Vonage Narrows Losses, But Churn Hurt by Verizon Litigation, ‘Inconsistent’ Service
Tangled in a patent lawsuit with Verizon, Vonage posted revenue growth and lower losses in Q2 results reported Thursday. Despite those positives, the VoIp company’s churn suffered from customer anxiety about suits and irritation at customer care quality. The second quarter was a “period of transition” and “one of the most difficult quarters in Vonage’s history,” CEO Jeffrey Citron said in a Q2 call. “Despite the continued challenges associated with the Verizon litigation,” which so far has cost $6 million, Vonage “made significant strides… reducing costs and narrowing [its] losses,” he said.
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Rising average revenue per line drove Vonage revenue up 43 percent year-over-year to $206 million, a company best. Vonage shrank its operations loss to $34 million, compared with last year’s $74 million. Average monthly Q2 revenue per line was $28.38, up 49 cents from 2006. Vonage added 56,691 subscribers, down from 255,936 last year and 165,646 last quarter. Net adds were hurt by lower gross adds and higher churn, UBS analysts said. Spending less on marketing had much to do with reduced gross adds, Vonage said. Vonage spent $68 million, compared to $90 million last year and $91 million in Q1. Vonage expects more subscriber additions Q3 “as new marketing initiatives take hold and the negative press associated with the Verizon litigation lessens,” Vonage said.
Rivals don’t pull customers from Vonage; Vonage drives them off, Citron said. Average monthly customer churn was 2.5%, up 0.1 percentage point from last year. Citron blamed an “inconsistent user experience” and reaction to Verizon litigation for alienating customers, Citron said. Q2 saw Vonage lengthen its grace period for non-payment in an effort to improve the number. The company has a plan for improving customer experience and honing customer care center support with better training and more investment in technology, Citron said. Vonage expects the Verizon litigation’s impact on churn to run into the third quarter even if the case goes Vonage’s way, since churn is a “lagging indicator,” he said. But that figure should improve more significantly Q4, he said.
The Verizon suit’s negative financial impact should ease by year-end, Citron said. Vonage deployed workarounds for Verizon’s two name translation patents and finished developing the wireless patent workaround, he said, calling those efforts “a significant step toward moving ahead with our business in the wake of the Verizon litigation.” Vonage is waiting on a Federal Circuit Appeals Court ruling expected in September, he said. Then it will be up to Verizon to pursue litigation as to Vonage’s workarounds, he said. Vonage need not pay Verizon another royalty unless the appeals court doesn’t rule until October, he said. “We look forward to the court’s ultimate decision and remain confident in the strength of our appeal.”
Vonage’s legal woes reach beyond Verizon. In a sealed order issued Tuesday, a federal judge rejected Vonage’s motion to dismiss Sprint’s patent infringement lawsuit against the VoIP company. In October 2005, Sprint filed 61 complaints in the Kansas District Court against Vonage alleging infringement of seven Sprint patents. Rendering summary judgment Monday, District Judge John Lungstrum rejected several of those; the rest will go to jury trial, Citron said, adding that Vonage believes jurors will reject Sprint’s surviving claims. The trial is set for Sept. 4.
SunRocket’s failure illustrates survival challenges in the VoIP industry, but Vonage sees opportunities for long-term growth, Citron said, observing that SunRocket followed a risky business plan and ran into a funding gap. SunRocket folded so quickly Vonage couldn’t woo its customers with much more than a press release; Vonage didn’t learn of SunRocket’s struggles until “right before” the Vienna, Va.-based company closed its doors, Citron said.
Vonage has formed partnerships to bring broadband service to its customers, Citron said. Now testing bundled offerings, the company likely will move soon to expand them to a bigger footprint, he said.