Q4

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> Verso Declares Bankruptcy Report

Just how bad can things get at Vonage?

Mon, 24 Mar 2008 07:59:55 -0400

The Wall Street Journal reports that Vonage auditor BDO Seidman says there is "substantial doubt" the Internet telephony pioneer can continue as a going concern. Vonage last week said its fourth quarter losses were $13.8 million, 24 percent higher than the $11.1 million in losses it reported in a February press release, and said it ended the year with a $217 million working capital deficit.

Vonage wants to alter the terms of a $253 million debt payable in December, telling the SEC earlier this month that a cash outlay that large would threaten its ability to operate. Vonage says it may up the interest rate to make the notes more appealing as longer-term investments, and might be able to pay some of the issue with cash or equity-type securities.

Vonage interim CEO Jeffrey Citron last month told analysts the resolution of the $253 million debt was the company's major priority.

For more:
- Check out the Wall Street Journal article

Related articles:
Vonage hopes to negotiate debt terms Report
Vonage scrambles as debt looms Report
Vonage Q4 still shows problems Report

Vonage loses a third of its customers every year

Tom Burton — Thu, 14 Feb 2008 06:59:59 -0500

Any business that loses a third of its customers a year has to be in trouble. Vonage's Q4 numbers yesterday showed some of the results of its more disciplined approach to costs, especially customer acquisition costs. A tight clamp on marketing enabled the company to record its first operating cash surplus.

It was a milestone the company desperately needed. With bond holders owed $250 million at the end of the year, Vonage has to convince its financiers it has a long-term business model. But with three percent of the customer base deserting each month, Vonage has to find 234,000 customers a quarter just to maintain the status quo. And with each new customer costing on average around $240 Vonage is paying out $56 million a quarter--or $225 million a year--just to keep its current customer numbers.

Reading the myriad of blogs and forums on why customers give up on Vonage it comes down to a combination of technology and service. Any IP system is inherently less reliable than traditional telephony. While many of the issues are ISP related, customers simply want a phone that works. if it doesn't, they want someone to fix it, quickly.

Operational excellence has not been Vonage's calling card. And again there is a litany of distressed Vonage users who left out of frustration with the poor service response. All voice communication firms struggle with churn, but as the industry responds with triple-play offerings, Vonage's pure-play looks uncompetitive. Vonage chief Jeffrey Citron admitted as much yesterday when he said the cable companies had caught Vonage "behind the gun." Citron then went on to make an unconvincing argument why Vonage's single offering customized to market segments (Florida Hispanics, busy moms, etc.) would win the day. -Tom

Vonage goes cash positive - churn and debt still problems

Tom Burton — Wed, 13 Feb 2008 12:04:49 -0500

A strong focus on costs has seen Vonage go cash positive on its operations for the first time, recording revenue of $219 million for Q4 2007, a 19 percent lift on the same quarter in 2006. The improved operating result came as Interim CEO Jeffrey Citron confirmed high "unacceptable" churn and a $253 million debt due in December remain the company's two most pressing issues.

Churn remained stuck at 3 percent a month and the reduction in marketing spend has seen subscriber growth stall. Net the company gained 56,000 customers and now has nearly 2.6 million subscribers. This makes Vonage easily America's largest pure play VoIP operator and compares with 4 million digital voice customers cable operator Comcast now has.

But with the focus on getting costs in line with revenue, Vonage was able to generate $3 million in adjusted operating income in the fourth quarter 2007. This is the first time the company has generated positive cash flows from its core business. John Rego, Vonage CFO said, "This is a significant accomplishment for the Company and reflects our ability to grow while effectively managing costs. We reached this milestone ahead of plan, and did so in a turbulent year." Vonage recorded a GAPP net loss of $11 million (or $0.07 per share) , down from the $53 million loss recorded in Q4 2006.

The improved result was underpinned by tight control over customer acquisition costs. Marketing expense for the quarter was $63 million, or 29 percent of revenue, down sharply from $96 million, or 53% of revenue a year ago. Marketing cost per gross subscriber line addition ("SLAC") was $223 in the fourth quarter 2007. SLAC increased slightly from $206 in the third quarter due to seasonal costs of advertising. The Company said it expects the cost of acquisition will be within $225- $250 for 2008.

In Q4 the company paid out $202 million in patent infringement costs, as part of a $240 million settlement of all IP cases with various telcos and vendors. Rego told analysts the company did not expect any further IP claims.

Citron said the two key goals of the company for 2008 was to lower its "unacceptably high" churn rate--which despite heavy focus on customer service and quality of service has not been reduced from Q3 levels-- and to resolve its refinancing requirements.

The company faces $253 million in convertible debt in December this year. Citron said the company could not give any timetable as to when this would be resolved, given the current state of the finance markets. Rego told the conference call the company believes it can resolve the debt issues, but if not, the company expected to have to post an explanatory note with its annual returns concerning the ability of the company to continue as a going concern.

"Although 2007 was a difficult period marked by numerous legal challenges, Vonage maintained its focus on improving the business," Citron said. "We improved our marketing efficiency, reduced our cost structure and for the first time in our history, generated positive adjusted operating income in the fourth quarter. Looking to 2008, we are confident in our ability to grow the business profitably and provide customers innovative, feature-rich and cost-effective communications services."

Citron said the company had not identified any impact from the economic slow down and predicted Vonage would win from any further slow down as customers looked for lower cost alternatives to traditional telephony services.

Vonage also said it would restate earnings upwards from Q2 and Q3 to correct the amount of non-cash stock compensation expenses it wrongly paid senior executives.

Vonage's stock price rose in early trading up 11 cent or 5.4 per cent to $2.14.

For more:
- Vonage Q4 results
- Vonage Q4 Press Release
- Vonage Q4 Slide presentation to analysts