Vonage: Is there a future?

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.

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TOPICS: Networking
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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.

Topic: Networking

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32 comments
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  • There is NO FUTURE for Vonage.

    What is it that doesn't sink in to people? VOIP is going to be embedded into OS's, apps, messenging, on and on and on. Who would invest in a company with no future that sells something everyone will be giving away in a couple years?
    No_Ax_to_Grind
    • Your right and wrong

      It has no future, but not for the reasons you mentioned. There is no future because of the increase in VOIP from the Cable companies, and services like verizons fios. The pricing that the Cable and Phone companies give on their triple play packages is too good to pass up and makes Vonage useless. As for VOIP built into IM thats nice for PC to PC calls when you don't care about quality but i wont ever replace a landline or cell phone which are held to higher quality standards.
      jfp
      • You assume status quo.

        Sorry but no. As wireless (WiMAX) spreads and we establish the "mesh" network then a company like Vonage is useless. As to traditional phones, they too are going the way of the DoDo bird. Heck, I already have a phone that plugs into my PC for VOIP (along with an 800 number) and others are catching on fast.
        No_Ax_to_Grind
    • Vonage will eventually fail

      I use Vonage now, and it works quite well once I figured out work arounds for technical problems with their hardware. As it's now reliable and affordable, I will remain with them for as long as it continues to work; but, I NEVER recommend them to others, and I opennly tell others to beware of Vonage's tech support. When the service works, it works well. If you have problems, you're better off figuring it out on your own rather than attempting to get support from Vonage's inneffective customer service. Recently, Vonage has offered discounts for pre-paying for a year - as I question their lengevity, I'll also never pre-pay that far in advance with them.
      ac2_z
      • Vonage Can't last long

        I too have used Vonage since it became available.
        I see the pre-paying for a year as a symptom that they don't expect to be acquiring customers by the end of the year. With Skype at $60 per year with a USB to RJ11 adaptor for less than $30, I don't blame them for trying to lock in as many customers as they can now. There will be a blood bath.
        jswilsonx
      • Same Concerns

        I am a Vonage user (no set-up problems) and I thought that they must be hard-up for cash to make the prepay offer
        SteveOs001@...
      • If Vonage fails I hate what will replace it

        Right now the only reliable alternatives in my area are Comcast cable ($42 for VOip) or Bellsouth ($50) for the features Vonage offers me for less than $20 per month.

        I know there are other VOiP services. But, my wife refuses to wear the geeky headset some require and others are no names with no track record.

        Vonage has been very good for me.
        ChazzMatt
    • Yes, You're All-Knowing No_Axe

      And have been right on everything from DRM to Vista....
      itanalyst
  • VOANGE...All smoke and mirrors

    I am a former Vonage customer. I had a business line, a private line, a softphone line, 2 virtual numbers and a toll-free number. It was a nice chunk of cash I sent Vonage's way. Now I give all my business to Verizon because Vonage doesn't know how to take care of its customers once they've nabbed them. Take note of that, because I promise that will be the trend for all of Vonage's customers. The oasis in the desert is just a mirage; but you only find out once you've made the trip to it. Vonage is skilled at gaining subscribers, but their service is so bad that they can't hold on to them.
    I paid twice as much for my Vonage business line as I paid for my residential line with Vonage. What do business customers get in return? Nothing. Absolutely nothing. No business advantages at all. You get the same sorry, ineffective customer support, the same overseas customer support department, no connection to anyone who can actually help you. If any subscriber cancels service inside of one year you get hit with a penalty, even if you paid for your own equipment. If you change your calling plan, you get hit with a fee for that. Add a virtual number...that's another "setup fee" on top of the monthly fee. This is how Vonage tries to stay profitable--or minimize it's losses. But it's a timebomb ticking because they can't hold on to their customer base by treating their customers like that. Want more reasons why customers will leave?? If you call customer support you're on hold for 10-30 minutes (no kidding!) before talking to customer care reps who can't do anything for you...they fill out trouble tickets and send them to real customer care agents or technicians....and the customer is not allowed to talk to those people. And because the support reps aren't native English speakers, miscommunication abounds, and they often misrepresent the customer's problem in the trouble ticket. I can go on and on about Vonage. But to put it simply, Vonage is good at planting seeds, but they aren't good at raising their crop. They stay afloat by charging more fees than you've ever heard of, and by nailing businesses with twice the subscription fee, without adding any incentives. Vonage is doomed because of their business practices. I suggest consumers (and business owners) stay far away from Vonage unless you absolutely must save that 10 or 20 bucks a month over your regular phone company. And if you invest in Vonage, you may want to consider moving your money elsewhere. This ship is sinking as we speak.
    theMacDaddy
  • If Skype had 800 number service...

    Yes, I'd switch. I've had Vontage ever sicne they began, but heaven help trying to
    listne to someone overseas or if the computer or local area network is actively
    downloading files.

    I've been very impressed with Skype video on Macs and if/when Skype offers 800-
    number service, I will give Vonage back their gear. The quality with my stereo
    headset is so much better than with the phoneset conected to the Vonage
    "modem".

    The issue with Vonage is quality, period. Vonage, are you listening? Oh, that's
    right, too busy with those innane TV commercials...
    pritchet1
    • what if

      What do you mean if they had 800 number service. You can certainly call 800 #s.
      pisangbyong@...
  • But the business services are SO GOOD!

    The best part about Vonage over other players in the market is the range of services for small businesses. Their Small Business Premium Unlimited service offers free features that you can only find in very, very expensive phone systems. The account control panel, being able to check your voicemail via phone, computer or email is astounding, Free fax line, call hunt, ring lists, click-2-call, and free calls to Puerto Rico and the European countries that matter to me.

    Who else offers these features?! And at $50/mon, that is between $20-$30 dollars less per month than I pay Verizon for 2 lines, caller-id and voicemail.

    Maybe Vonage needs to redirect it focus from simple residential to small business because that is where they REALLY shine!
    mvecera@...
  • Beware of Vonage!

    As you probably already know yesterday on the east coast all of Vonages customers lost their service because their servers had a problem! Last call I received was at 8:30 am next call was after 12:00pm. I called customer service and after my long wait on the phone I told them I wanted to disconnect and they said they will charge me $39.95 cancellation fee and as I asked for a supervisor I was transfered many times and finally at the final stage of cancellation the total fee would be $89.90 because of a discount on the equipment. This was not the first problem but the final straw. I e-mailed the headquarters about my problem and all I got was a generic response saying I had to call customer service so my next email will be to BBB and SCDOCA and LIVE5 news.........
    tgmjdavis
    • then go disconnect

      I've had them for 2 years and had no problems.
      ChazzMatt
  • I'm Satisfied

    I felt compelled to fire my telephone company. Vonage was a viable alternative which has worked out well with no glitches thus far. I think it is worth it. Been with 'em for about three months now.
    Webist
  • Vonage is a huge rip-off

    Vonage charges you 15 dollar/month, for something that sipphone and others charge you 3 dollar/month (that is, the call-in option via a land-line number). Vonage is a rip-off. Why the difference? With Vonage you pay for the cost of their marketing.

    They only allow free calls to other Vonage customers, when Sipphone and others allow free calls to any other SIP networks as well (as it should be). I'm not sure if Vonage allow incoming calls from other networks, but I don't even care in finding out.

    And then, they charge you 4 cents a minute for US-local calls. GET REAL!!! Calling main european cities for 5 cents a minute? Is this a joke?

    Stay away from Vonage, it is a rip-off of a company charging you with land-line rates for something that is technologically almost free. All this so you can finance their marketing. I feel soooo sorry for those who sign up with this service, the stockholders of Vonage must be laughing at them.

    Get a true SIP account, and run it with a VoiP adapter or a softphone, but don't get locked into this pirates.
    patibulo
    • What are you talking about!?!

      What in the world are you talking about? I have had Vonage service for 2-1/2 years now. I chose the $15 a month plan and it includes minutes with that. I don't get charged 4 cents a minute for local US calls. If the included minutes are not enough, get the unlimited plan. I have saved $20 a month ever since I switched from a basic phone service. Not to mention you receive all the bells and whistles for that $15 a month with no long distance fees in the US. My old telco charged me $35 a month plus long distance. A call to my work would be long distance with a traditional telco. With Vonage I my spouse can call me without fees. The call quality is excellent and anyone on any network can call me too. They may have made some poor marketing choices but the service is great.
      glennerd7
    • you are a liar or an idiot

      Everything you said about Vonage is NOT true. The don't charge per car. What are you talking about? They have flat rate $25 for unlimited local and long distance to US/Canada and even many European countries. They even have $15 plan for 500 minutes of phone calls you make (and all phone calls to you are free).

      You are a liar or an idiot or both.
      ChazzMatt
  • Peoples responses always amaze me

    I have Vonage service, it far better than cell phone service and much cheaper. I don't see anyone complaining about $100 a month Cell Billing for endless dropped calls or the poor call quality. I think most of the negativity is miss directed. Why don't you write Jeffery Citron with your ideas. Tell him small Biz needs more. Tell him he should do his own commercials and keep the blonds and sharks at home.
    drtom527
  • I am a 2-year customer

    I am satisfied. I pay $15 plue taxes (about $18) per month for local/long distance, voice mail, call forwarding, and caller ID. Whereas I paid Bellsouth about $50 for that. I have had no real issues. I moved from apt to house I bought and my sevice was there when cable got turned on. Painless. I would hate to see them go down the drain. My only alternative besides Bellsouth would be Comcast cable VOiP for $42 per month. A little cheaper than Bellsouth but not much!
    ChazzMatt