Analysts believe Vonage Holdings Corp. (NYSE: VG)'s worrisome fourth-quarter numbers, announced Thursday, reflect increasing competition from the bundled voice services of cable operators. (See Vonage Reports Q4.)

The VOIP specialist's latest financials reveal a worrying trend. Vonage's customer acquisition costs rose sharply to $306 for each new customer added during the fourth quarter, up from $244 per new customer a year earlier.

Despite that increased investment, Vonage's customer base grew by 166,267 subscribers, compared with 207,252 customer adds during the same quarter a year earlier.

Vonage ended 2006 with just over 2.2 million lines, up 75 percent from 1.27 million at the end of 2005.

"Net subscriber adds were lower than we expected, and the customer acquisition costs were higher than we thought," says Piper Jaffray & Co. analyst Troy Jensen.

The reason? People are attracted to the kind of service bundles that the cable operators are offering, says Jensen, and that's "raising the subscriber adds for the cable guys, and it's lowering [their] churn rate." (See Cable to Hit 11M VOIP Subscribers in '07 .)

And on the marketing side, the analyst says Vonage's best days might be behind it. "They had an opportunity two years ago when they were the only ones marketing and they were picking up share, but now it's just going the other way," Jensen says. (See Vonage Adding Enhanced Voice Tricks.)

Buckingham Research Associates analyst Qaisar Hasan notes that Vonage's customer acquisition costs have been increasing in each of the past few quarters. With the amount of cash the company has now, Hasan says Vonage can keep paying the current customer acquisition costs for another two-and-a-half years.

But Hasan notes that adding new customers is going to become "more and more challenging with the passage of every quarter," as competition from cable and telco bundles intensifies. Every day "more homes get access to cable telephony, and those homes are less likely to sign up with Vonage," he says.

Vonage appears to have accounted for the impact of greater competition in its forecast for 2007 revenue, which also fell short of analysts' expectations. The company predicts annual revenues of $850 million to $900 million, up from $607 million in 2006. Analysts, though, were expecting 2007 revenues of $924 million.

Investors weren't happy with Vonage's news and outlook. The service provider's share price closed down 54 cents Thursday, more than 9 percent, at $5.30. The stock has lost 65 percent of its value since the company joined the stock market in May 2006. (See Poll: Vonage IPO Gets Thumbs Down and Vonage Falls Hard & Fast in Public Debut.)

Vonage acknowledges it has a problem. "Although we had a great year, adding nearly 1 million new lines, we did see some reduced effectiveness in our marketing efforts during the fourth quarter," says Vonage spokeswoman Brooke Schulz.

But the company doesn't believe competition from cable service providers is hurting its numbers. "While competition is also a factor here, we don't think it is causing the deterioration in net additions, because the areas in which we have cable competition are those that perform the best for us," Schulz says.

Vonage reported that its fourth-quarter revenues rose to $181 million from $95 million in the year earlier period. Analysts had expected $180 million.

The company reported a net loss of $65 million for the final three months of 2006, though that at least was better than the $72 million net loss recorded a year earlier.

Hasan at Buckingham Research says Vonage's profitability doesn't provide much insight into the company's ongoing performance at present. "It's a little bit misleading to look at the bottom line of companies like Vonage, because they are subscription-based and still in a growth mode."

He says one reason Vonage's loss narrowed in the fourth quarter is that its customer activation costs were lower because of the reduced number of new customers.

— Mark Sullivan, Reporter, Light Reading