Vonage replaces CEO, still rudderless

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.