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.
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Vonage Holdings Corp
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2004
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2005
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2006
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2007
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2008
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2009
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Earnings Model
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Dec
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Dec
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Dec
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Dec
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Dec
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Mar
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12-Jun-09
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Gross margin
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47.20%
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53.75%
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52.91%
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66.67%
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66.44%
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67.74%
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Revenue growth
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237.73%
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125.63%
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-64.46%
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2.95%
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-0.27%
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Relevant Metrics
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Headcount
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648
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1,355
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1,790
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1,543
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1,491
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1,413
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Gross subscriber line additions
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364,214
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1,099,641
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1,470,138
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283,907
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201,423
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281,329
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Net subscriber line additions
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304,849
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878,472
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955,073
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56,016
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-14,744
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-6,493
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Subscriber lines
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390,566
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1,269,038
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224,111
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2,580,227
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2,607,156
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2,583,861
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Disconnects
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59,365
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221,169
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515,065
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227,891
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216,167
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287,822
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Average monthly churn
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1.8%
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2.0%
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2.5%
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3.0%
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2.9%
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3.1%
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Average monthly revenue per line (ARPU)
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$ 27.89
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$ 27.03
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$ 28.98
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$ 28.19
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$ 28.33
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$ 28.86
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Average monthly telephony services per line
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$ 26.55
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$ 25.93
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$ 27.76
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$ 27.42
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$ 27.28
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$ 27.78
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Average monthly direct cost of telephone services p/l
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$ 8.12
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$ 8.44
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$ 8.20
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$ 7.11
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$ 7.22
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$ 6.67
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Marketing costs per gross subscriber line addition (SLAC)
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$ 154
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$ 221
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$ 249
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$ 223
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$ 309
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$ 290
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Premarketing operating income (PMOI) p/l
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$ 12.68
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Vonage Holdings Corp
|
2004
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2005
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2006
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2007
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2008
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Cash Flow Analysis
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Dec
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Dec
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Dec
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Dec
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Dec
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Actual
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Actual
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Actual
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Actual
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Actual
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Operating:
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Net income (loss)
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(69,921)
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(261,334)
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(338,573)
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(267,428)
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(64,576)
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Adjustments to reconcile net income
to net cash provided (used in) ops:
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Depreciation and amortization
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3,907
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11,122
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23,677
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35,718
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49,494
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(Gain)/loss on PPE & investments
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438
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6,353
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5,860
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36,941
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Stock based compensation
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15
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26,980
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7,542
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12,238
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Impairments
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|
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Taxes
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Other (catch all)
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1,155
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941
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1,658
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4,651
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1,726
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Changes in working capital
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Receivables
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(2,100)
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(4,068)
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(10,196)
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(5,296)
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2,028
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Inventories
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(1,289)
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(15,130)
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(10,133)
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2,196
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7,472
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Other assets
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(1,518)
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(6,265)
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(6,512)
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(6,266)
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(7,780)
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Deferred customer acq. costs
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(5,765)
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(17,618)
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(21,053)
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(10,796)
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13,322
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Accounts payable and accrued expenses
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27,119
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75,884
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104,688
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(80,736)
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(34,767)
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Deferred revenue
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9,824
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28,565
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34,181
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20,509
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(10,124)
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Taxes
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Other liabilities
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(12)
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(2,315)
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32
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23,120
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(5,319)
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Cash flows from operations
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(38,600)
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(189,765)
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(188,898)
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(270,926)
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655
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Vonage Holdings Corp
|
2005
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2006
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2007
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2008
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2009
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Dec
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Dec
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Dec
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Dec
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Mar
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Trailing
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Net revenues
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269,196
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607,397
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828,228
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900,120
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899,508
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EBIT
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(253,415)
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(316,811)
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(93,111)
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42,173
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54,413
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EBT
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(250,602)
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(315,111)
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(98,577)
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15,284
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19,228
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EAT
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(250,212)
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(314,896)
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(98,759)
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14,606
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18,555
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Shares
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1,381
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94,207
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155,591
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156,257
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171,946
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Balance
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Cash, restricted cash & cash eq.
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273,832
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507,778
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190,412
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85,719
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84,724
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Net Cash & equivalents
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3,443
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230,093
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(86,143)
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(130,530)
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(154,590)
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A/R
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6,615
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16,544
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20,105
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17,696
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21,364
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Inventories
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15,687
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24,390
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19,604
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10,360
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10,568
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CA
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303,534
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569,772
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231,683
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116,517
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122,327
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TA
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446,562
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757,524
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462,297
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336,905
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330,237
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LT Debt
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269,616
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276,665
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22,200
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213,694
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236,700
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DR - ST
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20,449
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38,504
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53,653
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63,155
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62,712
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DR - LT
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21,600
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37,730
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43,575
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23,058
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17,030
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CL
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135,404
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259,928
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448,603
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173,170
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173,886
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Total Debt
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658,816
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277,685
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276,555
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216,249
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239,314
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Total Liabilities
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426,620
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574,323
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537,424
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427,647
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443,909
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Equity
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19,942
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183,201
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(75,127)
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(90,742)
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(113,672)
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Goodwill and intangibles
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-
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4,300
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7,656
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5,400
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4,753
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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