Vonage(VG)

May 8. 2008

New quarter data analysis:

Facts:

1. Gross subscriber line 281,329. Net subscriber line additions 30,133.

2. Total subscriber 2.61m. Previous period end is 2.58m.

3. Monthly customer churn: Jan 2008: 3.6%. Feb: 3.2%. Mar: 3.1%.

3. Marking expense 60.9m. Marketing costs per gross subscriber line addition $216.47

4. Share outstanding 156m

5. Net lose 8.96m. $0.06 pre share.

Analysis:

1. It lost (281,329-30,133) = 251,196 user during this quarter. 9.7% of 2.58m user.

2. Real earning should added the cost to acquire new customer 30133x216.47 = 6.5m. Even adding this number to their income. They still lost money.

3. Originally their marking expense is a big issue. Now the churn rate is the biggest. It doesn't make sense to acquire a number of new customers while lost 89% of the number of existing customers at the same period.

August 26, 2009

Luckily I have sold shares of VG after holding it close to 2 years for a little profit. When I bought it I have convinced myself for several reasons:

1. Their user line worth a lot of money. Based on 2.5m user line. If each line worth $500(with net profit close $100 per line), then they worth $1.5B. Even if they go bankruptcy, they still be able sold each line for at least $200. That is still $500m.

My mistake on this point is that I totally ignored the churn rate. With a churn rate around 3% a month, they could lost 36% of their users in one year. It cost a lot of money to replace them.

2. They are actually making money if they don't spend that much on marketing.

Again this is about the 3% churn rate. It is unacceptable. VOIP is generally good, but Vonage is not. With $25 a month it is still too expensive for most people who want to switch to VOIP. The only valuable service they provided probably is the unlimited international calling they given out recently. This might attract some immigrants.

3. Two year ago, they got big problem on lawsuit. But I think their legal issue is temporary.

Actually I am correct on this issue. However, I totally bypassed their $183m debt issue which is due at end of 2008.

It doesn't fit to any value standard which I follow latterly. So hopefully I will never get involved in the same type of stock again. But most valuable lesson I learned is: if I don't like the business, don't buy it. That is I should be more "business like".