Mixed news from Vonage: Jeff Citron’s Internet phone provider beat Wall Street’s estimates, but growth slowed to a trickle.
Vonage (VG) posted $225 million in Q1 revenue, up 15% year-over-year, and beating the Street’s $223 million consensus. Loss dropped to $9 million, down 88% from a $72 million loss during Q1 2007. Its 6 cents per share loss was a penny better than the 7 cents per share loss the Street expected. Shares opened 7% higher at $2.01, but have fallen to around $1.96, a more modest 4% gain.
Pre-marketing operating income more than doubled year-over-year to $83 million. And the marketing cost per gross subscriber addition dropped to $216, down 21% year-over-year from $273 in Q1 2007.
Not surprising, but not great news either: As Vonage spent less on marketing, growth collapsed, and subscribers continue to leave the service in droves. Gross subscriber additions fell by 15% y/y to 281,000. But net subscriber additions fell much faster: The company signed up only 30,000 net new subscribers during the quarter, down 82% from Q1 2007, when it added 166,000 net subscribers. Churn, the percentage of customers who leave the company each month, soared to 3.3% from 2.4% in Q1 2007. Vonage says it’s starting to fix its customer service problems, which it thinks will lead to lower churn in Q2.
One reason for the slower growth: Vonage says it continues to focus its subscriber acquisition on customers with “high lifetime value” — i.e. subscribers who won’t sign up just because they saw a Vonage TV commercial, only to flake off a few months later. As a result, Vonage warns that gross subscriber additions will fall further in Q2, but profitability will grow over time.
How will Vonage grow? The company says it will “gradually increase” marketing spend in the second half of 2008, but expects to keep acquisition costs between $225-$250 per subscriber. It also announced a deal with Covad to sell “Vonage Broadband” DSL service to homes and businesses — but DSL is quickly becoming irrelevant as telcos introduce super-fast, fibre-optic Internet offerings and cable companies make their networks faster, too. “Ample margins” in the Covad deal — not just a bundle deal, Citron says during the conference call.
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