April 12 (Bloomberg) -- Vonage Holdings Corp. founder Jeffrey Citron replaced Michael Snyder as chief executive officer after spiraling costs and the loss of a patent lawsuit led to an 81 percent drop in the Internet phone company's stock.

Citron, who took Vonage public last May, also announced plans to cut 10 percent of the workforce as the company appeals a court decision that would force it to pay Verizon Communications Inc. damages for infringing patents. Vonage's first-quarter sales and customer additions missed analysts' estimates.

To stem losses and help cover mounting legal bills, Vonage will lower its 2007 marketing budget by about $110 million after saying earlier it would spend as much as $425 million. The Holmdel, New Jersey-based company racked up $365 million in marketing costs last year through television commercials and promotions, leading some investors to dump Vonage's stock.

``While cutting marketing expenses is a wise move, it doesn't meaningfully change the outlook,'' said Clay Moran, an analyst at Stanford Group in Boca Raton, Florida. He has a ``hold'' rating on the shares and doesn't own them. The outcome of Verizon's lawsuit against Vonage will be the most important determinant of the company's future, he said.

Shares of Vonage rose 20 cents, or 6.7 percent, to $3.20 at 4:01 p.m. in New York Stock Exchange composite trading. The company went public at $17 a share.

`Pushing Ahead'

On top of the marketing cuts, Vonage plans to save about $30 million during the remainder of 2007 with staff reductions. The company has 1,800 employees, spokeswoman Brooke Schulz said. The cuts will result in costs of $5 million in the second quarter.

``The management team is incredibly focused on executing the plan, and focused very much on getting in place cost-cutting measures, the revamping of marketing and pushing ahead toward profitability,'' Citron, 36, said on a conference call.

Following the resignation Snyder yesterday, U.S. unit President Michael Tribolet also left the company, Schulz said. Louis Holder, executive vice president of product development, left as well, according to a person familiar with the departure.

Citron had yielded the CEO job to Snyder last February ahead of the initial public offering and will now serve on an interim basis until a replacement is found.

Citron is also the company's chairman and largest shareholder. He settled with the U.S. Securities and Exchange Commission in 2003 after he and other members of Datek Securities Corp., where he was previously an executive, were accused of committing fraud using the Nasdaq Small Order Execution System.

Customer Losses

Sales were about $195 million in the first quarter, Vonage said, citing preliminary figures. That trails an average analyst prediction of $200 million, according to estimates compiled by Bloomberg.

Net subscriber line additions totaled 166,000, missing the 190,000 estimated by UBS AG analyst John Hodulik in New York. Gross additions were 332,000, and the average marketing cost for each added line was $275, Vonage said in a statement today.

Vonage lost customers at an average monthly rate of 2.4 percent in the quarter, up from 2.3 percent in the previous three months. Subscribers have been defecting amid concerns about customer service and lawsuits.

More Risk

``Vonage is a company on life support,'' said Leo Hindery, managing partner at InterMedia Partners, which invests in media companies. Hindery is a former AT&T Inc. and Tele-Communications Inc. executive. He said Vonage is making cost cuts ``mainly because they are running out of money.''

Citigroup Inc., a manager of Vonage's IPO, said in a note to clients today that the risk Vonage will file for bankruptcy by 2009 has ``increased materially.'' Analyst Michael Rollins in New York said his share-price forecast of $2.50 is based on a 33 percent chance the company will go bankrupt.

The company has failed to report a profit since it began selling its phone service in 2001 as customers defect to Internet phone offerings by competitors such as Time Warner Cable Inc., which offers bundled cable, voice and Internet packages.

A federal jury last month decided that Vonage infringed three Verizon patents, including inventions that allow Internet- phone customers to make calls to standard phones. U.S. District Judge Claude M. Hilton in Alexandria, Virginia, said he would order Vonage to stop using the technology. He later decided he would limit the order while Vonage appeals, barring the company only from adding new customers.

Appeals Court

The U.S. Court of Appeals for the Federal Circuit in Washington froze Hilton's decisions on April 6, the same day he ruled. The appeals court will hear arguments from both sides on April 24.

The district court's interpretation of the patents was overly broad and was ``without precedent,'' which will improve Vonage's chances on appeal, Chief Legal Officer Sharon O'Leary said on the call today.

Vonage and Verizon lawyers sparred today in federal district court, arguing before Hilton about other pending issues in the patent case. Vonage agreed to post a $66 million judgment bond by 5 p.m. tomorrow and will also begin paying 5.5 percent of revenue into an escrow account to cover the cash compensation and future royalty portions of the jury's March 8 verdict.

Verizon also asked that Vonage be blocked from continuing with a new policy requiring Vonage customers who move to new phone-service providers to pay a penalty fee and wait 90 days for their numbers to transfer to a competitor. Vonage denied such a policy has been implemented, and Hilton denied Verizon's request.

To contact the reporter on this story: Amy Thomson in New York at athomson6@bloomberg.net

Last Updated: April 12, 2007 17:57 EDT