Vonage Holdings Corp. (NYSE: VG) shares rose over five percent today as its losses narrowed and subscribers rose. Unfortunately, the top-line numbers do not accurately reflect what is really going on in the company. A closer investigation reveals that the company has several internal trends that make their earnings unsustainable over the long-term if it can’t get its act together. So, what are these trends and what does it mean for Vonage going forward?

Vonage reported earnings that were lower than analysts expected, but greater than what the street predicted, sending shares higher in today’s session before dropping after hours. The net loss for this quarter came in at $11.1 million from $117 million a year earlier. Meanwhile, subscriber additions came in at 56,000 which is down from 166,000 last year. The company may have lowered its losses, but only because it reduced its marketing expenditures. Unfortunately, the company’s revenue per line declined while its marketing costs increased. Clearly, this is an unsustainable trend that must be reversed before this company can be a viable investment.

Vonage also has $253 in convertible debt that can be put back onto the company in December of 2008. This is money that the company cannot afford to pay at current rates, and they are in discussions to refinance the debt to make it more manageable. Vonage said that it believed that the situation will be resolved, but there are no assurances. As a result, it will likely receive a “going concern” letter from its auditor soon that may send shares lower. And to make matters even worse, the company announced that it would restate its second and third quarter results to correct its reported non-cash compensation expense, which it believes is off-base.

In the end, these are major concerns that Vonage must address in order to avoid some major problems and perhaps even bankruptcy. Additionally, there are some near-term announcements that could drop the stock substantially if they indeed surface. Combined, these factors make VG a good short target and definitely a stock that non-speculators should stay away from until the picture clears up!

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