Reeling From Q3 Loss, Vonage Plans To Ramp Up Ads

by Laurie Sullivan, Nov 9, 2007, 5:00 AM

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Vonage Holding on Thursday reported a sharp third-quarter financial loss from marketing costs and legal woes after settling patent disputes.

The net loss for the quarter jumped to nearly $162 million, or $1.04 per share--up from $62 million, or 40 cents per share, in the year-ago period. On the upside, revenue climbed 30%, to $211 million. Gains came from adding 78,000 subscribers.

Not great news considering the percentage of Vonage customers bailing to other carriers grew to 3%--up from 2.5% sequentially. Vonage says it's addressing the problem, which will likely require the company to incur higher advertising and marketing costs to convince consumers to stick around.

Vonage typically taps TV ads to get its brand in front of consumers. Now that its litigation troubles appear to be over, it will ramp advertising back up. The marketing activity will likely focus on reassuring existing and new customers that it is still in business, according to Jan Dawson, an analyst at research and consulting firm Ovum.

"Vonage advertises heavily because they have a weak brand," he says. "They had to pay out big to settle litigations and cut back on advertising so they wouldn't get stuck with a bunch of willing customers they couldn't sign up."

Meanwhile, marketing costs for the quarter ending Sept. 30 declined to $62 million, or 29% of revenue--down from $91 million, or 56% in the prior year. Cost-per-gross subscriber line addition (SLAC) was $206 in the third-quarter 2007--the lowest in two-and-a-half years-- but the company expects fourth-quarter 2007 SLAC to increase slightly, to between $225 and $250, citing seasonal factors. Pre-marketing operating income, excluding certain charges, was $71 million--up from $50 million in the year-ago quarter and flat sequentially.

Although the Holmdel, N.J., Internet-phone company still faces a multitude of problems, it claims to have "reached an agreement in principle" to settle the intellectual property litigation suit filed by AT&T on Oct. 17.

AT&T filed suit against Vonage in the District Court, Western District of Wisconsin, concerning Patent No. 6,487,200. The parties are working to finalize specific settlement terms that would require Vonage to pay $39 million over five years. In return, the two companies would agree to dismiss lawsuits against each other. According to an AT&T spokesperson, "we are in discussions with Vonage, as we have been for the last two-and-a-half-years."

Last month, Vonage settled two major patent lawsuits that raised possibilities of the company filing for bankruptcy protection. The company reconciled by agreeing to pay Verizon Communications $120 million, and Sprint Nextel $80 million.

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