Vonage Boots CEO For 'Disappointing' Results

The VoIP leader still expects to prevail in court versus Verizon and to settle Sprint's claims amicably.

By Michael Hickins | Posted Apr 12, 2007
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Vonage , shaken by a dangerous patent lawsuit with Verizon, today booted CEO Mike Snyder over what chairman and new interim CEO Jeffrey Citron termed "disappointing" results.

The Holmdel, N.J.-based VoIP  broadband voice carrier will attempt to reboot its operations, principally by slashing its marketing budget by $110 million.

Vonage stock rose almost 11 percent to $3.33 in midday trading after the news broke during an investor conference call this morning.

"The whole entire marketing strategy is going to be under review over the next few days," Citron said on the call.

While Citron admitted that reduced spending on marketing will result in fewer new subscribers, he said that the company will acquire customers at better margins, thus "enhancing the value of the additional lines" that are added.

Gross customer acquisition costs were $275 per new line for the quarter ended March 31, 2007, compared with $306 for the previous quarter. Citron did not specify a new target for that number but said "there is room for additional improvement."

Vonage will also reduce general and administrative expenses by $30 million this year, in part by consolidating its operations and reducing its workforce.

Citron noted that the churn rate of 2.4 percent, and average revenue per user, were both flat sequentially, which he termed "promising signs of improvement."

The company also addressed its ongoing litigation with Verizon , which last week won its patent infringement suit against Vonage in federal court.

Vonage attorney Sharon O'Leary said the company is appealing the ruling on the grounds that the court improperly interpreted Verizon's patents.

"The court construed coverage [of the patents] beyond what was intended by the patent office," she said.

Verizon has until tomorrow, April 13, to respond to Vonage's appeal, and Vonage will then have until Tuesday April 17 to reply to Verizon's response, after which the court will hear arguments.

O'Leary said the appeals process is likely to take between a year-and-a-half and two years. If Vonage wins its appeal, the whole case will go back to the lower circuit court and be retried using the appeals court's new, presumably more limited, construction of the patent.

In the interim, Vonage has to pay a 5.5 percent royalty on revenue from infringing activity and post a $66 million bond to cover damages awarded Verizon by the jury.

Vonage is also designing technological workarounds in the event that its appeal fails, which it will discuss in detail during its quarterly earnings report in May.

O'Leary took a swipe at Verizon's true motivation for the lawsuit, which she contrasted to Sprint's  approach.

According to O'Leary, Sprint's lawsuit attacks very specific components of the technology, as opposed to what she termed Verizon's broader attack on VoIP services generally.

She added that, also in contrast to Verizon, Sprint has approached Vonage about negotiating a settlement. She said the companies are likely to "enter into a business arrangement."

"There are other motivations in the Verizon patent infringement case," she said.

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