Vonage (VG): About That Churn Problem


Another ugly quarter from Holmdel, N.J.-based Vonage. First, the good news: revenue climbed 43% year-over-year to $206 million and net losses shrank to $34 million from $74 million ($18 million excluding D&A and stock comp). Chief Jeffrey Citron also said the company has “substantially completed” workarounds to do business without violating patents owned by NY-based Verizon Communications. (Earnings Release)

Now the bad news:

First, Vonage’s churn is high and getting higher–7.3% of its subscriber base per quarter (nearly 30% a year), up from about 6.9% last year:

Gross subscribers added in the quarter: 237,000
Gross subs lost: 180,000

Add those two together and you get the paltry increase of 57,000 new additions. At this churn rate, if Vonage stopped marketing, it would lose its entire subscriber base in a little over three years.

Second, Vonage hasn’t been able to cut its marketing cost to sign up each new customer. On the contrary, this cost has increased.

Q2 marketing cost declined from $90 million a year ago to $68 million. But the amount spent to sign up each new subscriber increased to $287 per gross acquisition, from $273 in Q1 and $239 a year ago.

On a net basis, moreover, Vonage’s CPA has soared. Vonage paid $1200 to sign up each of those 57,000 net new subs this quarter, versus $350 for each of the 256,000 they signed in Q2 last year.

Meanwhile, Vonage’s cable rivals like Comcast, Time Warner Cable and Cablevision continued their rapid Internet phone growth. Comcast, now the VoIP leader, has surged the most (see chart). This despite only having the connectivity to sell Internet phone service to 38 million homes, whereas Vonage can sell service to anyone with a broadband connection.