Vonage Holdings (NYSE: VG) is a leading provider of voice over Internet protocol (VoIP) telephone services in the U.S., with over 2.4 million subscribers. Through monthly service plans, customers can utilize many features that are not available on traditional telephone lines at little or no additional charge. Vonage competes with traditional phone companies as well as cable companies, who are becoming more prevalent in the telephone industry.
One example of Vonage's phone plans is the World Plan, which offers free unlimited calling to landline phones in all cities and locations in more than 60 countries with popular features like call waiting, call forwarding and voicemail for one low, flat monthly rate. Vonage's service is sold on the web and through national retailers including Best Buy (BBY) and Wal-Mart (WMT) and is available to customers in the U.S., Canada and the United Kingdom.
Vonage is a leading provider of broadband telephone service. Their Voice over Internet Protocol (VoIP) technology allows for inexpensive communications similar to traditional telephone service. Vonage offers a number of service plans to subscribers, each with features similar to (and in some cases beyond) those available through traditional phone line services.
First Quarter 2010 Results (ended March 31, 2010)
During the first quarter, Vonage generated net income of $14 million or $0.07 per share. This was an improvement from $5 million or $0.03 per share in the first quarter of 2009 and $4 million or $0.02 per share, sequentially. Vonage reported record adjusted EBITDA of $40 million, up from $21 million in the year ago quarter and $34 million sequentially. Revenue of $228 million increased from $224 million year-over-year and sequentially. Income from operations increased to $25 million, up from $5 million in the year ago quarter and $19 million sequentially.
Vonage provides subscribers with some features that are not available on standard telephone lines. Many of these features come at no cost, while some require additional fees. All the Vonage calling plans include call waiting, caller ID, and call forwarding.
Many consumers are skeptical of switching their phone service over to an Internet-based system. Traditional phone service is very well established and reliable, and, in many cases, the savings margins of Vonage's service are relatively small. VoIP service has been criticized for inconsistent call quality and is still a developing service.
In recent years, cable providers (who happen to provide the broadband Internet that Vonage customers use for VoIP) have been bundling multiple services into a single package. Most of these package deals include Internet service, cable television, and telephone service. By doing so, these companies have been able to cut service prices significantly. These package deals are also very convenient for consumers as they combine three services into one bill with one provider. If the competition amongst cable companies builds and the price wars continue, the implied price of the phone service they provide could become significantly cheaper than what Vonage offers.
tVonage has seen increases in both its churn rates and the cost of acquiring new customers. These two trends coupled together are especially negative for Vonage. The cost of acquiring new customers is rising because the target market is shifting away from "early adopters", who often need little convincing to switch providers, to a increasing mainstream market. As a result, Vonage is forced to spend more money on marketing to gain these mainstream customers. At the same time, Vonage's increasing churn rate means that it needs to gain a steadily rising number of new customers to maintain its customer base. This is a particularly toxic situation; Vonage needs more and more new customers, and each new customer costs Vonage more to win over than the previous ones.
Companies like 8x8 (EGHT) provide very similar services as Vonage. Barriers to entry are not very high.
Vonage's primary competition comes from traditional phone companies that have (in most cases) been in business for many years. These companies include: AT&T (NYSE: T), Qwest Communications (NYSE: Q) and Verizon Communications (NYSE: VZ). These companies are all much larger than Vonage and include many customers who don't have broadband internet access (and are thus unable to use Vonage) or are satisfied with their current provider. Furthermore, when Vonage customers make a call, the connection travels over these incumbent companies' "last mile" connections to reach the recipient of the call. For this service, Vonage pays their competitors directly. However, when a customer of one of these competitors calls a Vonage subscriber the incumbent phone companies pay nothing to Vonage. Below are some metrics that compare Vonage to major incumbent telephone companies.
These companies include Cablevision Systems (CVC), Comcast (CMCSK), Cox Communications, and Time Warner Cable. These companies are investing increasingly in last-mile broadband connections and, as a result, positioning themselves to use these connections to increase their share of the telephone service market. Cable companies are marketing many of their products as package deals. In many cases, cable companies are now offering fixed monthly prices for a bundle of cable television, Internet access, and phone service. This bundling allows for often substantial cost savings, which can make the implied cost of cable phone service lower than the prices for Vonage's VoIP services. To remain competitive with these providers, Vonage relies on its unique features such as area code choice and portability.
Wireless service providers like AT&T, Sprint Nextel Corporation, T-Mobile USA, Inc., and Verizon Communications (VZ) have customers that utilize wireless phones as a replacement for a traditional phone line. These companies also provide wireless broadband Internet access and could potentially offer VoIP services in the future.