KDG's  Instablog

The first time I heard of Vonage was when a friend and his wife relocated to Serbia and wanted to keep their existing number for calls. This was 3 years ago. Over time I would check on the stock and it always seemed as if there were recurring issues namely with patents and infrastructure.

Since I live in the US and have no real ongoing communications with anyone overseas, the service did not align with my needs. When the stock went to 0.30 I thought it another casualty in the telecom shark tank. Then Citi upgrades to 1.50 and suddenly they have an iPhone & Blackberry app. So who needs Vonage now I wonder, and is there really any long term future for their common stock?

Here is some food for thought:

1.) Lawsuits are settled

ATT
Verizon
Sonus

2.) Debt is refinanced
 

3.) A year ago, they hired Marc Lefar, Known as the "savior of Cingular" , who, after turning Cingular around, was involved in the sale to AT&T.

"In the second quarter, Skype's sales rose 25%, to $170 million, while its registered subscriber base increased 42%, to more than 480 million. In the same quarter, Vonage posted its first net profit, of $2.3 million. "We are generating positive cash flow, we reported record earnings," says Vonage CEO Marc Lefar, a former chief marketing officer at AT&T who joined Vonage in July 2008. "People are starting to realize there's a good business model here. It's absolutely a business that can be very profitable."

4.) Vonage has been $ flow + the last 3 quarters, Profitable for the last 2 quarter, and had EBITDA of $10 million in the 1st quarter and $31 million in the 2nd quarter

5.) Short Interest is waning

6.) Vonage's 3.3% is high, but their Vonage World, Transcribed voice, and SmartPhone Apps and focus on customer service, all will work together to reduce the rate of churn, & or increase the rate of subscriber additions

7.) PPS has moved from that $.32 range to the $1.50 Range.

8.) There may be more applications on the way; Vonage added "software company" to it's business model.

"Our new mobile app is an important step in establishing Vonage as a software technology company that enables high-quality voice and messaging across any device in any location, providing great value over any broadband network," said Marc Lefar, CEO of Vonage."

Is Vonage Undervalued at 2$?

_____________________________________
VALUATION PER SUBSCRIPTION

At today's stock price, VG is worth ~$101 per sub (customer) compared
to the industry standard of $250

VALUATION PER SUB WOULD PUT VONAGE PPS AT: $4.05
_____________________________________

BUYOUT VALUATION:
Skype, a company that is similar to VG was just valued at 4.5X
revenue

SKYPE VALUATION WOULD PUT VONAGE PPS AT: $21
_____________________________________

COMPARISON VALUATION by *Price/Sales (ttm) and *Enterprise Value/
Revenue (ttm)
* Definition - http://help.yahoo.com/l/us/yahoo/finance/tools/research-12.html

Vonage Corp (VG)
Price/Sales (ttm): 0.30
Enterprise Value/Revenue (ttm): 0.49

Vonage MAIN COMPETITORS

8x8 Inc. (EGHT)
P/S: 0.92
EV/R: 0.68

Verizon Communications Inc. (VZ)
P/S: 0.83
EV/R: 1.45

AT&T, Inc. (T)
P/S: 1.21
EV/R: 1.77

Comcast Corporation (CMCSA)
P/S: 1.26
EV/R: 2.09

AVERAGES

Average Price/Sales (ttm): 1.055
Average Enterprise Value/Revenue (ttm): 1.49

COMPARISON VALUATION WOULD PUT VONAGE PPS AT:

Average Price/Sales ================= $5.27
Average Enterprise Value/Revenue ======$4.56
_____________________________________
Per Sub Value ===================== $4.05
Buyout Value ====================== $21
Average Price/Sales ================= $5.27
Average Enterprise Value/Revenue ====== $4.56

Vonage may be a worthy consideration for the investor who is willing to accept the risks associated with this highly competitive sector for a potentially undervalued company. Q4 should be interesting.