Foolish Forecast: Vonage's New Look

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As the market opens on Wednesday, investors will get a fourth-quarter financial rundown from Internet telephony provider Vonage (NYSE: VG). Here's what's expected going into the earnings release.

What analysts say:

• Buy, sell, or waffle? Of the six analysts following Vonage, three think you should hold, and three recommend a sell. In our Motley Fool CAPS investor database, 1,407 of more than 83,000 users have rated the stock and given it a lowly one-star rating.
• Revenue. The average revenue estimate is pegged at $219 million this quarter, up 21% from last year.
• Earnings. Earnings are forecasted to be of the negative variety, with the average expectation set at a $0.10-per-share loss.

What management says:
Vonage chief Jeffrey Citron has been on a mission lately to resurrect what many thought was a soon-to-be-dead business. After paying millions to settle litigation from a cast including Verizon Communications (NYSE: VZ), AT&T (NYSE: T), and Sprint Nextel (NYSE: S) and slashing marketing expenses, Citron is now shopping the company's plan to reach profitability.

At a recent Citi Conference, Citron detailed efforts to retain customers and grow margins. Though the company admitted that reducing customer churnwill take time, it expects to report positive cash from operations this quarter -- not including settlement fees.

What management does:
Average revenue per user remains stable, but even though churn has been rising dramatically, Vonage stated that it will report no meaningful change in churn this quarter. And with the cutbacks in marketing, subscriber growth has slowed substantially. 

Metric	06/06	09/06	12/06	3/07	6/07	9/07
Subscriber base (in thousands)	1,853	2,058	2,224	2,390	2,446	2,524
Churn	2.3%	2.6%	2.3%	2.4%	2.5%	3.0%
Average revenue per line	$27.89	$27.59	$28.25	$28.31	$28.38	$28.24

Metrics from SEC filings.

Margins remain in the red but fluctuate dramatically, with large litigation settlements affecting the bottom line:

Margin	6/06	9/06	12/06	3/07	6/07	9/07
Gross	57.1%	59.7%	52.9%	54.7%	56.0%	55.6%
Operating	(63.9%)	(52.8%)	(56.1%)	(47.0%)	(36.1%)	(45.0%)
Net	(68.6%)	(56.3%)	(55.7%)	(47.7%)	(38.3%)	(48.5%)

Data for margins courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ended in the named months.

One Fool says:
There's little doubt that Vonage can continue to grow revenue. By offering its products through large retailers such as Best Buy (NYSE: BBY), Wal-Mart (NYSE: WMT), and Target (NYSE: TGT), consumers have plenty of ways to sign up. But retaining these consumers, and breaking into business and enterprise markets at a reasonable cost, defines the risk with Vonage as an investment. Until the company puts at least a few quarters of continuous improvement under its belt, many investors are unlikely to have faith in Vonage.