of Vonage’s Common Stock (the “Vested Equity”), and that any options underlying such Vested Equity are immediately exercisable and shall remain exercisable for 360 days following the Termination Date, but in no event after the tenth anniversary of the original grant date of such Vested Equity. Other than the Vested Equity, all equity awarded by Vonage to Executive has terminated and is of no further force or effect.

6.Prior Agreements. This Agreement supersedes all prior agreements entered into by Vonage and Executive, except for the following: (1) Sections 3(c), 3(d), and 4(d), Sections 5 through 12 and Section 15 of the Employment Agreement, which terms survive the termination of the Employment Agreement pursuant to Section 18 thereof, (2) the Parties’ Non-Compete Agreement dated as of April 3, 2014, (3) the Confidentiality Agreement, (4) the Equity Agreements and (5) the Indemnification Agreement. [List other appropriate agreements between Vonage and Executive.]

7.Resignation from Directorships and Officerships. Pursuant to Paragraph 4(f) of the Employment Agreement, Executive affirms that the Employment Agreement constitutes written notice of resignation effective as of the Termination Date and constitutes his immediate resignation from (i) any director, officer or employee position that Executive has with Vonage, and (ii) all fiduciary positions (including as a trustee) Executive holds with respect to any employee benefit plans or trusts established by Vonage.

8.Confidentiality of Agreement. Executive agrees to keep secret and strictly confidential the terms of this Agreement (except to the extent this Agreement is publicly filed) and further represents and warrants that he will not disclose, make known, discuss or relay any information concerning this Agreement, or any of the discussions leading up to this Agreement, to anyone (other than members of his immediate family, accountants or attorneys who have first agreed to keep said information confidential and to not disclose it to others), and that he has not done so. The foregoing shall not prohibit or restrict such disclosure as required by law or in connection with Vonage’s filings with the Securities and Exchange Commission or any other governmental or regulatory body or as may be necessary for the prosecution or defense of claims relating to the performance or enforcement of this Agreement or prohibit or restrict Executive (or Executive’s attorney) or Vonage from responding to any such inquiry about this settlement or its underlying facts and circumstances by the Securities and Exchange Commission, the New York Stock Exchange, any other self-regulatory organization, or in response to a duly served and effective subpoena or discovery request in the course of any litigation. Prior to making any disclosure other than to his immediate family, accountants or attorneys, Executive shall provide Vonage with as much notice as practicable that he has been requested or compelled to make disclosure

and shall cooperate with Vonage to maintain the confidentiality of this Agreement to the fullest extent possible.

9.Return of Property and Documents. Executive represents and warrants that he has returned, or will immediately return, to Vonage all Vonage property (including, without limitation, any and all computers, mobile devices (e.g., iPhone, iPad, etc.), identification cards, card key passes, corporate credit cards, corporate phone cards, files, memoranda, keys and software) in Executive’s possession and that he has not, and will not, retain any duplicates or reproductions of such items. Executive further represents and warrants that he has delivered to Vonage all copies of any Confidential Information (as defined in the Confidentiality Agreement) in his possession or control and has destroyed all copies of any analyses, compilations, studies or other documents in his possession that contain any Confidential Information. Notwithstanding the foregoing, subject to Sections 5 through 7 of the Employment Agreement, Executive shall maintain ownership and use of his rolodex and other address books and Vonage agrees to cooperate and reasonably assist Executive in the transfer to Executive of his personal files and contacts as well as any cell phone and mobile device numbers used by Executive if such numbers are registered in Vonage’s name.

10.Notices. All notices, requests, demands and other communications hereunder to Vonage shall be in writing and shall be delivered, either by hand, by facsimile, by overnight courier or by certified mail, return receipt requested, duly addressed as indicated below or to such changed address as Vonage may subsequently designate:

Vonage Holdings Corp.

23 Main Street

Holmdel, New Jersey 07733

Attention: Office of Chief Legal Officer

Any such notice, request, demand or other communication to Vonage delivered in the manner specified above shall be deemed duly given only upon receipt by Vonage.

All notices, requests, demands and other communications hereunder to Executive shall be in writing and shall be delivered, either by hand, by facsimile, by overnight courier, or by certified mail, return receipt requested, duly addressed as indicated below or to such changed address as Executive may subsequently designate:

Marc P. Lefar

at the last address on record with Vonage

Any such notice, request, demand or other communication to Executive delivered in the manner specified above shall be deemed duly given only upon receipt by Executive.

11.Severability. If, at any time after the Effective Date, any provision of this Agreement shall be held by any court of competent jurisdiction or arbitrator to be illegal, void or unenforceable, such provision shall be of no force and effect. The illegality or unenforceability of such provision, however, shall have no effect upon, and shall not impair the enforceability of, any

other provision of this Agreement, provided, however, that upon finding that Paragraph 4(a) is illegal and/or unenforceable, Vonage shall be released from any obligation to make any payment pursuant to Paragraph 5 of this Agreement, and Executive shall repay to Vonage any and all amounts already received pursuant to Paragraph 5.

12.Choice of Law; Arbitration. The terms of this Agreement and all rights and obligations of the Parties, including its enforcement, shall be interpreted and governed by the laws of the State of New Jersey, without regard to conflicts of law principles. Pursuant to Section 12 of the Employment Agreement, which is incorporated by operation thereof and reference herein, any disputes arising out of this Agreement and which are mandatorily arbitrable shall be settled exclusively by arbitration before the American Arbitration Association at a location in New Jersey.

13.Injunctive Relief. Notwithstanding the limited agreement to arbitrate set forth in Paragraph 12 of this Agreement, any claim alleging breach of the non-disparagement obligations under Section 10 of the Employment Agreement or alleging breach of Paragraph 8 of this Agreement may be brought in any federal or state court of competent jurisdiction in the State of New Jersey, where the parties consent to jurisdiction and agree not to argue that it is an inconvenient forum for resolution of the claim. A material breach of Section 10 of the Employment Agreement or Paragraph 8 of this Agreement shall be considered to be irreparable harm, where no adequate remedy at law would be available in respect thereof. The Parties agree that neither Party will have any obligation to post a bond to obtain said injunctive relief.

14.Modification of Agreement. No provision of this Agreement may be modified, altered, waived or discharged unless such modification, alteration, waiver or discharge is agreed to in writing and signed by the Parties hereto. No waiver by either Party hereto of, or compliance with, any condition or provision of this Agreement to be performed by such other Party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time.

15.Withholding. Vonage may withhold from amounts payable or benefits provided under this Agreement any and all federal, state and local taxes that are required to be withheld and reported by any applicable laws and regulations. Vonage may also withhold and report any amounts necessary pursuant to the benefit plans, policies or arrangements of Vonage or otherwise, in accordance with any applicable Vonage policies, laws and/or regulations.

16.Entire Agreement; Headings. Other than as set forth in Paragraph 6 hereof, this Agreement sets forth the entire agreement between the Parties hereto and any and all prior and contemporaneous agreements, discussions or understandings between the Parties pertaining to the subject matter hereof, including relating to severance payments or compensation, have been and are merged into and superseded by this Agreement. The headings of the sections contained in this Agreement are for convenience only and shall not be deemed to control or affect the meaning or construction of any provision of this Agreement.

17.Counterparts. This Agreement may be executed in several counterparts, each of which will be deemed an original, but all of which will constitute one and the same instrument.

18.EXECUTIVE ACKNOWLEDGES AND WARRANTS THAT:

(a) he has read the terms of this Agreement and that he understands its terms and effects, including the fact that he has agreed to release and forever discharge Vonage or any releasee from any legal action arising out of his employment relationship with Vonage, the terms and conditions of that employment relationship, and the termination of that employment relationship;

(b) he has signed this Agreement voluntarily and knowingly in exchange for the consideration described and referenced herein, which he acknowledges as adequate and satisfactory to him;

(c) he has been informed that he has the right to consider this Agreement for a period of twenty-one (21) days from receipt prior to entering into this Agreement and he has signed on the date indicated below after concluding that this Agreement is satisfactory;

(d) he has been informed that he has the right to revoke this Agreement for a period of seven (7) days following his execution of this Agreement by giving written notice to Vonage to the attention of Office of Chief Legal Officer, Vonage Holdings Corp., 23 Main Street, Holmdel, New Jersey 07733. This Agreement shall not be effective or enforceable until Executive’s right to revoke this Agreement has lapsed;

(e) he has been and is hereby advised in writing by Vonage to consult with an attorney prior to signing this Agreement and he has consulted with his attorney and fully discussed and reviewed the terms of this Agreement with his attorney;

(f) neither Vonage, nor any of its agents, representatives or attorneys have made any representations to Executive concerning the terms or effects of this Agreement other than those contained and referenced herein; and

(g) this Agreement shall be governed, interpreted and enforced by and under the laws of the State of New Jersey, without regard to choice of law principles.

IN WITNESS WHEREOF, the Company has caused this Agreement to be signed by its officer pursuant to the authority of its Board, and the Executive has executed this Agreement, as of the day and year set forth below.

VONAGE HOLDINGS CORP.

By:    By:

Marc P. Lefar

Dated:    Dated:

[Signature Page to Confidential Separation Agreement and General Release]

Exhibit B

Employee Confidentiality and Innovations Agreement

In consideration of my employment with Vonage Holdings Corp. (“Vonage”) (if such employment has not yet commenced) or my continued employment with Vonage, as the case may be, I agree to be bound by the terms of this Employee Confidentiality and Innovations Agreement (this “Agreement.”). I understand that as a result of my employment with Vonage (“Employment”), I may have access to information of a confidential nature about Vonage’s business, through the delivery of documents and permitted visits to Vonage’s premises. I understand that Vonage needs to maintain the confidentiality of that information, and I agree, as set forth below, to treat such information confidentially.

In addition, I understand and agree that if I develop Innovations (as defined in this Agreement) as a result of or in connection with my Employment, Vonage will have rights in those Innovations as set forth in this Agreement.

Terms of Agreement

A.Confidential Information

1.“Confidential Information” means all information, whether written or oral, tangible or intangible, and including trade secrets and data of whatever nature, disclosed by Vonage or any of its representatives or agents, whether before or after the date of this Agreement, or which may otherwise be made available or become known to me, which is either expressly designated by Vonage as being confidential or is disclosed under circumstances that should reasonably indicate to me that the disclosed information ought to be treated as confidential. “Confidential Information” shall not include information which

(i) becomes or has been generally available to the public other than as a result of disclosure by me in violation of this Agreement,

(ii) was in my possession from a third-party source prior to its disclosure by Vonage or its representatives, (iii) becomes available to myself from a third-party source other than Vonage or its representatives, or

(iii) is independently developed by myself without use of any of the Confidential Information. The burden of establishing the availability of the foregoing exceptions shall be on myself;

provided, however, that in (ii) and (iii) above the third-party source obtained the information without violation of the rights of Vonage and all restrictions on use or disclosure of such information from that third-party source are observed by myself.

1

2.I agree to use Confidential Information only for purposes directly related to my Employment. Without prior written consent of Vonage, I agree not to disclose any Confidential Information in any manner whatsoever, in whole or in part.

3.If I am requested or required (by oral questions, interrogatories, requests for information or documents, subpoena, civil investigative demand or similar process) to disclose Confidential Information supplied to it, I shall promptly notify Vonage of such request(s). If, in the opinion of my legal counsel, I am compelled to disclose Confidential Information to any tribunal or else stand liable for contempt or suffer other censure or penalty, I may do so without liability under this Agreement, provided I make reasonable efforts to have my disclosure limited to the narrowest scope practicable under the circumstances, including cooperation in any request for a protective order and seeking to have any proceedings held incamera, with a sealed record.

4.Upon termination of my Employment for any reason, I shall, upon request, promptly deliver to Vonage all copies of any Confidential Information in my possession or control and shall destroy all copies of any analyses, compilations, studies or other documents in my possession that contain any Confidential Information.

B.Innovations

1.“Innovations” means discoveries, developments, concepts and ideas, whether or not protectable under law, relating to Vonage’s present and prospective business activities, the name and extent of those business activities being known to me by reason of my Employment, such as (but not limited to) inventions, know-how, discoveries, improvements, original works of authorship, designs, software, source code, object code, programs, formulas, processes, developments, trade secrets, trademarks, copyrights, service marks, logos and related proprietary information and materials, whether patentable, copyrightable, subject to trademark registration, or not, and all drafts, proposals, sketches, revisions and demonstration and “beta” versions thereof, written, created, developed or produced or to be written, created, developed or produced.

2.In consideration of my Employment, I acknowledge and agree that all Innovations created by me (either working alone or as part of a group)

(i) during the term of my Employment, and

(ii) within six months after the end of the term if they (a) were made using equipment, supplies, facilities or trade secret information of Vonage, or (b) were developed at least in part on Vonage’s time, or (c) relate either to Vonage’s present or prospective business activities known to me when the Innovation was conceived, or (d) result from any work that I perform in the course of my employment, shall be the property of Vonage, free of any reserved or other rights of any kind on my part.

To achieve that result:

(i) I hereby permanently, irrevocably, exclusively and absolutely assign to Vonage all right, title and interest in and to all Innovations and all right, title and interest in and to all patents, domain names, trade secrets, trademarks and other intellectual property derived therefrom, effective when each Innovation first becomes capable of being so assigned, transferred or vested;

(ii) I agree to deliver all Innovations to Vonage no later than the end of the term of my Employment, unless Vonage requests otherwise;

(iii) As to any Innovation that is a copyrightable work, I agree that such Innovation constitutes and shall constitute a work made-for-hire as defined in the United States Copyright Act of 1976; that Vonage is and shall be the author of said work made-for hire and the owner of all rights in and to such Innovation throughout the universe, in perpetuity and in all languages, for all now known or hereafter existing uses, media and forms, including, without limitation, the copyrights therein and thereto throughout the universe for the initial term and any and all extensions and renewals thereof; and that Vonage shall have the right to make such changes therein and such uses thereof as it may deem necessary or desirable. To the extent that such copyrightable Innovation is not recognized as a work-made-for- hire, I hereby permanently, irrevocably, exclusively and absolutely assign, transfer and convey to Vonage, without reservation, all of my right, title and interest throughout the universe in perpetuity in such Innovation, including, without limitation, all rights of copyright and copyright renewal in such Innovation or any part thereof; and

(iv) I hereby waive all rights of “droit moral” or “moral rights of authors” or any similar rights or principles of law which I may now or later have in the Innovations. I warrant and represent that I have the right to execute this certificate, that each Innovation is and shall be new and original with me and not an imitation or copy of any other material, and that to the best of my knowledge, each of the Innovations does not and shall not violate or infringe upon any common law or statutory right of any party including, without limitation, contractual rights, copyrights, trademarks, patents, service marks and rights of privacy, publicity, or any other right of any person or entity and is not the subject of any litigation or claim that might give rise to litigation.

3.I agree to execute such further documents and do such other act as may be reasonably required by Vonage or its successors, licensees, or assignees to evidence or effectuate Vonage’s rights under this Agreement. Vonage’s rights in the Innovations may be assigned, licensed, or otherwise transferred.

4.I hereby irrevocably constitute and appoint Vonage with full power of substitution, to be my true and lawful attorney to execute, acknowledge, swear and file all instruments and documents, and to take any action which shall be deemed necessary, appropriate or desirable to perfect its rights in any Innovation created by me (working alone or as part of a group). This appointment shall be deemed to be coupled with an interest and shall be irrevocable and survive my death, disability or bankruptcy.

5.Except as the context otherwise requires, “Vonage” also includes all Affiliates of Vonage. “Affiliate” means any person that directly or indirectly, controls, is controlled by, or is under common control with Vonage.

6.This Agreement shall be construed under and governed by the laws of the State of New Jersey applicable to contracts executed and wholly performed in that state. This Agreement constitutes the entire agreement of the parties with respect to its subject matter and may not be amended or modified except by a written instrument executed by each of the patties. No failure or delay by any party in exercising any right, power or privilege hereunder shall operate as a waiver thereof, nor shall any single or partial exercise thereof preclude any other or further exercise thereof or the exercise of any other right, power or privilege hereunder.

7.This Agreement may be executed in any number of counterparts, each of which shall constitute an original and all of which shall constitute one and the same instrument. This Agreement shall become effective when signed by each of the parties on any counterpart, whether or not all of the parties have signed any one counterpart.

Execution

MY SIGNATURE BELOW SIGNIFIES THAT I HAVE COMPLETELY READ, AND FULLY UNDERSTAND AND AGREE TO THIS CONFIDENTIALITY AND INVENTIONS AGREEMENT.

Applicant Print Name	Home Address of Applicant
Signature of Applicant	Date
Vonage Signature	Date

Exhibit C

NON-COMPETE AGREEMENT

AGREEMENT, dated this 3rd day of April, 2014, by and between Vonage Holdings Corp. and its subsidiaries, a Delaware corporation with principal executive offices at 23 Main Street, Holmdel, New Jersey 07733 (“Vonage”), and Marc P. Lefar (“Employee”).

In consideration of Employee’s employment with Vonage or continued employment with Vonage, as the case may be, Employee agrees to be bound by the terms of this Non-Compete Agreement (“Agreement”) as follows:

1. Restriction on Competition. During the period of Employee’s employment with Vonage and for a period of twelve (12) months thereafter, Employee shall not directly or indirectly, own, manage, operate, control, be employed by or render services (whether as an employee, consultant, independent contractor or otherwise, and whether or not for compensation) to (i) any of the companies, or where indicated, only the lines of business,set forth on the attached Schedule 1, or (ii) the portion of any entity that sells and/or markets consumer and/or business voice services over a fixed broadband connection, (each, a “Competitive Entity”) anywhere within the “Territory,” that term meaning within the United States and Canada in those States and provinces (or States and provinces contiguous thereto) in which Vonage conducts or is substantially prepared to conduct its business on the date of Employee’s employment termination. Nothing contained in this Section 1 shall be deemed to prohibit Employee from (x) being employed by or rendering services as a consultant to a wireless services company in connection with the marketing and/or offering of wireless/cellular-based voice, data or entertainment services, except that Employee will not advise or assist such wireless services company with implementing technology-based strategies designed to directly disrupt or interfere with the provision or offering of “over-the-top” applications whose primary functionality is voice, video or messaging, or (y) acquiring or holding, solely for investment, publicly traded securities of a Competitive Entity, provided such securities do not, in the aggregate, constitute more than five percent (5%) of any class or series of outstanding securities of such Competitive Entity.

2. Specific Remedies. If Employee commits a breach of any of the provisions of Section 1, Vonage shall have the right to have such provisions specifically enforced by any court having equity jurisdiction, it being acknowledged and agreed that any such breach will cause irreparable injury to Vonage and that money damages will not provide an adequate remedy.

3. Independence, Severability and Non-Exclusivity. The right enumerated in Section 2 shall be in addition to and not in lieu of any other rights and remedies available to Vonage at law or in equity. If any of the covenants contained in Section 1 (“Covenants”) or any part of any of them, is found by a court of competent jurisdiction to be invalid or unenforceable, this shall not affect the remainder, or rights or remedies under this

Agreement, which shall be given full effect without regard to the invalid portions. The parties intend to and do hereby confer jurisdiction on courts located within the geographical scope of the Covenants. If any of the Covenants is held to be invalid or unenforceable because of the duration or geographical area, the parties agree that the court making such determination shall have the power to reduce the duration and/or area and, in its reduced form, such Covenant shall then be enforceable. No such holding of invalidity or unenforceability in one jurisdiction shall bar or in any way affect Vonage’s right to the relief provided in Section 2 or otherwise in the courts of any other jurisdiction within the geographical scope of the Covenants.

4. Successors; Binding Agreement. This Agreement and all obligations of Employee hereunder shall inure to the benefit of, and be enforceable by, Vonage and Vonage’s successors in interest.

5. Entire Agreement. This Agreement constitutes the entire understanding between the parties hereto relating to its subject matter hereof, and supersedes all prior negotiations, discussions, preliminary agreements and agreements relating to that subject matter.

6. Law Governing. This Agreement shall be governed by and construed in accordance with the laws of the State of New Jersey (without giving effect to conflicts of law provisions).

IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the day and year set forth above.

Vonage Holdings Corp.    AGREED AND ACCEPTED:

By:	Employee Signature
Name:	Date
Title:

EX-31.1

EXHIBIT 31.1

CERTIFICATION

PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Marc P. Lefar, certify that:

1.     I have reviewed this quarterly report on Form 10-Q of Vonage Holdings Corp.;

2.     Based on my knowledge, this report does not contain any untrue statement of material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.    Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.    The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a)    designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b)    designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c)    evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d)    disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5.    The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions):

a)    all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

b)    any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date:	July 31, 2014	/s/    Marc P. Lefar
		Marc P. Lefar
		Chief Executive Officer

EX-31.2

EXHIBIT 31.2

CERTIFICATION

PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, David T. Pearson, certify that:

1.    I have reviewed this quarterly report on Form 10-Q of Vonage Holdings Corp.;

2.    Based on my knowledge, this report does not contain any untrue statement of material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.    Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.    The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a)    designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b)    designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c)    evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d)    disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5.    The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions):

a)    all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

b)    any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date:	July 31, 2014	/s/   David T. Pearson
		Chief Financial Officer and Treasurer

EX-32.1

EXHIBIT 32.1

CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER

PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

I, Marc P. Lefar, certify to my knowledge pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Quarterly Report of Vonage Holdings Corp. on Form 10-Q for the quarterly period ended June 30, 2014 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in such Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of Vonage Holdings Corp.

Date:	July 31, 2014	/s/    Marc P. Lefar
		Marc P. Lefar
		Chief Executive Officer

I, David T. Pearson, certify to my knowledge pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Quarterly Report of Vonage Holdings Corp. on Form 10-Q for the quarterly period ended June 30, 2014 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in such Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of Vonage Holdings Corp.

Date:	July 31, 2014	/s/    David T. Pearson
		David T. Pearson
		Chief Financial Officer and Treasurer

XML

Common Stock - Common Stock Repurchases (Details) (USD $) Share data in Thousands, unless otherwise specified	6 Months Ended		0 Months Ended		3 Months Ended	6 Months Ended	7 Months Ended	3 Months Ended		0 Months Ended	3 Months Ended				6 Months Ended
	Jun. 30, 2014	Jun. 30, 2013	Feb. 12, 2013 $50,000 repurchase program Common Stock	Jul. 25, 2012 $50,000 repurchase program Common Stock	Jun. 30, 2013 $50,000 repurchase program Common Stock	Jun. 30, 2013 $50,000 repurchase program Common Stock	Feb. 12, 2013 $50,000 repurchase program Common Stock	Jun. 30, 2014 $100,000 repurchase program	Jun. 30, 2013 $100,000 repurchase program	Feb. 07, 2013 $100,000 repurchase program Common Stock	Jun. 30, 2014 $100,000 repurchase program Common Stock		Jun. 30, 2013 $100,000 repurchase program Common Stock		Jun. 30, 2014 $100,000 repurchase program Common Stock		Jun. 30, 2013 $100,000 repurchase program Common Stock
Common stock repurchases:
Authorized amount of stock repurchase				$ 50,000,000			$ 50,000,000			$ 100,000,000
Shares of common stock repurchased (in shares)					0	2,189					3,523	[1]	4,756	[2]	5,970	[1]	8,795	[2]
Value of common stock repurchased	23,347,000				0	5,374,000					13,244,000	[1]	13,451,000	[2]	23,287,000	[1]	24,458,000	[2]
Remaining authorized amount of stock repurchase program			16,682,000								26,060,000
Stock repurchased during period, unpaid (in shares)											147		220
Stock repurchased during period, unpaid	558,000	629,000									556,000		625,000
Payments for repurchase of common stock commission costs								$ 1,000	$ 4,000

[1] including 147 shares, or $556, of common stock repurchases settled in July 2014; excluding commission of $1.

[2] including 220 shares, or $625, of common stock repurchases settled in July 2013; excluding commission of $4.

XML

Supplemental Income Statement Account Information (Details) (USD $) In Thousands, unless otherwise specified	3 Months Ended		6 Months Ended
	Jun. 30, 2014	Jun. 30, 2013	Jun. 30, 2014	Jun. 30, 2013
Revenues:
USF fees	$ 18,396	$ 17,125	$ 37,032	$ 35,230
Disconnect fees	906	1,066	1,679	2,306
Initial activation fees	273	319	587	673
Customer equipment fees	174	12	585	170
Equipment recovery fees	19	26	39	55
Shipping and handling fees	545	322	924	690
Depreciation:
Depreciation and amortization expense	12,459	8,205	24,797	16,180
Debt related costs amortization			544	783
Direct Cost Of Telephony Services
Revenues:
USF costs	18,396	17,125	37,089	35,230
Direct cost of goods sold
Revenues:
Shipping and handling cost	1,580	1,436	3,137	2,844
Selling, general and administrative expense
Revenues:
Advertising costs	213	100	325	188
Acquisition related costs	0	0	20	0
Acquisition integration cost	4	0	98	0
Marketing
Revenues:
Advertising costs	37,122	36,089	71,696	67,815
Depreciation and amortization
Depreciation:
Depreciation and amortization expense, excluding impairments	12,392	8,205	24,730	16,182
Depreciation and amortization expense	12,459	8,205	24,797	16,180
Depreciation and amortization | Patents
Depreciation:
Depreciation and amortization expense, excluding impairments	505	576	1,081	1,152
Depreciation and amortization | Trademark
Depreciation:
Depreciation and amortization expense, excluding impairments	18	18	36	36
Depreciation and amortization | Customer relationships
Depreciation:
Depreciation and amortization expense, excluding impairments	2,134	0	4,268	0
Depreciation and amortization | Acquired technology
Depreciation:
Depreciation and amortization expense, excluding impairments	1,574	0	3,148	0
Depreciation and amortization | Trade names
Depreciation:
Depreciation and amortization expense, excluding impairments	50	0	100	0
Depreciation and amortization | Non-compete agreements
Depreciation:
Depreciation and amortization expense, excluding impairments	4	0	8	0
Depreciation and amortization | Property and Equipment
Depreciation:
Property and equipment impairments	2	0	2	(2)
Depreciation and amortization | Network equipment and computer hardware
Depreciation:
Depreciation and amortization expense, excluding impairments	3,602	3,339	7,211	6,647
Depreciation and amortization | Software
Depreciation:
Depreciation and amortization expense, excluding impairments	2,833	2,659	5,548	5,149
Software impairments	65	0	65	0
Depreciation and amortization | Capital leases
Depreciation:
Depreciation and amortization expense, excluding impairments	550	549	1,100	1,098
Depreciation and amortization | Other leasehold improvements
Depreciation:
Depreciation and amortization expense, excluding impairments	1,081	1,032	2,154	2,036
Depreciation and amortization | Furniture
Depreciation:
Depreciation and amortization expense, excluding impairments	35	29	69	56
Depreciation and amortization | Vehicles
Depreciation:
Depreciation and amortization expense, excluding impairments	6	3	7	8
Interest expense
Depreciation:
Debt related costs amortization	255	395	544	783
Other income (expense), net
Depreciation:
Net income (loss) resulting from foreign exchange transactions	$ 37	$ (22)	$ 22	$ (62)

XML

Basis of Presentation and Significant Accounting Policies - Valuation and Qualifying Accounts - Income Taxes (Details) (USD $) In Thousands, unless otherwise specified	6 Months Ended	3 Months Ended
	Jun. 30, 2014	Dec. 31, 2011 Valuation allowance, operating loss carryforwards
Valuation and qualifying accounts disclosure:
Adjustment to valuation allowance		$ 325,601
Estimated annual effective tax rate	49.00%

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Long-Term Debt and Revolving Credit Facility - Facility Terms (Details) (Secured debt, 2013 Credit Facility, USD $)	0 Months Ended													0 Months Ended									0 Months Ended
	Feb. 11, 2013	Jul. 26, 2013 Maximum	Feb. 11, 2013 Maximum	Feb. 11, 2013 Minimum	Feb. 11, 2013 LIBOR, Consolidated Leverage Ratio less than .75 to 1.00	Feb. 11, 2013 LIBOR, Consolidated Leverage Ratio less than .75 to 1.00 Maximum	Feb. 11, 2013 LIBOR, Consolidated Leverage Ratio greater than or equal to .75 to 1.00 and less than 1.50 to 1.00	Feb. 11, 2013 LIBOR, Consolidated Leverage Ratio greater than or equal to .75 to 1.00 and less than 1.50 to 1.00 Maximum	Feb. 11, 2013 LIBOR, Consolidated Leverage Ratio greater than or equal to .75 to 1.00 and less than 1.50 to 1.00 Minimum	Feb. 11, 2013 LIBOR, consolidated leverage ratio greater than or equal to 1.50 to 1.00	Feb. 11, 2013 LIBOR, consolidated leverage ratio greater than or equal to 1.50 to 1.00 Minimum	Feb. 11, 2013 LIBOR applicable to one month interest periods, consolidated levarage ratio greater than or equal to 1.50 to 1.00	Feb. 11, 2013 LIBOR applicable to one month interest periods, consolidated levarage ratio greater than or equal to 1.50 to 1.00 Minimum	Feb. 11, 2013 Base rate	Feb. 11, 2013 Federal Funds effective rate	Feb. 11, 2013 Prime rate JP Morgan Chase Bank, N.A.	Feb. 11, 2013 LIBOR applicable to one month interest periods	Feb. 11, 2013 LIBOR applicable to one month interest periods, conolidated leverage ratio less than .75 to 1.00	Feb. 11, 2013 LIBOR applicable to one month interest periods, conolidated leverage ratio less than .75 to 1.00 Maximum	Feb. 11, 2013 LIBOR applicable to one month interest periods, consolidated leverage ratio greater than or equal to .75 to 1.00 and less than 1.50 to 1.00	Feb. 11, 2013 LIBOR applicable to one month interest periods, consolidated leverage ratio greater than or equal to .75 to 1.00 and less than 1.50 to 1.00 Maximum	Feb. 11, 2013 LIBOR applicable to one month interest periods, consolidated leverage ratio greater than or equal to .75 to 1.00 and less than 1.50 to 1.00 Minimum	Feb. 11, 2013 Senior secured term loan	Feb. 11, 2013 Revolving credit facility	Feb. 11, 2013 Revolving credit facility London Interbank Offered Rate (LIBOR)	Feb. 11, 2013 Loans payable
Long-term debt and revolving credit facility:
Periodic payment amount																							$ 5,833,000
Commitment fee percentage																								0.45%
Description of variable rate basis														base rate	federal funds effective rate	prime rate	LIBOR rate applicable to one month interest periods								LIBOR
Basis spread on variable rate					3.125%		3.375%			3.625%		2.625%			0.50%			2.125%		2.275%
Consolidated leverage ratio						75.00%		150.00%	75.00%		150.00%		150.00%						75.00%		150.00%	75.00%
Duration of interest period used to determine interest rate	3 months
Percentage in addition to basis spread on variable rate																	1.00%
Prepayment amount percentage of net cash proceeds from disposition of assets	100.00%
Prepayment amount percentage of net cash proceeds received with other non-ordinary course transaction	100.00%
Additional Borrowing Capacity Allowed	60,000,000
Consolidated leverage ratio permitted by financial covenants			200.00%
Consolidated fixed coverage charge ratio permitted by financial covenants			175.00%
Restricted payments adjusted amount for consolidated fixed coverage charge ratio requirement		80,000,000	50,000,000
Cash requirement for financial covenants				25,000,000
Annual excess cash flow in addition to unused capital expenditures limit carried forward permitted by financial covenants in event of specified corporate actions				35,000,000
Annual capital expenditures permitted by financial covenants			55,000,000
Annual excess cash flow in addition to unused capital expenditures limit carried forward permitted by financial covenants			$ 8,000,000
Additional interest rate applied in the event of default																										2.00%

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Basis of Presentation and Significant Accounting Policies

6 Months Ended

Jun. 30, 2014

Organization, Consolidation and Presentation of Financial Statements [Abstract]

Basis of Presentation and Significant Accounting Policies

Basis of Presentation and Significant Accounting Policies

Nature of Operations

Vonage Holdings Corp. (“Vonage”, “Company”, “we”, “our”, “us”) is incorporated as a Delaware corporation. We are a leading provider of communications services connecting consumers and businesses through cloud-connected devices worldwide. Customers in the United States represented 94% of our subscriber lines for our broadband telephone replacement services at June 30, 2014, with the balance primarily in Canada and the United Kingdom.

Unaudited Interim Financial Information

The accompanying unaudited interim consolidated financial statements and information have been prepared in accordance with accounting principles generally accepted in the United States and in accordance with the instructions for Form 10-Q. Accordingly, they do not include all of the information and disclosures required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, these financial statements contain all normal and recurring adjustments considered necessary to present fairly the financial position, results of operations, cash flows, and statement of stockholders’ equity for the periods presented. The results for the three and six months ended June 30, 2014 are not necessarily indicative of the results to be expected for the full year.

These unaudited interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements and related notes included in our Annual Report on Form 10-K for the year ended December 31, 2013 filed with the Securities and Exchange Commission on February 13, 2014.

Significant Accounting Policies

Principles of Consolidation

The consolidated financial statements include the accounts of Vonage and its wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. We also consolidate a majority-owned entity in Brazil where we have the ability to exercise controlling influence. The ownership interest of the noncontrolling party is presented as redeemable noncontrolling interest.

Use of Estimates

Our consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States, which require management to make estimates and assumptions that affect the amounts reported and disclosed in the consolidated financial statements and the accompanying notes. Actual results could differ materially from these estimates.

On an ongoing basis, we evaluate our estimates, including the following:

• the useful lives of property and equipment, software costs, and intangible assets;

• assumptions used for the purpose of determining share-based compensation using the Black-Scholes option pricing model and Monte Carlo simulation model (“Models”), and various other assumptions that we believe to be reasonable; the key inputs for these Models include our stock price at valuation date, exercise price, the dividend yield, risk-free interest rate, life in years, and historical volatility of our common stock; and

• assumptions used in determining the need for, and amount of, a valuation allowance on net deferred tax assets.

We base our estimates on historical experience, available market information, appropriate valuation methodologies, and on various other assumptions that we believe to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities.

Revenue Recognition

Operating revenues consist of telephony services revenues and customer equipment (which enables our telephony services) and shipping revenues. The point in time at which revenues are recognized is determined in accordance with Securities and Exchange Commission Staff Accounting Bulletin No. 104, Revenue Recognition, and Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 605, Revenue Recognition.

At the time a customer signs up for our telephony services, there are the following deliverables:

• Providing equipment, if any, to the customer that enables our telephony services; and

• Providing telephony services.

The equipment is generally provided free of charge to our customers and in most instances there are no fees collected at sign-up. We record the fees collected for shipping the equipment to the customer, if any, as shipping and handling revenue at the time of shipment.

Telephony Services Revenue

Substantially all of our revenues are telephony services revenues, which are derived primarily from monthly subscription fees that customers are charged under our service plans. We also derive telephony services revenues from per minute fees for international calls if not covered under a plan, including calls made via applications for mobile devices and other stand-alone products, and for any calling minutes in excess of a customer’s monthly plan limits. Monthly subscription fees are automatically charged to customers’ credit cards, debit cards or electronic check payments ("ECP"), in advance and are recognized over the following month when services are provided. Revenues generated from international calls and from customers exceeding allocated call minutes under limited minute plans are recognized as services are provided, that is, as minutes are used, and are billed to a customer's credit cards, debit cards or ECP in arrears. As a result of multiple billing cycles each month, we estimate the amount of revenues earned from international calls and from customers exceeding allocated call minutes under limited minute plans but not billed from the end of each billing cycle to the end of each reporting period and record these amounts as accounts receivable. These estimates are based primarily upon historical minutes and have been consistent with our actual results.

We also provide rebates to customers who purchase their customer equipment from retailers and satisfy minimum service period requirements. These rebates in excess of activation fees are recorded as a reduction of revenues over the service period based upon the estimated number of customers that will ultimately earn and claim the rebates.

In the United States, we charge regulatory, compliance, E-911, and intellectual property-related fees on a monthly basis to defray costs, and to cover taxes that we are charged by the suppliers of telecommunications services. In addition, we charge customers Federal Universal Service Fund (“USF”) fees. We recognize revenue on a gross basis for USF and related fees. We record these fees as revenue when billed. All other taxes are recorded on a net basis.

Customer Equipment and Shipping Revenue

Customer equipment and shipping revenues consist of revenues from sales of customer equipment to wholesalers or directly to customers for replacement devices, or for upgrading their device at the time of customer sign-up for which we charge an additional fee. 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. Customer equipment and shipping revenues also include the fees that customers are charged for shipping their customer equipment to them. Customer equipment and shipping revenues include sales to our retailers, who subsequently resell this customer equipment to customers. Revenues are reduced for payments to retailers and rebates to customers, who purchased their customer equipment through these retailers, to the extent of customer equipment and shipping revenues.

Direct Cost of Telephony Services

Direct cost of telephony services consists primarily of direct costs that we pay to third parties in order to provide telephony services. These costs include access and interconnection charges that we pay to other telephone companies to terminate domestic and international phone calls on the public switched telephone network. In addition, these costs include the cost to lease phone numbers, to co-locate in other telephone companies’ facilities, to provide enhanced emergency dialing capabilities to transmit 911 calls, and to provide local number portability. These costs also include taxes that we pay on telecommunications services from our suppliers or are imposed by government agencies such as Federal USF and royalties for use of third parties’ intellectual property. These costs do not include indirect costs such as depreciation and amortization, payroll, and facilities costs. Our presentation of direct cost of telephony services may not be comparable to other similar companies.

Direct Cost of Goods Sold

Direct cost of goods sold consists primarily of costs that we incur when a customer signs up for our service. These costs include the cost of customer equipment for customers who subscribe through the direct sales channel in excess of activation fees. In addition, these costs include the amortization of deferred customer equipment, the cost of shipping and handling for customer equipment, the installation manual that accompanies the customer equipment, and the cost of certain promotions.

Development Expenses

Costs for research, including predevelopment efforts prior to establishing technological feasibility of software expected to be marketed, are expensed as incurred. Development costs are capitalized when technological feasibility has been established and anticipated future revenues support the recoverability of the capitalized amounts. Capitalization stops when the product is available for general release to customers. Due to the short time period between achieving technological feasibility and product release and the insignificant amount of costs incurred during such periods, we have not capitalized any software development, and have expensed these costs as incurred. These costs are included in selling, general and administrative expense.

Cash and Cash Equivalents

We maintain cash with several investment grade financial institutions. Highly liquid investments, which are readily convertible into cash, with original maturities of three months or less, are recorded as cash equivalents.

Certain Risks and Concentrations

Financial instruments that potentially subject us to concentrations of credit risk consist principally of cash equivalents and accounts receivable. They are subject to fluctuations in both market value and yield based upon changes in market conditions, including interest rates, liquidity, general economic conditions, and conditions specific to the issuers. Accounts receivable are typically unsecured and are derived from revenues earned from customers primarily located in the United States. A portion of our accounts receivable represents the timing difference between when a customer’s credit card is billed and the subsequent settlement of that transaction with our credit card processors. This timing difference is generally three days for substantially all of our credit card receivables. We have never experienced any accounts receivable write-offs due to this timing difference. In addition, we collect subscription fees in advance, minimizing our accounts receivable and bad debt exposure. If a customer’s credit card, debit card or ECP is declined, we generally suspend international calling capabilities as well as their ability to incur domestic usage charges in excess of their plan minutes. If the customer’s credit card, debit card or ECP could not be successfully processed during three billing cycles (i.e., the current and two subsequent monthly billing cycles), we terminate the account. In addition, we automatically charge any per minute fees to our customers’ credit card, debit card or ECP monthly in arrears. To further mitigate our bad debt exposure, a customer’s credit card, debit card or ECP will be charged in advance of their monthly billing if their international calling or overage charges exceed a certain dollar threshold.

Inventory

Inventory consists of the cost of customer equipment and is stated at the lower of cost or market, with cost determined using the average cost method. We provide an inventory allowance for customer equipment that has been returned by customers but may not be able to be reissued to new customers or returned to the manufacturer for credit.

Property and Equipment

Property and equipment includes acquired assets and those accounted for under capital leases and consist principally of network equipment and computer hardware, furniture, software, and leasehold improvements. In addition, the lease of our corporate headquarters has been accounted for as a capital lease and is included in property and equipment. Network equipment and computer hardware and furniture are stated at cost with depreciation provided using the straight-line method over the estimated useful lives of the related assets, which range from three to five years. Leasehold improvements are amortized over their estimated useful life of the related assets or the life of the lease, whichever is shorter. The cost of renewals and substantial improvements is capitalized while the cost of maintenance and repairs is charged to operating expenses as incurred.

Our network equipment and computer hardware, which consists of routers, gateways, and servers that enable our telephony services, is subject to technological risks and rapid market changes due to new products and services and changing customer demand. These changes may result in future adjustments to the estimated useful lives or the carrying value of these assets, or both.

Software Costs

We capitalize certain costs, such as purchased software and internally developed software that we use for customer acquisition and customer care automation tools, in accordance with FASB ASC 350-40, “Internal-Use Software”. Computer software is stated at cost less accumulated amortization and the estimated useful life is two to five years.

Goodwill and Purchased-Intangible Assets

Goodwill acquired in acquisition of a business is accounted for based upon the excess fair value of consideration transferred over the fair value of net assets acquired in the business combination. Goodwill is tested for impairment on an annual basis on October 1st and, when specific circumstances dictate, between annual tests. When impaired, the carrying value of goodwill is written down to fair value. The goodwill impairment test involves a two-step process. The first step, identifying a potential impairment, compares the fair value of a reporting unit with its carrying amount, including goodwill. If the carrying value of the reporting unit exceeds its fair value, the second step would need to be conducted; otherwise, no further steps are necessary as no potential impairment exists. The second step, measuring the impairment loss, compares the implied fair value of the reporting unit goodwill with the carrying amount of that goodwill. Any excess of the reporting unit goodwill carrying value over the respective implied fair value is recognized as an impairment loss.

Purchased-intangible assets are accounted for based upon the fair value of assets received. Purchased-intangible assets are amortized on a straight-line or accelerated basis over the periods of benefit, ranging from two to ten years. We perform a review of purchased-intangible assets whenever events or changes in circumstances indicate that the useful life is shorter than we had originally estimated or that the carrying amount of assets may not be recoverable. If such facts and circumstances exist, we assess the recoverability of purchased-intangible assets by comparing the projected undiscounted net cash flows associated with the related asset or group of assets over their remaining lives against their respective carrying amounts. Impairments, if any, are based on the excess of the carrying amount over the fair value of those assets. If the useful life of the asset is shorter than originally estimated, we accelerate the rate of amortization and amortize the remaining carrying value over the new shorter useful life. There was no impairment of purchased-intangible assets identified for the three and six months ended June 30, 2014.

Intangible Assets

Intangible assets acquired in the settlement of litigation or by direct purchase are accounted for based upon the fair value of assets received.

Patents and Patent Licenses

Patent rights acquired in the settlement of litigation or by direct purchase are accounted for based upon the fair value of assets received.

Long-Lived Assets

We evaluate impairment losses on long-lived assets used in operations when events and changes in circumstances indicate that the assets might be impaired. If our review indicates that the carrying value of an asset will not be recoverable, based on a comparison of the carrying value of the asset to the undiscounted future cash flows, the impairment will be measured by comparing the carrying value of the asset to its fair value. Fair value will be determined based on quoted market values, discounted cash flows or appraisals. Impairments are recorded in the statement of operations as part of depreciation expense.

Debt Related Costs

Costs incurred in raising debt are deferred and amortized as interest expense using the effective interest method over the life of the debt.

Redeemable Noncontrolling Interest

We consolidate a majority-owned entity where we have the ability to exercise controlling influence. The ownership interest of the noncontrolling party is presented as noncontrolling interest. If we are required to repurchase the noncontrolling interest at fair value, subject to adjustment, under a put option or other contractual redemption requirement, we will report the noncontrolling interest as redeemable in the Consolidated Balance Sheets between liabilities and equity. We adjust the redeemable noncontrolling interest to the redemption values on each balance sheet date with changes recognized as an adjustment to retained earnings, or in the absence of retained earnings, as an adjustment to additional paid-in capital when it becomes probable the noncontrolling interest will become redeemable.

Derivatives

We do not hold or issue derivative instruments for trading purposes. However, in accordance with FASB ASC 815, “Derivatives and Hedging” (“FASB ASC 815”), we review our contractual obligations to determine whether there are terms that possess the characteristics of derivative financial instruments that must be accounted for separately from the financial instrument in which they are embedded. We recognize these features as liabilities in our consolidated balance sheet at fair value each period and recognize any change in the fair value in our statement of operations in the period of change. We estimate the fair value of these liabilities using available market information and appropriate valuation methodologies.

Income Taxes

We recognize deferred tax assets and liabilities at enacted income tax rates for the temporary differences between the financial reporting bases and the tax bases of our assets and liabilities. Any effects of changes in income tax rates or tax laws are included in the provision for income taxes in the period of enactment. Our net deferred tax assets primarily consist of net operating loss carry forwards (“NOLs”). We are required to record a valuation allowance against our net deferred tax assets if we conclude that it is more likely than not that taxable income generated in the future will be insufficient to utilize the future income tax benefit from our net deferred tax assets (namely, the NOLs) prior to expiration. We periodically review this conclusion, which requires significant management judgment. If we are able to conclude in a future period that a future income tax benefit from our net deferred tax assets has a greater than 50 percent likelihood of being realized, we are required in that period to reduce the related valuation allowance with a corresponding decrease in income tax expense. This would result in a non-cash benefit to our net income in the period of the determination. In the fourth quarter of 2011, we released $325,601 of valuation allowance. In subsequent periods, we would expect to recognize income tax expense equal to our pre-tax income multiplied by our effective income tax rate, an expense that was not recognized prior to the reduction of the valuation allowance. Our effective rate may differ from the federal statutory rate due, in part, to our foreign operations and certain discrete period items. The 2014 estimated annual effective tax rate is expected to approximate 49%, but may fluctuate due to the timing of other discrete period transactions.

We file income tax returns in the U.S. on a federal basis and in U.S. state and foreign jurisdictions. Our federal tax return remains subject to examination by the Internal Revenue Service from 2010 to present, our New Jersey tax returns remain open from 2008 to present, our Canada tax return remains open from 2009 to present, and other domestic and foreign tax returns remain open for all periods to which those filings relate. We recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate resolution.

We have not had any unrecognized tax benefits. We recognize interest and penalties accrued related to unrecognized tax benefits as components of our income tax provision. We have not had any interest and penalties accrued related to unrecognized tax benefits.

Business Combinations

We account for business combinations using the acquisition method of accounting. The acquisition method of accounting requires that the purchase price, including the fair value of contingent consideration, of the acquisition be allocated to the assets acquired and liabilities assumed using the fair values determined by management as of the acquisition date. Goodwill as of the acquisition date is measured as the excess of consideration transferred over the net of the acquisition date fair values of assets acquired and the liabilities assumed. While the Company uses its best estimates and assumptions as part of the purchase price allocation process to accurately value assets acquired and liabilities assumed at the acquisition date, the Company’s estimates are inherently uncertain and subject to refinement. As a result, during the measurement period, which may be up to one year from the acquisition date, the Company records adjustments to the assets acquired and liabilities assumed, with the corresponding offset to goodwill to the extent the Company identifies adjustments to the preliminary purchase price allocation. Upon the conclusion of the measurement period or final determination of the values of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recorded to the consolidated statements of operations. We will include the results of all acquisitions in our Consolidated Financial Statements from the date of acquisition.

In connection with the acquisition of Vocalocity, Inc. on November 15, 2013, we recorded preliminary estimates primarily related to income, sales, excise, and ad valorem taxes. As such, the provisional measurements of fair value are subject to change.

Acquisition related transaction costs, such as banking, legal, accounting and other costs incurred in connection with an acquisition, are expensed as incurred in selling, general and administrative expense.

Acquisition related integration costs include costs associated with exit or disposal activities, which do not meet the criteria of discontinued operations, including costs for employee, lease, and contract terminations, facility closing or other exit activities. Additionally, these costs include expenses directly related to integrating and reorganizing acquired businesses and include items such as employee retention costs, recruiting costs, certain moving costs, certain duplicative costs during integration and asset impairments. These costs are expensed as incurred in selling, general and administrative expense.

Foreign Currency

Generally, the functional currency of our non-United States subsidiaries is the local currency. The financial statements of these subsidiaries are translated to United States dollars using month-end rates of exchange for assets and liabilities, and average rates of exchange for revenues, costs, and expenses. Translation gains and losses are deferred and recorded in accumulated other comprehensive income as a component of stockholders’ equity.

Share-Based Compensation

We account for share-based compensation in accordance with FASB ASC 718, “Compensation-Stock Compensation”. Under the fair value recognition provisions of this pronouncement, share-based compensation cost is measured at the grant date based on the fair value of the award, reduced as appropriate based on estimated forfeitures, and is recognized as expense over the applicable vesting period of the stock award using the accelerated method. The excess tax benefit associated with stock compensation deductions have not been recorded in additional paid-in capital. When evaluating whether an excess tax benefit has been realized, share based compensation deductions are not considered realized until NOLs are no longer sufficient to offset taxable income. Such excess tax benefits will be recorded when realized.

Earnings per Share

Net income per share has been computed according to FASB ASC 260, “Earnings per Share”, which requires a dual presentation of basic and diluted earnings per share (“EPS”). Basic EPS represents net income divided by the weighted average number of common shares outstanding during a reporting period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock, including stock options and restricted stock units under our 2001 Stock Incentive Plan and 2006 Incentive Plan, were exercised or converted into common stock. The dilutive effect of outstanding stock options and restricted stock units is reflected in diluted earnings per share by application of the treasury stock method. In applying the treasury stock method for stock-based compensation arrangements, the assumed proceeds are computed as the sum of the amount the employee must pay upon exercise and the amounts of average unrecognized compensation cost attributed to future services.

The following table sets forth the computation for basic and diluted net income per share for the three and six months ended June 30, 2014 and 2013:

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2014		2013		2014		2013
Numerator
Numerator for basic earnings per share-net income attributable to Vonage	$	5,518	$	7,447	$	10,106	$	20,494
Numerator for diluted earnings per share-net income attributable to Vonage	$	5,518	$	7,447	$	10,106	$	20,494
Denominator
Basic weighted average common shares outstanding	211,390		212,169		211,790		213,404
Dilutive effect of stock options and restricted stock units	9,612		7,668		9,520		8,927
Diluted weighted average common shares outstanding	221,002		219,837		221,310		222,331
Basic net income per share
Basic net income per share	$	0.03	$	0.04	$	0.05	$	0.10
Diluted net income per share
Diluted net income per share	$	0.02	$	0.03	$	0.05	$	0.09

For the three and six months ended June 30, 2014 and 2013, the following were excluded from the calculation of diluted earnings per common share because of their anti-dilutive effects:

	Three Months Ended		Six Months Ended
	June 30,		June 30,
	2014	2013	2014	2013
Restricted stock units	5,486	2,171	5,477	2,357
Stock options	22,447	27,796	22,548	26,349
	27,933	29,967	28,025	28,706

Comprehensive Income (Loss)

Comprehensive income (loss) consists of net income and other comprehensive items. Other comprehensive items include foreign currency translation adjustments.

Recent Accounting Pronouncements

In May 2014, Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update ("ASU") 2014-09, "Revenue from Contracts with Customers". This ASU is a comprehensive new revenue recognition model that requires a company to recognize revenue to depict the transfer of good or services to a customer at an amount that reflects the consideration it expects to receive in exchange for those goods or services. This ASU is effective for annual reporting periods beginning after December 15, 2016 and early adoption is not permitted. Accordingly, we will adopt this ASU on January 1, 2017. Companies may use either a full retrospective or modified retrospective approach to adopt this ASU and our management is currently evaluating which transition approach to use. We are currently evaluating the impact of adopting ASU 2014-09 on our consolidated financial statements and related disclosures.

Reclassifications

Certain reclassifications have been made to prior years’ financial statements in order to conform to the current year’s presentation. The reclassifications had no impact on net earnings previously reported.

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Supplemental Balance Sheet Account Information - Property and Equipment (Details) (USD $) In Thousands, unless otherwise specified	Jun. 30, 2014	Dec. 31, 2013
Property and Equipment:
Property equipment, gross	$ 147,721	$ 149,083
Less: accumulated depreciation and amortization	(102,891)	(96,840)
Property and equipment, net	44,830	52,243
Building (under capital lease)
Property and Equipment:
Property equipment, gross	25,709	25,709
Network equipment and computer hardware
Property and Equipment:
Property equipment, gross	75,598	78,312
Leasehold improvements
Property and Equipment:
Property equipment, gross	44,900	44,141
Furniture
Property and Equipment:
Property equipment, gross	1,422	812
Vehicles
Property and Equipment:
Property equipment, gross	$ 92	$ 109

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Supplemental Balance Sheet Account Information (Details) (USD $) In Thousands, unless otherwise specified	Jun. 30, 2014	Dec. 31, 2013
Prepaid expenses and other current assets:
Nontrade receivables	$ 9,039	$ 7,402
Services	9,825	7,084
Telecommunications	493	479
Insurance	954	757
Marketing	1,205	312
Other prepaids	2,007	858
Prepaid expenses and other current assets	23,523	16,892
Debt related costs, net:
Senior secured term loan	4,706	4,706
Less: accumulated amortization	(3,937)	(3,393)
Debt related costs, net	769	1,313
Accrued expenses:
Compensation and related taxes and temporary labor	15,600	20,276
Marketing	26,071	23,277
Taxes and fees	16,486	18,207
Litigation and settlements	339	89
Telecommunications	8,373	7,942
Other accruals	4,335	6,063
Customer credits	1,542	1,719
Professional fees	3,120	2,490
Accrued interest	10	12
Inventory	216	769
Credit card fees	314	283
Accrued expenses	$ 76,406	$ 81,127

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Supplemental Balance Sheet Account Information - Software (Details) (USD $) In Thousands, unless otherwise specified	Jun. 30, 2014	Dec. 31, 2013
Software:
Software, gross	$ 88,114	$ 82,175
Less: accumulated amortization	(66,046)	(61,618)
Software, net	22,068	20,557
Purchased
Software:
Software, gross	51,117	45,178
Licensed
Software:
Software, gross	909	909
Internally developed
Software:
Software, gross	$ 36,088	$ 36,088

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Supplemental Balance Sheet Account Information - Restricted Cash (Details) (USD $) In Thousands, unless otherwise specified	Jun. 30, 2014	Dec. 31, 2013
Restricted cash:
Restricted cash	$ 3,411	$ 4,405
Letter of credit-lease deposits
Restricted cash:
Restricted cash	3,308	4,306
Cash reserves
Restricted cash:
Restricted cash	$ 103	$ 99

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Consolidated Statement Of Stockholders' Equity And Redeemable Noncontrolling Interest (USD $) In Thousands, unless otherwise specified	Total	Common Stock	Additional Paid-in Capital	Accumulated Deficit	Treasury Stock	Accumulated Other Comprehensive Income (Loss)	Redeemable non-controlling interest
Balance at December 31, 2013 at Dec. 31, 2013	$ 338,074	$ 247	$ 1,136,289	$ (697,941)	$ (101,040)	$ 519	$ (38)
Increase (Decrease) in Stockholders' Equity [Roll Forward]
Stock option exercises	3,615	6	3,609
Share-based expense	11,114		11,114
Share-based award activity	(1,976)				(1,976)
Common stock repurchases	(23,347)				(23,347)
Other	(213)		21		(234)
Foreign currency translation adjustment	(1,089)					(1,058)	(31)
Net income (loss)	9,588			10,106			(518)
Balance at June 30, 2014 at Jun. 30, 2014	$ 336,315	$ 253	$ 1,151,033	$ (687,835)	$ (126,597)	$ (539)	$ (587)

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Supplemental Balance Sheet Account Information - Intangible Assets (Details) (USD $) In Thousands, unless otherwise specified	Jun. 30, 2014	Dec. 31, 2013
Finite-lived intangible assets:
Intangible assets, gross	$ 88,324	$ 93,824
Less: accumulated amortization	(20,117)	(16,974)
Intangible assets, net	68,207	76,850
Customer relationships
Finite-lived intangible assets:
Intangible assets, gross	39,100	39,100
Developed technology
Finite-lived intangible assets:
Intangible assets, gross	35,200	35,200
Patents and patent licenses
Finite-lived intangible assets:
Intangible assets, gross	12,764	18,264
Trademark
Finite-lived intangible assets:
Intangible assets, gross	560	560
Trade names
Finite-lived intangible assets:
Intangible assets, gross	500	500
Non-compete agreements
Finite-lived intangible assets:
Intangible assets, gross	$ 200	$ 200

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Commitments and Contingencies (Details) (USD $) In Thousands, unless otherwise specified	0 Months Ended	5 Months Ended
	Feb. 11, 2013 Defendant	Mar. 05, 2013	Jun. 30, 2014	Dec. 31, 2013
Commitments and contingencies:
Number of defendants	27
Percent increase in cost To terminate international calls to Pakistan		500.00%
Restricted cash			$ 3,411	$ 4,405
Reserve for potential tax liability pending new requirements from state or municipal agencies			5,708
Estimated maximum potential exposure for retroactive tax assessments			7,000
Letter of credit
Commitments and contingencies:
Restricted cash			3,308	4,306
Marketing Related Services
Commitments and contingencies:
Vendor commitments due in 2014			100
Vendor commitments due in 2015			900
Vendor commitments due in 2016			1,500
Vendor commitments due in 2017			1,500
Vendor commitments due in 2018			1,500
Vendor commitments due in 2019			1,500
Vendor commitments due in 2020			1,100
Purchased
Commitments and contingencies:
Vendor commitments due in 2014			500
Vendor commitments due in 2015			1,000
Vendor commitments due in 2016			1,000
Vendor commitments due in 2017			100
Networks Services
Commitments and contingencies:
Vendor commitments due in 2015

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Consolidated Balance Sheets (USD $) In Thousands, unless otherwise specified	Jun. 30, 2014	Dec. 31, 2013
Current assets:
Cash and cash equivalents	$ 54,962	$ 84,663
Accounts receivable, net of allowance of $699 and $683, respectively	21,705	19,649
Inventory, net of allowance of $115 and $229, respectively	7,266	10,584
Deferred customer acquisition costs, current	4,318	4,991
Deferred tax assets, current	18,361	18,361
Prepaid expenses and other current assets	23,523	16,892
Total current assets	130,135	155,140
Property and equipment, net	44,830	52,243
Goodwill	83,627	83,627
Software, net	22,068	20,557
Deferred customer acquisition costs, non-current	144	193
Debt related costs, net	769	1,313
Restricted cash	3,411	4,405
Intangible assets, net	68,207	76,850
Deferred tax assets, non-current	238,004	246,539
Other assets	1,450	1,882
Total assets	592,645	642,749
Current liabilities:
Accounts payable	40,684	49,867
Accrued expenses	76,406	81,127
Deferred revenue, current portion	35,666	36,899
Current maturities of capital lease obligations	3,119	2,889
Current portion of notes payables	23,333	23,333
Total current liabilities	179,208	194,115
Indebtedness under revolving credit facility	55,000	75,000
Notes payable, net of current portion	11,667	23,333
Deferred revenue, net of current portion	797	436
Capital lease obligations, net of current maturities	8,585	10,201
Other liabilities, net of current portion in accrued expenses	1,660	1,628
Total liabilities	256,917	304,713
Commitments and Contingencies	0	0
Redeemable noncontrolling interest	(587)	(38)
Stockholders’ Equity
Common stock, par value $0.001 per share; 596,950 shares authorized at June 30, 2014 and December 31, 2013; 250,994 and 246,741 shares issued at June 30, 2014 and December 31, 2013, respectively; 210,101 and 212,339 shares outstanding at June 30, 2014 and December 31, 2013, respectively	253	247
Additional paid-in capital	1,151,033	1,136,289
Accumulated deficit	(687,835)	(697,941)
Treasury stock, at cost, 40,893 shares at June 30, 2014 and 34,402 shares at December 31, 2013	(126,597)	(101,040)
Accumulated other comprehensive (loss) income	(539)	519
Total stockholders’ equity	336,315	338,074
Total liabilities, redeemable noncontrolling interest, and stockholders’ equity	$ 592,645	$ 642,749

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Consolidated Statements of Comprehensive Income (USD $) In Thousands, unless otherwise specified	3 Months Ended		6 Months Ended
	Jun. 30, 2014	Jun. 30, 2013	Jun. 30, 2014	Jun. 30, 2013
Net income	$ 5,383	$ 7,447	$ 9,588	$ 20,494
Other comprehensive income (loss):
Foreign currency translation adjustment	397	(1,063)	(1,089)	(1,687)
Total other comprehensive income (loss)	397	(1,063)	(1,089)	(1,687)
Comprehensive income	5,780	6,384	8,499	18,807
Comprehensive loss attributable to noncontrolling interest:
Add: Net loss	(135)	0	(518)	0
Foreign currency translation adjustment	(12)	0	(31)	0
Total comprehensive loss attributable to noncontrolling interest	(147)	0	(549)	0
Comprehensive income attributable to Vonage	$ 5,927	$ 6,384	$ 9,048	$ 18,807

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Long-Term Debt and Revolving Credit Facility - Financing (Details) (Secured debt, 2013 Credit Facility, USD $)	Jul. 26, 2013	Feb. 11, 2013
Senior secured term loan
Long-term debt and revolving credit facility:
Line of credit facility, maximum borrowing capacity		$ 70,000,000
Revolving credit facility
Long-term debt and revolving credit facility:
Line of credit facility, maximum borrowing capacity		75,000,000
Maximum
Long-term debt and revolving credit facility:
Restricted payments adjusted amount for consolidated fixed coverage charge ratio requirement	$ 80,000,000	$ 50,000,000

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Basis of Presentation and Significant Accounting Policies (Details)	6 Months Ended	3 Months Ended
	Jun. 30, 2014 billing_cycle	Jun. 30, 2014 United States Subscriber lines Geographic concentration
Concentration risk:
Percentage of subscriber lines represented by the United States		94.00%
Maximum original maturity term of investments to be considered cash and cash equivalents	3 months
Duration of timing difference between customer credit card billed and subsequent settlement of transaction with credit card processors	3 days
Number of unsuccessful billing cycles before account termination	3

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Long-Term Debt and Revolving Credit Facility - Use of Proceeds (Details) (USD $) In Thousands, unless otherwise specified			0 Months Ended			0 Months Ended
	Jun. 30, 2014	Dec. 31, 2013	Feb. 11, 2013 Secured debt 2013 Credit Facility	Feb. 11, 2013 Senior secured term loan Secured debt 2011 Credit Facility	Feb. 11, 2013 Senior secured term loan Secured debt 2013 Credit Facility	Nov. 15, 2013 Vocalocity 2013 Credit Facility
Long-term debt and revolving credit facility:
Proceeds from the issuance of debt			$ 27,500
Fees in connection with credit facilities	4,706	4,706		670	2,009
Payments in connection with acquisition from revolving credit facility						$ 75,000

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Basis of Presentation and Significant Accounting Policies - Intangible Assets (Details)	6 Months Ended
	Jun. 30, 2014
Software | Minimum
Finite-lived intangible assets:
Intangible asset useful life	2 years
Software | Maximum
Finite-lived intangible assets:
Intangible asset useful life	5 years
Purchased Intangible Assets | Minimum
Finite-lived intangible assets:
Intangible asset useful life	2 years
Purchased Intangible Assets | Maximum
Finite-lived intangible assets:
Intangible asset useful life	10 years

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Consolidated Statements of Cash Flows (USD $) In Thousands, unless otherwise specified	6 Months Ended
	Jun. 30, 2014	Jun. 30, 2013
Cash flows from operating activities:
Net income	$ 9,588	$ 20,494
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization and impairment charges	16,154	14,993
Amortization of intangibles	8,643	1,187
Deferred tax expense	8,409	12,469
Allowance for doubtful accounts	(183)	(100)
Allowance for obsolete inventory	216	230
Amortization of debt related costs	544	783
Share-based expense	11,114	8,401
Changes in operating assets and liabilities:
Accounts receivable	(1,814)	(2,823)
Inventory	3,100	(5,118)
Prepaid expenses and other current assets	(6,794)	(8,229)
Deferred customer acquisition costs	729	(1,009)
Other assets	432	1,668
Accounts payable	(9,266)	(30,397)
Accrued expenses	(6,543)	16,490
Deferred revenue	(892)	(466)
Other liabilities	32	31
Net cash provided by operating activities	33,469	28,604
Cash flows from investing activities:
Capital expenditures	(3,099)	(5,803)
Acquisition and development of software assets	(7,031)	(6,197)
Decrease in restricted cash	998	1,256
Net cash used in investing activities	(9,132)	(10,744)
Cash flows from financing activities:
Principal payments on capital lease obligations	(1,386)	(1,184)
Principal payments on notes and revolving credit facility	(31,666)	(11,667)
Proceeds received from issuance of notes payable	0	27,500
Debt related costs	0	(2,009)
Common stock repurchases	(23,525)	(30,066)
Proceeds from exercise of stock options, net of stock cancellation payment	3,615	2,505
Net cash used in by financing activities	(52,962)	(14,921)
Effect of exchange rate changes on cash	(1,076)	(1,501)
Net change in cash and cash equivalents	(29,701)	1,438
Cash and cash equivalents, beginning of period	84,663	97,110
Cash and cash equivalents, end of period	54,962	98,548
Cash paid during the periods for:
Interest	2,690	2,032
Income taxes	1,145	1,448
Non-cash financing transactions during the periods for:
Common stock repurchases	$ 558	$ 629

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Consolidated Balance Sheets (Parenthetical) (USD $) In Thousands, except Share data, unless otherwise specified	Jun. 30, 2014	Dec. 31, 2013
Accounts receivable, allowance	$ 699	$ 683
Inventory, allowance	$ 115	$ 229
Common stock, par value (USD per share)	$ 0.001	$ 0.001
Common stock, shares authorized	596,950,000	596,950,000
Common stock, shares issued	250,994,000	246,741,000
Common stock, shares outstanding	210,101,000	212,339,000
Treasury stock, shares	40,893,000	34,402,000

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Basis of Presentation and Significant Accounting Policies (Tables)

6 Months Ended

Jun. 30, 2014

Organization, Consolidation and Presentation of Financial Statements [Abstract]

Computation for basic and diluted net (loss) income per share

The following table sets forth the computation for basic and diluted net income per share for the three and six months ended June 30, 2014 and 2013:

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2014		2013		2014		2013
Numerator
Numerator for basic earnings per share-net income attributable to Vonage	$	5,518	$	7,447	$	10,106	$	20,494
Numerator for diluted earnings per share-net income attributable to Vonage	$	5,518	$	7,447	$	10,106	$	20,494
Denominator
Basic weighted average common shares outstanding	211,390		212,169		211,790		213,404
Dilutive effect of stock options and restricted stock units	9,612		7,668		9,520		8,927
Diluted weighted average common shares outstanding	221,002		219,837		221,310		222,331
Basic net income per share
Basic net income per share	$	0.03	$	0.04	$	0.05	$	0.10
Diluted net income per share
Diluted net income per share	$	0.02	$	0.03	$	0.05	$	0.09

Securities excluded from calculation of diluted earnings per common share because of anti-dilutive effects

For the three and six months ended June 30, 2014 and 2013, the following were excluded from the calculation of diluted earnings per common share because of their anti-dilutive effects:

	Three Months Ended		Six Months Ended
	June 30,		June 30,
	2014	2013	2014	2013
Restricted stock units	5,486	2,171	5,477	2,357
Stock options	22,447	27,796	22,548	26,349
	27,933	29,967	28,025	28,706

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Document And Entity Information	6 Months Ended
	Jun. 30, 2014	Jul. 30, 2014
Document And Entity Information [Abstract]
Document Type	10-Q
Amendment Flag	false
Document Period End Date	Jun. 30, 2014
Entity Registrant Name	VONAGE HOLDINGS CORP
Entity Central Index Key	0001272830
Current Fiscal Year End Date	--12-31
Document Fiscal Year Focus	2014
Document Fiscal Period Focus	Q2
Entity Filer Category	Accelerated Filer
Entity Common Stock, Shares Outstanding		209,052,038

XML

Supplemental Balance Sheet Account Information (Tables)

6 Months Ended

Jun. 30, 2014

Supplemental Balance Sheet Account Information [Abstract]

Supplemental balance sheet account information

Prepaid expenses and other current assets

	June 30, 2014		December 31, 2013
Nontrade receivables	$	9,039	$	7,402
Services	9,825		7,084
Telecommunications	493		479
Insurance	954		757
Marketing	1,205		312
Other prepaids	2,007		858
Prepaid expenses and other current assets	$	23,523	$	16,892

Property and equipment, net

	June 30, 2014			December 31, 2013
Building (under capital lease)	$	25,709		$	25,709
Network equipment and computer hardware	75,598			78,312
Leasehold improvements	44,900			44,141
Furniture	1,422			812
Vehicles	92			109
	147,721			149,083
Less: accumulated depreciation and amortization	(102,891		)	(96,840		)
Property and equipment, net	$	44,830		$	52,243

Software, net

	June 30, 2014			December 31, 2013
Purchased	$	51,117		$	45,178
Licensed	909			909
Internally developed	36,088			36,088
	88,114			82,175
Less: accumulated amortization	(66,046		)	(61,618		)
Software, net	$	22,068		$	20,557

Debt related costs, net

	June 30, 2014			December 31, 2013
Senior secured term loan	$	4,706		$	4,706
Less: accumulated amortization	(3,937		)	(3,393		)
Debt related costs, net	$	769		$	1,313

Restricted cash

	June 30, 2014		December 31, 2013
Letter of credit-lease deposits	$	3,308	$	4,306
Cash reserves	103		99
Restricted cash	$	3,411	$	4,405

Intangible assets, net

	June 30, 2014			December 31, 2013
Customer relationships	$	39,100		$	39,100
Developed technology	35,200			35,200
Patents and patent licenses	12,764			18,264
Trademark	560			560
Trade names	500			500
Non-compete agreements	200			200
	88,324			93,824
Less: accumulated amortization	(20,117		)	(16,974		)
Intangible assets, net	$	68,207		$	76,850

Accrued expenses

	June 30, 2014		December 31, 2013
Compensation and related taxes and temporary labor	$	15,600	$	20,276
Marketing	26,071		23,277
Taxes and fees	16,486		18,207
Litigation and settlements	339		89
Telecommunications	8,373		7,942
Other accruals	4,335		6,063
Customer credits	1,542		1,719
Professional fees	3,120		2,490
Accrued interest	10		12
Inventory	216		769
Credit card fees	314		283
Accrued expenses	$	76,406	$	81,127

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Consolidated Statements of Income (USD $) In Thousands, except Per Share data, unless otherwise specified	3 Months Ended		6 Months Ended
	Jun. 30, 2014	Jun. 30, 2013	Jun. 30, 2014	Jun. 30, 2013
Revenues	$ 218,882	$ 204,776	$ 439,615	$ 413,863
Operating Expenses:
Direct cost of telephony services (excluding depreciation and amortization of $5,098, $3,510, $10,252, and $6,962, respectively)	52,385	53,527	105,002	108,708
Direct cost of goods sold	9,450	9,217	19,189	18,095
Selling, general and administrative	73,569	61,481	152,022	124,391
Marketing	59,003	58,330	116,267	109,999
Depreciation and amortization	12,459	8,205	24,797	16,180
Total operating expenses	206,866	190,760	417,277	377,373
Income from operations	12,016	14,016	22,338	36,490
Other Income (Expense):
Interest income	31	74	122	111
Interest expense	(1,434)	(1,732)	(3,511)	(3,189)
Other income (expense), net	36	(17)	23	(56)
Total other income (expense)	(1,367)	(1,675)	(3,366)	(3,134)
Income before income tax expense	10,649	12,341	18,972	33,356
Income tax expense	(5,266)	(4,894)	(9,384)	(12,862)
Net income	5,383	7,447	9,588	20,494
Plus: Net loss attributable to noncontrolling interest	135	0	518	0
Net income attributable to Vonage	$ 5,518	$ 7,447	$ 10,106	$ 20,494
Net income attributable to Vonage per common share:
Basic (USD per share)	$ 0.03	$ 0.04	$ 0.05	$ 0.10
Diluted (USD per share)	$ 0.02	$ 0.03	$ 0.05	$ 0.09
Weighted-average common shares outstanding:
Basic (in shares)	211,390	212,169	211,790	213,404
Diluted (in shares)	221,002	219,837	221,310	222,331

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Long-Term Debt and Revolving Credit Facility (Notes)

6 Months Ended

Jun. 30, 2014

Debt Disclosure [Abstract]

Long-Term Debt And Revolving Credit Facility

Long-Term Debt and Revolving Credit Facility

A schedule of long-term debt at June 30, 2014 and December 31, 2013 is as follows:

	June 30, 2014		December 31, 2013
3.125-3.625% Credit Facility - due 2016	$	11,667	$	23,333
3.125-3.625% Revolving Credit Facility - due 2016	55,000		75,000

At June 30, 2014, future payments under long-term debt obligations over each of the next five years and thereafter were as follows:

	Credit Facility
2014	$	11,667
2015	23,333
2016	55,000
Minimum future payments of principal	90,000
Less: current portion	23,333
Long-term portion	$	66,667

2013 Financing

On February 11, 2013 we entered into Amendment No. 1 to the 2011 Credit Agreement (as further amended by Amendment No. 2 to our 2011 Credit Facility, the "2013 Credit Facility"). The 2013 Credit Facility consists of a $70,000 senior secured term loan and a $75,000 revolving credit facility. The co-borrowers under the 2013 Credit Facility are our wholly owned subsidiary, Vonage America Inc., and us. Obligations under the 2013 Credit Facility are guaranteed, fully and unconditionally, by our other United States subsidiaries and are secured by substantially all of the assets of each borrower and each of the guarantors. On July 26, 2013 we entered into Amendment No. 2 to our 2011 Credit Agreement, which amends our financial covenant related to our consolidated fixed charge coverage ratio by increasing the amount of restricted payments excluded from such calculation from $50,000 to $80,000.

Use of Proceeds

The net proceeds received of $27,500 from the senior secured term loan and the undrawn revolving credit facility under the 2013 Credit Facility will be used for general corporate purposes. We also incurred $2,009 of fees in connection with the 2013 Credit Facility, which is amortized, along with the unamortized fees of $670 in connection with the 2011 Credit Facility, to interest expense over the life of the debt using the effective interest method. We used $75,000 from the 2013 revolving credit facility in connection with the acquisition of Vocalocity on November 15, 2013.

2013 Credit Facility Terms

The following description summarizes the material terms of the 2013 Credit Facility:

The loans under the 2013 Credit Facility mature in February 2016. Principal amounts under the 2013 Credit Facility are repayable in quarterly installments of $5,833 per quarter for the senior secured term loan. The unused portion of our revolving credit facility incurs a 0.45% commitment fee.

Outstanding amounts under the 2013 Credit Facility, at our option, will bear interest at:

• LIBOR (applicable to one-, two-, three- or six-month periods) plus an applicable margin equal to 3.125% if our consolidated leverage ratio is less than 0.75 to 1.00, 3.375% if our consolidated leverage ratio is greater than or equal to 0.75 to 1.00 and less than 1.50 to 1.00, and 3.625% if our consolidated leverage ratio is greater than or equal to 1.50 to 1.00, payable on the last day of each relevant interest period or, if the interest period is longer than 3 months, each day that is three months after the first day of the interest period, or

• the base rate determined by reference to the highest of (a) the federal funds effective rate from time to time plus 0.50%, (b) the prime rate of JPMorgan Chase Bank, N.A., and (c) the LIBOR rate applicable to one month interest periods plus 1.00%, plus an applicable margin equal to 2.125% if our consolidated leverage ratio is less than 0.75 to 1.00, 2.275% if our consolidated leverage ratio is greater than or equal to 0.75 to 1.00 and less than 1.50 to 1.00, and 2.625% if our consolidated leverage ratio is greater than or equal to 1.50 to 1.00, payable on the last business day of each March, June, September, and December and the maturity date of the 2013 Credit Facility.

The 2013 Credit Facility provides greater flexibility to us in funding acquisitions and restricted payments, such as stock buybacks, than the 2011 Credit Facility.

We may prepay the 2013 Credit Facility at our option at any time without premium or penalty. The 2013 Credit Facility is subject to mandatory prepayments in amounts equal to:

• 100% of the net cash proceeds from any non-ordinary course sale or other disposition of our property and assets for consideration in excess of a certain amount subject to customary reinvestment provisions and certain other exceptions and

• 100% of the net cash proceeds received in connection with other non-ordinary course transactions, including insurance proceeds not otherwise applied to the relevant insurance loss.

Subject to certain restrictions and exceptions, the 2013 Credit Facility permits us to obtain one or more incremental term loans and/or revolving credit facilities in an aggregate principal amount of up to $60,000 plus an amount equal to repayments of the senior secured term loan upon providing documentation reasonably satisfactory to the administrative agent, without the consent of the existing lenders under the 2013 Credit Facility. The 2013 Credit Facility includes customary representations and warranties and affirmative covenants of the borrowers. In addition, the 2013 Credit Facility contains customary negative covenants, including, among other things, restrictions on the ability of us and our subsidiaries to consolidate or merge, create liens, incur additional indebtedness, dispose of assets, consummate acquisitions, make investments, and pay dividends and other distributions. We must also comply with the following financial covenants:

• a consolidated leverage ratio of no greater than 2.00 to 1.00;

• a consolidated fixed coverage charge ratio of no less than 1.75 to 1.00 subject to adjustment to exclude up to $80,000 in specified restricted payments;

• minimum cash of $25,000 including the unused portion of the revolving credit facility or $35,000 in the event of certain specified corporate actions; and

• maximum capital expenditures not to exceed $55,000 during any fiscal year, provided that the unused amount of any permitted capital expenditures in any fiscal year may be carried forward to the next following fiscal year; in addition, annual excess cash flow up to $8,000 increases permitted capital expenditures.

As of June 30, 2014, we were in compliance with all covenants, including financial covenants, for the 2013 Credit Facility.

The 2013 Credit Facility contains customary events of default that may permit acceleration of the debt. During the continuance of a payment default, interest will accrue at a default interest rate of 2% above the interest rate which would otherwise be applicable, in the case of loans, and at a rate equal to the rate applicable to base rate loans plus 2%, in the case of all other amounts.

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Supplemental Income Statement Account Information (Notes)

6 Months Ended

Jun. 30, 2014

Supplemental Income Statement Account Information [Abstract]

Supplemental Income Statement Account Information

Supplemental Income Statement Account Information

Amounts included in revenues

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2014		2013		2014		2013
USF fees	$	18,396	$	17,125	$	37,032	$	35,230
Disconnect fees	$	906	$	1,066	$	1,679	$	2,306
Initial activation fees	$	273	$	319	$	587	$	673
Customer equipment fees	$	174	$	12	$	585	$	170
Equipment recovery fees	$	19	$	26	$	39	$	55
Shipping and handling fees	$	545	$	322	$	924	$	690

Amount included in direct cost of telephony services

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2014		2013		2014		2013
USF costs	$	18,396	$	17,125	$	37,089	$	35,230

Amount included in direct cost of goods sold

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2014		2013		2014		2013
Shipping and handling cost	$	1,580	$	1,436	$	3,137	$	2,844

Amount included in selling, general and administrative expense

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2014		2013		2014		2013
Advertising costs	$	213	$	100	$	325	$	188
Acquisition related costs	$	—	$	—	$	20	$	—
Acquisition integration cost	$	4	$	—	$	98	$	—

Amount included in marketing

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2014		2013		2014		2013
Advertising costs	$	37,122	$	36,089	$	71,696	$	67,815

Depreciation and amortization expense

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2014		2013		2014		2013
Network equipment and computer hardware	$	3,602	$	3,339	$	7,211	$	6,647
Software	2,833		2,659		5,548		5,149
Capital leases	550		549		1,100		1,098
Other leasehold improvements	1,081		1,032		2,154		2,036
Furniture	35		29		69		56
Vehicles	6		3		7		8
Patents	505		576		1,081		1,152
Trademarks	18		18		36		36
Customer relationship	2,134		—		4,268		—
Acquired technology	1,574		—		3,148		—
Trade names	50		—		100		—
Non-compete agreements	4		—		8		—
	12,392		8,205		24,730		16,182
Property and equipment impairments	2		—		2		(2		)
Software impairments	65		—		65		—
Depreciation and amortization expense	$	12,459	$	8,205	$	24,797	$	16,180

Amount included in interest expense

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2014		2013		2014		2013
Debt related costs amortization	$	255	$	395	$	544	$	783

Amount included in other income (expense), net

	Three Months Ended					Six Months Ended
	June 30,					June 30,
	2014		2013			2014		2013
Net income (loss) resulting from foreign exchange transactions	$	37	$	(22	)	$	22	$	(62	)

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Basis of Presentation and Significant Accounting Policies - Property and Equipment (Details)	6 Months Ended
	Jun. 30, 2014
Minimum | Network equipment
Property and Equipment:
Useful life of property and equipment	3 years
Minimum | Computer hardware
Property and Equipment:
Useful life of property and equipment	3 years
Minimum | Furniture
Property and Equipment:
Useful life of property and equipment	3 years
Maximum | Network equipment
Property and Equipment:
Useful life of property and equipment	5 years
Maximum | Computer hardware
Property and Equipment:
Useful life of property and equipment	5 years
Maximum | Furniture
Property and Equipment:
Useful life of property and equipment	5 years

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Supplemental Income Statement Account Information (Tables)

6 Months Ended

Jun. 30, 2014

Supplemental Income Statement Account Information [Abstract]

Supplemental income statement account information

Amounts included in revenues

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2014		2013		2014		2013
USF fees	$	18,396	$	17,125	$	37,032	$	35,230
Disconnect fees	$	906	$	1,066	$	1,679	$	2,306
Initial activation fees	$	273	$	319	$	587	$	673
Customer equipment fees	$	174	$	12	$	585	$	170
Equipment recovery fees	$	19	$	26	$	39	$	55
Shipping and handling fees	$	545	$	322	$	924	$	690

Amount included in direct cost of telephony services

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2014		2013		2014		2013
USF costs	$	18,396	$	17,125	$	37,089	$	35,230

Amount included in direct cost of goods sold

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2014		2013		2014		2013
Shipping and handling cost	$	1,580	$	1,436	$	3,137	$	2,844

Amount included in selling, general and administrative expense

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2014		2013		2014		2013
Advertising costs	$	213	$	100	$	325	$	188
Acquisition related costs	$	—	$	—	$	20	$	—
Acquisition integration cost	$	4	$	—	$	98	$	—

Amount included in marketing

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2014		2013		2014		2013
Advertising costs	$	37,122	$	36,089	$	71,696	$	67,815

Depreciation and amortization expense

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2014		2013		2014		2013
Network equipment and computer hardware	$	3,602	$	3,339	$	7,211	$	6,647
Software	2,833		2,659		5,548		5,149
Capital leases	550		549		1,100		1,098
Other leasehold improvements	1,081		1,032		2,154		2,036
Furniture	35		29		69		56
Vehicles	6		3		7		8
Patents	505		576		1,081		1,152
Trademarks	18		18		36		36
Customer relationship	2,134		—		4,268		—
Acquired technology	1,574		—		3,148		—
Trade names	50		—		100		—
Non-compete agreements	4		—		8		—
	12,392		8,205		24,730		16,182
Property and equipment impairments	2		—		2		(2		)
Software impairments	65		—		65		—
Depreciation and amortization expense	$	12,459	$	8,205	$	24,797	$	16,180

Amount included in interest expense

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2014		2013		2014		2013
Debt related costs amortization	$	255	$	395	$	544	$	783

Amount included in other income (expense), net

	Three Months Ended					Six Months Ended
	June 30,					June 30,
	2014		2013			2014		2013
Net income (loss) resulting from foreign exchange transactions	$	37	$	(22	)	$	22	$	(62	)

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Redeemable Noncontrolling Interest (Notes)

6 Months Ended

Jun. 30, 2014

Noncontrolling Interest [Abstract]

Redeemable Noncontrolling Interest

Redeemable Noncontrolling Interest

In the third quarter of 2013, we formed a consolidated foreign subsidiary in Brazil in connection with our previously announced joint venture in Brazil, creating a redeemable noncontrolling interest. The redeemable noncontrolling interest consists of the 30.0% interest in this subsidiary held by our joint venture partner.

Pursuant to the stockholder agreement governing the joint venture, we have the right to purchase this noncontrolling interest (“call right”) from the joint venture partner and our joint venture partner has the right to sell the noncontrolling interest (“put right”) to us subject to certain triggering events. The amounts at which the call right can be exercised are based on appraised value as prescribed by the stockholder agreement, subject to certain adjustments ranging from 50% to 150%, multiplied by the noncontrolling interest holder’s percentage ownership of the subsidiary that is subject to the triggering event. The amounts at which the put right can be exercised are based on appraised value as prescribed by the stockholder agreement, subject to certain adjustments ranging from 50% to 120%, multiplied by the noncontrolling interest holder’s percentage ownership of the subsidiary that is subject to the triggering event. We adjust the redeemable noncontrolling interest to the redemption values at the end of each reporting period should it become probable that the noncontrolling interest will be redeemable. At that time the changes in the noncontrolling interest will be recognized as an adjustment to retained earnings, or in the absence of retained earnings, as an adjustment to additional paid-in capital.

On December 3, 2013, we extended a loan of $545 to our consolidated foreign subsidiary in Brazil pursuant to the shareholder agreement to meet the capital call requirement of our joint venture partner. The loan bore interest at a rate equal to 105% of rate of the Sistema Especial de Liquidação e Custódia (SELIC) (“SELIC Rate”).

In February 2014, pursuant to the shareholder agreement, we notified our joint venture partner that we are exercising our dilution rights as our joint venture partner did not meet a second successive capital call on December 17, 2013. As such, the loan that was provided in December will be converted to equity and we will make the second missed capital call of $503 . The dilution process was completed at the end of March 2014, increasing our ownership interest to 91% .

We have provided our joint venture partner with an opportunity to repurchase their diluted equity by making the first capital call in 2014, which is expected to be completed in August 2014, in addition to the two previously missed capital calls. Pursuant to the shareholder agreement, the price to be paid by our joint venture partner in order to repurchase their diluted equity is equal to (i) the loan principal amount adjusted from its disbursement date until the date of the repurchase, at a rate equal to 105% of the rate of the SELIC Rate pro rata; plus (ii) $503, adjusted from December 17, 2013 to the date of the repurchase, at a rate equal to 107% of the SELIC Rate pro rata; and (iii) their share of joint venture losses for diluted equity from the dilution date through the repurchase date.

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Common Stock (Notes)

6 Months Ended

Jun. 30, 2014

Stockholders' Equity Note [Abstract]

Common Stock

Common Stock

Net Operating Loss Rights Agreement

On June 7, 2012, we entered into a Tax Benefits Preservation Plan ("Preservation Plan") designed to preserve stockholder value and tax assets. Our ability to use our tax attributes to offset tax on U.S. taxable income would be substantially limited if there were an "ownership change" as defined under Section 382 of the U.S. Internal Revenue Code. In general, an ownership change would occur if one or more "5-percent shareholders," as defined under Section 382, collectively increase their ownership in us by more than 50 percent over a rolling three-year period.

In connection with the adoption of the Preservation Plan, our board of directors declared a dividend of one preferred share purchase right for each outstanding share of the Company’s common stock. The preferred share purchase rights were distributed to stockholders of record as of June 18, 2012, as well as to holders of the Company's common stock issued after that date, but will only be activated if certain triggering events under the Preservation Plan occur.

Under the Preservation Plan, preferred share purchase rights will work to impose significant dilution upon any person or group which acquires beneficial ownership of 4.9% or more of the outstanding common stock, without the approval of our board of directors, from and after June 7, 2012. Stockholders that own 4.9% or more of the outstanding common stock as of the opening of business on June 7, 2012, will not trigger the preferred share purchase rights so long as they do not (i) acquire additional shares of common stock or (ii) fall under 4.9% ownership of common stock and then re-acquire shares that in the aggregate equal 4.9% or more of the common stock.

The Preservation Plan was set to expire no later than the close of business June 7, 2013, unless extended by our board of directors. On April 4, 2013, after consultation with our advisors, our board of directors determined to extend the Preservation Plan through June 7, 2015, subject to ratification of the extension by stockholders at the Vonage 2013 annual meeting of stockholders. On June 6, 2013, at the Vonage 2013 annual meeting of stockholders, stockholders ratified the extension of the Preservation Plan through June 7, 2015.

Common Stock Repurchases

On July 25, 2012, our board of directors authorized a program to repurchase up to $50,000 of Vonage common stock (the "$50,000 repurchase program") through December 31, 2013. The specific timing and amount of repurchases would vary based on available capital resources and other financial and operational performance, market conditions, securities law limitations, and other factors. The repurchases would be made using our cash resources.

We repurchased the following shares of common stock with cash resources under the $50,000 repurchase program during the three and six months ended June 30, 2013:

	Three Months Ended			Six Months Ended
	June 30,			June 30,
		2013			2013
Shares of common stock repurchased		—			2,189
Value of common stock repurchased		$	—		$	5,374

On February 7, 2013, our board of directors discontinued the remainder of our existing $50,000 repurchase program effective at the close of business on February 12, 2013 with $16,682 of availability remaining, and authorized a new program to repurchase up to $100,000 of Vonage common stock (the "$100,000 repurchase program") by December 31, 2014. The specific timing and amount of repurchases will vary based on available capital resources and other financial and operational performance, market conditions, securities law limitations, and other factors. The repurchases will be made using our cash resources. The $100,000 repurchase program may be suspended or discontinued at any time without prior notice.

We repurchased the following shares of common stock with cash resources under the $100,000 repurchase program during the three and six months ended June 30, 2014 and 2013:

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2014 (1)		2013 (2)		2014 (1)		2013 (2)
Shares of common stock repurchased	3,523		4,756		5,970		8,795
Value of common stock repurchased	$	13,244	$	13,451	$	23,287	$	24,458

(1) including 147 shares, or $556, of common stock repurchases settled in July 2014; excluding commission of $1.

(2) including 220 shares, or $625, of common stock repurchases settled in July 2013; excluding commission of $4.

As of June 30, 2014, approximately $26,060 remained of our $100,000 repurchase program. The repurchase program expires on December 31, 2014 but may be suspended or discontinued at any time without notice.

In any period under either repurchase program, cash used in financing activities related to common stock repurchases may differ from the comparable change in stockholders' equity, reflecting timing differences between the recognition of share repurchase transactions and their settlement for cash.

Stock Option Cancellation

As part of our strategy to build shareholder value and to facilitate our goal of reducing the number of shares of common stock outstanding, on February 19, 2013, we entered into an agreement with our Chief Executive Officer to cancel a total of 4,500 of his vested stock options for $5,463. The payment reflects a discount, in favor of the Company, from the closing price of the common stock on the New York Stock Exchange on February 19, 2013.

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Commitments and Contingencies (Notes)

6 Months Ended

Jun. 30, 2014

Commitments and Contingencies Disclosure [Abstract]

Commitments and Contingencies

 Commitments and Contingencies

Litigation

IP Matters

Bear Creek Technologies, Inc. On February 22, 2011, Bear Creek Technologies, Inc. (“Bear Creek”) filed a lawsuit against Vonage Holdings Corp., Vonage America, Inc., Vonage Marketing LLC, and Aptela Inc. (a subsidiary of Vocalocity, Inc., a wholly-owned subsidiary of the Company which was acquired on November 15, 2013 pursuant to an Agreement and Plan of Merger dated October 9, 2013) in the United States District Court for the Eastern District of Virginia (Norfolk Division) alleging that Vonage’s and Aptela’s products and services are covered by United States Patent No. 7,889,722, entitled “System for Interconnecting Standard Telephony Communications Equipment to Internet Protocol Networks” (the “722 Patent”). The suit also named numerous other defendants, including Verizon Communications, Inc., Comcast Corporation, Time-Warner Cable, Inc., AT&T, Inc., and T-Mobile USA Inc. On August 17, 2011, the Court dismissed Bear Creek’s case against the Vonage entities and Aptela, as well as all the other defendants, except for one defendant. Later, on August 17, 2011, Bear Creek re-filed its complaint concerning the ‘722 Patent in the United States District Court for the District of Delaware against the same Vonage entities; and also re-filed a separate complaint concerning the ‘722 Patent in the United States District Court for the Eastern District of Virginia against Aptela. In each complaint, Bear Creek alleges that Vonage and Aptela, respectively, are infringing one or more claims of the ‘722 Patent. In addition, Bear Creek alleges that each party is contributing to and inducing infringement of one or more claims of the ‘722 Patent. On January 25, 2012, Bear Creek filed a motion with the United States Judicial Panel on Multidistrict Litigation seeking to transfer and consolidate its litigations against Vonage and Aptela with twelve other separate actions Bear Creek filed in the U.S. District Courts for Delaware and the Eastern District of Virginia. On May 2, 2012, the Multidistrict Litigation Panel granted Bear Creek’s motion and ordered the coordination or consolidation for pretrial proceedings of all fourteen actions in the U.S. District Court for the District of Delaware. On October 11, 2012, Vonage filed an answer to Bear Creek’s complaint, including counterclaims of non-infringement and invalidity of the ‘722 patent. Aptela, which filed a motion to dismiss Bear Creek’s complaint on September 27, 2011, has not yet answered, as its motion remains pending and awaiting disposition by the court. On November 5, 2012, Bear Creek filed an answer to Vonage’s counterclaims. On March 1, 2013, several defendants including Vonage moved the Court to stay the case pending resolution of the reexamination of the ‘722 patent requested by Cisco Systems, Inc. (“Cisco”) as described below; the motion was granted on July 17, 2013, and the case is now stayed pending the resolution of the reexamination. On November 8, 2013, the Court granted Bear Creek’s request to terminate and substitute counsel representing it in the litigation.

A request for reexamination of the ‘722 Patent was filed on September 12, 2012 by Cisco, challenging the validity of the ‘722 Patent. Cisco’s request was granted by the USPTO on November 28, 2012. On March 24, 2014, the Patent Office issued an Action Closing Prosecution, confirming its rejection of all claims of the ‘722 patent on multiple independent grounds. Bear Creek filed comments to the Action Closing Prosecution on April 24, 2014. Cisco filed responsive comments on May 22, 2014.

OpinionLab, Inc. On July 18, 2012, OpinionLab, Inc. (“OpinionLab”) filed a lawsuit against IPerceptions, Inc. and IPerceptions US, Inc. (collectively, “IPerceptions”) in the United States District Court for the Northern District of Illinois (Eastern Division) alleging claims of patent infringement, breach of contract, misappropriation of trade secrets, and tortious interference with business expectancy. On August 16, 2012, OpinionLab filed an amended complaint, adding Vonage Marketing LLC and Vonage Holdings Corp. as defendants, and alleging that Vonage’s products and services are covered by United States Patent Nos. 6,421,724, 6,606,581, 6,928,392, 7,085,820, 7,370,285, 8,024,668, and 8,041,805. OpinionLab alleged direct, indirect and willful infringement by Vonage. IPerceptions, the supplier to Vonage of the accused product in this lawsuit, has agreed to fully defend and indemnify Vonage in this lawsuit. On September 11, 2012, IPerceptions and Vonage each moved to dismiss OpinionLab’s indirect and willful patent infringement claims. The motions were denied on November 8, 2012. Vonage answered the complaint on December 7, 2012. On July 11, 2013, the Court issued an order setting the case schedule. On September 6, 2013, OpinionLab filed a second amended complaint, which defendants answered on September 23, 2013. On October 14, 2013, OpinionLab made an unopposed motion to consolidate the case for pre-trial purposes with Case No. 13-CV-1574, OpinionLab, Inc. v. Qualtrics Labs, Inc., currently pending in the United States District Court for the Northern District of Illinois. The motion was granted October 17, 2013. On February 14, 2014, defendants Vonage and iPerceptions moved to stay the case pending inter partes reviews requested by Qualtrics as to the ‘724, ‘581, ’820, ‘285, ‘668 and ‘805 patents.

RPost Holdings, Inc. On August 24, 2012, RPost Holdings, Inc., RPost Communications Limited, and RMail Limited (collectively, “RPost”) filed a lawsuit against StrongMail Systems, Inc. (“StrongMail”) in the United States District Court for the Eastern District of Texas (Marshall Division) alleging that StrongMail’s products and services, including its electronic mail marketing services, are covered by United States Patent Nos. 8,224,913, 8,209,389, 8,161,104, 7,966,372, and 6,182,219. On January 16, 2013, StrongMail moved the Court to transfer the venue of the lawsuit to the Northern District of California. That motion was denied by the Court on August 19, 2013. On February 11, 2013, RPost filed an amended complaint, adding 27 new defendants, including Vonage America Inc. RPost’s amended complaint alleges willful infringement of the RPost patents by Vonage and each of the other new defendants because they are customers of StrongMail. StrongMail has agreed to fully defend and indemnify Vonage in this lawsuit. Vonage answered the complaint on May 7, 2013. On January 30, 2014, RPost informed the Court that it is ready for a scheduling conference; the Court has not yet scheduled a conference.

Straight Path IP Group Inc. On November 4, 2013, Straight Path IP Group Inc. (“Straight Path”), a subsidiary of Straight Path Communications Inc., filed a lawsuit against Vonage Holdings Corp., Vonage America, Inc., and Vonage Marketing LLC in the U.S. District Court for the Eastern District of Virginia (Norfolk Division) alleging that Vonage’s products and services are covered by United States Patent Nos. 6,009,469, 6,131,121, 6,513,066, and 6,701,365. Straight Path alleged direct and indirect infringement by Vonage. On December 20, 2013, Vonage moved to transfer the case to the District of New Jersey and that motion was granted by the court on January 17, 2014. On December 30, 2013, Vonage answered the complaint and filed a motion to dismiss Straight Path’s claims for induced and contributory infringement. In response, Straight Path amended its complaint on January 7, 2014. On February 7, 2014, Vonage answered the amended complaint and moved to dismiss Straight Path's claims for indirect infringement. On March 26, 2014, the Court granted Vonage’s motion to dismiss in its entirety, dismissing Straight Path’s induced and contributory infringement claims without prejudice. Straight Path filed a second amended complaint on April 23, 2014. Vonage answered the second amended complaint on May 27, 2014 and again moved to dismiss Straight Path’s amended claims for indirect infringement. On July 7, 2014, the Court granted Vonage’s motion to dismiss in its entirety, this time dismissing Straight Path’s induced and contributory infringement claims with prejudice.

Previously, on August 2, 2013, Straight Path filed a lawsuit against Vocalocity, Inc. in the U.S. District Court for the Eastern District of Virginia (Richmond Division) alleging that Vocalocity’s products and services are covered by the ‘066 and ‘365 patents. On September 11, 2013, the lawsuit was ordered consolidated with two other lawsuits by Straight Path filed in early August 2013 against Bandwidth.com, Inc. and Telesphere Networks Ltd., relating to the same patents. Pursuant to a settlement agreement entered between Straight Path and Vocalocity, on June 19, 2014, the parties filed a joint motion to dismiss with prejudice all claims and counterclaims asserted in the case. The Court granted the joint motion on July 2, 2014, dismissing the case in its entirety. The costs associated with the litigation, including the settlement, are fully-indemnified under the terms of the acquisition of Vocalocity.

AIP Acquisition LLC. On January 3, 2014, AIP Acquisition LLC (“AIP”), filed a lawsuit against Vonage Holdings Corp., Vonage America, Inc., and Vonage Marketing LLC in the U.S. District Court for the District of Delaware (Norfolk Division) alleging that Vonage’s products and services are covered by United States Patent No. 7,269,247. Vonage filed an answer and counterclaims on February 25, 2014. AIP filed an amended complaint on March 18, 2014, which Vonage answered on April 4, 2014. On April 8, 2014, the Court ordered a stay of the case pending final resolution of non-party Level 3’s inter partes review request of United States Patent No. 7,724,879, which is a continuation of the ‘247 patent.

Spansion. On April 28, 2014, Spansion LLC (“Spansion”), filed a lawsuit against Vonage Holdings Corp., Vonage America, Inc., Vonage Marketing LLC, and 20 other defendants in the U.S. District Court for the Northern District of California alleging that Macronix’s flash memory chips and products containing those chips, including Vonage analog telephone adapter products, each are covered by one or more Spansion patents. On April 29, 2014, Spansion filed a complaint at the International Trade Commission containing substantially similar allegations, requesting that the ITC institute an investigation pursuant to Section 337 of the Tariff Act of 1930 against the respondents, including Vonage. Spansion’s complaints allege that Vonage’s telephone adapters are covered by United States Patent No. 6,246,611. Macronix has agreed to fully defend and indemnify Vonage in the district court and ITC proceedings. On June 25, 2014, the Northern District granted the parties’ joint motion to stay the district court proceedings pending the resolution of the ITC case. On June 30, 2014, Vonage responded to the ITC complaint.

Commercial Litigation

Merkin & Smith, et als.  On September 27, 2013, Arthur Merkin and James Smith filed a putative class action lawsuit against Vonage America, Inc. in the Superior Court of the State of California, County of Los Angeles, alleging that Vonage violated California’s Unfair Competition Law by charging its customers fictitious 911 taxes and fees. On October 30, 2013, Vonage filed a notice removing the case to the United States District Court for the Central District of California. On October 30, 2013 the case was assigned to a United States District Judge and a Magistrate Judge. On November 26, 2013, Vonage filed its Answer to the Complaint.  On December 4, 2013, Vonage filed a Motion to Compel Arbitration. On February 4, 2014, the Court denied Vonage’s Motion to Compel Arbitration. On March 5, 2014, Vonage filed an appeal with the United States Court of Appeals for the Ninth Circuit of the decision denying Vonage’s Motion to Compel Arbitration.  On March 6, 2014, Vonage moved to stay the district court proceedings pending its appeal; the Court granted Vonage’s stay motion on March 26, 2014.  Vonage’s appellate brief is due on September 24, 2014.

From time to time, in addition to those identified above, we are subject to legal proceedings, claims, investigations, and proceedings in the ordinary course of business, including claims of alleged infringement of third-party patents and other intellectual property rights, commercial, employment, and other matters. From time to time we receive letters or other communications from third parties inviting us to obtain patent licenses that might be relevant to our business or alleging that our services infringe upon third party patents or other intellectual property. In accordance with generally accepted accounting principles, we make a provision for a liability when it is both probable that a liability has been incurred and the amount of the loss or range of loss can be reasonably estimated. These provisions, if any, are reviewed at least quarterly and adjusted to reflect the impacts of negotiations, settlements, rulings, advice of legal counsel, and other information and events pertaining to a particular case. Litigation is inherently unpredictable. We believe that we have valid defenses with respect to the legal matters pending against us and are vigorously defending these matters. Given the uncertainty surrounding litigation and our inability to assess the likelihood of a favorable or unfavorable outcome in the above noted matters and our inability to reasonably estimate the amount of loss or range of loss, it is possible that the resolution of one or more of these matters could have a material adverse effect on our consolidated financial position, cash flows or results of operations.

Regulation

Telephony services are subject to a broad spectrum of state and federal regulations. Because of the uncertainty over whether Voice over Internet Protocol (“VoIP”) should be treated as a telecommunications or information service, we have been involved in a substantial amount of state and federal regulatory activity. Implementation and interpretation of the existing laws and regulations is ongoing and is subject to litigation by various federal and state agencies and courts. Due to the uncertainty over the regulatory classification of VoIP service, there can be no assurance that we will not be subject to new regulations or existing regulations under new interpretations, and that such change would not introduce material additional costs to our business.

Federal - Net Neutrality

Clear and enforceable net neutrality rules would make it more difficult for broadband Internet service providers to block or discriminate against Vonage service. Also explicitly applying net neutrality rules to wireless broadband Internet service could create greater opportunities for VoIP applications that run on wireless broadband Internet service. In October 2009, the FCC proposed the adoption of enforceable net neutrality rules for both wired and wireless broadband Internet service providers. The proposed rules would prohibit wired and wireless broadband Internet service providers from blocking or hindering lawful content, applications, or services and from unreasonably discriminating when transmitting lawful network traffic. In addition, broadband Internet service providers would have to publicly disclose certain information about their network management practices. In December 2010, the FCC adopted enforceable net neutrality rules based on its October 2009 proposal. All of the proposed rules in the October 2009 proposal applied to wired broadband Internet providers. The FCC applied some but not all of the proposed rules to wireless broadband service. Wireless broadband Internet services providers are prohibited from blocking or hindering voice or video applications that compete with the broadband Internet service provider's voice or video services. Wireless providers are also subject to transparency requirements, but they are not subject to the prohibition on unreasonable discrimination that applies to wired broadband Internet services providers. A number of parties filed appeals of the rules. On January 14, 2014, the D.C. Circuit vacated the anti-blocking and the unreasonable discrimination provisions of the rules. The D.C. Circuit decision did not foreclose the FCC from adopting anti-blocking or non-discrimination rules. On February 19, 2014, FCC Chairman Tom Wheeler announced that the FCC would not appeal the D.C. Circuit decision, electing to pursue restoration of the vacated provisions using the authority that the FCC has over broadband services, as recognized by the D.C. Circuit. The FCC adopted a new Notice of Proposed Rulemaking (“NPRM”) on net neutrality rules at its May 15, 2014 meeting. Opening comments on the NPRM were due July 18, 2014 and reply comments are due September 10, 2014.

Federal - Intercarrier Compensation

On February 9, 2011, the FCC released a Notice of Proposed Rulemaking on reforming universal service and the intercarrier compensation (“ICC”) system that governs payments between telecommunications carriers primarily for terminating traffic. In particular, the FCC indicated that it has never determined the ICC obligations for VoIP service and sought comment on a number of proposals for how VoIP should be treated in the ICC system. The FCC's adoption of an ICC proposal will impact Vonage's costs for telecommunications services. On October 27, 2011, the FCC adopted an order reforming universal service and ICC. The FCC order provides that VoIP originated calls will be subject to interstate access charges for long distance calls and reciprocal compensation for local calls that terminate to the public switched telephone network (“PSTN”). It also subjected PSTN originated traffic directed to VoIP subscribers to similar ICC obligations. The termination charges for all traffic, including VoIP originated traffic, will transition over several years to a bill and keep arrangement (i.e., no termination charges). Numerous parties filed appeals of the FCC order in multiple federal circuit courts of appeal. The 10th Circuit Court of Appeals was selected by lottery to decide the appeals. On May 23, 2014, the 10th Circuit upheld the FCC’s order.

Federal - Universal Service Contribution Reform

On April 30, 2012, the FCC released a Further Notice of Proposed Rulemaking on reforming federal universal service fund (“USF”) contributions. Currently USF contributions are assessed on the interstate and international revenue of traditional telephone carriers and interconnected VoIP providers like Vonage. The level of USF assessments on these providers has been going up over time because of decreases in the revenue subject to assessment due to substitution of non-assessable services such as non-interconnected VoIP services. If the FCC does reform USF contributions, it is likely that Vonage's contribution burden will decline.

Federal - Rural Call Completion Issues

On February 7, 2013, the FCC released a Notice of Proposed Rulemaking on rural call completion issues. The Notice of Proposed Rulemaking (NPRM) proposed new detailed reporting requirements to gauge rural call completion performance. Rural carriers have argued that VoIP provider call completion performance to rural areas is generally poor. On October 28, 2013, the FCC adopted an order on rural call completion that imposes new reporting obligations and restricts certain call signaling practices. The call signaling rules went into effect on January 31, 2014.  We filed for extensions that the FCC granted on January 30, 2014 and February 28, 2014 and as of April 17, 2014, we are compliant with the new FCC call signaling rules.  We could be subject to an FCC enforcement action in the future in the event the FCC took the position that our rural call completion performance is inadequate or we were not compliant with the FCC’s order.

Federal - Numbering Rights

On April 18, 2013, the FCC issued a Notice of Proposed Rulemaking (NPRM) that proposing to modify FCC rules to allow VoIP providers to directly access telephone numbers. In addition, the FCC granted a waiver from its existing rules to allow Vonage to conduct a trial of direct access to telephone numbers. The trial would allow the FCC to obtain real-world data on direct access to telephone numbers by VoIP providers to inform consideration of the NPRM. Direct access to telephone numbers would facilitate IP to IP interconnection, which may allow VoIP providers to provide higher quality, lower cost services, promote the deployment of innovative new voice services, and experience reductions in the cost of telephony services. Vonage successfully completed the trial in certain markets and filed the required reports on the trial with the FCC. On January 31, 2014, the FCC Wireline Competition Bureau issued a positive report on the trial, concluding that Vonage's successful trial confirmed the technical feasibility of interconnected VoIP providers obtaining telephone numbers directly from the numbering administrators. Given the positive report, the FCC may adopt its proposed rule to allow VoIP providers to directly access telephone numbers.

Pakistan Termination Rate Increase

On October 1, 2012, Pakistani carriers formed the International Clearing House (ICH). This cartel subsequently took action to increase the cost to terminate international calls to Pakistan by approximately 500 percent. As a result of the implementation of higher termination costs, Vonage was forced to remove Pakistan from unlimited calling in its Vonage World plan. Vonage filed a petition at the FCC, shortly after the ICH rates became effective, seeking an order prohibiting U.S. carriers from paying the new higher ICH rates. On March 5, 2013, the FCC issued an order that prohibits U.S. carriers from paying more than the prevailing termination rate prior to the implementation of the ICH rates. In addition to the Vonage challenge in the U.S., a Pakistani carrier challenged the ICH action under Pakistani competition law. After the trial court found that the ICH violated Pakistani competition law, the Supreme Court of Pakistan overturned the trial court decision and remanded the case to the Competition Commission of Pakistan (CCP). On April 30, 2013, the CCP issued an order that holds that the ICH violates Pakistani competition law. On May 9, 2013, the Sindh High Court temporarily suspended the CCP order while the court considers constitutional challenges to the order made by several Pakistani carriers. On June 17, 2014, the Pakistan Ministry of Information Technology withdrew its policy directing formation of the ICH as of August 1, 2014. Pakistani carriers challenged the Ministry’s order at the Sindh High Court and obtained a temporary injunction against the Ministry’s order. Despite favorable action by both U.S. and Pakistani authorities, it is currently unclear whether, or with what timing, international termination rates in Pakistan will return to a more competitive level.

State Telecommunications Regulation

In general, the focus of interconnected VoIP telecommunications regulation is at the federal level. On November 12, 2004, the FCC issued a declaratory ruling providing that our service is subject to federal regulation and preempted the Minnesota Public Utilities Commission from imposing certain of its regulations on us. The FCC's decision was based on its conclusion that our service is interstate in nature and cannot be separated into interstate and intrastate components. On March 21, 2007, the United States Court of Appeals for the 8th Circuit affirmed the FCC's declaratory ruling preempting state regulation of our service. The 8th Circuit found that it is impossible for us to separate our interstate traffic from our intrastate traffic because of the nomadic nature of the service. As a result, the 8th Circuit held that it was reasonable for the FCC to preempt state regulation of our service. The 8th Circuit was clear, however, that the preemptive effect of the FCC's declaratory ruling may be reexamined if technological advances allow for the separation of interstate and intrastate components of the nomadic VoIP service. Therefore, the preemption of state authority over our service under this ruling generally hinges on the inability to separate the interstate and intrastate components of the service.

While this ruling does not exempt us from all state oversight of our service, it effectively prevents state telecommunications regulators from imposing certain burdensome and inconsistent market entry requirements and certain other state utility rules and regulations on our service. State regulators continue to probe the limits of federal preemption in their attempts to apply state telecommunications regulation to interconnected VoIP service. On July 16, 2009, the Nebraska Public Service Commission and the Kansas Corporation Commission filed a petition with the FCC seeking a declaratory ruling or, alternatively, adoption of a rule declaring that state authorities may apply universal service funding requirements to nomadic VoIP providers. We participated in the FCC proceedings on the petition. On November 5, 2010, the FCC issued a declaratory ruling that allowed states to assess state USF on nomadic VoIP providers on a going forward basis provided that the states comply with certain conditions to ensure that imposing state USF does not conflict with federal law or policy. We expect that state public utility commissions and state legislators will continue their attempts to apply state telecommunications regulations to nomadic VoIP service.

Stand-by Letters of Credit

We had stand-by letters of credit totaling $3,308 and $4,306, as of June 30, 2014 and December 31, 2013, respectively.

End-User Commitments

We are obligated to provide telephone services to our registered end-users. The costs related to the potential utilization of minutes sold are expensed as incurred. Our obligation to provide this service is dependent on the proper functioning of systems controlled by third-party service providers. We do not have a contractual service relationship with some of these providers.

Vendor Commitments

We have committed to purchase software licenses. We have committed to pay approximately $500 in 2014, $1,000 in 2015 and 2016, and $100 in 2017.

We have committed to lease office space from a vendor. We have committed to pay this vendor approximately $100 in 2014, $900 in 2015, $1,500 in 2016 through 2019, and $1,100 in 2020.

State and Municipal Taxes

In accordance with generally accepted accounting principles, we make a provision for a liability for taxes when it is both probable that a liability has been incurred and the amount of the liability or range of liability can be reasonably estimated. These provisions are reviewed at least quarterly and adjusted to reflect the impacts of negotiations, settlements, rulings, advice of legal counsel, and other information and events pertaining to a particular case. For a period of time, we did not collect or remit state or municipal taxes (such as sales, excise, utility, use, and ad valorem taxes), fees or surcharges (“Taxes”) on the charges to our customers for our services, except that we historically complied with the New Jersey sales tax. We have received inquiries or demands from a number of state and municipal taxing and 911 agencies seeking payment of Taxes that are applied to or collected from customers of providers of traditional public switched telephone network services. Although we have consistently maintained that these Taxes do not apply to our service for a variety of reasons depending on the statute or rule that establishes such obligations, we are now collecting and remitting sales taxes in certain of those states including a number of states that have changed their statutes to expressly include VoIP. In addition, many states address how VoIP providers should contribute to support public safety agencies, and in those states we remit fees to the appropriate state agencies. We could also be contacted by state or municipal taxing and 911 agencies regarding Taxes that do explicitly apply to VoIP and these agencies could seek retroactive payment of Taxes. As such, we have a reserve of $5,708 as of June 30, 2014 as our best estimate of the potential tax exposure for any retroactive assessment. We believe the maximum estimated exposure for retroactive assessments is approximately $7,000 as of June 30, 2014.

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Basis of Presentation and Significant Accounting Policies (Policies)

6 Months Ended

Jun. 30, 2014

Organization, Consolidation and Presentation of Financial Statements [Abstract]

Principles of Consolidation

Principles of Consolidation

The consolidated financial statements include the accounts of Vonage and its wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. We also consolidate a majority-owned entity in Brazil where we have the ability to exercise controlling influence. The ownership interest of the noncontrolling party is presented as redeemable noncontrolling interest.

Use of Estimates

Use of Estimates

Our consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States, which require management to make estimates and assumptions that affect the amounts reported and disclosed in the consolidated financial statements and the accompanying notes. Actual results could differ materially from these estimates.

On an ongoing basis, we evaluate our estimates, including the following:

• the useful lives of property and equipment, software costs, and intangible assets;

• assumptions used for the purpose of determining share-based compensation using the Black-Scholes option pricing model and Monte Carlo simulation model (“Models”), and various other assumptions that we believe to be reasonable; the key inputs for these Models include our stock price at valuation date, exercise price, the dividend yield, risk-free interest rate, life in years, and historical volatility of our common stock; and

• assumptions used in determining the need for, and amount of, a valuation allowance on net deferred tax assets.

We base our estimates on historical experience, available market information, appropriate valuation methodologies, and on various other assumptions that we believe to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities.

Revenue Recognition

Revenue Recognition

Operating revenues consist of telephony services revenues and customer equipment (which enables our telephony services) and shipping revenues. The point in time at which revenues are recognized is determined in accordance with Securities and Exchange Commission Staff Accounting Bulletin No. 104, Revenue Recognition, and Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 605, Revenue Recognition.

At the time a customer signs up for our telephony services, there are the following deliverables:

• Providing equipment, if any, to the customer that enables our telephony services; and

• Providing telephony services.

The equipment is generally provided free of charge to our customers and in most instances there are no fees collected at sign-up. We record the fees collected for shipping the equipment to the customer, if any, as shipping and handling revenue at the time of shipment.

Telephony Services Revenue

Substantially all of our revenues are telephony services revenues, which are derived primarily from monthly subscription fees that customers are charged under our service plans. We also derive telephony services revenues from per minute fees for international calls if not covered under a plan, including calls made via applications for mobile devices and other stand-alone products, and for any calling minutes in excess of a customer’s monthly plan limits. Monthly subscription fees are automatically charged to customers’ credit cards, debit cards or electronic check payments ("ECP"), in advance and are recognized over the following month when services are provided. Revenues generated from international calls and from customers exceeding allocated call minutes under limited minute plans are recognized as services are provided, that is, as minutes are used, and are billed to a customer's credit cards, debit cards or ECP in arrears. As a result of multiple billing cycles each month, we estimate the amount of revenues earned from international calls and from customers exceeding allocated call minutes under limited minute plans but not billed from the end of each billing cycle to the end of each reporting period and record these amounts as accounts receivable. These estimates are based primarily upon historical minutes and have been consistent with our actual results.

We also provide rebates to customers who purchase their customer equipment from retailers and satisfy minimum service period requirements. These rebates in excess of activation fees are recorded as a reduction of revenues over the service period based upon the estimated number of customers that will ultimately earn and claim the rebates.

In the United States, we charge regulatory, compliance, E-911, and intellectual property-related fees on a monthly basis to defray costs, and to cover taxes that we are charged by the suppliers of telecommunications services. In addition, we charge customers Federal Universal Service Fund (“USF”) fees. We recognize revenue on a gross basis for USF and related fees. We record these fees as revenue when billed. All other taxes are recorded on a net basis.

Customer Equipment and Shipping Revenue

Customer equipment and shipping revenues consist of revenues from sales of customer equipment to wholesalers or directly to customers for replacement devices, or for upgrading their device at the time of customer sign-up for which we charge an additional fee. 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. Customer equipment and shipping revenues also include the fees that customers are charged for shipping their customer equipment to them. Customer equipment and shipping revenues include sales to our retailers, who subsequently resell this customer equipment to customers. Revenues are reduced for payments to retailers and rebates to customers, who purchased their customer equipment through these retailers, to the extent of customer equipment and shipping revenues.

Direct Cost of Telephony Services

Direct Cost of Telephony Services

Direct cost of telephony services consists primarily of direct costs that we pay to third parties in order to provide telephony services. These costs include access and interconnection charges that we pay to other telephone companies to terminate domestic and international phone calls on the public switched telephone network. In addition, these costs include the cost to lease phone numbers, to co-locate in other telephone companies’ facilities, to provide enhanced emergency dialing capabilities to transmit 911 calls, and to provide local number portability. These costs also include taxes that we pay on telecommunications services from our suppliers or are imposed by government agencies such as Federal USF and royalties for use of third parties’ intellectual property. These costs do not include indirect costs such as depreciation and amortization, payroll, and facilities costs. Our presentation of direct cost of telephony services may not be comparable to other similar companies.

Direct Cost of Goods Sold

Direct Cost of Goods Sold

Direct cost of goods sold consists primarily of costs that we incur when a customer signs up for our service. These costs include the cost of customer equipment for customers who subscribe through the direct sales channel in excess of activation fees. In addition, these costs include the amortization of deferred customer equipment, the cost of shipping and handling for customer equipment, the installation manual that accompanies the customer equipment, and the cost of certain promotions.

Development Expenses

Development Expenses

Costs for research, including predevelopment efforts prior to establishing technological feasibility of software expected to be marketed, are expensed as incurred. Development costs are capitalized when technological feasibility has been established and anticipated future revenues support the recoverability of the capitalized amounts. Capitalization stops when the product is available for general release to customers. Due to the short time period between achieving technological feasibility and product release and the insignificant amount of costs incurred during such periods, we have not capitalized any software development, and have expensed these costs as incurred. These costs are included in selling, general and administrative expense.

Cash and Cash Equivalents

Cash and Cash Equivalents

We maintain cash with several investment grade financial institutions. Highly liquid investments, which are readily convertible into cash, with original maturities of three months or less, are recorded as cash equivalents.

Certain Risks and Concentrations

Certain Risks and Concentrations

Financial instruments that potentially subject us to concentrations of credit risk consist principally of cash equivalents and accounts receivable. They are subject to fluctuations in both market value and yield based upon changes in market conditions, including interest rates, liquidity, general economic conditions, and conditions specific to the issuers. Accounts receivable are typically unsecured and are derived from revenues earned from customers primarily located in the United States. A portion of our accounts receivable represents the timing difference between when a customer’s credit card is billed and the subsequent settlement of that transaction with our credit card processors. This timing difference is generally three days for substantially all of our credit card receivables. We have never experienced any accounts receivable write-offs due to this timing difference. In addition, we collect subscription fees in advance, minimizing our accounts receivable and bad debt exposure. If a customer’s credit card, debit card or ECP is declined, we generally suspend international calling capabilities as well as their ability to incur domestic usage charges in excess of their plan minutes. If the customer’s credit card, debit card or ECP could not be successfully processed during three billing cycles (i.e., the current and two subsequent monthly billing cycles), we terminate the account. In addition, we automatically charge any per minute fees to our customers’ credit card, debit card or ECP monthly in arrears. To further mitigate our bad debt exposure, a customer’s credit card, debit card or ECP will be charged in advance of their monthly billing if their international calling or overage charges exceed a certain dollar threshold.

Inventory

Inventory

Inventory consists of the cost of customer equipment and is stated at the lower of cost or market, with cost determined using the average cost method. We provide an inventory allowance for customer equipment that has been returned by customers but may not be able to be reissued to new customers or returned to the manufacturer for credit.

Property and Equipment

Property and Equipment

Property and equipment includes acquired assets and those accounted for under capital leases and consist principally of network equipment and computer hardware, furniture, software, and leasehold improvements. In addition, the lease of our corporate headquarters has been accounted for as a capital lease and is included in property and equipment. Network equipment and computer hardware and furniture are stated at cost with depreciation provided using the straight-line method over the estimated useful lives of the related assets, which range from three to five years. Leasehold improvements are amortized over their estimated useful life of the related assets or the life of the lease, whichever is shorter. The cost of renewals and substantial improvements is capitalized while the cost of maintenance and repairs is charged to operating expenses as incurred.

Our network equipment and computer hardware, which consists of routers, gateways, and servers that enable our telephony services, is subject to technological risks and rapid market changes due to new products and services and changing customer demand. These changes may result in future adjustments to the estimated useful lives or the carrying value of these assets, or both.

Software Costs

Software Costs

We capitalize certain costs, such as purchased software and internally developed software that we use for customer acquisition and customer care automation tools, in accordance with FASB ASC 350-40, “Internal-Use Software”. Computer software is stated at cost less accumulated amortization and the estimated useful life is two to five years.

Intangible Assets

Goodwill and Purchased-Intangible Assets

Goodwill acquired in acquisition of a business is accounted for based upon the excess fair value of consideration transferred over the fair value of net assets acquired in the business combination. Goodwill is tested for impairment on an annual basis on October 1st and, when specific circumstances dictate, between annual tests. When impaired, the carrying value of goodwill is written down to fair value. The goodwill impairment test involves a two-step process. The first step, identifying a potential impairment, compares the fair value of a reporting unit with its carrying amount, including goodwill. If the carrying value of the reporting unit exceeds its fair value, the second step would need to be conducted; otherwise, no further steps are necessary as no potential impairment exists. The second step, measuring the impairment loss, compares the implied fair value of the reporting unit goodwill with the carrying amount of that goodwill. Any excess of the reporting unit goodwill carrying value over the respective implied fair value is recognized as an impairment loss.

Purchased-intangible assets are accounted for based upon the fair value of assets received. Purchased-intangible assets are amortized on a straight-line or accelerated basis over the periods of benefit, ranging from two to ten years. We perform a review of purchased-intangible assets whenever events or changes in circumstances indicate that the useful life is shorter than we had originally estimated or that the carrying amount of assets may not be recoverable. If such facts and circumstances exist, we assess the recoverability of purchased-intangible assets by comparing the projected undiscounted net cash flows associated with the related asset or group of assets over their remaining lives against their respective carrying amounts. Impairments, if any, are based on the excess of the carrying amount over the fair value of those assets. If the useful life of the asset is shorter than originally estimated, we accelerate the rate of amortization and amortize the remaining carrying value over the new shorter useful life. There was no impairment of purchased-intangible assets identified for the three and six months ended June 30, 2014.

Intangible Assets

Intangible assets acquired in the settlement of litigation or by direct purchase are accounted for based upon the fair value of assets received.

Patents and Patent Licenses

Patent rights acquired in the settlement of litigation or by direct purchase are accounted for based upon the fair value of assets received.

Long-Lived Assets

Long-Lived Assets

We evaluate impairment losses on long-lived assets used in operations when events and changes in circumstances indicate that the assets might be impaired. If our review indicates that the carrying value of an asset will not be recoverable, based on a comparison of the carrying value of the asset to the undiscounted future cash flows, the impairment will be measured by comparing the carrying value of the asset to its fair value. Fair value will be determined based on quoted market values, discounted cash flows or appraisals. Impairments are recorded in the statement of operations as part of depreciation expense.

Debt Related Costs

Debt Related Costs

Costs incurred in raising debt are deferred and amortized as interest expense using the effective interest method over the life of the debt.

Redeemable Noncontrolling Interest

Redeemable Noncontrolling Interest

We consolidate a majority-owned entity where we have the ability to exercise controlling influence. The ownership interest of the noncontrolling party is presented as noncontrolling interest. If we are required to repurchase the noncontrolling interest at fair value, subject to adjustment, under a put option or other contractual redemption requirement, we will report the noncontrolling interest as redeemable in the Consolidated Balance Sheets between liabilities and equity. We adjust the redeemable noncontrolling interest to the redemption values on each balance sheet date with changes recognized as an adjustment to retained earnings, or in the absence of retained earnings, as an adjustment to additional paid-in capital when it becomes probable the noncontrolling interest will become redeemable.

Derivatives

Derivatives

We do not hold or issue derivative instruments for trading purposes. However, in accordance with FASB ASC 815, “Derivatives and Hedging” (“FASB ASC 815”), we review our contractual obligations to determine whether there are terms that possess the characteristics of derivative financial instruments that must be accounted for separately from the financial instrument in which they are embedded. We recognize these features as liabilities in our consolidated balance sheet at fair value each period and recognize any change in the fair value in our statement of operations in the period of change. We estimate the fair value of these liabilities using available market information and appropriate valuation methodologies.

Income Taxes

Income Taxes

We recognize deferred tax assets and liabilities at enacted income tax rates for the temporary differences between the financial reporting bases and the tax bases of our assets and liabilities. Any effects of changes in income tax rates or tax laws are included in the provision for income taxes in the period of enactment. Our net deferred tax assets primarily consist of net operating loss carry forwards (“NOLs”). We are required to record a valuation allowance against our net deferred tax assets if we conclude that it is more likely than not that taxable income generated in the future will be insufficient to utilize the future income tax benefit from our net deferred tax assets (namely, the NOLs) prior to expiration. We periodically review this conclusion, which requires significant management judgment. If we are able to conclude in a future period that a future income tax benefit from our net deferred tax assets has a greater than 50 percent likelihood of being realized, we are required in that period to reduce the related valuation allowance with a corresponding decrease in income tax expense. This would result in a non-cash benefit to our net income in the period of the determination. In the fourth quarter of 2011, we released $325,601 of valuation allowance. In subsequent periods, we would expect to recognize income tax expense equal to our pre-tax income multiplied by our effective income tax rate, an expense that was not recognized prior to the reduction of the valuation allowance. Our effective rate may differ from the federal statutory rate due, in part, to our foreign operations and certain discrete period items. The 2014 estimated annual effective tax rate is expected to approximate 49%, but may fluctuate due to the timing of other discrete period transactions.

We file income tax returns in the U.S. on a federal basis and in U.S. state and foreign jurisdictions. Our federal tax return remains subject to examination by the Internal Revenue Service from 2010 to present, our New Jersey tax returns remain open from 2008 to present, our Canada tax return remains open from 2009 to present, and other domestic and foreign tax returns remain open for all periods to which those filings relate. We recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate resolution.

We have not had any unrecognized tax benefits. We recognize interest and penalties accrued related to unrecognized tax benefits as components of our income tax provision. We have not had any interest and penalties accrued related to unrecognized tax benefits.

Business Combinations

Business Combinations

We account for business combinations using the acquisition method of accounting. The acquisition method of accounting requires that the purchase price, including the fair value of contingent consideration, of the acquisition be allocated to the assets acquired and liabilities assumed using the fair values determined by management as of the acquisition date. Goodwill as of the acquisition date is measured as the excess of consideration transferred over the net of the acquisition date fair values of assets acquired and the liabilities assumed. While the Company uses its best estimates and assumptions as part of the purchase price allocation process to accurately value assets acquired and liabilities assumed at the acquisition date, the Company’s estimates are inherently uncertain and subject to refinement. As a result, during the measurement period, which may be up to one year from the acquisition date, the Company records adjustments to the assets acquired and liabilities assumed, with the corresponding offset to goodwill to the extent the Company identifies adjustments to the preliminary purchase price allocation. Upon the conclusion of the measurement period or final determination of the values of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recorded to the consolidated statements of operations. We will include the results of all acquisitions in our Consolidated Financial Statements from the date of acquisition.

In connection with the acquisition of Vocalocity, Inc. on November 15, 2013, we recorded preliminary estimates primarily related to income, sales, excise, and ad valorem taxes. As such, the provisional measurements of fair value are subject to change.

Acquisition related transaction costs, such as banking, legal, accounting and other costs incurred in connection with an acquisition, are expensed as incurred in selling, general and administrative expense.

Acquisition related integration costs include costs associated with exit or disposal activities, which do not meet the criteria of discontinued operations, including costs for employee, lease, and contract terminations, facility closing or other exit activities. Additionally, these costs include expenses directly related to integrating and reorganizing acquired businesses and include items such as employee retention costs, recruiting costs, certain moving costs, certain duplicative costs during integration and asset impairments. These costs are expensed as incurred in selling, general and administrative expense.

Foreign Currency

Foreign Currency

Generally, the functional currency of our non-United States subsidiaries is the local currency. The financial statements of these subsidiaries are translated to United States dollars using month-end rates of exchange for assets and liabilities, and average rates of exchange for revenues, costs, and expenses. Translation gains and losses are deferred and recorded in accumulated other comprehensive income as a component of stockholders’ equity.

Share-Based Compensation

Share-Based Compensation

We account for share-based compensation in accordance with FASB ASC 718, “Compensation-Stock Compensation”. Under the fair value recognition provisions of this pronouncement, share-based compensation cost is measured at the grant date based on the fair value of the award, reduced as appropriate based on estimated forfeitures, and is recognized as expense over the applicable vesting period of the stock award using the accelerated method. The excess tax benefit associated with stock compensation deductions have not been recorded in additional paid-in capital. When evaluating whether an excess tax benefit has been realized, share based compensation deductions are not considered realized until NOLs are no longer sufficient to offset taxable income. Such excess tax benefits will be recorded when realized.

Earnings per Share

Earnings per Share

Net income per share has been computed according to FASB ASC 260, “Earnings per Share”, which requires a dual presentation of basic and diluted earnings per share (“EPS”). Basic EPS represents net income divided by the weighted average number of common shares outstanding during a reporting period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock, including stock options and restricted stock units under our 2001 Stock Incentive Plan and 2006 Incentive Plan, were exercised or converted into common stock. The dilutive effect of outstanding stock options and restricted stock units is reflected in diluted earnings per share by application of the treasury stock method. In applying the treasury stock method for stock-based compensation arrangements, the assumed proceeds are computed as the sum of the amount the employee must pay upon exercise and the amounts of average unrecognized compensation cost attributed to future services.

Comprehensive Income (Loss)

Comprehensive Income (Loss)

Comprehensive income (loss) consists of net income and other comprehensive items. Other comprehensive items include foreign currency translation adjustments.

Reclassifications

Reclassifications

Certain reclassifications have been made to prior years’ financial statements in order to conform to the current year’s presentation. The reclassifications had no impact on net earnings previously reported.

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Long-Term Debt and Revolving Credit Facility (Details) (USD $) In Thousands, unless otherwise specified	6 Months Ended
	Jun. 30, 2014	Dec. 31, 2013
Future payments under long-term debt obligations:
2014	$ 11,667
2015	23,333
2016	55,000
Minimum future payments of principal	90,000
Less: current portion	23,333	23,333
Long-term portion	66,667
Secured debt | 2013 Credit Facility
Schedule of long term debt:
Amount outstanding	11,667	23,333
Stated interest rate, minimum	3.125%
Stated interest rate, maximum	3.625%
Secured debt | 2011 Credit Facility
Schedule of long term debt:
Amount outstanding	$ 55,000	$ 75,000
Stated interest rate, minimum	3.125%
Stated interest rate, maximum	3.625%

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Common Stock (Tables)

6 Months Ended

Jun. 30, 2014

$50,000 repurchase program

Common stock repurchases:

Common stock repurchases

We repurchased the following shares of common stock with cash resources under the $50,000 repurchase program during the three and six months ended June 30, 2013:

	Three Months Ended			Six Months Ended
	June 30,			June 30,
		2013			2013
Shares of common stock repurchased		—			2,189
Value of common stock repurchased		$	—		$	5,374

$100,000 repurchase program

Common stock repurchases:

Common stock repurchases

We repurchased the following shares of common stock with cash resources under the $100,000 repurchase program during the three and six months ended June 30, 2014 and 2013:

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2014 (1)		2013 (2)		2014 (1)		2013 (2)
Shares of common stock repurchased	3,523		4,756		5,970		8,795
Value of common stock repurchased	$	13,244	$	13,451	$	23,287	$	24,458

(1) including 147 shares, or $556, of common stock repurchases settled in July 2014; excluding commission of $1.

(2) including 220 shares, or $625, of common stock repurchases settled in July 2013; excluding commission of $4.

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Basis of Presentation and Significant Accounting Policies - Earnings Per Share (Details) (USD $) In Thousands, except Per Share data, unless otherwise specified	3 Months Ended		6 Months Ended
	Jun. 30, 2014	Jun. 30, 2013	Jun. 30, 2014	Jun. 30, 2013
Organization, Consolidation and Presentation of Financial Statements [Abstract]
Numerator for earnings per share-net income attributable to Vonage	$ 5,518	$ 7,447	$ 10,106	$ 20,494
Basic weighted average common shares outstanding (in shares)	211,390	212,169	211,790	213,404
Dilutive effect of stock options and restricted stock units (in shares)	9,612	7,668	9,520	8,927
Diluted weighted average common shares outstanding (in shares)	221,002	219,837	221,310	222,331
Basic net income per share (USD per share)	$ 0.03	$ 0.04	$ 0.05	$ 0.10
Diluted net income per share (USD per share)	$ 0.02	$ 0.03	$ 0.05	$ 0.09

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Redeemable Noncontrolling Interest (Details) (USD $) In Thousands, unless otherwise specified	0 Months Ended			3 Months Ended		0 Months Ended
	Feb. 13, 2014	Jun. 30, 2014	Dec. 03, 2013	Jun. 30, 2014 Minimum	Jun. 30, 2014 Maximum	Feb. 13, 2014 SELIC Rate [Member]	Dec. 03, 2013 SELIC Rate [Member]
Business Acquisition [Line Items]
Redeemable noncontrolling interest percentage ownership		30.00%
Call right exercise agreement, percent adjustment to appraised value of redeemable non-controlling interest				50.00%	150.00%
Put right exercise agreement, percent adjustment to appraised value of redeemable non-controlling interest				50.00%	120.00%
Loan to consolidated foreign subsidiary			$ 545
Loan to noncontrolling owners, basis spread on variable rate							105.00%
Capital call requirement	503
Noncontrolling interest, ownership percentage by parent	91.00%
Price for joint venture to repurchase diluted equity, loan, basis spread on variable rate						105.00%
Price for joint venture to repurchase diluted equity, portion for capital call requirement	$ 503
Price for joint venture to repurchase diluted equity, capital call requirement, basis spread on variable rate						107.00%

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Consolidated Statements of Income (Parenthetical) (USD $) In Thousands, unless otherwise specified	3 Months Ended		6 Months Ended
	Jun. 30, 2014	Jun. 30, 2013	Jun. 30, 2014	Jun. 30, 2013
Depreciation and Amortization	$ 5,098	$ 3,510	$ 10,252	$ 6,962

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Supplemental Balance Sheet Account Information

6 Months Ended

Jun. 30, 2014

Supplemental Balance Sheet Account Information [Abstract]

Supplemental Balance Sheet Account Information

Supplemental Balance Sheet Account Information

Prepaid expenses and other current assets

	June 30, 2014		December 31, 2013
Nontrade receivables	$	9,039	$	7,402
Services	9,825		7,084
Telecommunications	493		479
Insurance	954		757
Marketing	1,205		312
Other prepaids	2,007		858
Prepaid expenses and other current assets	$	23,523	$	16,892

Property and equipment, net

	June 30, 2014			December 31, 2013
Building (under capital lease)	$	25,709		$	25,709
Network equipment and computer hardware	75,598			78,312
Leasehold improvements	44,900			44,141
Furniture	1,422			812
Vehicles	92			109
	147,721			149,083
Less: accumulated depreciation and amortization	(102,891		)	(96,840		)
Property and equipment, net	$	44,830		$	52,243

Software, net

	June 30, 2014			December 31, 2013
Purchased	$	51,117		$	45,178
Licensed	909			909
Internally developed	36,088			36,088
	88,114			82,175
Less: accumulated amortization	(66,046		)	(61,618		)
Software, net	$	22,068		$	20,557

Debt related costs, net

	June 30, 2014			December 31, 2013
Senior secured term loan	$	4,706		$	4,706
Less: accumulated amortization	(3,937		)	(3,393		)
Debt related costs, net	$	769		$	1,313

Restricted cash

	June 30, 2014		December 31, 2013
Letter of credit-lease deposits	$	3,308	$	4,306
Cash reserves	103		99
Restricted cash	$	3,411	$	4,405

Intangible assets, net

	June 30, 2014			December 31, 2013
Customer relationships	$	39,100		$	39,100
Developed technology	35,200			35,200
Patents and patent licenses	12,764			18,264
Trademark	560			560
Trade names	500			500
Non-compete agreements	200			200
	88,324			93,824
Less: accumulated amortization	(20,117		)	(16,974		)
Intangible assets, net	$	68,207		$	76,850

Accrued expenses

	June 30, 2014		December 31, 2013
Compensation and related taxes and temporary labor	$	15,600	$	20,276
Marketing	26,071		23,277
Taxes and fees	16,486		18,207
Litigation and settlements	339		89
Telecommunications	8,373		7,942
Other accruals	4,335		6,063
Customer credits	1,542		1,719
Professional fees	3,120		2,490
Accrued interest	10		12
Inventory	216		769
Credit card fees	314		283
Accrued expenses	$	76,406	$	81,127

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Basis of Presentation and Significant Accounting Policies - Earnings Per Share, Antidilutive Securities (Details) In Thousands, unless otherwise specified	3 Months Ended		6 Months Ended
	Jun. 30, 2014	Jun. 30, 2013	Jun. 30, 2014	Jun. 30, 2013
Earnings per share, antidilutive securities:
Antidilutive securities excluded from earnings per common share	27,933	29,967	28,025	28,706
Restricted stock units
Earnings per share, antidilutive securities:
Antidilutive securities excluded from earnings per common share	5,486	2,171	5,477	2,357
Stock options
Earnings per share, antidilutive securities:
Antidilutive securities excluded from earnings per common share	22,447	27,796	22,548	26,349

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Common Stock (Details) (USD $) In Thousands, unless otherwise specified	0 Months Ended
	Feb. 19, 2013	Jun. 07, 2012
Stockholders' Equity Note [Abstract]
Ownership percentage limit for 5-percentage points shareholders under the NOL Rights Agreement		50.00%
Rolling period determining ownership percentage limit under NOL Rights Agreement		3 years
Dividend declared, preferred share purchase right, conversion ratio		1
Maximum ownership percentage limit under the NOL Rights Agreement in which significant dilution would be imposed		4.90%
Stock option cancellation (in shares)	4,500
Stock option cancellation	$ 5,463

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Long-Term Debt and Revolving Credit Facility (Tables)

6 Months Ended

Jun. 30, 2014

Debt Disclosure [Abstract]

Schedule of long-term debt

A schedule of long-term debt at June 30, 2014 and December 31, 2013 is as follows:

	June 30, 2014		December 31, 2013
3.125-3.625% Credit Facility - due 2016	$	11,667	$	23,333
3.125-3.625% Revolving Credit Facility - due 2016	55,000		75,000

Future payments under long-term debt obligations

At June 30, 2014, future payments under long-term debt obligations over each of the next five years and thereafter were as follows:

	Credit Facility
2014	$	11,667
2015	23,333
2016	55,000
Minimum future payments of principal	90,000
Less: current portion	23,333
Long-term portion	$	66,667