Jon Arnold’s been digging through some research from ChangeWave on residential VoIP. It’s good stuff — hard data and analysis. Right at the end, he writes:
Vonage will be hard pressed to hit 3 million US subs by end of year. I don’t know what their IPO plans are forecasting, but 3 million would put them close to $1 billion in revenues.
Jon’s math seems about right to me. But can they make a billion in revenues this year?
According to Vonage’s S1, Vonage made about $175m for the nine months ending in September of last year. If you assume that they continue to add customers as they have in the past, then they should have added approx 240,000 subscriber lines by end of March 2006. That would bring them to roughly 1.3 million lines. The S1 says they make 26.63 per subscriber line, per month. So, that puts annualized revenue, by end of March, at about $415 million. To get to a billion they need to make up $585 million, or 21,967,705 "subscriber line-months" of revenue. If they added all those subscribers at the start of March (impossible, but let’s just imagine for the sake of this thought experiment), they would need an additional 2.2 million subscriber lines, roughly. At an acquisition cost of $213.77 per line, they would need to spend $470 million to acquire these customers. But, the S1 says they had $126 million in cash at the end of September, and their plan is to raise another $250 million. They’re short $93 million.
Even if they wanted to target $1 billion in revenues this year, they couldn’t. They don’t have the money. They have to grow slower. More importantly, unless they can get to cash flow positive, they will never be a billion dollar business. They’ll run out of cash before they’ve acquired the subscribers.
Side note: the Vonage S1, is very difficult to interpret. Everything is reported in terms of revenue and cost per "subscriber line".
Subscriber lines include, as of a particular date, all subscriber lines from which a customer can make an outbound telephone call on that date. Our subscriber lines include fax lines, SoftPhones and WiFi phones but do not include our virtual phone numbers or toll free numbers, which only allow inbound telephone calls to customers.
Why is this a problem? Customers who purchase a small business package, which includes a fax line, count as two subscriber lines. Customers like me who have several softphone subscriptions, count as a bunch of subscriber lines. This lack of transparency creates all kinds of confusion.
For instance, we don’t know what the actual subscriber acquisition cost is, but it’s certainly higher than the $213 per subscriber line reported. For instance, if you assume assume that 25% of Vonage’s customers buy the small business offering then their subscriber acquisition cost is actually $285. While still very low compared to others — for instance, the cable players — it is much higher than the original report.
Or, how about the impact of inflating the number of subscriber lines. What would happen, if, for instance, Vonage ran a promotion on fax lines toward the end of a quarter. Say, for instance, they added 100,000 fax lines in at the end of September 2005. Subscriber lines would go up, subscriber line acquisition costs would fall, and revenue would rise marginally for the quarter. It’s an easy way to point to "progress" if other numbers aren’t looking good.
It also makes the churn numbers look better. A customer who churns away can be replaced by a new fax line subscription.
I am not saying Vonage is doing any of these things. But I would argue strongly in favor of additional transparency by exposing the actual number of subscribers, total added and churned, in a quarter. It would make the job of those who want to analyze those financials much easier.