UPDATE 2-Vonage 1st-qtr loss narrows; customer growth slows

(Updates with share fall, adds analyst comment)

By Ritsuko Ando

NEW YORK, May 8 (Reuters) - Internet-based phone company Vonage Holdings Corp (VG.N) reported a narrower first-quarter loss on Thursday after cutting marketing spending, but customer growth slowed drastically as a result.

Shares of Vonage initially rose, but ended down 2.7 percent as investors looked beyond the slight quarterly improvement and focused on concerns about the company's outlook and debt refinancing prospects.

Chairman Jeffrey Citron said in an interview he expects a nonbinding letter of intent for a $215 million debt financing that Vonage obtained in April to turn into a formal commitment in the second quarter.

The debt is crucial for Vonage to refinance $253 million in convertible debt redeemable in mid-December. But Stanford Group analyst Clayton Moran said debt terms may not be good, given the troubles in the credit market.

"Given the soft operating results and the strained credit environment, we're afraid the terms will be onerous," Moran said. "It's possible that they won't work out terms with the current financier and turning to another alternative with less time probably won't be much better."

Vonage's net loss shrank to $9 million, or 6 cents a share, from $72 million, or 47 cents a share, in the same quarter a year earlier. Revenue rose 15 percent to $225 million, in line with Wall Street expectations.

But it added only 30,000 net subscriber lines in the quarter, a sharp decline from 56,000 additions in the previous quarter and 166,000 in the year-ago period.

"The growth has slowed pretty meaningfully," said Moran.

Citron told Reuters the slowdown was expected. "We spent less money, and obviously that's going to translate into slower growth. That was a conscious decision by the company."

MARKETING COSTS

Vonage was a pioneer in selling Web-based phone services to consumers looking for a cheaper alternative to regular phone service.

Its shares have tumbled around 90 percent since their market debut at $17 in May 2006 on worries of competition from cable companies and other Internet-based phone companies. It has also been hit by a series of patent lawsuits, and analysts are concerned about heavy advertising expenses.

First-quarter marketing costs fell to $61 million, or 27 percent of revenue, from $91 million, or 46 percent of revenues, a year ago.

Monthly customer churn, or cancellations, rose to 3.3 percent from 3.0 percent in the previous quarter due to customer service problems, specifically long waits on the phone for representatives.

Citron said the problems were addressed, and churn would likely improve in the second quarter.

He also said the company plans to boost spending on marketing in the latter half of the year to around 30 percent to 32 percent of revenue, and customer growth was likely to pick up as a result.

Citron acknowledged concerns about a slower U.S. economy as well as rising fuel costs, but said "those concerns have not affected us in material ways."

Addressing Wall Street's worries about the debt financing, Citron said the company would seek an alternate source if the letter of intent fell through.

"It's likely it will get done this quarter. There's a potential it could bleed out a little bit into the next, but we're really focused on completing it this quarter," he said.

"We feel confident that it's a good transaction and feel confident that the transaction will be completed as contemplated," he said.

The stock fell 5 cents to end at $1.83 on the New York Stock Exchange. (Editing by Derek Caney/Jeffrey Benkoe)