Thursday, May 18, 2006

Vonage IPO Roadshow - Would You Buy a Telco From This Man?

Had a chance to see the roadshow video for Vonage's IPO. This is Jeff Citron's Hollywood moment, and he sure looks ready for the part. First off, they've done a spiffy job to update their logo, with a friendly orange and blue color scheme. When Jeff welcomes you at the start of the presentation, you can't help but notice how perfectly his orange tie and blue shirt matches their colors! Small detail, but, hey, we're talking about the most important IPO in the history of VoIP. It's no understatement to say that the collective health of this sector rides quite a bit on how Vonage fares next week - at least for anyone with hopes of going public.

Jeff does a great job telling the growth story of both broadband and VoIP adoption, not just for the US, but globally. Vonage just closed out their best quarter ever, market penetration is still very low, and the annual growth rate for VoIP (CAGR) is forecast at 52% out to 2009. So, lots of upside to grow, and Vonage is ready to claim its share, as VoIP is forecast to be in use by 23% of the world's 185 million broadband subs in 2009. That's a good base to build a dream around. So far, so good.

He goes on to talk about Vonage's strength as a company, with over 300 engineers and developers. This provides assurance they are trying to do a lot of their own innovation, and comfort that not all of your investment dollars will be cycled out for advertising and marketing. Phew!

From there, some discussion about their home and small biz offerings, emphasizing they have the best voice bundle in the industry, with a mix of PC, wireline and mobility-based solutions. To drive home the point, he contrasts this to the cablecos, who "handcuff" you by tethering your phone subscription to your TV subscription. Vonage has long advocated they are the best pureplay VoIP offering, and that there will always be a market for best-of-breed, so to speak. There is truth to this, and I for one am not convinced the bundle is the be-all and end-all to winning this game. So, I give Vonage credit for sticking to their game plan. Of course, with the IM players adding voice, it's getting more complicated, but that's another story.

He talked up their WiFi phone, and how it plays in nicely with the muni WiFi projects that are popping up across the US and elsewhere now. For the business market, he noted their Office Anywhere service, where your vital data is stored on a USB stick, and you can set up your business anywhere there's a PC-based broadband connection. I thought that was pretty neat.

Following Jeff, their new CEO, Mike Snyder spoke a bit, followed by long-time CFO, John Rego. It was important for them be part of this since Jeff stepped down from his CEO role at the beginning of the IPO process (that's another story). For investors to buy into Vonage, the story can't be just about Jeff Citron, and both Mike and John did their jobs.

Mike talked about how Vonage will keep its brand strong, build out their channels and retain their customers. He noted 3 ways they will achieve this last item - improve the network (80% E911 compliant), improve the customer experience (new features), and improve support (over 2,000 agents). He cited one thing in passing that blew me away. To date, Vonage has spent over $500 million to build up the business. I'd sure like to have a piece of their ad agency. That's an incredible marketing spend to get 1.7 million customers - you can do the math.

Finally, John Rego did a great job to explain how Vonage is building a business that has compelling economics and will be very profitable at some point. First, he showed how customer acquisition costs have held steady in the $200 range, and that includes a CPE subsidy of about $20. Sales have been growing at a healthy clip - a 31% quarterly compound growth rate, which is putting them on track for 2006 sales of over $400 million.

The most interesting numbers to me were ARPU and unit costs. Current ARPU is $25.97, and their operating cost per line is $8.74, leaving them with a "service margin" of $17.23. This is pre-marketing of course. He spoke about churn and how this is improving, and using a few assumptions, concluded that they are on a trajectory for an average customer lifespan of 5 years. I couldn't quite follow the math, but it looks like if they can keep their customers this long, they will make money. That's a tall order in this industry, and I'd say that everything in the presentation leading up to this is designed to convince you that they will achieve this. Otherwise - well, we all know what happens when you spend more than you bring in.....

Before signing off, I should mention that Mathew Ingram of the Globe & Mail had a nice article about Vonage today - just to add another voice to the mix.


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8 comments:

ipcom said...

Posted by: Moshe Maeir

They can talk about features and cute devices all day. The bottom line is that the majority of their market are residential customers that bought in mainly to get dial tone for cheap. As we are seeing the Cablevisions and Comcasts can do that better if they want to. Put that together with LNP and 25% churn - where is the upside?

ipcom said...

Posted by: skibare

I get a kick out of the VONAGE BASHING that goes on in the papers and editorial pages.........bottom line, they have SPENT alot of money but have 1.7 Million customers an they are starting to HOCKEY STICK straight north in the growth curve..........and, they pay Level3 $8.74 per line per month
Skibare

ipcom said...

Posted by: Jon Arnold

Moshe - I think Skibare's comment explains some of the upside here. I'm not saying they're going to make this work, but if they can hang on to their customers long enough, the tide will turn. It still is early days, and there's lots of growth for everyone.

ipcom said...

Posted by: mark evans

jon,
be careful about getting too enthusiastic about the road show. while vonage had its "best quarter ever" (from a revenue perspective), it also lost $88M in the quarter. the key question is whether vonage can maintain its competitive momentum if/when it turns off the marketing machine.

ipcom said...

Posted by: mark evans

jon,
be careful about getting too enthusiastic about the road show. while vonage had its "best quarter ever" (from a revenue perspective), it also lost $88M in the quarter. the key question is whether vonage can maintain its competitive momentum if/when it turns off the marketing machine.

ipcom said...

Posted by: Jon Arnold

Totally agree Mark, and of course the presentation steered away from the losses. I share your caution, and did say as much in a few places, esp at the very end. I don't think they'll ever be able to turn off the mktg machine, and their game plan can only work if they retain customers to amortize that acquisition cost over time, and somehow raise the ARPU. The gross margins are there, so it's all about acquisition costs and making customers even more profitable.

ipcom said...

Posted by: jj

Jon, I've posted elsewhere normally refuting critics that haven't done their homework. I think Mark would agree that it's "not a stretch" for Vonage to be valued over 2 billion at its IPO. I think he even threw that $2 billion figure in one of his blogs about a year and half ago. So we'll likely see this be double that now.

My main point though is that your blog says both sides of the story better than any other reporting I've seen since the Vonage IPO started getting daily press mentions. Congratulations on providing the most fair assertations on this issue out of all the media. I'll be adding your feed to homepage. Mark's hasn't been bad either - he's just a little more influenced by the negative hype I think.

ipcom said...

Posted by: Jon Arnold

JJ - thanks very much for the good words. I really appreciate the feedback, and glad you find my analysis balanced and fair. I sure try to be this way all the time. I'm not a journalist, but as a consultant, you pretty much have to play by the same rules. At the end of the day, it's all about your credibility and integrity.