Vonage CEO Snyder out, spending to be trimmed

Michael Snyder steps down as company pledges to reduce spending and to weather patent infringement suit filed by Verizon.
Written by Marguerite Reardon, Contributor
Vonage announced on Thursday that Michael Snyder has stepped down as the company's chief executive.

The Internet phone service also said it would make roughly $140 million in spending cuts over the next several months as it reduces spending on marketing and eliminates jobs.

Snyder has also resigned from his position on the company's board of directors. Jeffrey Citron, the company's chairman, has been named interim CEO while the company looks for a replacement. The changes took effect Wednesday.

Michael Snyder Michael Snyder

Vonage executives also told investors on a conference call Thursday that the company is looking to reduce spending on marketing by about $110 million this year. It had earlier projected marketing costs of as much as $425 million. In 2006, the company spent $365 million on marketing, a 50 percent increase from the previous year.

Executives also said the company would reduce its staff to save another $30 million.

The news comes a month after a jury in Virginia found that Vonage is infringing on three patents held by Verizon Communications and awarded Verizon $58 million in damages.

A judge ordered an injunction that would bar Vonage from signing up new customers, but the company was granted a temporary stay of the injunction by a federal appeals court on Friday.

Jeffrey Citron Jeffrey Citron

Vonage, which plans to appeal the lower court's decision that it is infringing on the three patents, is hoping to get a permanent stay on the injunction that will last as long as the appeals process.

Sharon O'Leary, Vonage's chief legal officer, said during the conference call that she is confident that Vonage will win its case on appeal.

O'Leary acknowledged, however, that the appeals process could take up to two years to complete. By that point, the appeals court will likely have redefined the parameters of the case, forcing Vonage and Verizon to restart their trial.

Citron, who is the company's founder and former CEO, said Vonage plans to keep its business running.

"We will continue to operate as usual," he said. "We'll grow the business while the stay is in effect. And we're designing a work-around so that we will no longer infringe on the Verizon patents. But a work-around takes time."

He said the company is currently in the design phase of developing a technical alternative to the Verizon patents, but he said that at this point, he doesn't anticipate the need for customers to swap out equipment they have in their homes.

While Vonage is dealing with its legal troubles, the company's core business is not meeting expectations. Despite its hefty marketing budget over the past several months, the company's business has not grown very much.

During the conference call, the company said it generated about $195 million in revenue for the first quarter of 2007, up from $181 million in the fourth quarter of 2006. But net subscriber additions remained flat, with a total of 166,000 new customers in the quarter, the same as the previous quarter.

Vonage also lost customers at a rate of 2.4 percent, which is the same rate it lost customers in the fourth quarter.

Citron said the company will review all of its marketing-strategy decisions to determine which campaigns are not working and therefore can be cut.

"We're not meeting expectations in the business right now," he said. "But the changes that we're putting in place will position us to compete more effectively. And they will have an impact on the bottom line."

CEO change: A good move or a risk?
Analysts following the company say that the change in CEO and strategy is necessary to move the company forward.

"It's pretty clear that Vonage is struggling," said Clayton Moran, a stock analyst with the Stanford Group. "A change in their strategy is a slight positive for the company given the patent case and their continued losses. If they hadn't done something now they could have faced some real financial trouble in a couple of years."

But Albert Lin, an analyst with American Technologies Research, said that making Citron interim CEO is risky. The company admitted in a Securities and Exchange Commission filing before it went public last year that some investors may be scared to invest in the company because of legal settlements that Citron made with the SEC and the National Association of Securities Dealers related to allegations of fraud against Citron.

Citron reached a settlement with the two agencies, without admitting or denying guilt, over allegations that he engaged in fraudulent use of the Nasdaq's Small Order Execution System while at Datek Securities and Datek Online Holdings. Citron allegedly attempted to hide such transactions by creating fictitious books and records and filing false reports with the SEC.

"Putting Jeff in as interim CEO seems risky as most investors don't like or trust him," Lin said in an e-mail. "I suppose there are many candidates looking for a challenge and a turnaround situation, so I don't think it will be impossible to find a CEO. But the question is: how hard will it be to find someone who will work with Jeff Citron, both as a major shareholder and chief strategist?"

As for the future of the company, analysts agree that Vonage will likely continue to operate for some time. The company has about $420 million in cash as of the end of the first quarter, so it is not in imminent danger of going out of business. But if legal decisions continue to work against the company, a shutdown or takeover of the company is possible.

Some experts have speculated that cable companies such as Comcast, which today has roughly 2 million voice customers, may be interested in acquiring Vonage's 2.2 million customer base. But Moran said that is unlikely given the fact that not all of Vonage's 2.2 million customers are in Comcast's territory.

It's also unlikely that Verizon or AT&T would buy Vonage, given that neither company has put much money behind marketing their own VoIP services.

"The most likely scenario down the road if the company continues to struggle is a management-led buyout," Moran said. "They are the biggest believers in the company. Most telcos and cable companies don't see enough value in Vonage right now."

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