Vonage Replaces CEO, Plans Cost Cuts

Vonage Holdings chief executive Michael Snyder has resigned as part of restructuring efforts that will also include firing employees and slashing the marketing budget, the company said yesterday.

Jeffrey A. Citron, chairman and founder of the Internet telephone provider, told financial analysts on a morning conference call that he would take Snyder's place while Vonage looked for a permanent replacement. Snyder and the company had "mutually agreed" on his departure, which took effect immediately, Citron said.

Snyder joined the company shortly before it went public in May. Since then, Vonage's stock price has tumbled by more than 80 percent while investors have grown increasingly nervous about the company's high marketing costs and legal troubles.

"We think this is in the best interest of the company at this time and for both parties," Citron said on the conference call.

He said Vonage plans to cut its annual marketing budget by $110 million, or more than 25 percent. The company will also consolidate its operations in the United States and Canada and combine its global operations into one team, resulting in a savings of about $30 million through the end of the year and a 10 percent reduction in the 1,800-employee workforce.

The latest turmoil at Vonage comes as it is embroiled in a life-or-death court battle over allegations that it infringed three patents held by Verizon, including one for the crucial technology it uses to connect online callers with the public telephone system. After a jury concluded last month that Vonage had violated the patents, a federal judge barred the company from acquiring new customers.

Vonage lawyers, who said this injunction amounts to a death sentence for the company, won a temporary reprieve from a federal appeals court last week. The appeals court will decide whether to extend the stay or reimpose the ban after hearing oral arguments, scheduled for April 24.

Hours after Citron's announcement, the company was back in federal court in Alexandria. U.S. District Court Judge Claude Hilton turned down Verizon's request that Vonage be required to post $255 million in bonds while the patent case is under appeal. But he told Vonage it would have to post a $66 million guarantee, mostly for damages awarded by the jury, and place 5.5 percent of its revenue in an escrow account to cover future royalties that could be due Verizon.

Though New Jersey-based Vonage has never made a profit, it has emerged as the leading Internet telephone provider, helping to popularize online calling as an inexpensive alternative to traditional phone service. Company executives have maintained a brave face in public despite their courtroom troubles, predicting they will eventually prevail and their 2.24 million subscribers will see no disruption in service.

"As we assess the current environment, we believe the steps we are taking to reduce cost are the appropriate ones. We look forward to working through this transition and bringing the business toward profitability," Citron said during the call with analysts.

He explained that the bulk of cost savings would come from cuts in Vonage's highly visible marketing campaign, which includes quirky television commercials and Internet ads. He said marketing consumes about 47 percent of the company's revenue, which is down slightly from the final quarter of last year. But, he said, it still represents about $275 for each new subscriber.

"The results continue to be disappointing," he acknowledged. "As such, we have reduced our marketing expenditures and are in the process of revamping our marketing campaign."

Zeus Kerravala, an industry analyst with the Yankee Group, said Vonage's announcement could mark a vital change of direction by tackling the high cost of wooing customers.

"Obviously, you want to acquire more subscribers, but you need more efficiency," he said. "You need a change in thinking." Kerravala predicted the next chief executive would be a specialist in operations and efficiency rather than a visionary.

Citron said the company had appointed him interim chief executive while searching for Snyder's replacement.

When Snyder was named to the post last year, Citron had said this would give him more time to work on market strategy and technical development.

But analysts said the move was also meant to lower Citron's profile with investors, who might be concerned about his background. Four years ago, Citron agreed to pay $22.5 million in penalties to the Securities and Exchange Commission to settle allegations that he had abused a Nasdaq Stock Market trading system to make illicit profits.

Even with predicted savings, industry analysts said, Vonage would have trouble surviving if it is banned from using the disputed technology. Citron said the company is trying to design alternative techniques to continue serving its customers.

"It is important to remember that such workarounds will take time," he said.