Stock analyst Albert Lin at American Technology Research said it would take at least two or three years for Vonage to become profitable.
But while having slightly more than 2 million customers means Vonage is a small nationwide phone service provider compared to its much larger telco and cable rivals, Vonage seems to be hanging tough.
The company’s share price has limped in the $7 to $8 range on Wall Street, which is more than half below its IPO price in mid-May. But the stock has edged up recently to nearly $9.
Subscriber growth has grown steadily, from more than 1.8 million during the second quarter to more than 2 million this week.
In general, the company has seen a period of great acceleration during recent quarters, Lin said. However, there was a slight deceleration in subscriber growth during the past quarter, Lin noted, in part because of seasonal weakness.
This is usually a weak period for Vonage because so many of its customers are students and people who are very mobile and are in transition during the summer, Lin said.
Another reason for the slowdown was the number of users who quit Vonage was greater than expected, Lin noted. During the past quarter, the company’s customer churn rate rose to 2.3% from 2.1% in the previous quarter. And given that most of Vonage’s current subscribers are new, the behavior of the overall base of customers remains a wildcard, so churn could rise much higher in future quarter, Lin said.
He recently raised the company’s churn estimates from 2.2% to 2.3% for the rest of the year, which reduces his subscription target for Vonage to 2.55 million from 2.44 million.
Seems Vonage is still unable to conquer its formidable competitive landscape. The company’s market share continues to drop, from 34% at the end of 2004, to 31% a year later and to just 29.7% at the end of the first quarter, according to Sanford C Bernstein & Co research.
While Lin is more bullish on Vonage stock than many other Wall Street analysts, he agrees it is tough for Vonage to retain its customers over time because VoIP customers often are attracted to the service for its low price. Vonage is not the price leader, Lin noted.
Still, Vonage is adding profitable subscribers and Lin expects it will continue to grow so long as they sustain a reasonable level of churn, he said. And as it grows, Vonage will become more competitive because it will be able to buy termination and other telco services at more competitive prices, Lin said.
With growth, Vonage also will become a more attractive acquisition target, he added. After all, the market is valuing potential suitors for Vonage at a much higher price per customer than Vonage, Lin said. The market is under the impression that the VoIP market is so competitive that they don’t to value the customer for Vonage at any sort of premium rate.
Potential Vonage suitors, including large satellite radio, telco and cable companies, which have a similar monthly subscription fee model as Vonage’s, are valued much higher on a per subscriber level than Vonage.
Either the market is paying too richly for these other company’s business models … or it is undervaluing Vonage, Lin said. He suspects the latter, because while Vonage may be seeing an up tick in customer churn, its quality of customer is relatively high. For example, Vonage has had very little bad debt experience with customers and it does make money on the bulk of its subscribers, Lin said.
This makes Vonage an attractive take-over target for the companies that are being valued more per customer, especially telcos that already compete against Vonage, Lin said.
The only risk you have as a telco buying Vonage is if you accidentally buy a subscriber base that is actually trying to avoid you, he added. After all, millions of people are thought to have switched to Vonage simply because they hate the incumbent monopolies and wanted to try something different.
Vonage is currently too small to be an acquisition target right now, Lin said, but probably would be in about a year or so.
While Vonage could last long enough to be profitable, Lin reckons the odds of Vonage continuing to grow and be acquired is a more likely scenario.
For the quarter ended June 30, Vonage posted a net loss of $74m, a 17% increase from a net loss of $63.6m in the year-ago quarter. Sales rose 141% to $143m from $59m a year earlier. This fell short of the $148m analysts had hoped for.
