updated 8/1/2006 4:59:30 PM ET 2006-08-01T20:59:30

In its first earnings report as a public company, Internet phone carrier Vonage Holdings Corp. said Tuesday its losses increased 17 percent in the second quarter as customer-acquisition costs stayed high.

The results illustrated the challenges facing Vonage, which raised nearly $500 million with a May 24 initial public offering that was disastrous for investors. The stock debuted at $17 per share and dropped immediately, recently lingering below $7.

Vonage's loss from April through June was $74.1 million, or $1.16 per share, compared with a loss of $63.6 million in the same quarter last year.

The consensus forecast of analysts surveyed by Thomson Financial was for a loss of 56 cents per share this time, but the predictions fell in a very wide range, from a loss of 38 cents to a loss of $1.18.

Revenue was $143.4 million, short of Wall Street's forecast of $148.3 million. Vonage's revenue was $59.4 million in the same quarter a year ago.

Vonage shares dropped 39 cents, or 5.5 percent, to close at $6.70 on the New York Stock Exchange.

A pioneer in selling inexpensive phone service using Voice over Internet Protocol (VoIP) technology, Holmdel, N.J.-based Vonage has attracted 1.9 million subscribers who use their broadband connections to make calls with regular phones.

But Vonage has spent heavily on marketing and is under competitive assault from cable TV companies that are using VoIP to offer attractive phone plans. Meanwhile, computer-based services such as eBay Inc.'s Skype program offer free voice chats.

As a result, Vonage's pains are expected to continue for some time. Wall Street envisions losses of $2.11 per share this year, $1.47 in 2007 and 94 cents in 2008.

Vonage's marketing costs were $90 million in the second quarter, 46 percent higher than a year ago. The cost of acquiring a new subscriber was $239, up from $236 last year.

However, Vonage's CEO, Mike Snyder, said the company sees the quarter "as a key inflection point on our path to profitability." He said Vonage expects to begin generating "adjusted operating profits" by the first quarter of 2008.

Vonage's 1.9 million subscribers at the end of the quarter marked a 16 percent increase from the previous quarter and more than doubled from 848,000 a year ago.

One important measure of how Vonage capitalizes on that base, monthly revenue per line, rose to $27.70 from $26.63 a year ago. Vonage said the increase came partly from attracting new customers to premium calling plans, but also from a new fee to recover the costs of providing 911 service. VoIP services like Vonage are not automatically linked to 911 as traditional landline phones are.

Vonage and other VoIP carriers also must soon begin paying into the Universal Service Fund, which subsidizes phone coverage in rural areas. That figures to cut into Vonage's price advantage over traditional phone carriers — although Vonage has said customers will see only slightly higher bills, because a separate phone tax will be ending.

In the first half of 2006, Vonage showed a loss of $159.3 million on revenue of $262.3 million. In the same period in 2005, the loss was $123.6 million, with revenue of $100.1 million.

Vonage's IPO was unusual in that the company set aside 4.2 million shares for its customers to buy directly. But Vonage revealed Tuesday that as the company's shares sank, customers who had registered for nearly 1.1 million shares went back on their pledges. The company was forced to spend $11.7 million buying the shares from the IPO's underwriters and expects to pay an additional $6.2 million in underwriting expenses.

Vonage said it plans to pursue efforts to force the customers to pay up. That could prove tricky for a company that already admits customer-relations difficulties. "Churn," a closely watched measure of the number of subscribers who leave each month, averaged 2.3 percent in the second quarter, up from 2.1 percent a year ago.

Snyder told analysts on a conference call that the figure was "unacceptably high." He said Vonage's intense growth had strained customer service, but he promised a turnaround.

"Improving our metrics in customer care is our single most important priority," he said.

Copyright 2006 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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