Vonage CEO resigns; Company moves to cut costs

Company Chairman Jeffrey Citron brought in as interim CEO

With much of Vonage Holdings Corp.'s future already clouded by a losing fight in a recent patent infringement case that threatens its business, Michael F. Snyder, CEO of the broadband telephone service provider, resigned, effective yesterday.

In an announcement this morning, the company said that Snyder "stepped down" and was replaced by Vonage Chairman Jeffrey A. Citron, who will act as interim CEO.

The move came as part of a broad restructuring also announced by the company as it tries to stem its operating losses. The company had a net loss of $286 million in 2006, compared with a net loss of $261 million in 2005. Revenue for 2006 was $607 million, compared with 2005 revenue of $269 million.

In addition to battling for customers, the company has been mired in a court fight with telecommunications giant Verizon Communications Inc. over the technologies Vonage uses to provide its voice-over-IP phone services.

Early last month, Vonage was ordered by a federal court to pay $58 million for infringing on three patents owned by Verizon. The eight-member federal jury also said Vonage must pay a 5.5% royalty to Verizon on Vonage sales going forward.

Two weeks later, Vonage share prices plunged by more than 24% when a federal judge agreed to bar the company from signing up new customers and using Internet phone call technology patented by Verizon. An appeals court later issued a temporary stay on that order, which allows Vonage to continue to sign up new customers until an appellate court can hear Vonage's request for a permanent stay.

As part of today's announcement, the company said it will cut expenses to continue its operations as it battles for its survival.

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

The company said it will cut marketing expenses by about $110 million, and general and administrative expenses by $30 million through the remainder of 2007, through consolidation of operations and workforce reductions.

"Mike has made valuable contributions to the growth of our business, and we will miss him," Citron said in a statement. "We thank him and wish him well in his future endeavors."

Snyder came to Vonage in February 2006 as CEO from ADT Security Services Inc., where he had been president since 1997. Snyder joined ADT, a subsidiary of Tyco International Ltd., in 1977.

Jeff Kagan, an independent telecom analyst based in Atlanta, said today that the problems facing Vonage are with the company itself and are not specific to VoIP technology.

"It is always disturbing to hear about a CEO stepping down when a company hits turbulent waters," he said via e-mail. "Vonage has been in very rough waters lately. The question is will Vonage be able to make it through? They have customers, but they have been spending way too much to get them. The idea behind Vonage is VoIP and that is still hot. VoIP is not in jepardy. This is a Vonage problem we are watching, not an industry problem."

David Lemelin, an analyst with In-Stat in Scottsdale, Ariz., said that the company needs to let its customers know that it is still focused on their needs. "They're essentially on life support and communicating substantial changes is key to their survival," Lemelin said.

The announced cuts in marketing spending are a surprise, Lemelin said, especially since the company said during its IPO last year that strong marketing efforts would be core to its success. "Obviously, they are hurting for money right now and their legal fees are going to be mounting, so I don't think they have much choice. The key to reassuring as many existing customers as they can is that they'll continue to benefit from the service."

Another problem is that Vonage's high churn rate -- the constant turnover of old and new customers each month -- is about 2.5%, Lemelin said. An acceptable churn rate for VoIP services is still difficult to gauge, he said, but an acceptable churn rate for wired phone service is less than 1% per month.

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