VONAGE HOLDINGS CORP VG
July 19, 2016 - 12:04am EST by
ATM
2016 2017
Price: 6.08 EPS 0 0
Shares Out. (in M): 227 P/E 0 0
Market Cap (in $M): 1,380 P/FCF 0 0
Net Debt (in $M): 404 EBIT 0 0
TEV ($): 1,784 TEV/EBIT 0 0

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Description

While we often produce long write-ups that go on for pages, this will be short and sweet.  It will be especially sweet for people who buy VG here at around $6.00. Lukai put together an outstanding write-up back in January 2016 and we could not provide better detail than that.  Since that write-up though something significant has changed – Nexmo.

 

Nexmo is in the Communications Platform as a Service (CPaaS) business.  Basically the company provides software to the developer community to build voice, SMS and messaging functionality into apps.  The developer communities get to use the software for free and then pay for it on a per use basis when consumers use the app.  The market was fairly oblivious to this whole business model until a couple weeks ago when Twilio came public (NasdaqGS:TWLO).  Twilio is the #1 company in the CPaaS business.  Twilio has a market cap of $3.5B and revenue of $192mm.  Twilio sports a TEV/Revenue multiple of 19x.

 

Here are the key facts on Nexmo:

·         Deal closed June 3, 2016

·         Purchase price of $230mm plus $20mm earnout

·         Revenue in 2016 estimated at $85mm+

·         Nexmo CEO is staying onboard VG

·         Nexmo also comes with 165 developers

·         Nexmo has 5,000 customers

·         99.9% customer retention

·         Key customers

o   Uber

o   Airbnb

o   Snapchat

o   WeChat

o   KLM

o   Daimler

o   Viber

o   Expedia

o   Alibaba

o   Lazada

o   Zalora

o   GrabTaxi

o   Telegram

·         Revenue growth over the last five years at 47% CAGR

 

What CPaaS does is allows app users to make phone calls and messages within an app.  This may sound intuitive, but it is rather complicated.  Think of your Uber app on your phone.  If there was no ability to call the driver from the app, you’d have to write down the driver’s phone number from the app, leave the app and then dial the number from your native phone on your smartphone.  To make this all possible, you’d have to be provided the driver’s real phone number.  Instead with the CPaaS functionality this can all be accomplished from the Uber app directly and you don’t have to get the driver’s actual phone number and the driver doesn’t see your actual phone number (higher security for passenger and driver).  Absent the CPaaS software, the Uber app developer would actually have to build a phone and phone functionality and then the connectivity to send and receive phone calls end-to-end.  Instead, the CPaaS company provides the software and then actually facilitates the actual placing of the call or messaging.

What else does Nexmo do for Vonage - it makes the business segment as big as the consumer segment in the next couple quarters and this is going to be significant.  Also, we think it is likely that soon management could decide to spin-off the business segment as a standalone entity if the valuation does not begin to improve.  The addition of Nexmo to the business sgment makes this more of a possiblity - it is a total game changer and the market is totally missing it.

So let’s talk about the valuation of Nexmo.  VG paid with earnout $250mm for Nexmo.  Nexmo will do $85mm in revenue in the current year.  What is this worth?

 

 

1.       SaaS multiple (median is 5.7x revenue for 45+ SaaS companies we follow) - $485mm

2.       TWLO multiple (19.0x revenue) - $1.6B

3.       Our estimate (10.0x revenue – faster growth SaaS multiple) $850mm

 

So let’s update the rest of Lukai’s valuation work:

 

·         Value of consumer segment $758mm (we agree – no adjustment)

·         Value of business segment $1,077 (Lukai’s no M&A value)

o   We disagree

o   Multiples have gone up and peers are at 4.6x revenue (EGHT, RNG, BSFT)

o   Revenue for 2016 - $322mm

o   Value $1.5B

·         Value of NOL $155mm (NPV of NOL at 10% discount rate)

 

So total SOTP valuation is $3.3B.

 

 

The current net debt is $404mm (pro forma for both the Nexmo purchase and the full earnout).  So this implies the equity value is worth $2.9B and there are 227mm fully diluted shares outstanding – based on this we estimate the fair value of VG’s shares to be $12.50 each or over 100% upside to the current trading price.

I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.

Catalyst

Market realizes how valuable Nexmo is.

Management breaks up business and spins the business segment off (which would include Nexmo).

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