It may surprise some to know that Internet telephony provider Vonage Holdings (NYSE:VG) is still alive and kicking, waiting in the wings to report third-quarter earnings Thursday. Here's a preview of what everyone will soon be talking about.

What analysts say:

  • Buy, sell, or waffle? More analysts have dropped coverage on Vonage, leaving only six giving an opinion. Of these, three maintain a hold rating and three say to sell. In our Motley Fool CAPS investor database, more than 1,286 of more than 73,000 users have rated the stock, collectively giving the company a bottom-feeding one-star rating.
  • Revenue. The average revenue guess is $210 million this quarter, a 31% jump from last year.
  • Earnings. The average analyst expects a $0.13-per-share loss, a significant improvement from the $0.40-per-share loss a year ago.

What management says:
Last quarter, Vonage was working feverishly on workarounds for the Verizon Communications (NYSE:VZ) patents it was ruled to have violated. Chairman Jeffrey Citron noted that "we have substantially completed the deployment of workarounds" and "we look forward to the Court's ultimate decision and remain confident in the strength of our appeal."

Indeed, in a mere three months, Vonage has managed to slay two major litigation dragons breathing fire down its neck. It settled a Sprint Nextel (NYSE:S) lawsuit and then announced an agreement with Verizon that will have Vonage pay at least $80 million and potentially $120 million, depending upon the outcome of a rehearing. More suits persist however, including a new one filed by AT&T (NYSE:T).

What management does:
Vonage dramatically scaled back its marketing efforts this year, and the numbers reflect the predicted effects of this: Growth in subscribers has stalled. Increasing churn remains an issue, and the company expects the average revenue per line to remain stable or only slightly increase for the balance of 2007. 

Metric

03/06

06/06

09/06

12/06

3/07

6/07

Subscriber base (in thousands)

1,597

1,853

2,058

2,224

2,390

2,446

Churn

2.1%

2.3%

2.6%

2.3%

2.4%

2.5%

Average revenue per line

$27.65

$27.89

$27.40

$28.25

$28.31

$28.38

Metrics from SEC filings.

With the cutbacks in marketing and the new business approach, Vonage is making progress on improving margins from ghastly to just bad:

Margin

3/06

6/06

9/06

12/06

3/07

6/07

Gross

55.0%

57.1%

59.8%

52.9%

54.7%

56.0%

Operating

(77.0%)

(63.9%)

(52.9%)

(56.1%)

(47.0%)

(36.1%)

Net

(82.3%)

(68.6%)

(56.4%)

(55.7%)

(47.7%)

(38.3%)

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:
The settlements with Verizon and Sprint Nextel snuffed out a big financial sword hanging over Vonage. But even with the margin haircut mitigated, competition from digital phone offerings from cable providers Comcast (NASDAQ:CMCSA) and Time Warner Cable (NYSE:TWC) and telcos looms even larger. If Vonage continues to report increasing churn, it will be harder to convince investors of the long-term viability of the business, especially if legal distractions persist.

For more Foolishness:

Fool contributor Dave Mock can write with one hand tied behind his back, but advises against the exercise. He owns no shares of companies mentioned here. Dave is the author of The Qualcomm Equation. The Fool's disclosure policy is not too hot, nor too cold, but just right.