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Vonage posts smaller 2Q loss, but subscriber recruitment stalls
[August 09, 2007]

Vonage posts smaller 2Q loss, but subscriber recruitment stalls

By PETER SVENSSON AP Technology Writer
The Associated Press

Internet telephone company Vonage (News - Alert) Holdings Corp. on Thursday reported a much reduced loss for the second quarter as it scaled back marketing, but it also saw a drastic drop in new subscribers.

The drop in recruitment means that Vonage is no longer the country's largest provider of Internet-based telephone service, a field it pioneered. Cable company Comcast (News - Alert) Corp. reported 3 million digital phone subscribers at the end of the second quarter, surpassing Vonage's 2.45 million, an increase of just 57,000 lines from the first quarter.

The Holmdel, N.J., company is struggling in court with another old-line telecommunications company, Verizon (News - Alert) Communications Inc. In March, a jury found that Vonage infringed on three Verizon patents. The judge barred Vonage from signing up new customers, but that decision has been stayed while an appeals court considers it. In the mean time, Vonage is trying to work around the patented technologies.

Vonage posted a net loss of $34 million, or 22 cents per share, for the April-June period, down from $74 million, or $1.16 per share, in the same period last year.

Excluding one-time charges, Vonage lost $18 million, or 12 cents a share, substantially better than the average analyst estimate compiled by Thomson (News - Alert) Financial at 34 cents a share. Analyst estimates generally exclude charges.

Revenue came to $206 million, $2 million short of analyst expectations but up 43 percent from $144 million in the second quarter of 2006.

Vonage, which once blanketed the Internet with its banner ads, spent $68 million on marketing in the second quarter, down from $91 million in the first quarter. However, it got less for its money: the market costing per added subscriber rose by $14 to $287.

Vonage's interim chief executive, Jeffrey Citron, said a more focused marketing effort has reduced the cost to about $250 per subscriber in June and July, and the company expects that cost level to be sustained through the third quarter.

Rather than focusing on building the Vonage brand, Citron said, the company is now directing its money to where it's most likely to recruit subscribers. For instance, its Web ads are now only showing up on the "highest-performing" sites.

Citron also said he expects subscriber additions to rise in the third quarter as new marketing initiatives take hold.

"I believe we're turning the corner on one of the most difficult periods of Vonage's history," he said.

The business of selling Voice over Internet Protocol service, or VoIP, independently of cable and phone companies has looked increasingly shaky in recent months. Vonage's legal troubles have no doubt scared off some potential subscribers. In July, rival SunRocket (News - Alert) abruptly shut down, stranding more than 200,000 subscribers.

On June 30, Vonage had cash reserves of $344 million, down from $410 million three months earlier. Of the total, $66 million were tied up as collateral for a bond tied to the Verizon patent verdict. The company said it expected its "cash burn" to decline in the third quarter.


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