Vonage Numbers Don’t Add Up

Pali Capital analyst Richard Greenfield is getting concerned about the Vonage numbers, and is bringing about some of the issues we had talked about previously. He points out that while cable companies report customer stats, Vonage on the other hand reports subscriber line stats.

However, the churn statistic that Vonage reports is based on customers (not lines) making it even more difficult to model their business based on reported figures.

He points out the company is pushing hard to get more second lines because the cost of acquisition of those second lines is lower than signing up a new customer.

When a new customer signs up for Vonage they are normally billed a $29.99 activation fee and if they cancel within the first twelve months they are billed a $39.99 cancellation fee. However, the current second line promotion waives the activation fee, gives a customer two free months of phone service, and the cancellation fee is waived. Essentially, Vonage is giving away a second line to all existing customers for two months with no strings attached (“no risk”).

Vonage’s marketing push is highly visible on company’s website and direct mailings. I have received two in a month. Greenfield says investors should watch out for these non-paying second lines, when the company reports it 2Q 2006 numbers.