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Telecom Industry: Vonage Michael Ding, Dilshoda Yergasheva, Remen Okoruwa, Trieu Ton, Tae Yoon, Steven Zhu.

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Presentation on theme: "Telecom Industry: Vonage Michael Ding, Dilshoda Yergasheva, Remen Okoruwa, Trieu Ton, Tae Yoon, Steven Zhu."— Presentation transcript:

1 Telecom Industry: Vonage Michael Ding, Dilshoda Yergasheva, Remen Okoruwa, Trieu Ton, Tae Yoon, Steven Zhu

2 Porter’s Five Threat of Substitutes – Uncountable: Cellular phones Landlines Other means of communication

3 Porter’s Five Supplier Power – Minimal: Inputs are rather cheap Buyer Power – Vonage has tried to differentiate its product by offering a slew of nifty, yet unnecessary, feature – Price sensitivity is critical – Number of people accessing telecom services worldwide is growing

4 Porter’s Five Buyer’s Power – Many available substitutes available – Broadband connection necessary for VoIP to be used (foreshadowing….) 55 million in the US: most broadband service provided by cable companies Barriers to Entry – Telecommunications at large is difficult – VoIP is easy to enter due to low start-up costs and materiel required

5 Porter’s Five Barrier’s to Entry – Proprietary Knowledge: Vonage has been subject to four IP lawsuits from AT&T, Sprint, Verizon, and Klausner Technologies Rivalry – Intense: one must develop a differentiated, appealing product while navigating a maze of patents and competing with just about everyone

6 Strengths A leading VoIP provider in US – 2.45 million customers Low-price service competitive against landline phone companies Good customer service – PC World’s 2006 World Class Award VoIP winner Computer-based phone services are gaining much attention and has room for great improvement in a such technological era. –Subscriber line has increased greatly and continuously since 2003 –Continuing to improve on expenses and gains Second quarter of 2007: adjusted loss from operations declined to $18M, a 70% year-over-year improvement Second quarter 2007 revenue grows to $206M An increase of 43% from $144M in the year-ago quarter Direct margin improved to 64% of revenues from 61% a year ago

7 Weaknesses Competition with cable companies – Top seven US VoIP providers include 5 of the largest cable companies – Prone to patent trouble – Not a feasible acquisition target Competition with other VoIP providers P/E is N/A, which seems very mysterious… Almost went bankrupt after the Verizon incident on June 19, 2006 (for the infringement on five of Verizon’s patents related to VoIP service). Not great brand name

8 Opportunities Expanding global market By being part of a still relatively new industry, Vonage still has much room for development in its technology and services.

9 Threats Cable providers in the US “removing the middleman” Other VoIP services –Cheaper than Vonage –Free (Skype) Revenue and customer base growth may not meet expectations or be sufficient to pay off debt More patent trouble The company is not financially stable at the moment, with it’s stock price down to almost $2.00 Bankruptcy

10 Legal issues with Verizon Verizon sued Vonage for patent infringements The company was ordered to pay $58M Moreover, Vonage had to refrain from signing new customers up Recently confirmed the lack of workarounds that would allow it to operate without Verizon’s Patent infringing RESULT: stock falls down 26%, loss/share =$1.04, SEO resigns, 3d quarter net loss = $161.8M ($100M more than a year ago) -> Investors = 

11 THERE IS MORE… Settlement for the AT&T patent infringement lawsuit ~ $39M/ 5 years Speed of this settlement is a clear indication that Vonage has no intensions to defend itself in court against its far wealthier competitors Since October 8, Vonage has settled patent lawsuits with Verizon, Sprint Nextel and voic firm Klausner Technologies for possibly $200m.

12 Competitor Analysis Large (bundled service): –AT&T –Qwest Communications –Verizon Small (lower rates): –Voip.com –Cordia –Phone Power

13 Standard Valuation Metrics Current P/E is not available, but the 5 year P/E, when calculated using the DCF, turns out to be 10. Growth in Earnings per Share: EPS Price/Sales (ttm): 0.42 Enterprise Value/Revenue (ttm): 0.40

14 Financial Analysis Cash & cash equivalents < current liabilities –210 mil < 260 mil –Long-term investments = 60k * Numbers in millions Net Income Q32007 Q22007 Q12006 Q

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17 VG WACC

18 VG DCF

19 Generous Estimates 20% YOY growth from 2009 onwards 5% capital expenditures from 2011 onwards Artificially low discount rate of 6.74% No changes in working capital Total expenses are actually less than revenues from 2009 onwards

20 Even with such approximations, Vonage will continue to lose money until 2009 They do not have enough cash on hand to keep making losses Future Profits

21 So What’s It Worth? Assuming everything goes perfectly for Vonage, it’s stock is valued at… $2.33 Current Price: $2.10


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