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Contributors: Douglas McIntyre Jon C. Ogg

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Tuesday, October 03, 2006

Pondering Some Vonage Numbers

Vonage (VG) has been on an interesting path lately. No one needs the paiful reminder of it being the worst IPO in recent memory.

What is somewhat puzzling is that after it touched $9.00 one day in late August, it never saw it again. Part of the pressure on the stock has been competitors raising cash and the street not really liking the company going after customers to demand payment for the IPO shares they subscribed to. It closed down as low as $6.72 last week and is already back over $7.00 per share.

Its short interest grew marginally from August to September with it growing from 5.567 million shares up to 5.799 million shares. Vonage has an official average daily volume of 832,000, but it is actually very spotty volume and if you weighted the last two weeks it would actually be an average of closer to 600,000 shares per day. If you used the last 5 days it would be closer to 500,000 shares per day.

The stock had quite a run at the end of August and briefly got to sniff the $9.00 handle on the stock, but a share conversion and a mix of a boutique downgrade and some cautious comments from larger analysts sent it back down. Since it announced a service bundling offer with Hewlett-Packard (HPQ) the stock is up almost 6% from the day before the news, but the volume has petered out. If the company isn't in a quiet period yet it probably will be soon as we are about 1 month away from its quarterly earnings release.

Back on September 5, VG noted that it had crossed the 2 million line service mark and shows over 1 million customers on its site, but we dont have a breakdown of the pricing plans as to how many are basic at $14.99 per month, how many are at premium residential at $24.99 per month, and how many are on the $39.99 and $49.99 per month business plans.

While you cannot do an apples to apples comparison and while you cannot use a linear "all things being equal" comparison, there is a calculation for a quarter end based on the TWO MONTH subscriber line inflow from June 30 to early September: you would come up with a quarter-end lines of roughly 2.07 million, or roughly 220,000 line adds. That assumes no extra churn rates and assumes no extra major inflows. That also compares to 256,000 line adds in the second quarter (which was its highest ever). The H-P additions probably won't make much difference until later. If you could just assume linear growth with the same percentage of revenues per line then you would end up with an approximate $159.9 million. Once again, you cannot use that equally so be very careful on trying to determine that. Forget about trying to decipher the earnings numbers too, because you know advertising costs are up if you watch CNBC or other cable TV and you have no clue what the real churn rates will end up being.

Here is what the Guidance was with last earnings, and it is hard to draw any comparisons out after 2 months of data to determine the whole quarter:

- Fiscal Year 2006 Ending Subscriber Lines (in millions): 2.3 to 2.45
- Fiscal Year 2006 Total Revenue (in millions): $600 to $615
- Fiscal Year 2006 Marketing Expense (in millions): $360 to $380
- Second Half 2006 Direct Margin(5) (% of Total Revenue): 62% to 65%
- Second Half 2006 Adjusted SG&A(6) (% of Total Revenue): 39% to 41%
- Positive Adjusted Operating Income As early as First Quarter 2008

It would seem on the surface that the subscriber line adds may be actually a hair above their prior plan, but that could be picked apart by any seasonality issues or interruptions. The company could also issue another "subscriber line adds" statement at any time it chooses, so please do not interpret this article as any sort of endorsement of the company's growth. We are merely trying to come up with some numbers that may be used, and if one thing can probably predicted it would be that VG will show something different. The question is really if it will be a good different or a bad different.

We aren't trying to show or hint that numbers are above plan or behind plan, so only use this as reference. Earnings are approximately 1 month out on VG, and we have a whole slate of other key tech names reporting before VG gets its scheduled 10 minutes on the stage. The day VG reported its last earnings its stock was at $6.70, and now trades at $7.20.

Jon C. Ogg
October 3, 2006

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