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Telecom Industry: Vonage

Telecom Industry: Vonage. Michael Ding, Dilshoda Yergasheva, Remen Okoruwa, Trieu Ton, Tae Yoon, Steven Zhu. Porter’s Five. Threat of Substitutes Uncountable: Cellular phones Landlines Email Other means of communication. Porter’s Five. Supplier Power Minimal: Inputs are rather cheap

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Telecom Industry: Vonage

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  1. Telecom Industry: Vonage Michael Ding, Dilshoda Yergasheva, Remen Okoruwa, Trieu Ton, Tae Yoon, Steven Zhu

  2. Porter’s Five • Threat of Substitutes • Uncountable: • Cellular phones • Landlines • Email • Other means of communication

  3. Porter’s Five • Supplier Power • Minimal: Inputs are rather cheap • Buyer Power • Vonage has tried to differentiate its product by offering a slew of nifty, yet unnecessary, feature • Price sensitivity is critical • Number of people accessing telecom services worldwide is growing

  4. Porter’s Five • Buyer’s Power • Many available substitutes available • Broadband connection necessary for VoIP to be used (foreshadowing….) • 55 million in the US: most broadband service provided by cable companies • Barriers to Entry • Telecommunications at large is difficult • VoIP is easy to enter due to low start-up costs and materiel required

  5. Porter’s Five • Barrier’s to Entry • Proprietary Knowledge: Vonage has been subject to four IP lawsuits from AT&T, Sprint, Verizon, and Klausner Technologies • Rivalry • Intense: one must develop a differentiated, appealing product while navigating a maze of patents and competing with just about everyone

  6. Strengths • A leading VoIP provider in US • 2.45 million customers • Low-price service competitive against landline phone companies • Good customer service • PC World’s 2006 World Class Award VoIP winner • Computer-based phone services are gaining much attention and has room for great improvement in a such technological era. • Subscriber line has increased greatly and continuously since 2003 • Continuing to improve on expenses and gains • Second quarter of 2007: adjusted loss from operations declined to $18M, a 70% year-over-year improvement • Second quarter 2007 revenue grows to $206M • An increase of 43% from $144M in the year-ago quarter • Direct margin improved to 64% of revenues from 61% a year ago

  7. Weaknesses • Competition with cable companies • Top seven US VoIP providers include 5 of the largest cable companies • Prone to patent trouble • Not a feasible acquisition target • Competition with other VoIP providers • P/E is N/A, which seems very mysterious… • Almost went bankrupt after the Verizon incident on June 19, 2006 (for the infringement on five of Verizon’s patents related to VoIP service). • Not great brand name

  8. Opportunities • Expanding global market • By being part of a still relatively new industry, Vonage still has much room for development in its technology and services.

  9. Threats • Cable providers in the US “removing the middleman” • Other VoIP services • Cheaper than Vonage • Free (Skype) • Revenue and customer base growth may not meet expectations or be sufficient to pay off debt • More patent trouble • The company is not financially stable at the moment, with it’s stock price down to almost $2.00 • Bankruptcy

  10. Legal issues with Verizon • Verizon sued Vonage for patent infringements • The company was ordered to pay $58M • Moreover, Vonage had to refrain from signing new customers up • Recently confirmed the lack of workarounds that would allow it to operate without Verizon’s Patent infringing • RESULT: stock falls down 26%, loss/share =$1.04, SEO resigns, 3d quarter net loss = $161.8M ($100M more than a year ago) -> Investors = 

  11. THERE IS MORE… • Settlement for the AT&T patent infringement lawsuit ~ $39M/ 5 years • Speed of this settlement is a clear indication that Vonage has no intensions to defend itself in court against its far wealthier competitors • Since October 8, Vonage has settled patent lawsuits with Verizon, Sprint Nextel and voicemail firm Klausner Technologies for possibly $200m.

  12. Competitor Analysis • Large (bundled service): • AT&T • Qwest Communications • Verizon • Small (lower rates): • Voip.com • Cordia • Phone Power

  13. Standard Valuation Metrics Current P/E is not available, but the 5 year P/E, when calculated using the DCF, turns out to be 10. Growth in Earnings per Share: EPS -2.48 Price/Sales (ttm): 0.42 Enterprise Value/Revenue (ttm): 0.40

  14. Financial Analysis • Cash & cash equivalents < current liabilities • 210 mil < 260 mil • Long-term investments = 60k

  15. VG WACC

  16. VG DCF

  17. Generous Estimates • 20% YOY growth from 2009 onwards • 5% capital expenditures from 2011 onwards • Artificially low discount rate of 6.74% • No changes in working capital • Total expenses are actually less than revenues from 2009 onwards

  18. Future Profits • Even with such approximations, Vonage will continue to lose money until 2009 • They do not have enough cash on hand to keep making losses

  19. So What’s It Worth? • Assuming everything goes perfectly for Vonage, it’s stock is valued at… • $2.33 • Current Price: $2.10

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