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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
• 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
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
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
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
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
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.
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
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 =
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.
Competitor Analysis
• Large (bundled service): – AT&T – Qwest Communications – Verizon
• Small (lower rates): – Voip.com– Cordia– Phone Power
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
Financial Analysis
• Cash & cash equivalents < current liabilities – 210 mil < 260 mil – Long-term investments = 60k
*Numbers in millions 2006 2005 2004
Net Income -338 -262 -70
2007 Q3 2007 Q2 2007 Q1 2006 Q4
-162 -34 -72 -117
VG WACC
VG DCF
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
VG
20032004
2005
20062007E
2008E
2009E 2010E 2011E 2012E 2013E 2014E 2015E 2016E
$(300)
$(250)
$(200)
$(150)
$(100)
$(50)
$-
$50
$100
0 2 4 6 8 10 12 14 16
Year
NOPAT
• Even with such approximations, Vonage will continue to lose money until 2009
• They do not have enough cash on hand to keep making losses
Future Profits
So What’s It Worth?
• Assuming everything goes perfectly for Vonage, it’s stock is valued at…
• $2.33
• Current Price: $2.10