Vonage Churning Subscribers, Stomachs

Can this really be true? Vonage (VG) posted a quarterly profit? Indeed it is. The Iong-suffering Internet phone company reported first-quarter earnings today and with them its first profit ever: $5 million on revenue of $224 million. Sadly, that profit was only made possible by “a $13 million mark-to-market adjustment relating to the derivative liability in the Company’s convertible debt.” Without the adjustment, Vonage would have reported a net loss of $7.7 million.

That’s not nearly as bad as the $10.3 million loss the company posted in the fourth quarter of 2008. Still, it’s not pretty. Especially given some of the company’s other metrics. Vonage lost 6,000 net subscriber lines during the quarter at a time when you’d expect the souring economy to be driving cost-conscious consumers into its waiting arms. Churn rose to 3.1 percent from 2.9 percent. And ultimately, the company ended the quarter with 2,583,861 subscribers, fewer than the 2,610,360 it had a year ago.

In its earnings release, Vonage said it has tapped TBWA\Chiat\Day, “a firm known for creating impactful messaging on highly regarded brands,” to do something similar for it. But is that even possible with a not-so-highly-regarded brand like Vonage?

Comments

[PastTense:]

I don't see much of a long-term market for Vonage: either people are going to the higher reliability cable Voip offerings, the much cheaper Skype type offerings, or use their cell phone for everything.

May 07 10:46 PM

[kenboy:]

I agree there's a trend to move to all cell phone, and I agree Skype presents a challenge. I also think many people will use their cable VOIP offering because it's bundled in a lower-cost package -- BUT I don't understand why anyone would call that "higher reliability." It isn't. It's the same thing. I've had Vonage for around three years now, and have used it with three different ISPs: a DSL provider, a cable company, and now Verizon FIOS. I have NEVER had a Vonage outage, other than when the underlying broadband connection was out.

Further, I think it's strange to focus on 6,000 subscribers leaving when the company has 2.5 million subscribers. 0.24%? Really?

Bottom line: Vonage faces, I think, a challenge from bundled TV/internet/VOIP providers; however, the bundle pricing generally expires after the first or second year, which gives Vonage an opportunity to swoop in and get those customers -- who have ALREADY overcome the psychological resistance to VOIP. The new ad campaign (which points out how much less expensive they are, by the way) will help.

May 08 09:39 AM

[psyclepump:]

Vonage seems to have a real problem now - non-strategic investors don't like them anymore.

With better market positioning, they can start to compare themselves to the cable/fios and they still have a strong value proposition: more features to help you be more effective. They may actually be in a superior position since their patent settlements give them open license for their current technology that they supposedly ripped off from entrenched telcos. No single telco can provide the same package as Vonage or they will face similar lawsuits. Since VG has already settled, this means they can continue to operate, whereas a competitor has to develop that technology from scratch. If those features represent value to the customer, then there is some intrinsic value to VG beyond the customer base.

Ultimately, VG is a strategic acquisition if they can prove this value. Big if, and it has to occur before some new technology wipes out their comparative advantage. Longer battery life in a cell phone is one advantage that will spur the transition to all cell phone life. But let's face it, people's consumer preferences are not homogeneous and choice of telecom is also a generational issue.

Ironically, they still face the same inertia from potential customers, that is, "Will Vonage work if I switch from my normal (POTS or VOIP) provider?" People who have taken the plunge to trust Vonage love the features and what this allows them to do.

There is the whole other issue of more intelligent VOIP, like what you can get from a business class VOIP system. They could look to acquire another company in this space, but with their "currency" so depressed this looks unlikely.

I don't think Skype or MagicJack presents any real competition. It is just not the same customer experience. Vonage is easy, and you can use the same old phone. Plus it has features, which gives it more value than the other VOIP choices.

So VG is a small permanent call option in the hope it will be acquired by some larger telco to get instant customer of ~2.6m plus technology. I think I saw that one customer is worth $375 to the telcos. And that is close to what Vonage pays to acquire in terms of marketing costs. Add a small premium for the cost to replace (or defend) its IP and you get a valuation north of $1B. I am sure that someone will discount this figure for integration costs and lack of marketability for its shares and so forth. I dunno. But at current capitalization structure, that amounts to about 5.42 per share. Just some thoughts.

May 08 11:04 AM

[lfarbes:]

I have a similar experience to Kenboy. My cell phone is the backup to my VOIP, as well as my mobile phone.
Monthly telephone bill predictability was one of the principle reasons I became a Vonage VOIP subscriber, and I am totally immune to bundling attempts of my local cable provider due to the high level of dependable, high-quality, and cost effectiveness of my Vonage VOIP services.
Yes, Skype is very interesting, and nice option to have, But I don't absolutely have to have it.

Leon C. Farbes III
Burke, VA



On May 08 09:39 AM kenboy wrote:

> I agree there's a trend to move to all cell phone, and I agree Skype
> presents a challenge. I also think many people will use their cable
> VOIP offering because it's bundled in a lower-cost package -- BUT
> I don't understand why anyone would call that "higher reliability."
> It isn't. It's the same thing. I've had Vonage for around three years
> now, and have used it with three different ISPs: a DSL provider,
> a cable company, and now Verizon FIOS. I have NEVER had a Vonage
> outage, other than when the underlying broadband connection was out.
>
>
> Further, I think it's strange to focus on 6,000 subscribers leaving
> when the company has 2.5 million subscribers. 0.24%? Really?
>
> Bottom line: Vonage faces, I think, a challenge from bundled TV/internet/VOIP
> providers; however, the bundle pricing generally expires after the
> first or second year, which gives Vonage an opportunity to swoop
> in and get those customers -- who have ALREADY overcome the psychological
> resistance to VOIP. The new ad campaign (which points out how much
> less expensive they are, by the way) will help.

May 08 02:16 PM

[boblab:]

With telemarketers and bill collectors constantly calling and ignoring Do Not Call Lists, Vonage would increase their customer base enormously if subscribers could control what calls do and do not get through to their phones

May 09 01:52 PM

[futuresmkt:]

That option is and has been available for some time (call blocking)


On May 09 01:52 PM boblab wrote:

> With telemarketers and bill collectors constantly calling and ignoring
> Do Not Call Lists, Vonage would increase their customer base enormously
> if subscribers could control what calls do and do not get through
> to their phones

Aug 02 10:29 AM

[directcommu...:]

with new voip mobile apps the trend should only improve

Nov 08 03:42 PM