Is Vonage Wasting Your Money?

Stock buybacks are generally considered a bullish signal on Wall Street. They return capital to shareholders, while declaring management's belief that its own cheap shares are its best return on investment. As long as profits remain consistent, share repurchases can even increase earnings per share, by dividing the same amount of earnings among a smaller pool of shares outstanding.

But don't forget -- a company isn't obligated to repurchase shares just because it announced its intention to do so. So don't use the announcement as a reason to buy by itself. Rather, use it as a launching pad for additional research.

Gray clouds forming
For VoIP specialist Vonage (NYSE: VG  ) , the second-quarter earnings report seems to make a turning point in what has been a long, torturous path down. The stock has climbed 28% since it reported adjusted EBITDA of $35 million, up $3 million from the first quarter, though still lower than last year's record earnings. Adding to the healthier picture was its ability to reduce customer churn from 2.8% down to 2.5%.

Vonage isn't alone in doing a better job of keeping its customers, as enterprise-facing VoIP specialist 8x8 (Nasdaq: EGHT  ) reduced its churn -- or the number of customers who leave the service -- to just 1.7%, down from 2% in the first quarter. Unfortunately, magicJack VocalTel (Nasdaq: CALL  ) doesn't reveal this important business metric.

When it rains it pours
Part of the improvement in customer retention at Vonage has been the reintroduction of service agreements. Like Verizon (NYSE: VZ  ) or AT&T (NYSE: T  ) , requiring you to hang around for two years, Vonage reintroduced the option for its customers in February so that those who disconnect in the first 12 months of their contract will be charged a disconnect fee. It says it expects more of them to opt in for that agreement and believes that will help it reduce churn further.

To me, it seems a risky ploy. While there are many who still remain tethered to a wireless carrier for years at a time to get access to new smartphones, the growth of the prepaid plan has shown customers want to be free to move when the mood strikes them. And T-Mobile recently announced it was eliminating speed throttling on its prepaid plans, albeit for a fee, in an effort to attract more customers to its service.

The benefit to leaving one of the Big Three wireless carriers and their ball-and-chain contracts is that you could move to a service that best met your needs at that moment without having to run out the clock on a big disconnect fee. Vonage seems to be walking backwards -- and making a mistake -- by trying to force its customers to stay.

We'll need to check on the anniversary the reintroduction of the agreements next year to see whether they're really reducing churn or if it's just a matter of having customers wait out the agreement period before moving on.

Raining cats and dogs
The stock-repurchase agreement Vonage announced is modest, allowing for the buyback of 50 million shares, but it's going to achieve that reduction by the end of next year, so at least it offers investors a defined timetable and will be using its available cash resources.

Revenues were still lower in the quarter than they were last year (or sequentially even, and operating expenses were higher. It did end the quarter with $72 million in the bank, a higher balance than it had at the end of 2011, so it should have the wherewithal to make the repurchases.

Singing in the rain?
At just seven times earnings estimates, Vonage seems cheap, but stocks are often cheap for a reason, and there have been plenty of reasons for investors to bid its stock down. Its enterprise value does go off at a very cheap four times free cash flow, and though there remain many risks to its business, I'm willing to rate it to outperform the broad market averages on Motley Fool CAPS, where jasecio agrees it's time for a turnaround.

Admittedly, most of the investment community is still pitted against the VoIP proivder, but tell me in the comments box below whether you think Vonage's focus on the customer along with its new initiatives will be enough to dial up additional growth.

Oftentimes, dividends can help investors smooth out the bumps of turnaround plan with a regular quarterly payment. Check out the Fool's new free report "Secure Your Future With 9 Rock-Solid Dividend Stocks," where you'll find a host of promising companies that will pay you for your time. Get your free copy.

Fool contributor Rich Duprey holds no position in any company mentioned. Check out his holdings and a short bio. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days. The Motley Fool has a disclosure policy.


Read/Post Comments (8) | Recommend This Article (4)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On August 29, 2012, at 7:15 PM, dgroves0 wrote:

    Glad to see you rate this OUTPERFORM!

    Vonage is PROFITABLE, Generating huge FCF, moving forward.

    Vonage is expanding into MOBILE, expanding OVERSEAS, creating new PARTNERSHIPS, developing NEW PRODUCTS and SERVICES, and was granted three new patents in the last two months!

    Vonage now has more Cash than Debt.

    Vonage has announced a share buyback plan. But NOT 50 million Shares as you stated, but $50M

    Vonage is CHEAP, and the comparison ratios show it.

    Here are the 6 main comparison ratios, shown at most stock sites, ON ONE PAGE, With 19 other telcos, enabling investors to compare against it's competition , some telcos, and others in it's own sector!

    ONE position, as the most undervalued, could be a fluke, THREE a coincidence. BUT SIX?

    The most Undervalued in ALL SIX?

    1.) EV/EBIDTA

    2.) PRICE/FCF

    3.) PE

    4.) FWD PE

    5.) PEG

    6.) PRICE/SALES

    To see the details well on my screen, I zoom to 200%.

    Vonage PPS is like a time bomb, waiting for the right catalyst, to explode.

    Conmparison Values:

    http://www.acronet.net/~dgroves0/VonageComparisons3.htm

    Spead the link far and wide!

  • Report this Comment On August 29, 2012, at 7:36 PM, jaredpower wrote:

    Vonage's sales have decreased each of the last 6 quarters. Who wants to put their hard earned money on a company that sells less goods quarter after quarter after quarter after quarter after quarter after quarter? The above gentleman who commented by posting a bunch of mumbo jumbo does not understand that the market rewards growth and punishes companies with a long track record of declining sales. My advice is to not invest in a landline phone company because it is a dying business, evident in Vonage's decreasing sales.

  • Report this Comment On August 29, 2012, at 7:40 PM, jaredpower wrote:

    "Vonage is expanding into MOBILE"

    Vonage has been in mobile since early 2010 and has generated doodly squat from it. That's 2 1/2 years of butkus, certainly not "expanding into" unless you were referring to 2010. What great revenues do they receive from mobile? Next to zippo. Try not to be a blind pumper.

  • Report this Comment On August 29, 2012, at 7:50 PM, dgroves0 wrote:

    True, Revenues have declined slightly.

    But they have become profitable, during that very same time period.

    Part of that was reducing Advertising Spend, which effected Revenues downward, but pushed the company into profitability.

    Huge Revenues are no good, if you are losing money.

    As far as landlines, many of us still have them. BUT Vonage is more. My Cell phone is tied to my Vonage landline, and I can call the world from either - for my low monthly payment.

    Again,Vonage is not sitting still. Vonage is expanding into MOBILE, expanding OVERSEAS, creating new PARTNERSHIPS, developing NEW PRODUCTS and SERVICE, that should help that top line.

    They are not sitting still.

    Vonage revenues for the last six years:

    http://www.acronet.net/~dgroves0/davevgrevs.PNG

  • Report this Comment On August 29, 2012, at 8:02 PM, dgroves0 wrote:

    Yes Jaredpower, Vonage was in mobile in 2010, but they didn't stop there, they have had new products since then, the latest came out in February.

    http://ir.vonage.com/releasedetail.cfm?ReleaseID=650288

    It has evolved and has aggressive updates, since February.

    They have plans to monetize it, they also have plenty of time to do it.

    $25+ million in Free Cash Flow per quarter guarantees that.

  • Report this Comment On August 30, 2012, at 11:49 AM, jaredpower wrote:

    "True, Revenues have declined slightly."

    Wow that is like saying there is an elephant in the room but pay no attention to him he's not very big. Revenues have gone down every single quarter for six straight quarters. Lower lower lower lower lower lower six times in a row. Call it like it is and don't gloss over the elephant in the room and act like it is no big deal. That is why Vonage is a $2 buck stock and not $4, $5, or more.

    "Vonage was in mobile in 2010, but they didn't stop there, they have had new products since then, the latest came out in February. It has evolved and has aggressive updates, since February. They have plans to monetize it, they also have plenty of time to do it."

    Oh yes that have big plans blah blah. They have been in mobile for 2.5 years and they still don't make diddly from it. Why do you blindly pump, do you work for the company? Call it like it is. Mobile is a product they have had out for years and they generate next to no revenues from it. Seriously, they have big plans? OK, wanna buy a bridge? I've got a good deal on one in Brooklyn.

  • Report this Comment On September 03, 2012, at 12:41 PM, dgroves0 wrote:

    Huge revenues are no good if you are losing money.

    Here is a look at Revenues per Employee for the last SIX years- you can see why they became profitable!

    http://www.acronet.net/~dgroves0/REVSPEREMPLOYEE.JPG

    They certainly reversed the Free Cash Flow and Profitability Trend.

    The effects of that, debt paid off, lowered interest rates, cash generation, and asset recognition accounting benefits, PROFITS are shown dramatically during the last 7 quarters on my Shareholder equity chart.

    This is a real easy to see indicator of Vonage's TURNAROUND!

    http://www.acronet.net/~dgroves0/SHAREHOLDEREQUITY.JPG

  • Report this Comment On September 03, 2012, at 11:59 PM, jaredpower wrote:

    Yeah yeah keep telling yourself the company isn't shrinking keep reporting about the bottom line but what are you going to do if VG reports lower sales again for a 7th straight quarter? Ouch that would probably cause the share price to tumble to a buck and a half.

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