Vonage Is Headed up on Emerging Market Growth

For VoIP innovators Vonage (NYSE: VG  ) , things looks to be stabilizing. While the company was originally heralded as the next big thing in the tech and telecom industries, subsequent innovations took the wind out of the web-based phone company's IPO sails. But even though the company does have a tech component, it is a relatively simple business to understand. Vonage is a promotions-oriented consumer-facing business -- typically meaning that the more it spends in the marketing department, the better things get (hopefully). As the company posts its third consecutive quarter of net subscriber additions and a nearly flat marketing spend, investors should be encouraged about the future.

Dialing in
In last year's fiscal first quarter, Vonage had slowed its net subscriber loss to 7,000 -- an encouraging figure from 2012's 12,000 lost subscribers. At that point, the question was whether the company had managed to plug the hole in its business model, one that was attacked by technological shifts and an overcrowded space.

Three quarters later paints a different picture. Vonage gained 9,000 subscribers compared to last year's fiscal fourth quarter. Leading the way was BasicTalk, the entry level package that gives consumers unlimited domestic calling with no annual contract and no hidden fees. BasicTalk launched in the second quarter of 2013.

Looking at a two-year picture, net additions are at roughly 3,000. Throughout all of fiscal 2013, Vonage tacked on a net addition of 25,000 subscribers, excluding the impact of the company's Vocalocity acquisition -- a communications solutions firm for small and medium-sized businesses.

Year-over-year financials on the top and bottom line were lower but again reflect a stabilizing business. The company is spending money on brand building and acquisitions, keeping short-term profitability limited but ultimately enhancing shareholder value -- as evidenced by the subscriber gains. Even better, marketing expense was down sequentially and up only slightly year-over-year. Subscriber line acquisition cost -- a unit level cost measure -- was down sequentially and down from the year-ago quarter.

Headed up?
The market has been aware of Vonage's improving financials for some time. Since bottoming out in May of 2012, the stock has appreciated nearly 150% in value. Vonage now trades at 22 times earnings and holds a EV/'13 EBITDA of 8.85 times.  

The earnings ratio makes the stock look somewhat richly valued, but the operating level valuation is more appealing.

Vonage continues to expand its core business with an eye on emerging markets. The company has spent millions preparing to launch its business in Brazil -- a market where more people may have access to wifi than phone lines and will be attracted to the value-oriented service. The business is set to launch in 2014.

Customer attrition rates continue to improve (2.5% in the most recent quarter) as management focuses on improving customer service and product offerings. Vocalocity is a high-growth addition to the company, posting 40% revenue growth from its 2012 fourth quarter figures and hitting $17 million.

All in all, things look good for the company, especially when compared to just a couple of years back. Though Vonage suffered the all-too-common fate of being an overhyped IPO, it is now set to deliver real shareholder value in the long run.

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