Thursday, November 23, 2006

Vonage and Telio - Quarterly Results Comparison

If you've been following my blog for a while, you'll know I'm one of a handful of people this side of the Atlantic following Norway-based Telio, who I long ago dubbed as the "Vonage of Europe".

Well, both operators released their quarterly filings recently, and having compared them before, I thought it would be a good idea to look into the state of the nation for both.

First off, I'd like to say that I didn't comment on Vonage's filing a few weeks ago, but there was no shortage of predictable gloom and doom from the bloggers. Sure, there were some poor results, and it's very easy to jump all over these and paint Vonage deeper into a corner. Frankly, I didn't think the numbers were so terrible, and despite the shortcomings, the news wasn't all bad, but nobody seemed to cut them any slack. Well, I will, but I'm also trying to be balanced. You don't have to look far to find trouble with Vonage - that's easy - but they're in a very tough market, and they're fighting hard to hold their own. Listen, it wasn't that long ago that people couldn't say enough good things about them, right?

This post isn't about a deep analysis of what they're doing right and wrong. Rather, I'm continuing my theme of Vonage and Telio, especially since their numbers both came out so recently. I'd love to see Vonage make it - don't get me wrong, but I also want to draw attention to how Telio is having success in the same business. Vonage is doing some important things right, but in my books, Telio is simply doing more things right, and I think they are showing the way for what it will take for a pureplay broadband operator to make it in VoIP.

So, let's first look at some Q3 highlights from Telio.

Overall, the news is good, with incremental quarter-over-quarter growth in all areas. Slow and steady - nothing wrong with that. Here are some key highlights...

- 8% revenue growth from Q2, at 76.1 million NOK
- Gross margins holding steady at 55%
- Pre-tax profit in Q3 of 2.8 million NOK
- ARPU holding steady at 300 NOK
- Economies of scale starting to be realized. They have a nice metric showing the ratio of Opex per subscriber, which makes a lot of sense. In Q1, it was 443 NOK, and has trended down nicely since then. In Q2, it was 361, and now it's 310. Clearly, as the subscriber base grows, their Opex is being held in check, and Telio is leveraging the power of IP economics nicely.

A few other highlights that round out the story...

- Telio is on track to hit 1 billion minutes of traffic this year. That's triple from last year, and they claim to now be carrying 7.2% of all residential fixed line traffic in Norway. That's pretty impressive for a company most of you have never heard of.
- They seem to have the ideal balance of price and quality for a value proposition that is hard to beat. Their presentation cites independent sources showing that their price per minute is the lowest of all local operators, and their quality rating comes out well ahead of the pack.
- Telio is by far the dominant broadband VoIP player in Norway. Similar to Vonage, there is a lot of distance between them and all the other broadband operators. They have a nice chart comparing Telio's revenues and gross margins against their peers, and the numbers speak for themselves. In Norway, there's Telio and everybody else.

These numbers alone tell a good story, but the best news is about where Telio is going. They've got a great business model for fixed line VoIP, but it's just the base. What really distinguishes Telio is their focus on FMC, and to me, this is where the paths with Vonage start to diverge. It's not hard to see that mobile VoIP is the big story right now, and Telio very much at the vanguard. They're already doing voice to a small extent, which not only reduces their costs, but makes for a tighter relationship with subscribers. Next year, Telio will be adding SMS, MMS and video, and this will continue to expand once WiFi comes to market later next year.

And you'll never guess who they're partnering with for mobile VoIP. Nokia - what a surprise! In fact, they are the first operator to deploy FMC on the Nokia Service Suite, with support for the N80 and E61 handsets. When you look at how far Telio has taken VoIP, it only stands to reason that Nokia would go to market with them before anyone else. Their partnership was announced on October 31 at the VON show in Berlin. I wasn't there, but I know it was a small show by VON standards, so this news didn't get much coverage. Now you know!

On to Vonage, and some key highlights.

- Their Q3 results came out the same day as the Telio/Nokia news, and I doubt anyone connected both events at this time.
- I found it interesting to note how they describe themselves in the press release - "a leading provider of broadband telephone service". Wasn't that long ago that Vonage was THE leading provider, but times have changed!
- Several key metrics are going in the right direction - revenues are up 12% and losses are down 12% from Q2, and even better, losses are down 18% from Q3 2005. So, sure they lost $53 million in Q3, which is the better part of a half a mil a day, but at least the trend is positive.
- ARPU was flat at $26.33, which is on par with Telio. In absolute terms, Vonage's ARPU is up $1.49 from last year, but this eaten up most by E911 charges, so they're not really growing the business revenue-wise on a per subscriber basis.
- Direct costs continue to decline, and are now at $6.86 per line. Again, a similar story to Telio - Opex is being held in line. However, the big difference is the marketing spend, which of course is what's killing them.
- Marketing spend was 57% of revenues in Q3, at $91 million. So, not only are they spending $1 million a day in advertising, but they're losing about half that amount in terms of earnings. The good news, however, is that the trend is down - in Q2, marketing spend was 63% of revenues. Comparatively, Telio's marketing spend is only 11% of revenues.

So, what's not going right?

- The pace of subscriber growth is slowing - but only slightly . Vonage added 204,591 subs in Q3 compared to 213,937 in Q2. A lot of people jumped all over that, but I don't see such a big red flag there. We all know how competitive this market has become and it's only going to get tougher. It's still a big number, so to me, this is neutral metric - there's both good and bad news here.
- Churn has edged up to 2.6% from 2.3% in Q3 2005, and yes, that's a big concern. Again, this comes with a competitive market, and churn effects everyone. We all know that reduced churn is key for Vonage's survival, so let's move on.
- The cost of doing business is increasing. If you look at the line items a bit closer, there's one that caught my eye - their CPE subsidy. It's up from $24.48 last year to $29.79 in Q3. Again, we all know how competitive things are, and this is symptomatic of what Vonage needs to do to stay top of mind with both subscribers and their retail partners.

And finally, a bit of guidance from their CEO, Mike Snyder - "we anticipate we will generate adjusted operating profits as early as the first quarter 2008".

Well, then, there you have it. Just 6 more quarters to go to be in the money - maybe. When you're a public company, it's all about the profits and returns to shareholders. I think this quote sums it up nicely, especially in comparison to Telio who is already in the black. I'd love to see Vonage be profitable by then or even sooner, but that is such a long time away, and there are so many variables that could derail their plans at any point in time.

All I can say is that based on what Telio has shown us to date, one can only imagine where they will be in Q1 2008. Again, Vonage can still be a good story, but in my mind, Telio is a good story today, and one that I think will unfold more favorably if they continue to execute well.

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1 comment:

ipcom said...

Posted by: Moshe Maeir

Jon, just goes to show you that if you do marketing right and add features - VoIP is a great business.
Vonage started out great, but took the wrong path!