Vonage CEO quits; firm will cut jobs, costs
Vonage Holdings Corp., its survival threatened by a court loss in a patent case, said Thursday that its chief executive had quit and that it would cut jobs and costs by $140 million this year to help put the Internet phone company on a path toward profitability.
Ahead of its full first-quarter report in May, the pioneering but money-losing company also said it took in $195 million in revenue and netted 166,000 new subscribers during the first three months this year to reach 2.4 million.
Those results disappointed many industry analysts, who believe that the company’s problems run deeper than what basic cost cuts can fix and go beyond the battle with Verizon Communications Inc. over such patents as the technology to deliver Internet phone calls. Vonage is finding itself muscled aside by bigger, better-armed cable TV companies, the analysts said.
Former CEO Michael Snyder agreed late Wednesday to leave, Chairman Jeffrey A. Citron told analysts. Citron, the company’s co-founder and original chief executive, took over Snyder’s post for what he said would be a short interim basis while Vonage directors search for a replacement.
Citron would not say how many of Vonage’s 1,800 employees would be fired, but experts predicted that as many as 10% would go. Spokeswoman Brooke Schulz said the cuts would be across the board, including the technology and consumer service divisions.
The departure of Snyder had been expected. He was brought in as CEO shortly before Holmdel, N.J.-based Vonage went public in May, but had failed to meet some major goals the company had set, analysts said.
“With the stock tanking and pressure from cable TV operators entering the [Internet phone] space, people felt Mike was not able to turn the company around, at least not fast enough,” said analyst Albert Lin at American Technology Research.
Vonage shares rose 20 cents to $3.20, having fallen steadily since they fetched $17 in last spring’s initial public offering.
The resignation and other changes, although significant, aren’t meaningful when a court order in the patent case could bar Vonage from signing up new customers, said Clayton F. Moran, an analyst at Stanford Group Co.
A federal jury last month found that Vonage had infringed three Verizon patents and ruled that Vonage must pay Verizon damages of $58 million plus future royalties of 5.5%. Verizon then won a court order halting Vonage from using its technology to serve new customers.
Vonage won a temporary reprieve from a federal appeals court, which has scheduled a hearing for April 24.
“It’s crucial for the company to get a permanent stay pending appeal,” Lin said. Otherwise, he said, Vonage won’t grow and the business won’t be viable.
Citron said the company, meantime, was designing technology to get around Verizon’s patents, which include one that connects Internet calls to the public phone network. He promised more information when quarterly results were released.
Vonage lowered its huge cost to acquire each new customer by $31 in the first quarter, but the $275 price tag is still too high, Citron and analysts said.
Worse, the churn rate -- the percentage of customers quitting the service -- rose to 2.4% from 2.3% in the fourth quarter. The company added a total of 332,000 new subscribers, but lost 166,000, or half the number it had gained.
The company’s patent loss and operating and marketing issues aren’t the real problem, said Blair Levin, an analyst at Stifel, Nicolaus & Co.
“The real problem is their business model,” he said. “The market is changing significantly to where people are bundling services from one provider and where cable TV firms already have relationships with large groups of customers.”
