Vonage's Growth Initiative: Better Late Than Never

Dec.11.13 | About: Vonage Holdings (VG)

In February 2012 during Vonage's (NYSE:VG) Q4 2011 earnings call, CEO Marc Lefar announced a strategic growth initiative that would add $100 million in revenues by the fourth quarter of 2014. The plan, which would require the company to invest $5 million to $10 million per quarter, was to focus on three areas: international long distance, mobile services, and international expansion. During that call, Lefar stated that "quality revenue growth is our top priority for 2012." Former Vonage CFO Barry Rowan echoed Lefar's comments later that month at the Deutsche Bank 20th Annual Media and Telecom Conference when he said: "We believe these growth initiatives have the potential to achieve over $100 million in annualized revenue within two to three years."

Fast-forward 22 months and Lefar's strategic growth initiative can only be viewed as a failure. When Lefar announced the growth initiative during the Q4 2011 earnings call, revenues for that quarter were $216 million. Revenues in the seven quarters since have been as follows:

  • Q1 2012: $216 million
  • Q2 2012: $212 million
  • Q3 2012: $208 million
  • Q4 2012: $214 million
  • Q1 2013: $209 million
  • Q2 2013: $205 million
  • Q3 2013: $204 million

Instead of achieving over $100 million in annualized revenue within two to three years, Vonage's revenues have declined, with the two most recent quarters being the worst revenue-generating quarters in the last two years. Even worse, income has declined during the same time frame as spending has increased to fund the strategic growth initiative. Pre-adjusted income for Q4 2011 was .11 cents per share. In the seven quarters since, pre-adjusted income was as follows:

  • Q1 2012: .08
  • Q2 2012: .09
  • Q3 2012: .09
  • Q4 2012: .10
  • Q1 2013: .10
  • Q2 2013: .06
  • Q3 2013: .04

So why hasn't Lefar's plan worked? First, international long distance has turned into a legacy business for Vonage. Its core plan, Vonage World, has been in the marketplace now for over four years, and while it provides the company with a solid foundation of low-churn customers, its best days are behind it. The company is also doing itself no favors by promoting the plan with distasteful TV commercials in which Vonage's "chief generosity officer," a scruffy-looking man, tells people on the street that their phone company is living in the stone age.

Second, Vonage was late to the game with its mobile offering and got left behind. Other providers like Tango and Viber have over 100 million and 200 million users, respectively. Meanwhile, Vonage has yet to surpass even 10 million users, though downloads did increase in the most recent quarter following the April introduction of video calling. What Vonage needs to do is offer off-net texting, but unfortunately Lefar has stated that is not currently in the company's plans.

Third, international expansion has been far too slow. Vonage announced a partnership in May 2012 with Globe Telecom of the Phillipines and now offers a Vonage 3000 to Globe Phillipines calling plan, but it is not a needle mover. The company needs many more of these types of partnerships. While the last two years have been frustrating for Vonage investors seeking growth, 2014 could prove the old phrase true better late than never.

In February 2013, Vonage entered into an agreement to form a joint venture with Brazilian-based Datora Telecom to deliver communications services in Brazil. During Vonage's Q3 2013 earnings call, CEO Lefar stated that "the company is on track for customer and production testing later in the fourth quarter and phased market entry targeted for early in the second quarter of 2014.." The company has stated that Brazil represents a substantial growth opportunity for Vonage, with 67 million total households, 17 million broadband households, and more than one million expats. As a comparison, as of 2010 there were only 20 million households in the Phillipines according to data from the Republic of the Phillipines National Statistics Office. Based on market size alone, the Datora partnership will give Vonage a better chance of growth than the previous deal with Globe Telecom. Also, Lefar stated during the Q3 earnings call that the company is also pursuing additional partnerships in India and Mexico.

In addition, in November 2013 Vonage closed on a deal to acquire Vocalocity, one of the fastest growing providers in the SMB hosted VoIP market. The company had revenue of $28 million during the first half of 2013, which was 39% higher than the same period in the prior year. The SMB market represents a large growth opportunity for Vonage. According to a July 2013 report by Frost & Sullivan, the SMB market alone for VoIP is $15 billion annually. Additionally, The SMB hosted VoIP market is forecast to grow at a compound annual rate of 27.5% over the next five years. The SMB VoIP service will be marketed under the Vonage Business Solutions brand and will be headed by Wain Kellum, formerly Vocalocity's CEO. Kellum recently stated that "85% of small businesses are still using traditional phones," and that VoIP can reduce monthly phone costs by at least 30%.

The Vocalocity acquisition, which cost Vonage $130 million, places the company as one of the largest providers of VoIP services to the SMB market. In its Q3 2013 earnings release, the company stated: "This transformative acquisition will place Vonage at the forefront of the large and rapidly growing small and medium business market. Vocalocity is already growing customers and revenue rapidly, and we believe we can fuel their growth with our brand and scale while achieving meaningful cost synergies." The Vocalocity deal is something Vonage investors should be excited about, as Vonage will now provide real competition in the fast growing SMB space to stock darling 8x8, which sports a hefty 56 forward P/E.

Lefar predicted that the growth initiative would add $100 million in revenues by the fourth quarter of 2014. Datora going to market in Q2 2014 will help some and any additional partnerships in India or Mexico would be a nice bonus. But Vocalocity will be the real key, as it provides Vonage a large presence in the fast-growing SMB hosted VoIP market.

Better late than never.

Disclosure: I am long VG. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.