Vonage's "Patent Workaround"

Vonage Holdings (VG-NYSE) earnings came out shortly before the open and the good news is that the bleeding wasn’t any worse on a look-back to March 31.  The main crux of this has nothing to do with the current earnings.  It is the "patent workarounds" and you can see what was said.

Jeffrey Citron, Vonage Chairman: "We have battled through an extremely difficult quarter and will continue the fight in the courtroom. While the patent litigation has challenged our business, it has not distracted our focus on providing consumers with the opportunity to choose a better phone service.  We believe we have workable designs for the two name translation patents and intend to begin deploying the solution to our customers shortly. In addition, we are continuing our development of the workaround for the wireless patent."

Revenue for the first quarter 2007 grew to a record $196 million, up 64% from the first quarter 2006.  Adjusted loss from operations narrowed to $58 million in the quarter, a 20% improvement from $73 million in the year-ago quarter. Adjusted loss from operations "excluding royalty" narrowed to $48 million in the first quarter 2007, a 34% improvement from $73 million in the first quarter 2006 and a 10% improvement from $53 million last quarter.  The net loss narrowed to $72 million, or $0.47 per share for the first quarter 2006, or a loss of $0.39 per share on an "excluding royalty basis."  As we previously noted, they added 166,000 lines to end just short of 2.4 million lines.  Marketing cost per gross subscriber line addition was $273 in the first quarter 2007, a reduction of $33 from $306 last quarter and up $64 from $209 a year ago. As previously announced, the Company expects to spend approximately $310 million in marketing in 2007. Average monthly customer churn was 2.4% in the first quarter 2007, up slightly from 2.3% last quarter.

NO GUIDANCE: The Company says it has taken a number of steps which it believes will increase its ability to reach Profitability, but given the uncertainty surrounding the Verizon litigation, the Company will not comment on previously issued guidance.  Cash and equivalents did come in that $410 million range.  Now you have to consider the bond and royalties ahead.  So going on this it really boils down to if you trust the company or not.  So far shares are up 9%, so we’ll have to see if that holds.   Last month’s short interest was 7.879 million shares, up from 7.37 million in March.  There is still a prevailing thought that customers will flee if they are worried about the service being around, but so far that hasn’t seemed to occur.

Jon C. Ogg
May 10, 2007

Jon Ogg can be reached at [email protected]; he does not own securities in the companies he covers.