Everyone's favourite whipping VoIP whipping boy, Vonage, posted third-quarter results that left a lot to be desired. Churn climbed to 2.6% from 2.3% in the second quarter, the cost of acquiring a new customer rose to $254 from $239, while the number of net new subscribers was 205,000 compared with 256,000 in Q2. While the company had a smaller loss ($62-million) than analysts expected, the investment community was disappointed with guidance of 2.2 million to 2.3 million new users in 2006, compared with a previous estimate of 2.3 million to 2.4 million. The company now has 2.05 million customers, compared with 1.85 million at the end of Q2 and 1.06 million a year earlier. Vonage shares were down 1% in early-morning trading to $6.80 (compared with the 52-week low of $6.30). The question facing investors is whether Vonage can gain enough critical mass and reduce marketing/acquisition costs so it can compete with the cablecos, which are aggressively gaining market share.  

Nothing like the venerable New York Times to jump-start a public relations campaign. The newspaper provided Vonage with some invaluable coverage by doing an interview with chairman - and P.R. savvy - Jeff Citron. Here are the highlights:

- On how he felt after the stock dropped like a stone following its $17-a-share IPO earlier this year: “I was a little, I guess, confused." Confused? Citron's confused by how investors soured on the company's prospects in light of large losses, huge marketing expenses and increasingly intense competition from cablecos?

- Vonage is now in "good shape". Hmmm, I wonder how Citron defines good shape. If it's by the number of subscribers, I guess Vonage is doing okay given it will soon announce it has two million customers. But what about churn, which compels Vonage to spend more than $300-million on marketing?

- "We definitely believe the shares were undervalued" in explaining his decision to buy 188,000 shares for $1.3-million. After losing two-thirds of their value, Vonage was either under-valued or maybe just trading where it should. Don't give Citron credit for stepping up to make a "value" buy. It was a P.R. move to reassure investors, particularly those who still held their IPO shares, analysts and customers.

- “I want nothing. I’m just generally a very happy guy.” Nice way for the NYT to end the story but why wouldn't Citron be happy. He's made a mint off Vonage despite the stock's performance. He has also hit the entrepreneurial jackpot twice before - Island ECN and Datek. We could all be so lucky.

One more thing: Vonage shares closed Friday at $8.90, which means they have lost 47% since the IPO hit the street. Andy Abramson, who knows the P.R. and VoIP industries like the back of his hand, calls the NYT story "pure spin control". 21Talks also makes some good points, particularly about one analysts believes Vonage needs five million customers to be profitable. Russell Shaw describes the NYT story as pretty close to a "puff piece". Ouch!

So, let's do some simple number-crunching with Vonage's second-quarter results. The company posted a loss of $74.6-million, largely due to $90.1-million of marketing costs (50% more than a year earlier) amid fierce competition from the cablecos, which makes attracting customers even more of a challenge. Assuming competition remains as intense and Vonage has to spend as much or more on marketing each quarter, the company's $597.7-million of cash will evaporate over the next eight quarters. Then what? Well, Vonage CEO Mike Snyder believes the company will generate "adjusted operating profits as early as the first quarter of 2008" (I wonder what adjusted operating profits are?) Of course, Vonage's efforts to become profitable aren't helped by the fact it spent more to acquire a customer ($239 vs. $236) in the second-quarter, while churn climbed to 2.3% from 2.1%. To put churn into perspective, Vonage attracted 377,005 new customers in the quarter but lost 121,069. Now, I'm not a financial wizard but these numbers don't pass the smell test. Granted, Vonage may 1.85 million customers but the rest of its financial metrics are going in the wrong direction. It explains why the stock is trading at $6.70 - compared with IPO price of $17.
Update: Jon Ogg has some good perspective on Vonage's numbers, while Om Malik also weighs into the Vonage fray. Meanwhile, the New York Times looks at how large carriers such as Verizon are losing local customers to cable rivals and VoIP service providers such as Vonage.

Not to revel in anyone's misery but Vonage shares touched a new low of $6.93 (59% below the $17 IPO price) yesterday before closing at $7.04. It didn't help Klausner Technologies Inc. is suing for alleged patent infringement, and seeking damages and royalties of $180-million. Klausner said the patents involve Vonage's voice-mail services. Ironically, the lawsuit was filed the same day Vonage said it acquired three patents from Digital Packet Licensing Inc.
Update: Dealbreaker.com has a post looking at how many Vonage customers have balked at paying for the IPO shares given their sharp decline.

Vonage's V-Phone - a USB-like device that turns any laptop into a Vonage phone - makes its Canadian debut today in downtown Toronto. Vonage shares, meanwhile, closed at $7.87 yesterday after touching a new low of $7.81 - 54% below the IPO price. It's interesting to see that analyst coverage of Vonage is expanding. UBS Securities recently initiated coverage with a "neutral" rating and a $10 target price, while CitiGroup initiated coverage with a 'hold" rating and an $11 target price. The target prices make you wonder how Vonage ever managed to sell the IPO at $17 a share. Someone did a great job selling investors on the prospects for Vonage and VoIP.