Thursday, April 12, 2007

Vonage Speaks - Want to be Their CEO?

How's that for an opening to this morning's investor call???

Vonage had three spokespeople this morning - CEO - then Chairman - now interim CEO Jeff Citron, Sharon O'Leary and John Rego.

Jeff did most of the talking - no surprise there - and the first order of business was to announce that effective yesterday, Mike Snyder has stepped down as their CEO, and a replacement search is underway immediately. Any takers? Talk about an opportunity for a turnaround artist... or perhaps someone more aligned with where Jeff Citron wants to take the company.

It's not clear to me if this was Mr. Snyder's decision or the board's, but Jeff explained it was in the best interests of the company to do this. Until a replacment is found, Jeff will be the interim CEO.

Of course, by law, Jeff Citron can no longer be the CEO of a public company, so "interim" is the operative word here. Vonage may be his baby, but for now, he probably doesn't have much choice.

The call was barely 30 minutes, and there were 2 other key takeaways of note, and I'll also comment on some of the secondary items.

- Vonage will be doing internal restructuring and consolidating, both operationally, and on its marketing activities. No surprise there, but Jeff said this would include Canada and international operations, and would result in a $30 G&A reduction. No details were provided, but I could see that translating into closing down these operations, which would be bad news for Canada, and maybe even my Vonage line. Hmmm. Would they continue to provide service outside the U.S.? I hope so - and not just for my sake. Building Vonage into a global brand - "the world's broadband telephone company" - so to speak - is certainly one path they could take going forward, but I don't know if they're thinking that way. Doesn't look like it.

Operationally, it's mostly about cutting back on the marketing spend. Jeff said the 2007 spend will be down by $110 million from last year, and will come in at $310 million. That's still almost $1 million a day, but it is coming down. In short, he said they will have fewer new customers, but they'll come at a lower cost.

Jeff also explained that much of their marketing spend is "highly variable", and to get this down, they will cut channels and programs that are bringing in "marginal" customers. Sounds like a plan to me.

-Sharon provided a high level summary of the litigation issues and their take on things. At face value, she explained how they feel Verizon's allegations are too broad and not directly related to the technologies Vonage is using. She noted how Verizon's blanket allegations were pushed through and accepted wholesale by the judge in far less time - an hour - than the norm, and the technology was not reviewed or explained in enough detail to make a fair assessment. Well, if she's right, and if after a more balanced consideration is given to the case, and the jury sees it this way, then there's hope for Vonage. That would sure change things, at least for Vonage.

Being based in Canada, I can't help but notice the parallels here to the Conrad Black trial going on Chicago. That's another post in itself, but not today.

Some other items and dates of note she shared....

- 3 of 5 claims from VZ were upheld - 2 for address translation and 1 for wireless - the other 2 claims were rejected
- VZ has until Friday to file for a permanent injunction on VG
- VG has until the 17th to reply to this application
- court will decide at 10am on April 24
- she expects the appeals process to take 1.5 to 2 years

Otherwise, there some basic facts and figures worth passing on...

- Q1 revenues were $195M - up 63% from a year ago
- ARPU is expected to stay flat - that's not what I wanted to hear
- Q1 reported 2.39 million lines, with 332,00 adds
- Q1 marketing spend was $91M - down from $96M in Q4
- Q1 customer acquistion cost was $275 - wow! - but down $31 from Q4
- Q1 churn has stabilized at 2.4%
- Q1 cash balance was $420 million
- full earnings release coming in May
- expect $140 million in savings coming from these new initiatives

Jeff summed up by saying it's business as usual for now, but results have not been meeting expectations, so these changes are needed. They will also continue on finding workarounds to VZ, and he would only say that "these will take time". Your guess is as good as mine as to whether they are hot or cold in terms of having anything here.

There was some interesting dialog during the Q&A, but mostly cautious commentary. When asked about a profitability timetable, Jeff said it was too early to say how the 5.5% royalty scenario will impact earnings. Fair enough. I don't think profitability is Vonage's biggest problem right now, but this is what financial analysts want to know, and they were asking almost all the questions.

I tried repeatedly to get in the queue for questions, but never got the go ahead, which is too bad. Especially toward the end when they asked if there were any other questions out there, and then quickly said there were none, so it was time go. Arghh. Maybe they don't want to hear from Canada - or maybe Canadian area codes don't get picked up at their end. I'm reaching here, I know - and for the record, I was dialing in on a Vonage line. Needless to say, I wanted to ask Jeff what "consolidation" will mean for Vonage Canada. Guess we'll know soon.

Oh, two other Q&A items of note...

- good question about how the VZ claims differ from Sprint. They explained that Sprint's were more specific to Vonage's technology, whereas VZ's was a blanket claim and very general. Sharon also commented that the motivations behind each claim were different, but didn't elaborate other than saying with Sprint, a business arrangement is a more likely outcome than a legal settlement. Hmmm. Could that be a clue about Vonage's future???

- finally, the best question - I thought - came from fellow analyst, Daniel Berninger. Figures - the best questions come from the industry analysts, right? :-)) Anyhow, Daniel asked what I wanted to ask as well - why Vonage? To understand behavior and root cause you have to start with a motive. Why did VZ go after VG, and not someone else? I've said my piece on this already, but since you've got Jeff on the phone, you have ask, right? Well, we got nada on this one from Mr. Citron - "you'll have to ask Verizon". Maybe I should, but I suspect they'll tell me to go ask Vonage.

Back to work...

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ipcom said...

Posted by: TP

ARPU is flat...were you expecting existing customers to add lines or a higher selling price? You need to reconsider your expectations just like the rest of the analysts. Analysts haven't gotten anything right--especially Wall St. Ha ha IPO at $17, hold at $7 and sell at $3...says enough. Berringer at Tier1? He's been DEAD wrong since...well, $17. I like his thinking though. His question about VZ is a comment for a documentary. Hold on, I gotta take this call--it's Michael Moore.

Ok, I'm back. If Citron had all the answers to the analysts' questions, I don't think the stock would be circa $3. VZ is playing hardball and taking the class-action approach to letting all the indies (VOIP) know YOU! could be next. The claims are far reaching on the surface and certainly the USPTO needs to do a post-review if those claims are withheld and basically position Verizon as the Father of all things VOIP (which makes me wonder why Al Gore isn't the CEO).

As for Citron interim CEO...great. Wall St makes the most money from people with questionable pasts. It doesn't bother me a bit he's in here dealing with the other filthy side. I'll give you the difference between Citron and say Key Lay and Jeff Skilling. Both Lay and Skilling were LOVED by Wall St. They could do no wrong back in the day making billions for the banks, lawyers, accountants, etc.--I'm talking filthy rich at least until reality burned it all down. The results were a disaster and Wall St (to this day) denies involvement claiming its a victim despite 2 tons of paper-shredding by Arthur Andersen, etc. Citron et al took advantage of the SOES system and beat the Wall St crooks at their own game. Peanuts monetarily. Someone prominent on the Street lost and squealed. Citron said he was doing what everyone else on the St was (abusing SOES) and he settled to avoid exposing the whole scheme. Still, he's in the penalty box for being blatant.

Finally, go look at the companies with the least integrity, shady business deals and questionable leadership (oh...try Haliburton (HAL)). These companies outperform the model citizen (stocks) by a wide margin. These companies make Wall St big money vs. some green company that is virtuous. Simply, VZ is acting over-aggressive to protect its (and massive shareholder) interest. The vast majority of its current business--landlines--is funding its future SURVIVAL. Consider cut-off its oxygen and see how fast you get to the nerves of the monopolistic empire and all the prominent names holding the stock...instantly it get alarmingly uncomfortable. Cable is a major threat, but VG is simply in the crossfire and the sounding board. Now you have your answer.

ipcom said...

Posted by: TP

Interesting how people like Jimanipulator Cramer go from pro-Vonage death to Verizon (under $30 permanently) to death to Vonage (dog) to buy Verizon at $38.

Telcos Will Miss Chance With Vonage

March 5, 2004

By James J. Cramer

"Vonage keeps getting written off. And Vonage keeps winning. I don't think people understand that Vonage is Digital TV, that Vonage is EchoStar (DISH:Nasdaq - commentary - research).

They don't understand that this little company has a great business model, aggressive sales plans and all the money it needs.

It's funny, but if I were AT&T (T:NYSE - commentary - research) or MCI, I would buy Vonage, just because I have seen the future and this company's the winner.

Because it has the culture of a winner. Because it is hungry and has no infrastructure or legacy to fight against.

We've been bringing John Rego on "Kudlow & Cramer" regularly. He's Vonage's CFO. I know that I would love to see CEO Jeffrey Citron on the show, but he stays behind
the scenes. He's the visionary who saw all of the good things that could happen with the Internet and stock
trading.( I know he got in trouble, but that's past and it's time to stop harping on it.)

Today's announcement that Circuit City (CC:NYSE -commentary - research) will offer Vonage services is going to double Vonage's growth in the next three months, in
my opinion. This 120,000 customer company soon will have 240,000 customers, and it will be time for an IPO,
which will be the hottest IPO of the year, barring Google, and will be still one more great branding event.

I can't tell you how many people in entrenched telecom firms have dissed Vonage to me. They are so aggressive in despising it and insisting it will fail that I'd bet the farm that Vonage will beat them all at their own game."

Jimanipulator is blather for special interest. He incriminated himself weeks ago--a candid interview + off-the-cuff remarks = self-proclaimed fraud. Worse than anything Citron never admitted! Anyway, what is he or the rest of the million man media marching death to Vonage! going to do when Vonage does get some air to breath? All these media hucksters paid for attention. By the way, today, the $255 million bond the Gorilla requested during the appeal was denied by the judge. Next window, please.

ipcom said...

Posted by: TP

I'm sick and disgusted with hipocrytes like Jimanipulator "Jail-bird" Cramer. Shame on him for passing judgement on Jeff Citron.

I hope Cramer is arrested, charged and prosecuted for the crimes he's admitted to committing. There is no statute of limitation for fraud. Just punishment would be banned permanently from the media and securities industry . Immediately, CNBC should fire him as fast as Don Imus got a size 12 boot from NBC. The guy is a !#$king shill and a self-incriminated fraud.

Jimanipulator "Jail-bird" Cramer admitted in a candid, lengthy and descriptive interview that he manipulated markets and stocks to make money and there was nothing anyone could or would do about it--especially the ineffective (joke) SEC. He recanted a day later saying he was out of his mind... The video was on Youtube for awhile, but it's since been removed (again) for copyright reasons...imagine that. Jimanipulator "Jail-bird" Cramer is WORSE than Citron's alleged SOES abuse, and he should keep his mouth shut and prepare to answer to his own problems. He's going to have MAJOR legal problems with this.

What a hypocrite Jimanipulator is...

Cramer dedicated his "Sell Block" segment to Vonage (VG - Cramer's Take - Stockpickr).

Michael Snyder recently stepped down as Vonage's CEO and Jeffrey Citron has taken his place. However, because Citron was "banned from the securities industry in 2003," Cramer believes he "should not be allowed to be the CEO of a public company." This new appointment is just one more reason to sell Vonage, he said.

Cramer also put Johnson & Johnson (JNJ - Cramer's Take - Stockpickr - Rating) in the sell block, saying he likes the company, but he got it wrong.

J&J used to be best of breed, but the truth is there are very few blue chips left and this drugmaker is not one of them, he said. Not only are its drugs starting to come off patent, but J&J's Invega drug has been a "huge disappointment."

ipcom said...

Posted by: Kameran Ahari

My thoughts on the last question posed to Vonage � why did Verizon go after Vonage?

There are all kinds of strategies to compete. Those who have not mastered marketing strategy always seem to fall into the "frontal approach" trap. The two most commonly misused approaches are:

1. Take your competition head on � frontal - to build your brand and market share.

2. Take your time and circumvent your competition by differentiating your brand on the obvious merits of your superior offering.

A stealth approach to build sufficient brand equity using word of marketing would have been a smarter approach. Especially when you have incumbents with deep pockets.

When your ad strategy is to take on the incumbent's brand head on with TV commercials running nationally during primetime and with tag lines like "�one smart decision among many many stupid ones", be prepared for retaliation my friend.

As I commented earlier, Vonage's current situation only underscores a bigger problem for investors

Kameran Ahari

ipcom said...

Posted by: TP

It really is simple. Verizon can't sue anyone else. All CLECs/LECs and MSOs would crush Verizon like a grape on the grocery store floor.

Vonage is an easy target--an effective little project to staunch the indie VOIPps from flourishing too much. So why involve the world? Cable certainly doesn't want to get involved. Nope. They are too busy eating Verizon's and former Bell's breakfast, lunch and dinner--snapping up defectors and value-conscious consumers...even more so with Verizon preoccupied in the courts bedazzling itself with using its nuclear legal arsenal on an ant. This is why it can't serve THE WORLD with its lawsuit based on faulty claim constructions and invalid patents that otherwise deem it the Father of all things VOIP.

ipcom said...

Posted by: vic

It's been interesting following the development of this story. 80% share loss to date for Vonage. Verizon went after the poster child of VoIP, but I still want to know why even go after Vonage to begin with?

ipcom said...

Posted by: TP

Simple. It had over $500 million in cash that it has been spending [ineffectively] on new acquiring new customers. Verizon is simply relieving them of the inefficiency and applying the money towards funding its FiOS efforts.

Look at the Verizon horizon: wireless sales are cresting and competition is increasing, land-line sales are falling to the point Verizon is neglecting these lines

and it has a massive need for capital...enter Vonage. A small but easy target for half a billion. Who else could it sue? SunRocket with $12 million in cash and hanging by a thread? Ditto on 8x8 (plus it'd be crossing-over into BLS territory). Cable companies with deeper resources than Verizon could shake a stick at...

It's had success with this nuclear legal strategy so far [read: VG dead], yet most agree the suits are bogus. Still the easy money, stopping its loss of land-lines to Vonage (or at least convenient excuse for VZ's shareholders as to why land-lines are increasingly vanishing) and sending a message to the other indies (including pending MajicJack?) are the reasons to begin with Vonage.

ipcom said...

Posted by: john

It's been interesting following the development of this story. 80% share loss to date for Vonage. Verizon went after the poster child of VoIP, but I still want to know why even go after Vonage to begin with?