By
Dave Mock
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August 9, 2007
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Internet telephony service provider Vonage Holdings (NYSE: VG ) unveiled a sleeker, slimmer company when it reported earnings today. On display was Vonage's first full quarter of operations under a new strategy that included reduced marketing costs and headcount. The effect was as predicted -- cash burn was reduced but subscriber growth also slowed.
Vonage reported a $34 million net loss on a 43% increase in revenue to $206 million. The top line benefited from an increase in average revenue per line to $28.38, almost 2% higher than last year. Slashed marketing expenditures fell to the bottom line, resulting in a quarterly net loss much lower than last year's $74 million. However, the cutback was evident as it only brought in a meager 56,691 subscribers, bringing the total base to just shy of 2.45 million.
Even with a reduced marketing budget, each dollar spent in marketing is acquiring fewer subscribers than before, signaling that effectiveness of the marketing plan is waning. The company acknowledged the opportunity here, and expects the third quarter to be much better with a more focused marketing campaign.
Another area of Vonage's business is of even greater concern, though -- how the company is dealing with rising churn. Monthly churn increased sequentially by 10 basis points to 2.5% thanks to ever-increasing competition from the likes of AT&T (NYSE: T ) , Comcast (Nasdaq: CMCSA ) , and Time Warner Cable (NYSE: TWC ) . The company's solution to this problem is to -- get this -- allow delinquent customers more time to pay their bill before cutting them off. This strategy helped the company avoid reporting an even higher 2.7% churn level.
So the best way to impress Wall Street with metrics is to deteriorate the quality of your subscriber base? Good plan. Despite my personal concerns, though, investors had a different take and bid shares up by as much as 13.5% in the morning. What likely helped was the company's comments that it has deployed workarounds to two patents owned by Verizon (NYSE: VZ ) and is developing a third to help it avoid a taxing 5.5% royalty to the company.
But with another major lawsuit in the wings from Sprint Nextel (NYSE: S ) and the company's penchant for coddling delinquents, I'll sit this one out and let investors speculate.
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Fool contributor Dave Mock is lobbying for mac n' cheese to be added as the fifth basic food group -- or at least be represented somewhere in that darn pyramid. He owns no shares of companies mentioned here. Dave is the author of
The Qualcomm Equation. The Fool's disclosure policy gave up a lucrative career in log rolling to serve the masses of humanity.
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