Vonage Shares Jump, But Churn and Debt Challenging

Nov. 9.07 | About: Vonage Holdings (VG)

In what may be a sign of just how irrelevant Vonage Holdings Corp. (NYSE:VG) has become, only one Wall Street analyst (calling from Boca Raton, Fla.) bothered to ask a question during the Internet telephony company's third-quarter earnings conference call Thursday morning.

But Vonage had enough good things to say during its call to please investors, who had watched the company's stock fall below $1 in October. Shares were up 10.4% to $2.44 in Thursday afternoon trading. The gain was partly due to news that the company had settled patent litigation "in principle" with AT&T Corp., following agreements to resolve lawsuits with Verizon Communications Inc. (NYSE:VZ) and Sprint Nextel Corp. (NYSE:S) over similar patent violations. Vonage would pay AT&T $39 million over a five-year period under terms of the agreement.

But company management acknowledged the company still has a lot of work to do. Key is its customer churn rate, which was 3% in the quarter. Vonage chairman and interim CEO Jeffrey Citron said most subscribers who quit the service do so not because they're getting a better deal on Internet phone service elsewhere, but because of poor user experience at Vonage that he claims can be rectified. Citron said the company is working to provide better customer care for people setting up their service and those experiencing problems.

Indeed, Vonage is far from out of the woods. It has $253 million of convertible debt that begins to come due in December 2008, and the legal settlements have cut its cash reserves to $194 million, $40 million of which is restricted. Vonage must show that it can improve customer service and do a better job holding onto subscribers, while also keeping marketing costs in line to decrease customer acquisition costs.

See Nov. 8 earnings release from Vonage
See Oct. 8 story from TheDeal.com
See Sept. 26 story from TheDeal.com
See Nov. 8 post from Digital Daily
See Nov. 8 post from Lead Counsel Corner