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Tuesday, October 31, 2006

Vonage Indicated Up After Earnings

Vonage (VG-NYSE) has released earnings and revenues this morning. Quarterly revenue more than doubled to $161 Million. Non-GAAP adjusted loss from operations was -$53 million in the quarter, down 12% from the prior quarter and down 18% from the year-ago quarter. Net loss for the quarter was $62 million, or $0.40 per share, an improvement of 16% from a net loss of $74 million, or $1.16 per share, in the prior quarter and from $66 million last year.

It added 204,591 net subscriber lines in the third quarter, which is almost 1 million adds in the last 12 months. Vonage finished the quarter with 2,057,844 lines in service, an increase of 11% sequentially and 94% above the year-ago level. Total subscriber lines were 2,057,844 at September 30, 2006, versus 1,853,253 at June 30, 2006 and 1,061,786 at September 30, 2005.

Average monthly telephony services revenue per line for the quarter was flat sequentially at $26.33 and up $1.49 from the third quarter 2005. On a year-over-year basis, positive shifts in customer mix to premium calling plans and the introduction of an Emergency 911 Cost Recovery fee contributed to a 6% net improvement in average monthly telephony services revenue per line.

Direct margin as a percentage of revenues increased to 64% in the third quarter 2006 versus 62% in the second quarter 2006 and 54% in the year- ago quarter. Direct cost of telephony services fell $0.66 sequentially to $6.86 on a per line basis and declined $1.70 from $8.56 in the year-ago quarter.

Total marketing costs were 57% of revenues, or $91 million, in the third quarter 2006 versus 63% of revenues, or $90 million, in the second quarter 2006 and 80% of revenues, or $59 million, in the year-ago quarter. Marketing costs per gross subscriber line addition were $254 for the third quarter 2006, an increase of 6% from the second quarter 2006.

Average monthly customer churn increased to 2.6%, up from 2.3% in both the second quarter 2006 and the year-ago quarter. The increase is attributable in part to the rapid growth in subscriber lines throughout 2006 and resulting impact on customer care.

The Company is reaffirming guidance on the following metrics:
- Fiscal Year 2006 Total Revenue: $600 to $615 million
- Fiscal Year 2006 Marketing Expense: $360 to $380 million
- Second Half 2006 Direct Margin(% of Total Revenue): 62% to 65%
- Second Half 2006 Adjusted SG&A(% of Total Revenue): 39% to 41%
- Positive Adjusted Operating Income as early as Q1 2008

The Company is updating subscriber line guidance:
- Fiscal Year 2006 Ending Subscriber Lines: 2.2 to 2.3 million

There are several metrics that the Bears can use against the company, but the initial indication is up on VG shares. The volume is still too thin to hang any firm figures on. Since the company is showing numbers that can be lived with, you should have a lot of "chat room" related traders moving the stock back and forth today. VG had over 5 million shares listed as its short interest as of October, down from almost 5.8 million shares.

This is a stock that the street is still somewhat in the guessing game on for many of the normal metrics used by analysts. It is of course known it is still fairly young company that has now only 2 earnings reports as a public company, and calling it a controversial and poor after-market IPO would be understatements.

The bears can focus on rising churn and rising marketing costs per subscriber, but so far the street has chosen to look alsewhere. So far it looks like traders are focusing on the early 2008 positive adjusted operating income, and that (with its burn rate) may be the main focal point in what has been such a battleground stock.

Jon C. Ogg
October 31, 2006

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