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Vonage Customers Flee in Q3

Light Reading
News Analysis
Light Reading
10/31/2006

Vonage Holdings Corp. (NYSE: VG) said it found consumer VOIP customers harder to catch and keep in the third quarter, but earnings from existing customers remained steady.

The company lost about 5,000 more customers a month in the third quarter than it did during the second quarter. The monthly rate at which subscribers left the service -- the churn -- increased from 2.3 percent to 2.6 percent in the quarter. (See Skype Sales Hit $50M.)

Vonage attributed the increase to problems in customer support. "Our huge growth has impacted our ability to take care of our customers," says Vonage spokeswoman Brooke Schulz. Schulz says her company is adding support personnel and training them better, and has already seen improvements as a result.

Vonage's customer acquisition costs increased as well. The company spent $254 to acquire each new customer during the third quarter. That's up from $239 per new customer in the previous quarter.

Vonage also isn't getting quite the bang from its advertising buck that it once did, Schulz says. "We saw a problem with our marketing; we're not seeing quite as much pull-though sales from our advertising." Schulz says Vonage's next wave of advertising will contain more educational content about VOIP as it tries to reach a "more mainstream" audience.

Vonage added 256,000 new subscribers in the second quarter, but only 205,000 new subscribers in the third quarter, bringing its total to just more than 2 million. (See Vonage Claims 2M Customers.)

The company told investors last quarter it expected to add 2.3 million to 2.45 million subscribers this year, but scaled back that prediction to between 2.2 million and 2.3 million for the year. Revenue guidance remained the same from last quarter, at between $600 million and $615 million for the year.

Vonage investors were a little spooked Tuesday. Shares were trading down $0.59 (7.92%) to $6.86 in late afternoon trading.



"We remain concerned about rising churn in the base in the face of increased competition from cable MSOs," wrote UBS AG analyst John Hodulik in a brief note to clients on Tuesday.

Vonage reported an adjusted net loss of $62 million for the third quarter, or 40 cents a share, on revenues of $161 million. That compares with a loss of $74 million, or $1.16 a share, on revenues of $143 million in the second quarter. Analysts polled by Thomson Financial expected a much wider loss of 44 cents a share.

— Mark Sullivan, Reporter, Light Reading

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