Vonage Holdings (VG-NYSE) reports earnings today. Estimates are for -$0.42 EPS and $195.35M revenues. The issue today is that the earnings just don’t matter. Only someone named Pangloss would be expecting much good out of the actual numbers.
The most pressing issue is this patent situation with Verizon, where it lost an appeal to get a retrial based on the new patent laws. The company has agreed to pay a 5.5% quarterly royalty into escrow in case it loses the final decision and has put up a $66 million bond. The company has maintained that its current cash position allows it to pay these fees.
The problem that is evident here is that this will drastically cut the cash position: Vonage has been burning through roughly $40 million per quarter on average, so we would normally expect a $450 million cash position. But with the add ons we can expect this number to now dip down closer to $375 million, and that is before whatever amount they are going to say was for extra legal costs and for whatever they’ll end up forking over to IPO shareholder. Its cost cutting is starting, but that was only recent.
The company will probably maintain that it remains financially viable and can operate on its own with tapping extra liquidity sources even though its filings have disclosed that the patent suits could ultimately lead to a bankruptcy. The company has already begun its cost cutting strategies and the founder Jeff Citron took control back at the helm.
As far as what the numbers have been, it ended last year with 2.2 million lines and added another 166,000 lines in the March quarter. The monthly churn rates are still far too high at 2.4% and it had been spending close to $275 to acquire each new customer.
It isn’t the earnings this last quarter that matter. It’s the ability for the company to be able to say that it will still keep growth plans in a post-royalty world and that it can make it on its own. Anything short of that will be met with more skepticism by Wall Street AND Main Street.
Jon C. Ogg
May 10, 2007
Jon Ogg can be reached at [email protected]; he does not own securities in the companies he covers.
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