IP Democracy: Vonage Death Vigil: Loss Narrows But Growth Stalled

Troubled VoIP pioneer Vonage issued its Q1 07 earnings report today and the news wasn’t, surprisingly, totally bad. As it has promised to do in the past, Vonage continued to narrow its losses, even in the face of royalty costs paid to Verizon following its loss to the telco in a much-publicized lawsuit.

Vonage posted a loss of $72.3 million, down 15% year-over-year even with the new, added royalty charge of $10.4 million for the quarter. Vonage will pay royalties to Verizon on certain technologies that the telco contends it owns, although the funds are being held in escrow and will be returned to Vonage if the VoIP provider ultimately prevails in the courts.

That’s the good news, namely losses are down. The bad news: Vonage’s growth continued to cool. During the quarter, the company added 165,646 net new customers, down 50% from Q1 06 net adds and basically unchanged from the net adds gained during Q4 06. Gross subscriber line additions during the quarter were 332,493, twice the number of net adds, the widest disparity between gross and net adds Vonage has experienced to date.

During Vonage’s earnings call, interim CEO Jeffrey Citron blamed the negative media coverage for Vonage’s slow growth. “The Verizon lawsuit has consumed significant financial and human resources and the associated media coverage has had an impact on our business,” he said.

Citron also said that Vonage has developed “work-arounds” that obviate the need to use the disputed patented technology, meaning that Vonage might survive even if it loses all of its legal appeals. “I believe we have workable designs for the 574 and 711 patents and intend to begin deploying the solution to our customers shortly,” he said.

A work-around for one disputed technology dealing with wireless, the 880 patent, is in the works but won’t seemingly be deployed soon. Citron said that Vonage is confident in its legal appeal, an assessment backed up by Chief Legal Officer Sharon O’Leary.

Selected Vonage Financial Data ($ in 000)
	1Q06	2Q06	3Q06	4Q06	1Q07
Operating Revenues:
Telephony services	$ 111,658	$  136,636	$  154,487	$  176,074	$  189,367
Customer equipment and shipping	$     7,225	$      6,742	$      6,235	$      5,389	$      6,573
Total	$ 118,883	$  143,378	$  160,722	$  181,463	$  195,940
Operating Expenses:
Direct cost of telephony services	$   38,424	$    38,946	$    40,272	$    52,205	$    55,566
Royalty	na	na	na	$    51,345	$    10,415
Total Direct Costs of Telephony Services	$   38,424	na	na	$  103,550	$    65,981
Direct cost of goods sold	$   17,580	$    16,047	$    16,934	$    12,169	$    13,333
Selling, general and administrative	$   52,875	$    66,109	$    72,052	$    81,790	$    90,992
Marketing(1)	$   88,288	$    90,164	$    91,316	$    95,581	$    90,850
Depreciation and amortization	$     4,959	$      5,740	$      5,946	$      7,032	$      7,859
Total	$ 201,286	$  217,006	$  226,520	$  248,778	$  269,015
Net loss	$ (85,160)	$  (74,136)	$  (62,184)	$ (117,093)	$  (72,334)
Selected Vonage Operational Data
	1Q06	2Q06	3Q06	4Q06	1Q07
Gross subscriber line additions	421,890	377,005	359,148	312,094	332,493
Net subscriber line additions	328,279	255,936	204,591	166,267	165,646
Subscriber lines	1,597,317	1,853,253	2,057,844	2,224,111	2,389,757
Average monthly customer churn	2.1%	2.3%	2.6%	2.3%	2.4%
Average monthly revenue per line	$       27.7	$        27.7	$        27.4	$        28.3	$        28.3
Average monthly telephony services revenue per line	$       26.0	$      26.40	$      26.33	$      27.41	$      27.36
Average monthly direct cost of telephony services per line	$         8.7	$        7.52	$        6.86	$        8.13	$        9.53
Marketing cost per gross subscriber line addition	$        209	$         239	$         254	$         306	$         273
Employees	1,416	1,602	1,675	1,790	1,729
CPE Subsidy	$     24.54	$      24.68	$      29.79	$      21.72	$      20.33
Direct Margin % Total Revenue	53%	62%	64%	65%	60%
Source:  Emerging Media Dynamics, Inc. analysis of company data.  © 2007.

Posted by Cynthia Brumfield on May 10, 2007 7:15 PM to IP Democracy