Vonage Problems Persist, But Still Hanging In There (VG)

Vonage Holdings (NYSE: VG) has posted earnings at -$0.07 EPS on revenues of $215.9 million,  These compare to -$0.76 EPS and $181.5 million on a year over year basis, and compares to First Call estimates of -$0.10 EPS and $219.4 million in revenues.

The company did generate positive adjusted operating income in Q4 and reduced its marketing costs and operating structure.  Its average monthly revenue per line in Q4-2007 was $28.19, down from $28.25 in the year-ago quarter and $28.24 reported in Q3-2007. Its average monthly telephony services revenue per line rose to $27.42, in line with $27.41 reported a year ago and up from $27.32 sequentially. Its marketing expense for the quarter was $63 million, or 29% of revenue, which is down from $96 million or 53% of revenue a year ago. Vonage also noted the cost of acquisition will be within $225- $250 for 2008.

Jeffrey Citron, Vonage Chairman, noted, "…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."  Vonage added 56,000 net subscriber lines during the quarter to end the year at nearly 2.6 million line, while its average monthly customer churn remained essentially flat sequentially at 3.0%.

Its cash and marketable securities and restricted cash on December 31, 2007 was $190 million, including $39 million in restricted cash as collateral for routine business operations.  The change in cash was driven by settlement payments of $202 million, cap-ex of $9 million, and cash from operations of $15 million, and an $8 million increase in restricted cash.  Vonage also has $253 million in convertible debt, which can be put back to the company in December 2008. The Company with its financial advisors is currently in discussions with several parties regarding a refinancing of the debt.

Unfortunately, Vonage is also going to restate its financial statements for the second and third quarters of 2007 to correct the amount of non-cash stock compensation expenses recorded during those periods.  The restatement will apparently not result in a change in  previous revenues, cash flow from operations or total cash and cash equivalents shown in the second and third quarter 2007 financial statements.  It will result in a reduction in non-cash stock compensation will effect a decrease in selling, general and administrative expense of approximately $10 million in the second quarter and approximately $4 million in the third quarter of 2007.  There is also a "material weakness in control procedures" relating to the recording of stock-based compensation expenses.

Vonage is not signaling that it it is on the verge of implosion, even if there are problems and challenges.  Its customer acquisition costs remain high even if marketing and general costs have been reduced.  Its new client additions are also slowing sharply and it still needs to figure out how to lower its churn rates.  Shares were up 1% in earlier pre-market trading, but shares are now down 1.5% at $2.00 in pre-market trading.  We will be making our own call again on this stock in our STOCKS UNDER $10 Newsletter next week.

Jon C. Ogg
February 13, 2008