Vonage Dropped: What You Need to Know

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Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Vonage Holdings (NYS: VG) dropped as much as 10% in early Thursday trading, but while you wouldn't know it from the stock price, Vonage actually had a pretty good second quarter.

So what: Q2 earnings came in at $0.09 per share, a penny ahead of estimates. Revenue dropped, true -- but only because Vonage made itself a more customer-friendly service, discontinuing the practice of charging activation fees for new accounts.

Now what: If there was one thing worrisome in the report -- one thing that may have justified the 7% selloff Vonage ended up with at day's end -- it's probably the fact that Vonage's customer count declined sequentially against the March quarter. That, and the prediction that Vonage sees little chance that the count will grow again through the end of this year.

And if there's another thing that worries me, it's the that free cash flow at Vonage has weakened dramatically. Vonage generated in excess of $81 million FCF in last year's Q2; this time around, that number dropped by more than half, to just $36.6 million. This all still leaves Vonage with close to $100 million in trailing free cash flow, of course, and a price-to-free cash flow ratio of about 7.5. Still, I'd much rather invest in a company at 7.5 FCF that's growing than one where the cash spigot is slowly getting choked off.

Think Vonage can turn it around?Add the stock to your Fool Watchlistand find out.

At the time this article was published Fool contributorRich Smithdoes not own (or short) shares of Vonage. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has adisclosure policy.

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