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Contributors: Douglas McIntyre Jon C. Ogg

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Thursday, July 20, 2006

Is Vonage Close to be Being Worth a Looksie

Stock Tickers: VG, IDT, EGHT, DDDC, CALL

Have you found anyone saying anything good about Vonage (VG) lately? We haven't either, but....... There is something to note, and it may be what the current share buyers want to hear. Before you read on and on, you need to know that is not a "Buy it now" call, but it looks like it may be getting to a point where investors should start doing some homework.

It is not arguable that Vonage has been a disaster, and everyone that covers the stock expects the company to post operating losses through 2007 and beyond. Lets just call it a pig, everyone else does. But if you put a pig on a diet and give it a makeover, you might end up with an animal that looks like a dog with hooves. This would be one loyal beast after it is all said and done.

So what gives? This VoIP pure-play stock still has a market cap of $1.1 Billion, and this is for a company that lsot over $200 million on revenues of $269 million in 2005. This $1.1 billion in market cap may still be too high and it may be time to put the pig on a diet and send it for a makeover at finishing school. So let's pretend this happens.

Vonage did have some more than angry customers that got duped into this IPO, and you can imagine they had some loyalists flee to other VoIP services. By now this has likely played out and the company may be able to focus on operations and playing the funny commercials again. The company is also the subject of more class action lawsuits than you can name, but it should not be entirely their fault. In truth, the company goes around making their dog and pony show (pig show in this case). The UNDERWRITERS are the ones that ultimately have the responsibility of setting the price and the terms of an IPO. They have their share of problems too, and the underwriters are going to have to sole out some bucks with the company here after the dust settles.

Personally, I hate VoIP as it exists right now. The call quality is just not there. The VoIP taqxing from the FCC and the myriad of state and local taxing authorities haven't gotten their act together to finalize everything yet. They will debate this, but remember who told you this when you see tax and tariff hikes in the future. VoIP calls drop, they have packet loss, and they just do not work as well as analog phones or even as well as "some" cell calls. Sometimes they even echo. VoIP loyalists will accuse me of herecy for saying that, but it is what it is. This issue of Net Neutrality also puts VoIP at risk, since an a Bell or Telco that owns a network may not be all that crazy about in offering cheap data packet pricing to a company that is competing on the core product offerings. Even with all these issues, you might be able to make money off the scraps at some point down the road.

VoIP prices are actually in much stronger competition with the Bells, as they offer unlimited calling packages too. The cable operators are also competitors now that they offer phone services. Despite everything there are still VoIP lovers who are just enamored with the fact that they get to make telephone calls from their computers or from a phone mimic that goes through a network. Also, all of the things that I hate about VoIP will only get better and better through time. If some still use dial-up Internet access, then you have to remember that not everyone migrates to better services just because they are out there.

All of the points above MAY, and stress "MAY," make Vonage worth a look fairly soon. If the market breaks down again, then forget about this one because no one wants pigs in a down market. This is down 50% from its IPO pricing, and it has had Down Days in its stock by probably a 5 to 1 ratio. That can only happen so long before you hit zero. In truth, you still have to be patient and you still have to quantify the environment out there. Just assume the company is going to be forced to fork out some money over the stock performance. Just assume that the company won't meet growth goals because it was so hated. Just assume VoIP won't be the hype that they promised. Assume away, but remember the caveats about assumption: Tom Clancy has penned "Assumption is the mother of all f&^%-ups" and "When you assume you make an A%$ out of U and Me."

This new portability device it has unveiled is probably only going to help, although it is questionable how many people will carry a portable device like that as the main usage device when you could just as easily say "Do you mind if I use your phone?". Maybe it is perfect for the highly portable tech traveler, but how many units will it sell and how many subscribers will it drive? The other point is the patent acquisitions announced last week. These patent acquisitions MAY prove to be the "Get Out of Jail Free" card that the company needs. Either way, these patent and intellectual property cases against Vonage from the major telecoms are probably not going to go away.

Lastly, Vonage needs to get a couple earnings releases behind it so we can see how many subscriber adds they post each quarter. After we see this then we can determine if this is worth dabbling into, but trying to be a hero by predicting trying to call the bottom dollar is more than dangerous. Be patient and see where the shares really settle in, and then start translating the "assumptions" into a quantifiable dollar amount.

Jon C. Ogg
July 20, 2006

Also, there is another thought about Vonage and VoIP. It is puzzling as to where IDT (IDT) has been in all of this. They now own Net2Phone again after spinning it off and then reacquiring it for close to nothing. IDT offered VoIP calls as I can recall back in 1996. They were even my first or second dial-up ISP along with AOL, and this was the reason until I realized what a nightmare it was in a dial-up world ruled by 28K and 56K modems. The quality was atrocious, but Vonage wasn't even a business plan that was on paper cocktail napkins back then. Presumably IDT will raise its head when the CEO is not busy making straight to DVD animated movies, but who knows.

Other VoIP segment stocks have been in the dumps too. Here is a full list of the various components and providers:
Brooktrout (BRKT)-equipment: now part of Cantata Technology after the merger with Excel Switching; will probably come publig again.
Callwave (CALL)-services/provider trading at $3.30, right off the 52-week lows and at the bottom of the $3.15 to $5.25 trading band over the last 52-weeks.
Deltathree Inc (DDDC)-provider; at $1.81 it is also trading at lows close to the bottom of its $1.71 to $3.58 trading band over the last 52-weeks.
8X8 (EGHT)-equipment; at $0.95 this is very close to the lows of the $0.85 to $3.39 trading range of the last 52-weeks.

So as you can see, the VoIP universe is a fairly lonely spot right now. Stay tuned.


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