Vonage goes cash positive - churn and debt still problems

A strong focus on costs has seen Vonage go cash positive on its operations for the first time, recording revenue of $219 million for Q4 2007, a 19 percent lift on the same quarter in 2006. The improved operating result came as Interim CEO Jeffrey Citron confirmed high "unacceptable" churn and a $253 million debt due in December remain the company's two most pressing issues.

Churn remained stuck at 3 percent a month and the reduction in marketing spend has seen subscriber growth stall. Net the company gained 56,000 customers and now has nearly 2.6 million subscribers. This makes Vonage easily America's largest pure play VoIP operator and compares with 4 million digital voice customers cable operator Comcast now has.

But with the focus on getting costs in line with revenue, Vonage was able to generate $3 million in adjusted operating income in the fourth quarter 2007. This is the first time the company has generated positive cash flows from its core business. John Rego, Vonage CFO said, "This is a significant accomplishment for the Company and reflects our ability to grow while effectively managing costs. We reached this milestone ahead of plan, and did so in a turbulent year." Vonage recorded a GAPP net loss of $11 million (or $0.07 per share) , down from the $53 million loss recorded in Q4 2006.

The improved result was underpinned by tight control over customer acquisition costs. Marketing expense for the quarter was $63 million, or 29 percent of revenue, down sharply from $96 million, or 53% of revenue a year ago. Marketing cost per gross subscriber line addition ("SLAC") was $223 in the fourth quarter 2007. SLAC increased slightly from $206 in the third quarter due to seasonal costs of advertising. The Company said it expects the cost of acquisition will be within $225- $250 for 2008.

In Q4 the company paid out $202 million in patent infringement costs, as part of a $240 million settlement of all IP cases with various telcos and vendors. Rego told analysts the company did not expect any further IP claims.

Citron said the two key goals of the company for 2008 was to lower its "unacceptably high" churn rate--which despite heavy focus on customer service and quality of service has not been reduced from Q3 levels-- and to resolve its refinancing requirements.

The company faces $253 million in convertible debt in December this year. Citron said the company could not give any timetable as to when this would be resolved, given the current state of the finance markets. Rego told the conference call the company believes it can resolve the debt issues, but if not, the company expected to have to post an explanatory note with its annual returns concerning the ability of the company to continue as a going concern.

"Although 2007 was a difficult period marked by numerous legal challenges, Vonage maintained its focus on improving the business," Citron said. "We improved our marketing efficiency, reduced our cost structure and for the first time in our history, generated positive adjusted operating income in the fourth quarter. Looking to 2008, we are confident in our ability to grow the business profitably and provide customers innovative, feature-rich and cost-effective communications services."

Citron said the company had not identified any impact from the economic slow down and predicted Vonage would win from any further slow down as customers looked for lower cost alternatives to traditional telephony services.

Vonage also said it would restate earnings upwards from Q2 and Q3 to correct the amount of non-cash stock compensation expenses it wrongly paid senior executives.

Vonage's stock price rose in early trading up 11 cent or 5.4 per cent to $2.14.

For more:
- Vonage Q4 results
[1]- Vonage Q4 Press Release
[2]- Vonage Q4 Slide presentation [3] to analysts