Vonage Finds Its Footing

Cover Story

Vonage Finds Its Footing

By Paula Bernier, Executive Editor, IP Communications Magazines  |  June 01, 2011

The communications industry has been on a wild ride for many years now, but few companies have been through as many ups and downs as Vonage.

After effectively creating the market for residential VoIP through a popular media campaign that educated consumers about the benefits of this type of service, and later struggling with some high profile legal problems, an abysmal IPO, and then financial issues and low stock values, Vonage appears to have attained firm footing.

The company, whose stock had fallen to 33 cents at one point, now trades in the $4 to $6 range. That’s still well below the $17 per share price at which it was first sold to the public in 2006, but it’s a nice improvement from where it was recently. In fact, BESPOKE Investment Group in April 2011 noted that Vonage (which at $5.15 per share was up 129.91 percent at the time) ranked No. 4 among the top performing Russell 3000 stocks.

Vonage CEO Marc Lefar (News - Alert) says the VoIP services provider has had an extraordinary operational and financial turnaround over the last three years, with record cash flow, record EBITDA and increasing per customer revenue (up more than 8 percent over the past three years).

The company, which had record high positive EBITDA in 13 of the last 14 quarters, last month reported its financial performance for the first quarter of 2011. EBITDA for the quarter was $43 million, up $3 million from the same quarter last year and $2 million better than last quarter. Based on that, Vonage now expects to reach EBITDA of $165 million (rather than the initial guidance of more than $156 million) in 2011. Its income from operations was $30 million in the first quarter of 2011, which is up from $25 million a year ago and above the $26 million reported last quarter. Vonage also had record high net income of $21 million, or $0.10 per share; that’s an improvement from net income of $14 million in the first quarter of 2010, and up from a net loss of $42 million, or $0.19 sequentially, which included $58 million in one-time adjustments.  

"Vonage continued to deliver strong financial results as we generated record high EBITDA and net income,” says Lefar. “We improved average revenue per user, reduced costs and continued to deliver on our strategy to penetrate international calling segments."

This follows record high financial results for 2010 that included adjusted EBITDA of $156 million and income from operations of $95 million, up 31 percent and 66 percent over the prior year, respectively.

Having refinanced its debt in December 2010 Vonage was able to get a $200 million term loan at an interest rate that is less than half ($26 million vs. $49 million) of what it was paying previously. And the company last month revealed that it’s ahead of schedule in paying down that debt.

"Our strong cash flow enabled us to prepay $20 million in debt; and we expect to make another $30 million in voluntary prepayments by year end, resulting in annual interest savings of nearly $5 million,” Lefar reports. “Combined with scheduled amortization of $20 million, we expect term debt to be $130 million at the end of 2011."

Despite all of the company’s trials and tribulations, some industry watchers never lost faith in Vonage. A 2008 Wired Magazine article quoted Patrick Monaghan, a Yankee Group (News - Alert) analyst, as saying: "Vonage is like Rocky Balboa: They get beat down and get back up. Their chances of turning around are very good."

And after Vonage reported its first-ever profit in the first quarter of 2009, analysts like Roger Entner began singing the praises of Lefar, who took over as Vonage CEO in 2008.

“He has really put them on the smart growth program, because before, they were growing to the point of bankruptcy,” the Nielsen analyst was quoted in a story last year as saying. “Hats off – not a lot of people would have thought that would have happened.”

Lefar tells INTERNET TELEPHONY that the cost of customer acquisition at Vonage continues to come down and the company is still adding subscribers. In the fourth quarter of 2010, Vonage added 6,000 new lines, the first quarterly subscriber gain it had in more than two years. Meanwhile, it reduced customer churn by 2.4 percent. In the first quarter of this year, which was the fourth consecutive quarter of increasing gross line additions, Vonage reported 3,000 net line additions, up from a loss of 26,000 lines in the year-ago quarter and down from 6,000 net line additions sequentially. And while lower value customers are leaving, Lefar says Vonage has been able to keep most of its higher value customers.

The vast majority of Vonage customers today fall into the residential and small home/small office category, although it does serve some small businesses, generally those with less than 10 lines. Lefar says Vonage gets a good number of its domestic callers as a result of those users’ frustration with the price and value offered by incumbent telcos and cablecos. He adds that Vonage is able to avoid pricing compression by offering a full suite of features, including unlimited visual voicemail and unlimited information services, with its services.

World Outlook

In an effort to drive top line revenues, Vonage about a year and a half ago shifted its focus from domestic home phone services to the international outbound long-distance market.

VoIP can seriously disrupt the international roaming market, Lefar says, given 70 percent of international long-distance users spend three to four times to complete calls on wireline and wireless networks as they would have to pay using Vonage service. To address that opportunity, the company more than a year ago launched Vonage World, a flat-rate calling program to more than 60 countries. In late April the company turned up Vonage World Premium, an upsell service to the original Vonage World.

More than 1 million customers now use Vonage World, with 25 percent of the company’s customer base actively making international calls (vs. just 5 percent two and a half years ago), says Lefar. He adds that the service can support the use of traditional handsets, and includes 911 and number porting capabilities, which Lefar says is not offered by most non-traditional voice providers.

“In 2011 and 2012 we expect meaningful expansion beyond the U.S.,” says Lefar, adding that ethnic populations are Vonage’s new bread and butter.

Asian Indians were the strongest adopters of the Vonage World service initially, and the company since has moved to expand its success with other ethnicities. Last year Vonage focused its efforts on winning Hispanic subscribers. To do so, Vonage launched a campaign that delivers what Lefar says is a 360-degree Spanish experience. That includes creating and supporting marketing efforts, call centers, web sites and services in Spanish. That’s key given almost 30 percent of Vonage’s incoming prospects prefer to do business with the company in Spanish, Lefar emphasizes.

Vonage also recently launched a calling plan for the Philippines. And the company expects to continue its international expansion, with an eye toward Central and South America and select locations in the Far East – assessing expansion into select markets based on their broadband access, Wi-Fi-based device penetration, economic factors, and regulatory environment relative to VoIP.

“Our increased marketing focus on the Hispanic segment where we provide in language sales and service drove an increase in account starts for the second consecutive quarter,” Lefar said in his comments about the company’s first quarter 2011 results. “Asian Indian subscribers continue to be a loyal and growing portion of our business, and growth in Canada continued with [gross line addition] increases sequentially and versus the year ago period.

“Our launch of an unlimited plan for the Philippines drove strong press attention; however, the retail price of $64.99 made necessary by unusually high termination rates has proven to be a barrier to broad adoption,” he added. “We are considering alternative offers to address the ongoing needs of this heavy calling segment.”

Vonage Unplugged

It’s no surprise that mobile is another new area of focus for Vonage.

Lefar made that clear last summer when he mentioned that devices like the iPad would help “speed the digital phone company’s recovery,” as Bloomberg put it.

Given Lefar is a telco veteran who helped engineer AT&T’s exclusive deal for the iPhone (News - Alert), he appears well positioned to help Vonage move forward on the mobile opportunity.

The same June 2010 Bloomberg story noted Vonage’s stated interest in potentially joining forces with a software or phone company as part of the new mobile strategy. Of course, that led to speculation that an acquisition might be forthcoming. But while there’d been no news as of May of any merger or acquisition action related to Vonage, Lefar tells INTERNET TELEPHONY that the company had $87 million cash on hand as of Dec. 31 and is considering acquisitions. As of March 31, 2011, Vonage’s cash, cash equivalents and restricted cash totaled $87 million; unrestricted cash was $80 million; and free cash flow was $13 million, up from $3 million sequentially.  

Vonage, Lefar says, is primarily interested in acquiring properties with unique technology, or unique mobile engineering or mobile development assets. Lefar adds that Vonage recently opened an R&D lab in Tel Aviv focused on mobile apps. And last year at about this time the company hired on Amichay Oren, founder of a software company called Expression Inc. that was acquired by SAP (News - Alert) AG, as vice president of research and development. Located in Tel Aviv, Oren leads Vonage’s technology teams in Holmdel, N.J., and the Israel location.

As Lefar notes, mobile international calling is an area of great frustration for people who call overseas. Vonage, he says, is trying to help simplify that process.

The company came out with a mobile phone app for international long-distance outbound more than a year ago. That’s available for Android (News - Alert), BlackBerry and iPhone devices. Additionally, this spring Vonage unveiled a mobile rate plan on terminating locations.

Vonage also plans to introduce an extension service to enable subscribers to use their Vonage plans from multiple numbers – mobile and/or wireline.

View on Video

While video has become a hot topic of discussion in the communications space, and an area that many of the top service providers and their equipment vendors are moving to address, this subject elicits only a lukewarm response from Lefar.

The Vonage network can support video, he says, but the real question is whether video can be monetized, particularly when broadband operators begin charging by the megabyte.

Video may be part of the services Vonage offers, Lefar continues, but the company doesn’t see a consumer willingness to pay for video communications, which is essentially free on a PC-to-PC basis. Lefar goes on to note that Vonage’s market research studies indicate that the minute a company starts to charge resident consumers even modest amount for video, utilization drops by more than 90 percent.

That said, Vonage believes its best bet is to focus on voice and messaging solutions, and all forms of international calling, including international roaming, says Lefar.


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