Vonage replaces CEO, still rudderless

Vonage replaces CEO, still rudderless

Summary: Updated below: Perhaps Michael Snyder stepped down as CEO of Vonage because he realized he wasn't the best executive for the job. But naming company founder Jeffrey Citron as interim CEO--even for a short time--may not be the best fix either.

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TOPICS: Verizon
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Updated below: Perhaps Michael Snyder stepped down as CEO of Vonage because he realized he wasn't the best executive for the job. But naming company founder Jeffrey Citron as interim CEO--even for a short time--may not be the best fix either.

Why? Citron has had his run-ins with the Securities and Exchange Commission while he was at Datek Online Holdings over securities fraud allegations. He was barred from associating with any securities broker or dealer and paid $22.5 million in civil penalties.

From Vonage's IPO filing dated August 2006:

"Citron and other individuals participated in an extensive fraudulent scheme involving improper use of the Nasdaq Stock Market's Small Order Execution System, or SOES. Datek Securities (through its successor iCapital Markets LLC), Mr.  Citron and other individuals entered into settlements with the SEC in 2002 and 2003, which resulted in extensive fines, bans from future association with securities brokers or dealers and enjoinments against future violations of certain U.S. securities laws."

Indeed, Citron's issues are in the past, but Vonage gave the Datek incident a lot of play in its filings leading up to the IPO. In fact, part of the reason Snyder was CEO in the first place was that Citron was a liability.

"There is a risk that some third parties will not do business with us, that some prospective investors will not purchase our securities or that some customers may be wary of signing up for service with us as a result of allegations against Mr.  Citron and his past SEC and NASD settlements. We believe that some financial institutions and accounting firms have declined to enter into business relationships with us in the past, at least in part because of these matters."

And now Citron, who had been Chief Strategist, has to right the ship as CEO on a "short-term basis." But the risks Vonage noted about Citron before are still in play. Bottom line: Citron may still be a liability. As a Vonage customer questioning the company's prospects, this development isn't comforting.

Meanwhile, Citron is applying the band-aids to Vonage's business. Vonage said it plans to reduce its marketing expense by about $110 million. For 2007, Vonage plans marketing expenditures of roughly $310 million. General and administrative expenses will be cut by $30 million through "consolidation of operations and workforce reduction."

Vonage is projecting revenue of $195 million for the quarter ending March 31. Wall Street was expecting revenue of $197 million, according to Thomson Financial. Vonage is projecting 332,000 gross subscriber line additions, 166,000 net subscribers and an average monthly churn of 2.4 percent. Those projections a bit light, but are in the ballpark of Wall Street estimates.

The big question is how those projections unravel in the upcoming quarters. An even bigger question: What if Vonage needs more financing as it dukes it out with Verizon over patents? Financial firms were wary of Citron before. They certainly aren’t going to be more enthusiastic given Vonage’s problems.

Update 12:15 p.m. ET:

A few takeaways from the Vonage conference call. Jon Arnold also has his take.

Citron's status: Citron said a search to replace Snyder started today. When asked about his previous problems with the SEC, Citron declined to comment on whether he was allowed to be CEO of a public company.

Verizon patent dispute: Vonage chief legal officer Sharon O'Leary said that the company's plan was to appeal Verizon's patent suit. She also noted that "we don't believe we infringed on Verizon's patents." She had a bevy of issues with the way the court handled the Verizon suit. O'Leary said the court essentially took Verizon's word that the patents were valid and "reduced a hearing that usually takes days to a few hours."

"The likelihood we will succeed on appeal is strong," said O'Leary. "We will work on our appeal and expect it to take one and a half or two years to run its course."

Sprint patent suit coming: O'Leary said it was uncertain whether a Sprint suit overlapped with Verizon patent claims. O'Leary said Sprint has approached Vonage about patents to work out a business arrangement. "I feel very strongly we can enter into a business arrangement to solve that matter," she said.

The workaround: Citron couldn't give a timeline on the development and design of workarounds that would render Verizon's patent moot. However, these workarounds are in the design phase. Citron said Vonage "will have better picture of timelines in May."

Churn increase due to negative publicity: Citron argued that Vonage's churn rate in the first quarter was consistent with the fourth quarter. Citron noted it's too early to see any customer impact due to the Verizon patent suit. 

Topic: Verizon

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4 comments
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  • Vonage vs. Verizon

    I was seriously considering Vonage but have recently changed my mind. I want to order DSL and VoIP have you or a friend ever ordered through www.dsldance.com or other sites like it? Their deals look better than the providers.
    Sparky1635
  • I dont like what i am seeing.. this is not good.

    Both sprint and verizon? Why the patent claims if the hardware is commerically based? Wouldnt the issue reside with the OEM? What prompted them to put a guy who has been nailed for cheating in the drivers seat of a public company?

    I looked at thier IPO, i chose not to buy stock, heck i can buy it for less now than what they offered me months ago. No, i dont think the ship is sinking, no i dont think they need a life raft, yes every company has its problems... just some serious uncertainty at a not so good time.
    Been_Done_Before
  • Vonage is screwed

    It's just another company founded on the dot-bomb premise that it is something new on the internet, people will buy the service and it will be a wild success - because it is internet.
    Anyone who subscribes had best research a contingency plan for their phone service so they aren't totally lost when the company tanks. Cable company VoIP (aka digital phone) would be a safer bet if you don't want to go with a telco. Maybe they can hire the pinhead CEO that sank Webvan? He's got experience in the area. :)
    NotMSUser
  • Vonage may not be screwed

    I have had Vonage for over 2 years now and I am quite happy with it, free long distance to anywhere in the continental US and several countries in Europe. I've taken it with me to Europe and it worked great, just plug it into a broadband connection and it works. The only complaint that I have had is the off-shore support staff but have of the industries deals with that.
    balsover