• by Kevin Ransom , April 13, 2007

Vonage Holdings Corp., beleaguered provider of broadband telephone service, announced yesterday that CEO Michael Snyder has stepped down and resigned from the company's board of directors--and that chairman and company founder Jeffrey Citron has added interim CEO to his title as the company searches for Snyder's replacement.

Concurrently, the company announced significant cuts: Vonage's 2007 marketing budget has been slashed by $110 million, down to a projected $310 million for the year. And another $30 million in general and administrative cuts will be implemented for '07, mostly through consolidation of operations and workforce reductions.

Repercussions could be enormous--since the company was the biggest online ad spender in 2006, plunking down more than $185 million. While withdrawal of Vonage's ads could hurt some sites, it would open inventory for other advertisers.

Vonage said the cuts will "enhance shareholder value and improve its competitiveness in the marketplace." The company did not return phone calls seeking more information.

These moves come as the company is still reeling from a devastating courtroom body blow. In March, a federal jury ordered Vonage to pay $58 million to competitor Verizon Communications Inc. for infringing on several of its patents. That heavy legal smackdown led to a reported 82% free-fall in the company's stock.

Verizon asked the court to issue a permanent injunction that would prevent Vonage from using the patented technology, which connects its Internet system to the public phone network. Vonage appealed, and a U.S. District Court of Appeals issued a partial stay, allowing Vonage to keep serving current customers, but preventing the company from adding any new ones until it stopped using Verizon's patented technology. The appeals court gave Verizon until today to respond.

Vonage reported that it will continue to provide digital telephone service to existing customers indefinitely, by paying into escrow a quarterly royalty of 5.5% throughout the appeals process. The District Court also required Vonage to post a bond of $66 million to secure Verizon's damages judgment.

Although Vonage had not finalized its financial statements for the quarter ending March 31, it did project further losses from operations. The company presented a preliminary statement yesterday, estimating first-quarter total revenues of $195 million; gross subscriber line additions of 332,000, net subscriber line additions of 166,000 and a marketing cost of $275 per gross subscriber line addition.

"In order to strengthen Vonage's financial position, we are taking (these) measures to reduce our costs and operating expenses," said Citron in a statement. "We remain focused on improving our competitive position in the marketplace."

Earlier this week, Vonage issued a separate statement musing that Verizon's lawsuit is "an attempt to do in the court room what Verizon could not succeed in doing in the marketplace--which is to put Vonage out of business."

Vonage's legal woes make its rocky financial outlook even rockier. Vonage reported a net loss of $286 million for 2006, and a net loss of $261 million in 2005.

Vonage has yet to post a profit since it began selling its Internet phone service in 2001, partly because many of its new customers later drop Vonage in favor of Internet phone services offered by cable companies that bundle cable TV, voice and Internet services into low-priced packages.