Vonage: Is there a future?

Summary:VOIP giant Vonage reported its fourth quarter results and analysts are teeing off on the company. Vonage is still churning a good chunk of customers, spending too much on marketing and serving up a disappointing outlook.

VOIP giant Vonage reported its fourth quarter results and analysts are teeing off on the company. Vonage is still churning a good chunk of customers, spending too much on marketing and serving up a disappointing outlook.

The good news: Vonage isn't a total train wreck. It met Thomson Financial estimates with a fourth quarter loss of $65 million, or 42 cents a share. Hey, we'll take what we can get. It also has enough cash to keep the company upright for awhile.

But Vonage shares are falling--again. Vonage is down about 5 percent to $5.54. At least poor Vonage shareholders are used to it. A brief history: Vonage does customers a favor and offers them an opportunity to buy IPO shares. Then the IPO tanks. Vonage then tries to collect money from customers that went "hey this wasn't supposed to happen." Vonage then tries to fend off numerous competitors as customer service issues arise. Vonage's short history could fill a book, but we'll cut to the chase. See the chart courtesy of MarketWatch.

That performance leads to a big question: Is Vonage viable? I'm torn on this issue as I'm a Vonage customer and the service has been decent. Vonage is also creating test labs, trying out new models and benefiting of the VOIP industry. However, if Vonage isn't acquired it's very hard to see this business surviving. Perhaps all Vonage customers are like me: Too lazy to switch yet too cheap to get a second land line. In other words, Vonage may be in a tenuous situation in the customer loyalty department. And the more Vonage screws up the more it'll be seen as a struggling company. That perception will ultimately hurt Vonage's subscriber count.

Vonage lost $286 million in 2006, up from $261 million in 2005. Vonage spent $365 million on marketing in 2006, or 60 percent of its annual revenue. And on a conference call, Vonage executives noted much of that spending was on ads that flopped. New "informational" advertising seems to be working better.

The company had 2.2 million lines as of the end of the year, but analyst fret about slowing growth. For 2006, Vonage had a churn rate--percentage of people who ditch the service--of 2.5 percent, up from 2 percent in 2005.

Vonage is shooting for "positive adjusted operating profits as early as the first quarter 2008."

Wall Street would wait out Vonage's losses if growth was stellar. But Vonage is projecting 2.9 million to 3.1 million lines by the end of 2007. Revenue will be $850 million to $900 million with marketing expense topping $400 million for the year. Add it up and Vonage will lose $150 million to $170 million adjusted for various items.

Citigroup analyst Michael Rollins called Vonage's quarter "disappointing" since it added 166,000 subscribers in the fourth quarter compared to his estimates of 261,000. "Monthly cash contribution per user, which nets out the subscriber metrics to imply a future level of profitability in a zero-growth environment, fell substantially to $0.18 vs. our estimate of $1.44," said Rollins.

Soleil Securities Group analyst Gregory Lundberg notes that Vonage's subscriber line growth is stalling, which "is not good at a telecom start-up."

On the bright side: Vonage could look like a takeover target at some point for what Lundberg describes as a non-telecommunications or non-cable buyer. But unless Vonage gets its financials in order those buyers aren't exactly going to be storming the gates.

Topics: Networking

About

Larry Dignan is Editor in Chief of ZDNet and SmartPlanet as well as Editorial Director of ZDNet's sister site TechRepublic. He was most recently Executive Editor of News and Blogs at ZDNet. Prior to that he was executive news editor at eWeek and news editor at Baseline. He also served as the East Coast news editor and finance editor at CN... Full Bio

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