Vonage Speaks - Want to be Their CEO?

How's that for an opening to this morning's investor call???

Vonage had three spokespeople this morning - CEO - then Chairman - now interim CEO Jeff Citron, Sharon O'Leary and John Rego.

Jeff did most of the talking - no surprise there - and the first order of business was to announce that effective yesterday, Mike Snyder has stepped down as their CEO, and a replacement search is underway immediately. Any takers? Talk about an opportunity for a turnaround artist... or perhaps someone more aligned with where Jeff Citron wants to take the company.

It's not clear to me if this was Mr. Snyder's decision or the board's, but Jeff explained it was in the best interests of the company to do this. Until a replacment is found, Jeff will be the interim CEO.

Of course, by law, Jeff Citron can no longer be the CEO of a public company, so "interim" is the operative word here. Vonage may be his baby, but for now, he probably doesn't have much choice.

The call was barely 30 minutes, and there were 2 other key takeaways of note, and I'll also comment on some of the secondary items.

- Vonage will be doing internal restructuring and consolidating, both operationally, and on its marketing activities. No surprise there, but Jeff said this would include Canada and international operations, and would result in a $30 G&A reduction. No details were provided, but I could see that translating into closing down these operations, which would be bad news for Canada, and maybe even my Vonage line. Hmmm. Would they continue to provide service outside the U.S.? I hope so - and not just for my sake. Building Vonage into a global brand - "the world's broadband telephone company" - so to speak - is certainly one path they could take going forward, but I don't know if they're thinking that way. Doesn't look like it.

Operationally, it's mostly about cutting back on the marketing spend. Jeff said the 2007 spend will be down by $110 million from last year, and will come in at $310 million. That's still almost $1 million a day, but it is coming down. In short, he said they will have fewer new customers, but they'll come at a lower cost.

Jeff also explained that much of their marketing spend is "highly variable", and to get this down, they will cut channels and programs that are bringing in "marginal" customers. Sounds like a plan to me.

-Sharon provided a high level summary of the litigation issues and their take on things. At face value, she explained how they feel Verizon's allegations are too broad and not directly related to the technologies Vonage is using. She noted how Verizon's blanket allegations were pushed through and accepted wholesale by the judge in far less time - an hour - than the norm, and the technology was not reviewed or explained in enough detail to make a fair assessment. Well, if she's right, and if after a more balanced consideration is given to the case, and the jury sees it this way, then there's hope for Vonage. That would sure change things, at least for Vonage.

Being based in Canada, I can't help but notice the parallels here to the Conrad Black trial going on Chicago. That's another post in itself, but not today.

Some other items and dates of note she shared....

- 3 of 5 claims from VZ were upheld - 2 for address translation and 1 for wireless - the other 2 claims were rejected
- VZ has until Friday to file for a permanent injunction on VG
- VG has until the 17th to reply to this application
- court will decide at 10am on April 24
- she expects the appeals process to take 1.5 to 2 years

Otherwise, there some basic facts and figures worth passing on...

- Q1 revenues were $195M - up 63% from a year ago
- ARPU is expected to stay flat - that's not what I wanted to hear
- Q1 reported 2.39 million lines, with 332,00 adds
- Q1 marketing spend was $91M - down from $96M in Q4
- Q1 customer acquistion cost was $275 - wow! - but down $31 from Q4
- Q1 churn has stabilized at 2.4%
- Q1 cash balance was $420 million
- full earnings release coming in May
- expect $140 million in savings coming from these new initiatives

Jeff summed up by saying it's business as usual for now, but results have not been meeting expectations, so these changes are needed. They will also continue on finding workarounds to VZ, and he would only say that "these will take time". Your guess is as good as mine as to whether they are hot or cold in terms of having anything here.

There was some interesting dialog during the Q&A, but mostly cautious commentary. When asked about a profitability timetable, Jeff said it was too early to say how the 5.5% royalty scenario will impact earnings. Fair enough. I don't think profitability is Vonage's biggest problem right now, but this is what financial analysts want to know, and they were asking almost all the questions.

I tried repeatedly to get in the queue for questions, but never got the go ahead, which is too bad. Especially toward the end when they asked if there were any other questions out there, and then quickly said there were none, so it was time go. Arghh. Maybe they don't want to hear from Canada - or maybe Canadian area codes don't get picked up at their end. I'm reaching here, I know - and for the record, I was dialing in on a Vonage line. Needless to say, I wanted to ask Jeff what "consolidation" will mean for Vonage Canada. Guess we'll know soon.

Oh, two other Q&A items of note...

- good question about how the VZ claims differ from Sprint. They explained that Sprint's were more specific to Vonage's technology, whereas VZ's was a blanket claim and very general. Sharon also commented that the motivations behind each claim were different, but didn't elaborate other than saying with Sprint, a business arrangement is a more likely outcome than a legal settlement. Hmmm. Could that be a clue about Vonage's future???

- finally, the best question - I thought - came from fellow analyst, Daniel Berninger. Figures - the best questions come from the industry analysts, right? :-)) Anyhow, Daniel asked what I wanted to ask as well - why Vonage? To understand behavior and root cause you have to start with a motive. Why did VZ go after VG, and not someone else? I've said my piece on this already, but since you've got Jeff on the phone, you have ask, right? Well, we got nada on this one from Mr. Citron - "you'll have to ask Verizon". Maybe I should, but I suspect they'll tell me to go ask Vonage.

Back to work...

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