Vonage's Q3 Earnings - Signs of Hope

When you're busy making a living, it's tough to blog in real/near real time - but better late than never.

Yesterday, Vonage announced its Q3 earnings, and the results are mixed. Am not going to get into a detailed discussion, but basically the results can be interpreted to validate anybody's point of view - which I find very interesting in itself.

For the legions of Vonage-bashers, it's very easy to point to how the patent settlements have depleted their cash, how subscriber growth is tailing off, how churn is alarmingly high, customer acquisition costs are still out of sight, customer service is a not doing its job, and how the recently enacted VoIP number portability regulations are going to drive their churn even higher. All of this is true, and I could go on, but you get the idea.

Well, call me an eternal optimist, but you can take a lot of good news away from this as well. Namely, how their losses have dropped substantially to only $1 million in Q3 (factoring out the patent settlements), ARPU is up (only slightly, but it's going in the right direction), revenues are up 30% (if you're keeping score, folks, Vonage is on pace to have $1 billion in revenues in 2008 - what's wrong with that???), the subscriber base is well north of 2 million, the AT&T damages can be paid over 5 years, marketing expenses are coming down, and best of all, the worst seems to be over on the litigation front. Hopefully.

Perhaps the best news is that despite all these challenges, Vonage is still standing, and at current performance levels, the business is almost self-sustaining. This basic sentiment was reflected in the stock price which jumped from about $2.10 to about $2.70 on the news. That said, the pricing eased off over the course of the trading day, and closed around $2.30 today.

All told, the company is still very much on the ropes, but I think they at least have a fighting chance now. Of most concern to me is VoIP number portability, which is just coming into effect now. That's going to make it much easier now for unhappy VoIP subscribers to pick up and go elsewhere, whether it be to their cableco or even back to their incumbent telco. SunRocket didn't have this luxury, which left a bad taste in a lot of subscriber's mouths.

The other major concern is that their cash position is getting precariously low. As mentioned, if they can stay the course, they shouldn't need to draw this down too much, and hopefully start building it up again. But, if churn doesn't come down, they'll need to burn cash, and their current levels won't last very long. In that scenario, they'll be in trouble for sure. And of course, new patent suits could come out of the woodwork, and the cablecos won't be going away. Attracting new subscribers will only get harder, not easier, and in my mind, Vonage needs to focus more on retaining their base and making it profitable than on growing the base. I suspect that most of the VoIP adds that cablecos are winning are coming at the expense of the telcos, and not the VoIP pure plays like Vonage.

To me, the path of least resistance would be to protect what you have instead of competing against Goliath for incremental gains. The low hanging fruit is gone, and the competition is much tougher now, especially now that the VoIP pure plays are pretty much out of the game except for Vonage.

The mainstream media has covered this fairly well, and Business Week was nice enough to cite me in their coverage today.

Aside from the business press coverage, though, Vonage's news didn't attract much attention in the blogosphere. Am not really surprised, though, and this is another interesting facet to the story.

In my view, Vonage is a non-starter for people following this space closely. It's all bad news, the company is a hopeless money-loser with a broken business model and is living on borrowed time. They have a 1.0 service in a 1.5/2.0 world, and are fighting a losing battle. Etc., etc. There is truth to all of this, but at the same time, it's actually a good thing that Vonage is flying under the radar now. They've managed to survive a lot of adversity for now, and the less negative attention, the better.

For me, the next quarter will determine if they have a future, especially for getting churn down. This is the time for them to restore trust and confidence with their subscribers, and that's where I'd be spending my money right now. There is enough good news in the Q3 numbers to tell/sell a good story to both subscribers and the market, and if faith can be restored, I think they have a fighting chance.

I may be a lonely voice for a company that most people have written off, but c'mon, if Vonage cannot provide an alternative to the bundle, then who can? If they can somehow get their mojo back when everybody loved them, I think they can turn this David/Goliath thing to their advantage again. The little engine that could...

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