Vonage Holdings Corporation VG
June 12, 2009 - 12:29pm EST by
danconia755
2009 2010
Price: 0.42 EPS -$0.15 -$0.06
Shares Out. (in M): 157 P/E n/m n/m
Market Cap (in $M): 66 P/FCF 0.0x 0.0x
Net Debt (in $M): 154 EBIT 57 99
TEV ($): 219 TEV/EBIT 3.8x 2.2x

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Description

 

Besides ubiquitous Internet ads, Vonage Holdings Corp provides broadband Voice over Internet Protocol (VOIP) services to residential and small business customers. Vonage's service is priced significantly below what Incumbent Local Exchange Carriers (ILECs) charge and it offers features, such as call waiting, caller ID with name, call forwarding, and voicemail at no additional cost to the basic plan. The company also provides area code selection, virtual phone numbers, and number portability. As of March 31, 200, it had approximately 2.58 million subscriber lines in service.

 

Vonage Holdings Corp

2004

2005

2006

2007

2008

2009

Earnings Model

Dec

Dec

Dec

Dec

Dec

Mar

12-Jun-09

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross margin

47.20%

53.75%

52.91%

66.67%

66.44%

67.74%

Revenue growth

 

237.73%

125.63%

-64.46%

2.95%

-0.27%

Relevant Metrics

 

 

 

 

 

 

  Headcount

648

1,355

1,790

1,543

1,491

1,413

  Gross subscriber line additions

364,214

1,099,641

1,470,138

283,907

201,423

281,329

  Net subscriber line additions

304,849

878,472

955,073

56,016

-14,744

-6,493

  Subscriber lines

390,566

1,269,038

224,111

2,580,227

2,607,156

2,583,861

  Disconnects

59,365

221,169

515,065

227,891

216,167

287,822

  Average monthly churn

1.8%

2.0%

2.5%

3.0%

2.9%

3.1%

  Average monthly revenue per line (ARPU)

 $        27.89

 $        27.03

 $    28.98

 $        28.19

 $        28.33

 $     28.86

  Average monthly telephony services per line

 $        26.55

 $        25.93

 $    27.76

 $        27.42

 $        27.28

 $     27.78

  Average monthly direct cost of telephone services p/l

 $          8.12

 $          8.44

 $      8.20

 $          7.11

 $          7.22

 $       6.67

   Marketing costs per gross subscriber line addition (SLAC)

 $           154

 $           221

 $       249

 $           223

 $           309

 $        290

   Premarketing operating income (PMOI) p/l

 

 

 

 

 

 $     12.68

 

 

Vonage Holdings Corp

2004

2005

2006

2007

2008

Cash Flow Analysis

Dec

Dec

Dec

Dec

Dec

 

Actual

Actual

Actual

Actual

Actual

Operating:

 

 

 

 

 

Net income (loss)

      (69,921)

    (261,334)

   (338,573)

   (267,428)

       (64,576)

Adjustments to reconcile net income
to net cash provided (used in) ops:

 

 

 

 

 

Depreciation and amortization

3,907

11,122

23,677

35,718

49,494

(Gain)/loss on PPE & investments

 

438

6,353

5,860

36,941

Stock based compensation

 

15

26,980

7,542

12,238

Impairments

 

 

 

 

 

Taxes

 

 

 

 

 

Other (catch all)

1,155

941

1,658

4,651

1,726

Changes in working capital

 

 

 

 

 

Receivables

(2,100)

(4,068)

(10,196)

(5,296)

2,028

Inventories

(1,289)

(15,130)

(10,133)

2,196

7,472

Other assets

(1,518)

(6,265)

(6,512)

(6,266)

(7,780)

Deferred customer acq. costs

(5,765)

(17,618)

(21,053)

(10,796)

13,322

Accounts payable and accrued expenses

27,119

75,884

104,688

(80,736)

(34,767)

Deferred revenue

9,824

28,565

34,181

20,509

(10,124)

Taxes

 

 

 

 

 

Other liabilities

(12)

(2,315)

32

23,120

(5,319)

Cash flows from operations

(38,600)

(189,765)

(188,898)

(270,926)

655

 

Vonage Holdings Corp

2005

2006

2007

2008

2009

 

Dec

Dec

Dec

Dec

Mar

Trailing

 

 

 

 

 

Net revenues

    269,196

    607,397

    828,228

    900,120

     899,508

EBIT

   (253,415)

   (316,811)

     (93,111)

      42,173

       54,413

EBT

   (250,602)

   (315,111)

     (98,577)

      15,284

       19,228

EAT

   (250,212)

   (314,896)

     (98,759)

      14,606

       18,555

Shares

        1,381

      94,207

    155,591

    156,257

     171,946

 

 

 

 

 

 

Balance

 

 

 

 

 

Cash, restricted cash & cash eq.

    273,832

    507,778

    190,412

      85,719

       84,724

Net Cash & equivalents

        3,443

    230,093

     (86,143)

   (130,530)

   (154,590)

A/R

        6,615

      16,544

      20,105

      17,696

       21,364

Inventories

      15,687

      24,390

      19,604

      10,360

       10,568

CA

    303,534

    569,772

    231,683

    116,517

     122,327

TA

    446,562

    757,524

    462,297

    336,905

     330,237

LT Debt

    269,616

    276,665

      22,200

    213,694

     236,700

DR - ST

      20,449

      38,504

      53,653

      63,155

       62,712

DR - LT

      21,600

      37,730

      43,575

      23,058

       17,030

CL

    135,404

    259,928

    448,603

    173,170

     173,886

Total Debt

    658,816

    277,685

    276,555

    216,249

     239,314

Total Liabilities

    426,620

    574,323

    537,424

    427,647

     443,909

Equity

      19,942

    183,201

     (75,127)

     (90,742)

   (113,672)

Goodwill and intangibles

              -  

        4,300

        7,656

        5,400

         4,753

 

With trailing sales of approximately $900 million, a market cap of $66 million, $85 million of cash in the till ($39.6 million of that cash is restricted and does not show up on databases as cash), and trading at 0.26 times enterprise value to trailing revenue we believe VG is undervalued. While we recognize that VG has a high interest expense with an enterprise value of $219 million, it has no debt maturities until 2011 and it was able to refinance in November of 2008 in the depths of the financial crisis so imminent bankruptcy is unlikely.

 

With new management the focus has changed from revenue growth to cost management in the effort to drive to profitability. Cost controls are evident with the drop in the average monthly direct cost of telephone services per line from $8.44 in 2005 to $6.67 in Q1 2009. Gross margin has improved from 53.75% in 2005 to 67.74% in Q1 2009. EBIT has improved from a loss of $253 million in 2005 to trailing twelve months EBIT of $54.4 million in Q1 2009.

 

Currently the Company spends over $200 million a year in marketing with most of the expense coming from ad purchases.  The company believes it can continue to make incremental costs reductions and a transition to a new ad agency should help mitigate some advertising costs and is expected to restart subscriber growth. Investors should begin to take notice of a company that trading at 1.2x EV / Trailing EBIT and 3x EV / 2010 EBIT with a powerful franchise.

 

Catalyst

Catalysts:

-         Further reduction in costs driven by lower costs of its number portability provider (recent contract negotiation) and lower advertising expenses through voluntary costs controls and a new ad purchasing agency that has negotiated lower ad rates

-         Debt refinancing that lowers the double-digit interest rate currently being paid (this should not be difficult given the thawing of the credit markets)

-         Stabilization of subscriber base (current churn is 3.1%)

-         The realization by investors that Vonage has gone from an Internet relic that focused on revenue growth at any cost to a company "run by grown ups" that trades at less that 1x 2010 EBIT to market cap.

 

Risks:

-         Inability to repay or refinance debt

-         Possible patent litigation with Alcatel Lucent

-         Dramatic loss of subscribers

 

 

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