Company Overview
Vonage Holdings Corp (NYSE: VG) is a provider of cloud communications solutions across a variety of internet-enabled devices. The company’s two primary operating segments are business services and consumer services.
For business customers, Vonage provides Unified Communications as a Service (UCaaS) and Communications Platform as a Service (CPaaS). UCaaS consists of integrated voice, text, video, data, collaboration, and mobile applications over Vonage’s Voice over Internet Protocol (VoIP) network. CPaaS allows businesses to communicate with their customers by embedding communication features into apps, websites and business processes.
For retail customers, the company provides access to UCaaS services and features through a unique number or username. Consumers may access their service over 3G, LTE, Cable, or DSL broadband networks.
Vonage was founded in 2001 and is headquartered in Holmdel, New Jersey.
Products and Services
As noted above, Vonage has separate business and consumer segments. For its business customers, the company has three main product offerings:
Vonage Essentials, designed for small and medium business (SMB) customers, is a low-cost option with scalable features. Within this category, customers may choose from unlimited domestic (U.S. and Canada) calling or metered calling (charged per-minute) for domestic and international calls. Vonage Essentials includes features such as call display, call waiting, voicemail, and emergency assistance (911). Customers may also add features such as paperless fax, toll-free numbers, call recording, and conferencing.
Vonage Premier, targeted at mid-market and enterprise customers, provides a full suite of unified communication and collaboration services including voice, data, video, mobile, and contact center services. Using a private nationwide network, the company can deliver bandwidth ranging from 1.5 Mbps to 1Gbps. This allows the company to offer a variety of services including internet access, virtual private networks, hosted video conferencing, and web collaboration.
Nexmo (Vonage API) is the company’s CPaaS product. Nexmo was acquired by Vonage in June 2016 for $230 million in cash and stock. Nexmo’s application program interfaces (APIs) for text and voice messaging allow software developers to easily embed communication features into mobile apps, websites, and social media. As of December 31, 2016, the company had more than 200,000 registered developers using Nexmo.
First quarter metrics for the business segment can be found below:
*Seats are all paid seats from which a customer can make an outgoing call Source: Company Filing
For consumers, Vonage offers home telephone replacement services through different plans and pricing structures. All plans include voicemail, call waiting, and call forwarding. The two primary consumer offerings are Vonage World and Vonage North America.
Vonage World plans consist of unlimited domestic calling (U.S., Canada, Puerto Rico) and unlimited landline calling to more than 60 countries including India, Mexico, and China. These plans also offer unlimited calling to mobile phones in certain international countries. Vonage North America plans consist of unlimited calling across the U.S., Canada, Mexico, and Puerto Rico.
First quarter metrics for the consumer segment can be found below:
Source: Company Filing
Recent Developments
- On May 15, 2017, the company announced that it had been awarded seven new patents by the United States Patent and Trademark Office. The patents issued were as follows:
- One patent (Pat. No. 9,591,144) related to the creation of user-defined SMS groups. Group settings may be configured to specify which group members receive messages and the group identifier displayed to recipients;
- Two patents for call processing which include the ability to identify and notify a user that a call is no longer on hold (Pat. No. 9,560,197), and a feature that allows incoming cellular calls received while roaming to be routed over the internet, offering significant potential cost savings (Pat. No. 9,538,134);
- Two patents for quality of service improvements. The first patent (Pat. No. 9,560,180) covers techniques that allow service providers to make more efficient network route selections. The second patent (Pat. No. 9,538,134) covers improvements to conference call architecture; and
- Two patents related to security including methods for masking VoIP traffic (Pat. No. 9,560,085) and enhanced account verification (Pat. No. 9,565,220).
As of March 31, 2017, Vonage held more than 150 U.S. patents and an additional 160 U.S. patent applications pending.
- In April 2017, Vonage signed the largest UCaaS deal in its history. The company will provide more than 20,000 corporate seats across 550 locations to a global real estate firm. Furthermore, Vonage will partner with this customer to deploy communications services at its 4,000 franchisee offices.
First Quarter Earnings Review
Revenue for the first quarter of 2017 increased seven percent from the same period one year ago to $243 million. This was driven by strong growth in the business segment which offset declining revenues in the consumer segment. These results are consistent with the company’s stated strategy of shifting resources toward business cloud communications.
Operating expenses increased 14 percent year-over-year to $238 million. Higher cost of service and general and administrative expenses were the primary contributors. Adjusted operating income before depreciation and amortization (OIBDA), which removes depreciation, amortization, and acquisition related costs from income from operations, fell 12 percent to $37 million. Net income was $5.9 million, or $0.02 per share on a fully-diluted basis.
Cash from operations was flat year-over-year at $17 million. In the first quarter of 2017, Vonage repurchased approximately 1.6 million shares (for approximately $10 million) under its current four-year $100 million repurchase plan.
At March 31, 2017, the company had a cash balance of $26 million and a working capital deficit of $79 million. Between a revolving credit facility and notes payable, Vonage listed $311 million of long-term debt on its balance sheet, yielding a debt-to-equity ratio of 0.7.
Full-Year Earnings Guidance
After a mostly in-line quarter, Vonage adjusted revenue guidance slightly to reflect the divestiture of its hosted infrastructure business, to between $966 million and $981 million (decrease of $4 million). However, the company is still targeting at least $165 million of adjusted OIBDA and $40 million in capital expenditures.
Stock Influences
- Changes in revenue churn and revenue per seat;
- A potential acquisition of Vonage by a larger provider;
- Significant growth in the Nexmo / CPaaS unit; and
- M&A in the UCaaS area.
Risk Factors.
- The company faces substantial competition from multiple players including traditional telecoms, cable companies, and software as a service (SaaS) providers;
- As the cloud communication service market evolves, it may attract new entrants;
- The company markets to small and medium-sized businesses which may be disproportionately affected by an economic downturn; and
- Due to the nature of its services, the company may face additional government regulation in the future.
Stock Performance
As of May 19, 2017, shares of Vonage closed at $6.45, up approximately two percent on the day, yielding a market capitalization of $1.4 billion. In the past year, the stock is up more than 50 percent after trading as low as $4.18 in June 2016. Shares hit a high of $7.88 in January and traded at $7.44 prior to its most recent earnings announcement. Since then, the stock has seen resistance between $6.40 and $6.75.
Following are selected analyst ratings and price targets:
| Analyst | Firm | Rating | Price Target | Date |
| Michael Latimore | Northland CM | Outperform | $9.00 | 5/10/2017 |
| Catharine Trebnick | Dougherty & Co. | Buy | $8.50 | 5/10/2017 |
| Timothy Horan | Oppenheimer | Outperform | $8.00 | 5/9/2017 |
Summary
Vonage delivered solid first quarter results, largely in-line with estimates and the company’s prior guidance. The most promising growth opportunities are within the business segment, particularly within CPaaS. As Vonage shifts more resources towards the enterprise market, business revenue will likely outgrow the consumer segment. While the company has positive operating cash flows, high debt levels remain a concern. Further, the company could see increased competition from the players mentioned above. Therefore, the median price target of $8.50 seems attainable within the next 12 to 18 months.
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