No Future for Vonage

What is Vonage (VG) doing with a NYSE listing? It’s been trading at under a buck a share since last December — and it received a delisting notice as long ago as October 2008. Somehow, it managed to persuade the NYSE not to delist it in April, but it’s very unclear how. The stock has been languishing at about 40 cents since February, it’s lucky to get one analyst asking questions on its conference calls, and — this is my favorite datapoint — according to its latest results, its book value is negative to the tune of more than $108 million: the company has $334 million in assets, and $442 million in liabilities. Net income of $1 million in the most recent quarter (or $0.01 per share) isn’t going to make much of a dent in that.

I signed up for Vonage service in April 2003, so I’m a customer of long standing. There have been rocky periods along the way, especially as regards voice quality, but the thing which strikes me most is the fact that back then, when I signed up, the standard residential calling plan was $25.99 a month. Over the intervening six years, Vonage has faced huge competition, not only from triple-play packages and from Skype and Google Voice and the like, but also from people simply giving up land lines altogether for their cellphones. That has helped to push prices down, even as significant technological advances have helped to pull prices down. Today, the price of the standard calling plan has plunged all the way to… $24.99 a month.

I have too many phone numbers: my home phone (Vonage), my work phone, my iPhone, and my BlackBerry. And that’s not including my Skype and iChat accounts. I have more access to more telecommunications capability than I really know what to do with, especially since increasingly I communicate not by voice but rather by Twitter (when it’s up) and IM. Vonage isn’t really saving me money any more: it’s just an extra cost every month which I have increasing difficulty justifying.

I like having a home phone, I don’t particularly want to give up my home phone number, and through sheer inertia I’m likely to keep my Vonage account for the time being. But it’s hard to see much of a future for Vonage itself. The stock market has long since worked this out. Why hasn’t the NYSE?

(see Vonage earnings call transcript)

Comments

[Envoy Globa...:]

Very silly article. You clearly don't know how to read a financial statement. Vonage did over $30 million in EBITDA this past quarter and nearly $15 million in free cash-flow. The stock is trading at less than 2X EV/EBITDA. The company is not going anywhere. The future is that the company is now a cash cow. And the less they spend on marketing and just focus on their core customers who love the service, the more cash they'll bring in.

Aug 06 08:12 PM

[prairiedog555:]

Not so fast, I am in telecom business and I switched from Vonage to magic jack, after a kid told me about it after I dismissed it as too good to be true. > $2 a month, plugs into USB port.
Vonage is way overpriced and doomed.
you sound like the guy defending the buggy whip industry in early 1900's as a sound long term investment.

Aug 07 07:35 AM

[RockyC:]

A cash cow, for sure, but one with potential for substantial growth and enormous upside if they can find the right business structure for their new mobile offering, coming soon. Whether it's a jv with a wireless carrier (T? S? VZ?) or an MSO (CMCSA?), or they decide to go it alone, they are the only wireline voice company with the capability to offer home phone service extension (same number, etc.) over EV-DO or wifi to a portable device---PDA, smartphone, cellphone, etc. So, for instance, you might be in a wifi hot spot in Paris and make calls from (and receive them to) your home number, even while the folks back home are using the same number with no problem. The current CEO's prior telecom and marketing experience suggest that he may be just the guy to be able to pull this off, but the devil, and the angels, will be in the details. Meanwhile, at today's price of 40 cents and with the cash flow they've been able to generate, you're getting a free option on a potentially big future. I am surprised by the number of people who dismiss this company as an investment without even bothering to investigate its feature set. The lack of street coverage is less a problem than it is an opportunity. Magic Jack is a gimmicky distraction whose business model may have as much to do with termination fee arbitrage as it does with selling the USB plug-in. It may eventually find a smallish niche of its own but will have little effect on VG (by the way, try fully costing out the monthly nut for MagicJack given that your PC must always be turned on and drawing power).

Aug 07 09:45 AM

[Skjellifetti:]

Vonage is doomed in the long run. What Vonage does is to connect internet machines using VOIP (Voice Over IP) to the POTS (Plain Old Telephone Service). But at some point, we will all be using VOIP and POTS goes away. When that happens, there will be no need for Vonage as a service provider since VOIP apps will be bundled into the computer OS or the phone handset itself.

Of course, the demise of POTS could be many years away, but beyond the interconnect, what does Vonage offer that has not already been trivially duplicated?

Vonage's competition:

www.voip-info.org/wiki...

Aug 07 12:04 PM

[Envoy Globa...:]

POTS goes away? Call me in ten years from now with that potential issue. By then VG has already morphed into something else.

Aug 07 12:51 PM

[Envoy Globa...:]

They have 2.5 million subscribers right now. Alot recurring revenue, happy customers, and cash-flow to work with to grow the mobile offering.

Aug 07 12:53 PM

[secmaven:]

Magic Jack says it is all over for Vonage.

Aug 08 12:57 PM

[milkchaser:]

MagicJack did not work for me and I spent 3 aggravating hours "chatting" with first level and then second level support only to have them tell me it cannot co-exist with a Vonage line (they could not say why, though). I am not going to give up a working phone line while evaluating a new service (that initially refused to install). Also, their support (like Vonage in the early days) is less than stellar.

Also, notwithstanding the cost of running the PC 24/7, something geeks like me do anyway, what does one use for a phone during a PC failure while one is rebuilding one's PC and re-installing all apps?

MagicJack is not ready for prime time. Great if it works, but not ready to compete with Vonage.

Aug 10 09:38 AM

[gmaggipinto:]

Figures lie but liars figure.

Last qtr VG generated more than $220 million in revenue in one qtr,and lowered their expenses to $205 million.
That translates into $15 million to the good of which they improved their cash position from $84 million to $96 million.
4-5 more disasterous qtrs like this one and they can retire every share of stock at the current mkt cap, and still have $84 million in the bank.
What seems unusual is the number of people who think VG is doomed, but who buy telecom stocks offering POTS service. If you hate VG because of competition, or cell phone headed, you better short the hell out of the Bells, because they're much more expensive than VG, and they're still charging extremely non-competitive rates.
I myself switched to VG after I got a long distance bill from ATT, plus my DSL, plus my ordinary service, for $98.
That number is now $40 using VG plus a dsl service.
The VG bet is that there still may be 100 million accounts like mine to target. VG has 2.5 million of them.
Now consider that SkYPE is about to be sold back to its founders for half of what EBAY paid to buy them a few years back. SKYPE revenue in 2008 was $381 million. VG $900 million.
Current bid for SKYPE looks like it will be $1.55 billion. VG capitalization $60 million.
There's more..Last qtr VG reported that it's income from it's existing base of subscriber before marketing expense came in at $94 million for the QUARTER.
That means that this much maligned company, founded on $900 million equity investment, plus another $250 million in debt, has a base of customers that generates more income than SKYPE does in revenues. Yet EBAY is about to get an offer to buy SKYPE of 26 times the present capitalization of VG, from Skype's founders.

Aug 10 07:27 PM

[Leftfield:]

My experience with Vonage: I called the 800 number to get hooked up as I was in a hurry for various reasons. They charged $50 for a modem that was supposed to be free, $29.99/mo instead of $24.99 and finally, after 1-1/2 years when I terminated, I paid an extra month fee because I terminated in less than 2 years. (I had been told the penalty period was one year). I paid to get rid of them. But they're still chasing me for another month's fees.

Aug 11 10:24 AM

[Yabadabadoo:]

"Vonage To Offer Flat-Rate Pricing For International Calls" is just one of the reasons why this company will not only survive but gain customers and greatly improve profits. Included in that article is "Lefar hinted at additional services, including a mobile application that will work with Vonage's services." This company is only moving forward. I believe the potential is why Vonage went to over $2.00 and profit takers brought it down. This company can easilt grow without needing to spend much in capital.
I am not too concerned that analyst are not paying attention to this stock; most of them cannot figure what is happening to the market. If they did, why be an anaylst; just buy and sell and live off the profits!!!!!

Aug 28 07:52 PM

[Jerrold Wil...:]

I listened to you and sold my shares of vonage!!!!Now it is up BIG TIME!!!!You guys are total crooks!!! What ramification do you face when you cost people big time money!!! Do you at least write an article saying how wrong you were wrong and you don't really know any more than a bum on the street?
"But it’s hard to see much of a future for Vonage itself. The stock market has long since worked this out. Why hasn’t the NYSE?
This is your advice to people if they listened to you and saw no future? then the stock goes up 500%!!! Now what do you say...You bash the company, can you bash your website and your self for costing people money!!?
Well, I joked when I said I listened to you, I just didnt invest and I missed out on a big opportunity. I learned a long time ago, you and your counterparts are total idiots. I have other investments that you bash and I am up big on....You should really put a disclaimer saying that your opionion is worthless, in fact your opinions can cost it's readers big money..

Aug 31 09:37 AM