Vonage (VG) Close To AT&T Settlement, But Q3 Stinks

Vonage (VG) continues to burn cash and lose subscribers. Churn increased. Competitive position worsened. But the company is at least close to settling its patent suit with AT&T — the last of Vonage’s three major patent wars, which have cost the company a ton of money and potential customers. Also, some metrics are finally improving.  Release

Key Stats:

  • Revenue: $211 million (up 30% y/y, beat est. by $1mm)
  • Adjusted loss (excluding depreciation and amortization, stock compensation, royalty, IP litigation settlements and severance expense): $16 million, or 10 cents per share. This beat expectations by 3 cents.
  • Net loss: $161.7 million, or $1.04 per share vs. $62.1 million, or 40 cents a share during 3Q06
  • Gross subscriber adds: 300,000 (down 16% y/y)
  • Net subscriber adds: 77,800 (down 62% y/y)
  • Total subscribers: 2.52 million (up 22% y/y)
  • Churn: 3% (vs. 2.6% a year ago)
  • ARPU: $28.24 (up 2% y/y)

Analysis and live conference call notes after the jump.
Vonage is getting its act together but still has a long way to go. Churn, the per cent of customers leaving the service every month, increased from 2.5% during Q2 to 3%. During Q3, Vonage convinced 300,000 people to sign up for its Internet phone service. But more than 222,000 customers left Vonage, resulting in 77,800 net subscriber adds. Ugly.

How did this impact Vonage’s marketing spend? Vonage has managed to trim its marketing costs significantly, from $254 per gross subscriber sign-up during 3Q06 to $206 during 3Q07 — a 19% cut year-over-year. (And a 28% reduction sequentially; VG spent $287 per gross sub add in Q2.) But when applied to Vonage’s net Q3 subscriber additions, it’s paying almost $800 for each subscriber.

Why are customers leaving Vonage? Some, no doubt, leave because of the uncertainty from Vonage’s patent suits, and others because of better deals from cable, wireless and phone companies. But Vonage said 70% are leaving because of “user experience,” meaning either the phone service sucks or customer service sucks. This is pitifiul and embarrassing, but fixable. Vonage is firing bad management and working to fix its customer service infrastructure — a good idea.

Can Vonage turn it around? The company generated cash from operations for the first time, which is a good sign, and both gross and net subscriber additions increased sequentially, which is also good. We don’t yet know the full cost of all patent suits, but if the company can keep marketing costs down, cut churn, and grow, it could survive. It won’t be easy: Vonage has lost its early lead in the Internet phone biz and has to compete with cheap, “triple-play” bundles of TV, Internet, and phone service offered by cable and phone companies. We’re also worried that Vonage has alienated its early-adopter-type customer base — key for referring new subscribers — with admittedly crappy customer service.

Live conference call notes:

  • 10:05 First time in Vonage’s history generated cash from operation.
  • 10:07 Marketing: Big changes since last quarter, focusing on channels with big returns.
  • 10:09 Higher sequential net and gross adds on lower marketing spend. Expect costs to increase during Q4.
  • 10:10 Expanding visual voicemail (gee, great!), new devices.
  • 10:11 70% of churn leaving for bad service/experience. Yikes! Developing plan to fix experience. But Q3 churn (3%) higher than expected.
  • 10:13 Need to fix customer service problems — customers calling several times before problems fixed. New CRM system, routing system, more call monitoring. Fixing user experience will take time; churn won’t get better for 1-2 quarters. Fired customer service execs!
  • 10:15 On track for adjusted operating profitability in 2008.
  • 10:16 $145 million total litigation expense
  • 10:18 AT&T settlement update: Vonage could have to pay AT&T $39 million over 5 years.
  • 10:20 Running through operational stats from release.
  • 10:22 SLAC $206. Marketing per gross ad. Net, of course, much higher.
  • 10:25 Q&A. Earlier notes after jump.
  • 10:25 Working capital for quarter end? $54 million. Royalty payment disappears in Q4? Yes. Convertible debt options? “All available options.”
  • 10:27 No more questions? Wow.

Business Insider Emails & Alerts

Site highlights each day to your inbox.

Follow Business Insider Australia on Facebook, Twitter, LinkedIn, and Instagram.

Tagged In

earnings sai-us telecom