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Vonage Holdings (NYSE:VG) is at the tipping point. They have announced encouraging numbers such as doubling revenue and substantially reducing losses. They anticipate profits as early as Q1 2008. However management does admit to a higher churn rate last quarter. Average telephony revenue was sequentially flat from last quarter, which is not encouraging as it places too much emphasis on acquiring new customers. Most distressingly management reports “Marketing costs per gross subscriber line addition were $254 for the third quarter 2006, an increase of 6% from the second quarter 2006.” (emphasis mine) The question becomes has the business model reached a point where marginal revenue increases are growing at a slower rate than marginal costs. Have they managed to attract the majority of cheap price conscious clients. Another quarter and the game should be called one way or the other. Look for management to start pointing out how the parts are worth more than the whole, how they are reviewing their strategic alternatives and trying to get a take-over premium into the stock price.

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