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Vonage 2Q 2009 financial results – Half empty or half full?

I’ve been spending the last day staring at the ocean and pondering what the latest financials for Vonage really mean.  Is the glass half empty or half full?

The half-empty argument is pretty straightforward and buried at the end of the company’s rah-rah “We’re in the black” verbiage. Vonage lost a net 89,000 subscribers last quarter, which is chump change with around 2.5 million subscribers on the books, but the company’s run rate in adding subs has slowed for a while, then went red last quarter with a  net loss of 6,000 subs.

For a while, Vonage was parroting the “When the economy is bad, we’ll gain because we’re a cheaper alternative to domestic phone service” babble, but the trend line for new subs is downward trending. Time to face facts: The very cheap are going to MagicJack and the thrifty-minded are taking advantage of triple-play bundling by telcos and cable companies.

Add onto this problem #2: Vonage’s monthly churn rate has risen from 3.1 percent per month to 3.2 percent.  No matter how you slice it, Vonage has been around the 3 percent range for churn, so this is an ongoing problem that they haven’t managed to manage yet.

Finally, we come to chronic problem #2: cost of customer acquisition.  This quarter, Vonage spent a whopping $363 per signed customer, a number that has gone UP  both from the last quarter and on a year-to-year basis. This time last year, Vonage spent $283 per customer, while last quarter the company “only” spent $290.

Double-wammie here is that market expense was down $14 million from the first quarter as Vonage “eliminated redundant spending, offset costs for prior period promotions and transitioned to a new marketing campaign.”  Sooo, they cut their marketing expenditures and raked in fewer customers per dollar spent — it ain’t pretty.

For the price of of what Vonage spent to acquire new customers, ooma would have given each customer new phone hardware, five years of phone service — and still have around $113 or so left over at list price (plus $20 more for the sale this week as ooma unloads generation 1 hardware).

Balance that against the half-full argument – record earnings of $31 million, making the seventh consecutive quarter of positive and increasing adjusted EBITDA.  There’s a bunch of new (for Vonage) products in the pipeline to leverage its existing customer bases, with plays in the mobile and international markets. Vonage also believes that its new marketing campaign will drive more customers…. we’ll see. It also has lowered its total cost in delivering phone service, but the costs per line are up about 9 cents. (Multiply by 2.5 million to figure out the real money).

Vonage has a long way to go before it breaks out the champagne.

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