Mark Evans

Vonage's Q3: Trick or Treat?

Everyone's favourite whipping VoIP whipping boy, Vonage, posted third-quarter results that left a lot to be desired. Churn climbed to 2.6% from 2.3% in the second quarter, the cost of acquiring a new customer rose to $254 from $239, while the number of net new subscribers was 205,000 compared with 256,000 in Q2. While the company had a smaller loss ($62-million) than analysts expected, the investment community was disappointed with guidance of 2.2 million to 2.3 million new users in 2006, compared with a previous estimate of 2.3 million to 2.4 million. The company now has 2.05 million customers, compared with 1.85 million at the end of Q2 and 1.06 million a year earlier. Vonage shares were down 1% in early-morning trading to $6.80 (compared with the 52-week low of $6.30). The question facing investors is whether Vonage can gain enough critical mass and reduce marketing/acquisition costs so it can compete with the cablecos, which are aggressively gaining market share.  

Related Posts

• Good VoIP News for Vonage? Probably Not.
• Vonage IPO: Let the Fun Begin
• Vonage by Numbers..1,2,3

Vonage's New P.R. Agency: The New York Times

Nothing like the venerable New York Times to jump-start a public relations campaign. The newspaper provided Vonage with some invaluable coverage by doing an interview with chairman - and P.R. savvy - Jeff Citron. Here are the highlights:

- On how he felt after the stock dropped like a stone following its $17-a-share IPO earlier this year: “I was a little, I guess, confused.” Confused? Citron's confused by how investors soured on the company's prospects in light of large losses, huge marketing expenses and increasingly intense competition from cablecos?

- Vonage is now in “good shape”. Hmmm, I wonder how Citron defines good shape. If it's by the number of subscribers, I guess Vonage is doing okay given it will soon announce it has two million customers. But what about churn, which compels Vonage to spend more than $300-million on marketing?

- “We definitely believe the shares were undervalued” in explaining his decision to buy 188,000 shares for $1.3-million. After losing two-thirds of their value, Vonage was either under-valued or maybe just trading where it should. Don't give Citron credit for stepping up to make a “value” buy. It was a P.R. move to reassure investors, particularly those who still held their IPO shares, analysts and customers.

- “I want nothing. I’m just generally a very happy guy.” Nice way for the NYT to end the story but why wouldn't Citron be happy. He's made a mint off Vonage despite the stock's performance. He has also hit the entrepreneurial jackpot twice before - Island ECN and Datek. We could all be so lucky.

One more thing: Vonage shares closed Friday at $8.90, which means they have lost 47% since the IPO hit the street. Andy Abramson, who knows the P.R. and VoIP industries like the back of his hand, calls the NYT story “pure spin control”. 21Talks also makes some good points, particularly about one analysts believes Vonage needs five million customers to be profitable. Russell Shaw describes the NYT story as pretty close to a “puff piece”. Ouch!

Related Posts

• What Say You, Jeff Citron?
• Is Vonage a "Buy" Now?
• Vonage IPO: Let the Fun Begin

Vonage by Numbers..1,2,3

So, let's do some simple number-crunching with Vonage's second-quarter results. The company posted a loss of $74.6-million, largely due to $90.1-million of marketing costs (50% more than a year earlier) amid fierce competition from the cablecos, which makes attracting customers even more of a challenge. Assuming competition remains as intense and Vonage has to spend as much or more on marketing each quarter, the company's $597.7-million of cash will evaporate over the next eight quarters. Then what? Well, Vonage CEO Mike Snyder believes the company will generate “adjusted operating profits as early as the first quarter of 2008″ (I wonder what adjusted operating profits are?) Of course, Vonage's efforts to become profitable aren't helped by the fact it spent more to acquire a customer ($239 vs. $236) in the second-quarter, while churn climbed to 2.3% from 2.1%. To put churn into perspective, Vonage attracted 377,005 new customers in the quarter but lost 121,069. Now, I'm not a financial wizard but these numbers don't pass the smell test. Granted, Vonage may 1.85 million customers but the rest of its financial metrics are going in the wrong direction. It explains why the stock is trading at $6.70 - compared with IPO price of $17.
Update: Jon Ogg has some good perspective on Vonage's numbers, while Om Malik also weighs into the Vonage fray. Meanwhile, the New York Times looks at how large carriers such as Verizon are losing local customers to cable rivals and VoIP service providers such as Vonage.

Related Posts

• More (Bad) Info For Vonage IPO
• Vonage's Q3: Trick or Treat?
• It's Good to be Ted (Rogers)

V-V-V-Vonage…D-D-Down….

Not to revel in anyone's misery but Vonage shares touched a new low of $6.93 (59% below the $17 IPO price) yesterday before closing at $7.04. It didn't help Klausner Technologies Inc. is suing for alleged patent infringement, and seeking damages and royalties of $180-million. Klausner said the patents involve Vonage's voice-mail services. Ironically, the lawsuit was filed the same day Vonage said it acquired three patents from Digital Packet Licensing Inc.
Update: Dealbreaker.com has a post looking at how many Vonage customers have balked at paying for the IPO shares given their sharp decline.

Related Posts

• Another Day, More Bad News for Vonage
• Vonage Tumbles on VZ Lawsuit
• Who's Rates Technology Inc.?

V-Phone Debuts in Canada

Vonage's V-Phone - a USB-like device that turns any laptop into a Vonage phone - makes its Canadian debut today in downtown Toronto. Vonage shares, meanwhile, closed at $7.87 yesterday after touching a new low of $7.81 - 54% below the IPO price. It's interesting to see that analyst coverage of Vonage is expanding. UBS Securities recently initiated coverage with a “neutral” rating and a $10 target price, while CitiGroup initiated coverage with a 'hold” rating and an $11 target price. The target prices make you wonder how Vonage ever managed to sell the IPO at $17 a share. Someone did a great job selling investors on the prospects for Vonage and VoIP.

Related Posts

• Vonage Comes to Canada
• AOL Canada to Drop Prices
• Vonage Raises More VC

Citron's Losing His Marketing Mojo

Vonage's post-IPO troubles must be weighing heavily on the shoulders of chairman and co-founder Jeff Citron. For the second time in two weeks, he gave a keynote at a conference that lacked any kind of sizzle. Brian Ward said Citron's speech at Convergence 2.0 failed to address any of the issues facing Vonage these days (growing criticism about its marketing spending, class-action lawsuits, discounts for subscribers who threaten to leave, etc.). With Vonage under siege, this is a time when you'd expect a marketing-wizard such as Citron to creatively and enthusiastically come to the company's defense. After all, he co-founded Vonage because he believed VoIP would be a disruptive technology. What happened to that chutzpah? Now that Vonage is public, itseems like Citron believes he has to behave. But if all you're going to do is give tepid keynotes with no meat, why bother talking at all because you end up doing more harm than good? One other thing, Citron declined to answer questions after his keynote. Strange because it's not like he's not good at avoiding questions he can't answer.

Related Posts

• What Say You, Jeff Citron?
• Is Vonage a "Buy" Now?
• Vonage's Spending Plans

Jumpin' Off the Vonage Bandwagon

Talk about a story celebrating 20-20 hindsight: Bloomberg has a story looking at Vonage's controversial IPO, its post-IPO troubles (lawsuits, analyst downgrades. tumbling stock price, etc.) and co-founder Jeff Citron's "colourful history". Perhaps the highlight of the story is this quote:

"I don't even know how the company went public,'' said Mark Mowrey, an analyst with Al Frank Asset Management, whose firm's $850 million in funds includes shares of Verizon and AT&T. “With big companies trading at the valuations they're trading at, I don't know how an upstart that's stolen customers from them and has no defensible business model should be valued more highly.''

If every investor was as smart as Mowrey, Vonage might have had a difficult time doing the IPO at $17 a share. But the market works in strange and mysterious ways. For more insight into Vonage's prospects, check out my column this week in the Financial Post.

Related Posts

• Vonage IPO Apparently Over-Subscribed
• Like Vonage Service? Buy Some Shares
• Vonage's New P.R. Agency: The New York Times

Analyst: Not too Late to Hang Up on Vonage

Veritas Research analyst Neeraj Monga has published an extensive and critical report on Vonage after some serious number crunching. Entitled “Not Too Late to Hang Up”, Monga concludes Vonage is a “sell” and its stock is worth less than $5. “Vonage is caught up in the perfect storm,” he said. “Regulatory uncertainty, competitive pressures, lawsuits, unhappy customers and a damaged brand will derail its business plan. Time to hang up.” While the company's supporters point out Vonage could have 4.5-million to 7-million customers by 2009, Monga said growth will come at a cost: $777-million to $1.28-billion of cash burn. If things come in on the high of the range, he thinks Vonage may have to make a debt or equity offering next year.
  Vonage is starting fight back after a post-IPO quiet period that lasted until June 19. In a BusinessWeek story, spokeswoman Brooke Schulz said “we're not toast”, and that people who look at the cash burn are ignorning the fact “we have a healthy business here”. That's a certainly optimistic outlook, which it ignores the fact Vonage is bleedling rink ink and it has no plans to become profitable any time soon as it focuses on subscriber growth. It should also be noted Vonage just hired a new senior v.p. of investor relations, Craig Streem, who will a huge job trying to convince the investment community that the company is headed in the right direction. Vonage shares closed yesterday at $8.85, just above the 52-week low of $8.25. Just in case you forgot, the company did its IPO at $17 a share.

Related Posts

• What Say You, Jeff Citron?
• Vonage Raises More VC
• Vonage by Numbers..1,2,3

Vonage Tumbles on VZ Lawsuit

Another day, more bad news for Vonage as Verizon has sued the VoIP service provider for patent infringment. So far today, Vonage shares have tumbled another $1.07 to $8.53 - a 50% decline from the IPO issue price of $17. Every $1 that Vonage drops, reduces its market capitalization by $155-million. At some point, it could get low enough for Vonage to become an attractive takeover target - although the Verizon lawsuit may complicate the issue.

Related Posts

• Good VoIP News for Vonage? Probably Not.
• V-V-V-Vonage…D-D-Down….
• Weekly Podcast: Nortel, Vonage, Bill Gates

Vonage Continues to be Savaged

It didn't get a lot of attention but Vonage shares crashed through the $10 barrier to close at $9.60 on Friday - a 43% tumble from its IPO price. Preston Gralla savages Vonage and the fools who bought into the IPO, while raising the well-trodden notion eBay overpaid for Skype. While it's difficult to argue with Gralla's assessment, I would contend there are a few major differences between Vonage and Skype - aside from financial issues. Perhaps the biggest is that Vonage has mostly been seen as an opportunistic investment play by Jeff Citron and his band of VCs more than a disruptive business. On the other hand, Skype is still seen as a cool technology with plenty of potential to make a major impact on how people communicate and do business online (without even getting into whether it's worth $4.1-billion. Perhaps this is the real genius of Niklas Zennstrom and Janus Friis. They sold the world on Skype's disruptive potential, and then convinced eBay to buy into the dream. One point where I will disagree with Gralla is Vonage's takeover potential. Gralla contends he “wouldn't count on” a buy-out but I would argue anything can be sold at the right price. Vonage wasn't worth $2.65-billion (its IPO valuation); and you could argue it's not worth $1.5-billion (its current valuation). But what happens if Vonage shares drop to $5? Would a suitor justify making a $750-million bid for 1.6 million customers?
Addendum: Bloomberg reports that Pali Research downgraded Vonage to a “sell” from “neutral” after analyst Richard Greenfield learned Vonage is offering existing customers a discounted rate of $19.99 if they threaten to leave. “It is increasingly apparent that Vonage is struggling to drive subscriber growth following the IPO,” he said in a research note.

Related Posts

• eBay Stumbling Away from StumbleUpon
• A Vonage IPO on the Way?
• Vonage Raises More VC