Vonage CEO steps down

A man makes a free phone call in an orange phone booth by Vonage at the 2006 Consumer Electronics Show in Las Vegas January 6, 2006. Internet phone company Vonage Holdings Corp. said on Thursday its chief executive stepped down and it plans to cut jobs and costs, as it seeks to revive its struggling business.

NEW YORK (Reuters) - Internet phone company Vonage Holdings Corp. (VG.N) said on Thursday its chief executive had stepped down and it plans to cut jobs and marketing costs, seeking to revive a business that investors worry may collapse.

Vonage shares, which have fallen more than 80 percent from their initial public offering price a year ago, rose 11 percent or 33 cents to $3.33 in early afternoon trading.

But analysts said the moves did little to improve business growth prospects or to address concerns over a patent lawsuit filed by Verizon Communications (VZ.N) that threatens to cripple Vonage's ability to sign on new customers.

"Reducing marketing will probably not help to accelerate growth. From a financial perspective, though, it's probably the right move," said Stanford Group analyst Clayton Moran.

He said he was telling clients to avoid Vonage shares, citing growing competition from cable and telecommunication rivals. "There's too much uncertainty in its operations," he said. "The risk is too high."

Vonage said CEO Michael Snyder resigned from the board effective Thursday. Chairman Jeffrey Citron, who had been CEO of Vonage from January 2001 to February 2006, will be interim CEO until the company finds a replacement.

Vonage did not say how many jobs it plans to eliminate, but the goal was to reduce its general administrative expenses by $30 million through the rest of 2007 by cutting its workforce and consolidating operations. It estimated a $5 million charge for employee termination benefits in the second quarter.

The company also said it plans to cut marketing costs by $110 million this year, resulting in marketing spending of about $310 million in 2007.

Heavy spending has been one of the top concerns among investors as Vonage prioritized subscriber growth over profitability.

"This reduction in marketing will result in fewer line adds in 2007 but it will enhance the economics of the lines we bring in, which we will acquire at a lower cost," Citron told investors on a conference call.

"We believe these initiatives will strengthen the company's financial position and bring us to positive adjusted operating income," he said, without giving a time frame.

The money-losing company had previously said it would post an adjusted operating profit in the first quarter of 2008. It declined to update that estimate, saying it was still assessing the impact of the patent dispute with Verizon.

DOUBTS OVER GROWTH

Analysts have said the lawsuit has turned into a graver setback for Vonage than initially expected.

A federal jury in March found Vonage had infringed three patents owned by Verizon related to Voice-over-Internet Protocol (VOIP) technology, and said Vonage must pay $58 million, plus royalties on future sales.

The court said it would bar Vonage from adding new customers to its Internet phone service while it appealed the finding, but the company got an appeals court to consider allowing business as usual during the appeals process.

The lower court's bar has been temporarily suspended pending consideration of a permanent stay. The U.S. Court of Appeals for the Federal Circuit has scheduled oral arguments for April 24.

Analysts say any disruptions in service would likely lead to cancellations and throw off the company's growth model, adding to worries about competition.

"I think that regardless of what happens with the patent case, offering stand-alone voice service is a commodities business under intense competition," said Stanford's Moran.

He also noted the company did not give details on how it expects to work around Verizon's patents on Thursday, a factor many analysts say would be crucial to its viability.

Vonage lawyer Sharon O'Leary said the company was confident it will win the appeal. "We will continue to work on our appeal, and expect the entire appeals process to take one-and-a-half to two years to run its course," she said.

Vonage estimated revenue of $195 million for the quarter ended March 31, compared with the average Wall Street analyst forecast of $197.8 million according to Reuters Estimates.

It added 166,000 net subscriber lines in the quarter, with customer losses -- known as churn -- of 2.4 percent. The average marketing cost per gross subscriber addition was $275.

Citron's assumption of the CEO position, while short-term, may also raise some questions. He relinquished the CEO role before Vonage's IPO, a move that was widely seen as a way to avoid investor worries about a previous run-in with the U.S. Securities and Exchange Commission.

Citron paid the SEC $22.5 million to settle charges of unlawful trades, without admitting or denying the SEC's allegations.