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BigTime
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PostPosted: Tue Aug 01, 2006 1:38 pm    Post subject: Big Time: Right on the Money Reply with quote Back to top

My predictionsposted here before earnings:

Churn rate rises from 2.11% to 2.35%

They came in at 2.3% monthly! Ding ding ding!

$115 million in cash burned to a crisp

Not Disclosed!!!! What kind of company doesn't disclose a quarterly statement of cash flows in its quarterly report? I have NEVER seen this before. I thought companies HAD TO REPORT cash flow data. I guess Vonage found some loophole. Jeff Citron is good at that, isn't he? I wonder how long it will be before the SEC nails him for defrauded investors for a second time.

Cash flow statements are vital to understand a company's operations. VG went to great effort to create "pro forma" numbers on its earnings release, but did not diclose this very basic information.

The IPO only raises $475 million, not the $491 that Vonage was expecting.

Ding ding ding! The IPO raised only $474 million. Slightly worse than I thought.

Customer aquisition costs continue to rise

Ding ding ding! Each new "subscriber line" costs Vonage $239. Marketing spending WENT UP this quarter. New customers WENT DOWN. Vonage's growth is clearly decellerating. Ouch!

And remember, Vonage also keeps us all in the dark on how many new CUSTOMERS it gets. It only reports "subscriber lines." This means we can't tell how much of its growth is from second lines, and how this figures changes quarter to quarter. It would be the easiest thing in the world to just fess up. But that's not want this company does. There is no transparancy. All we know is that they lose tons of money each month and somehow expect this to change by Q1 2008.

And this is an important metric. New customers impress me a lot more than second lines, which are easy to cancel and bring in less revenue.
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scerruti
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PostPosted: Tue Aug 01, 2006 3:11 pm    Post subject: Re: Big Time: Right on the Money Reply with quote Back to top

BigTime wrote:
All we know is that they lose tons of money each month and somehow expect this to change by Q1 2008.


And one line spoils your whole post.

Picture a graph against time with a line called revenue, a second line called expense. The revenue line is climbing faster than the expense line (Net loss for the quarter was $74 million, down 14% from $85 million in the prior quarter). When they cross then Vonage will turn a profit. Vonage predicts this will occur, based on market forecasts and current trends no doubt, in Q1 or 2008.

Now, I know you know this, you were spot on with your predictions. So why, instead of trying to be funny, don't you make some reasonable statements about why Vonage's prediction of 2008 Q1 profitability is wrong. Are you predicting that marketing expenses will climb even higher, that Vonage is overestimating the number of new subscribers that will be obtained or is there some other reason?

Your personal overemphasis on subscribers versus subscriber lines is faulty. Vonage sells to small businesses that have multiple lines under a single account. Those lines, unlike residential second lines, are really tied together and not likely to move downward in number. These accounts are also likely to be more profitable because they are more likely to make use of extra cost features like virtual numbers.

I'm not saying it wouldn't be useful, I just think you put too much emphasis on it.

I think the revenue per line ($27.70) is very important figure. It tells us that Vonage is not picking up a ton of cost is everything $14.99/month customers. The penny pinching $14.99 customers are the ones, in my opinion, most likely to jump ship when low cost competition heats up.

Finally I would like to talk about churn. I think it is significant that Vonage's churn rate is approximately the same as traditional carriers. Vonage technology is new, that means that it won't work for some customers and that some early adopters are moving onto the next new thing. I would like to see Vonage have a lower churn rate because of all the money they spend acquiring customers, but as long as the churn rate stays below 3 to 4% I think that they are being successful in actually penetrating the traditional phone market and not simply skimming off a few loose customers who then drift off to the next new thing.

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BigTime
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PostPosted: Tue Aug 01, 2006 3:40 pm    Post subject: Reply with quote Back to top

I already have made projections, see my older posts on Vonage's cash crunch and death spiral. I think they will run out of money well before Q1 of 2008. Even if they had unlimited money, I think revenue per customer is going to go down in the future.

Notice I did not make that prediction this Q. Competition is only now starting to heat up.

I do note that much of the increase, perhaps the majority, was becuase of the imposition of the universal service fee on Vonage customers. That's bad news, not good news, because not having to pay this made VG more competitive before, now it doesn't.

2.3% churn is a big deal when you have to spend $239 for each new customer. It means 27.6% of those customers are gone within a year.
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scerruti
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PostPosted: Tue Aug 01, 2006 4:00 pm    Post subject: Reply with quote Back to top

BigTime wrote:
Even if they had unlimited money, I think revenue per customer is going to go down in the future.


I don't think competition in the Voip market is going to heat up next year because of the triple play wars. I expect Comcast to eat into Vonage but only in limited markets.

BigTime wrote:
I do note that much of the increase, perhaps the majority, was becuase of the imposition of the universal service fee on Vonage customers. That's bad news, not good news, because not having to pay this made VG more competitive before, now it doesn't.


Read it again. Wasn't it the E911 recovery fee that generated the increase? That goes into Vonage's pocket.

BigTime wrote:
2.3% churn is a big deal when you have to spend $239 for each new customer. It means 27.6% of those customers are gone within a year.


These costs are not out of line with wireless customer acquisition costs. Three years ago leap wiress was spending $450, in January they and T-Mobile were reporting costs around $150.

Quote:
But the large, national carriers apparently haven't been as successful in getting acquisition costs down. Before the Big Five became the Big Three, they were spending an average of $392 to acquire a new customer, up from $349 in 2004, according to Bear, Stearns. A $300 to $400 customer acquisition cost was common when carriers were reporting CPGA several years ago.
http://www.wirelessweek.com/article/CA6299484.html


Now Vonage gets significantly less revenue per customer, but it also has lower operating costs, is not paying for spectrum licenses and is in an initial growth period where gaining customers can provide non-linear increases in network value (please see my post on Metcalfe's law).

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pcapelli
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PostPosted: Tue Aug 01, 2006 5:55 pm    Post subject: Re: Big Time: Right on the Money Reply with quote Back to top

scerruti wrote:

(Net loss for the quarter was $74 million, down 14% from $85 million in the prior quarter). When they cross then Vonage will turn a profit. Vonage predicts this will occur, based on market forecasts and current trends no doubt, in Q1 or 2008.


Revenue is not generally compared quarter to quarter; rather, to the same quarter of the previous year. This helps smooth out seasonal changes. Based on that traditional metric, net loss was UP from $63.6 million last year.

They also mentioned a charge of $11.7 million to cover the shares not paid for by current subscribers who signed up for the IPO. Approx. 1 million (out of 4.5 million) of the shares were not paid for.
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BigTime
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Posts: 111

PostPosted: Tue Aug 01, 2006 6:35 pm    Post subject: Reply with quote Back to top

Quote:
Read it again. Wasn't it the E911 recovery fee that generated the increase? That goes into Vonage's pocket.


Both fees increased revenue, and only some of it went to VG. Anyway this is a dead end. There is only so much nickle and diming fees you can hit your customers with.

Quote:
These costs are not out of line with wireless customer acquisition costs. Three years ago leap wiress was spending $450, in January they and T-Mobile were reporting costs around $150.


For $150 they get someone locked into a 1 or 2 year contract and paying $50 a month, and make a profit on them. Vonage pays $239 for customers who are not locked in and who pay $27 a month, and which it takes a loss on.

Quote:
non-linear increases in network value (please see my post on Metcalfe's law).


Doesn't really apply for Vonage because the whole point is you can call POT lines for the same price as Voip numbers. It does for Skype though, whose Voip calls are free and whose user base is growing much faster and is about 75 times larger than Vonage's. What happens when eBay runs a promotion where you get a free month of Skype calls to POT lines for every $50 that you buy or sell?

eBay needs more revenue growth, and they have a huge hoard of cash they can use to promote Skype. eBay big plans for Skype and we are only now seeing the beginning. They didn't pay 2.6B for it for nothing.

VG is getting squeezed from every side: Better cell telephones and service, POTS prices dropping, other VOIPco's dropping prices, CableCo's entering Voip, and Skype Skype Skype.


Last edited by BigTime on Tue Aug 01, 2006 6:43 pm; edited 1 time in total
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BigTime
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PostPosted: Tue Aug 01, 2006 6:40 pm    Post subject: Re: Big Time: Right on the Money Reply with quote Back to top

pcapelli wrote:

Revenue is not generally compared quarter to quarter; rather, to the same quarter of the previous year.


Normally yes, but for rapidly growing companies q/q is more informative.

Doesn't matter to much. Vonage's numbers were horrible this quarter, they were horrible last quarter, and they were horrible last year.

Reading Vonage's financial statements is like watching a train wreck, or the Hinderberg explode.

Oh the humanity!!!!

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scerruti
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PostPosted: Wed Aug 02, 2006 6:43 am    Post subject: Reply with quote Back to top

BigTime wrote:
Quote:
Read it again. Wasn't it the E911 recovery fee that generated the increase? That goes into Vonage's pocket.


Both fees increased revenue, and only some of it went to VG. Anyway this is a dead end. There is only so much nickle and diming fees you can hit your customers with.


I believe that they also said the new USF was offset by the removal of the FET. My point was that the $/line was well above the $14.99 baseline, I am really unconcerned about the increase in that number, but encouraged that it did not decrease despite promotions.

BigTime wrote:
Quote:
These costs are not out of line with wireless customer acquisition costs. Three years ago leap wiress was spending $450, in January they and T-Mobile were reporting costs around $150.


For $150 they get someone locked into a 1 or 2 year contract and paying $50 a month, and make a profit on them. Vonage pays $239 for customers who are not locked in and who pay $27 a month, and which it takes a loss on.


It is not quite true that you are not "locked-in" with Vonage. There is an early termination fee that is on par with the mobile early out provisions. In addition the hardware costs for new mobile subscribers are higher and in order to retain customers mobile carriers are subsidizing new hardware ever 1 or two years. Vonage is not currently doing that.

BigTime wrote:
Quote:
non-linear increases in network value (please see my post on Metcalfe's law).


Doesn't really apply for Vonage because the whole point is you can call POT lines for the same price as Voip numbers.

[snip]

VG is getting squeezed from every side: Better cell telephones and service, POTS prices dropping, other VOIPco's dropping prices, CableCo's entering Voip, and Skype Skype Skype.


Actually if you look at the sidebar to the article it talks about how the n log(n) formula actually better models interconnected networks and shows how the smaller network gets more benefit from being connected to the larger network.

Again, I am not convinced about this whole price squeezing thing. You yourself are not forecasting it to occur in this quarter, exactly when do you think it will occur and what do you see as the price point?

The biggest cable company threat remains Comcast, but they have higher up front expense, higher customer support expense, recurring expenses (batteries in their CPE), and they are bleeding customers to Verizon for their mainline business and have probably dropped their price as low as they will go for the near future.

VoiceWing is Verizon's product. Verizon is walking a tightrope between trying to hold on to POTS customers leaving for Voip and CLEC carriers and squeezing every last drop or revenue out of their current network to pay for the FIOS deployment. Although FIOS Internet Service and VoiceWing would be a good fit you never see them advertised together. Verizon is desperately trying to keep customers on higher priced POTS plans.

Skype does not concern me yet. When eBay decides to a) market Skype and b) give away adapters so that you don't need to use your computer, then I will consider Skype as a threat to Vonage's main line business. Skype will suffer tremendously trying to compete with Vonage as it will face serious regulation issues that it currently avoids by being a computer based service.

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