Vonage Is A Win, But Competition & Metrics Remain Key Issues (VG, MSFT, CALL, EGHT)

Vonage Holdings Corporation (NYSE: VG) is now a consistently profitable company.  Concerns remain, but the focus so far seems to be more on the positive side of the equation.  The VoIP telephony outfit has reported adjusted earnings of $0.10 EPS, up from $0.08 a year ago.  Revenues remain a challenge as the firm turned in sales of $218 million, down from $220.6 million a previously.  There are probably too few analysts covering the stock to have a reliable consensus target, but Thomson Reuters lists $0.08 EPS and $220.58 million in sales as the consensus price target.

Even if you back out the adjusted figures, the net income was $0.09 EPS or $22 million versus a $1 million net loss a year ago.  The VoIP telephony outfit has managed to keep its costs from rising, and it is projecting that its gross subscriber line additions will grow in 2011 and that it should have $165 million in reported EBITDA.

Along with revenues, there are still some concerns that need to be addressed.  The ARPU, or average revenue per user, came down to $30.14 from $30.71 in year-ago quarter.  The company’s gross line additions came to 158,000, but the net came to a loss of 11,000 lines as the churn increased to 2.5%.  This is too high of a churn.  The company sees 2011 churn in the “mid two percent range.”  Vonage ended with 2,397,660 subscriber lines at June 30.

Marketing costs are also higher, another concern.  This was $52 million versus $49 million a year ago and sequentially.  The key measure of subscriber line acquisition costs also ticked higher to $330 from $318 a year ago and from $282 sequentially.

Microsoft Corporation (NASDAQ: MSFT) has become the number one problem here.  The acquisition of Skype is THE biggest pressure.  The threat from Google Inc. (NASDAQ: GOOG) and its free inter-call features is one thing, but unleashing Microsoft on the domestic and global phone market is much more concerning with the Facebook integration that if Skype had just gone public and struck its own deals.  Skype had an average of 145 million connected users per month in the fourth quarter of 2010.

VocalTec Communications Ltd. (NASDAQ: CALL) continues to be a threat as well with its magicJack low-cost phone line service, which has sold more than seven million magicJack device since the launch in 2008.

8×8 Inc. (NASDAQ: EGHT) remains a competitor in VoIP, but the reality is that this $32 million market value is just not in the same league even if it claims more than 25,000 businesses using its VoIP, video conferencing, and unified communications services.

The gain is that Vonage’s operating expenses came down by a factor of 7% in the quarter.  The cost per line was cut to $8.03, down from $8.34 sequentially and down from $8.72 a year earlier.  Another boost may come with some mixed results at first but should pay off.  The company is effectively doubling its store distribution channel to 6,000 spots.  That will raise costs but will help to boost sales, at least it would seem to be the case.

Another boost is coming from a debt refinancing.  It has cut what appears to be some $43 million annually due to a LIBOR-plus-3.50% pact.  That is a saving which makes up for many losses elsewhere.

Along with a retail distribution expansion, the company has launched its global pay-per-call application for the iPhone as well.  That means that as long as you can get a wireless connection, you can use your iPhone whether your phone can travel and be carrier-compatible globally or not.

Vonage shares are up 1% after an hour of trading at $3.75 after having hit $3.88 earlier today. The 52-week trading range is $1.92 to $5.39, and the stock was down almost 30% since its report in early May.  The market cap is now $830 million.

The report was taken as a positive one despite some obvious concerns.  Now the company just has to worry about an eight-day losing streak turning into nine days, as well as that heavy competition.

JON C. OGG