Earnings Preview: Will Vonage Set the Mobile World on Fire?

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Voice over Internet protocol specialist Vonage (NYS: VG) has always been a volatile stock. With a beta value of nearly 1.7, the price jumps are even wilder than enterprise-focused rival 8x8 (NAS: EGHT) at just 1.3. By contrast, the stodgy telephone networks they aim to replace have beta values of 0.6 or lower, meaning that even the S&P 500 is more sprightly.

That's why I'm not particularly surprised to see Vonage jumping all over the place before Wednesday morning's fourth-quarter report. For one, the company reports results just days before February's options expiration deadline. For another, Vonage's brand-new mobile calling app is only a couple of days old and already draws rave reviews. This could be the cell-minute avoidance tool that finally breaks the traditional mobile phone model's back.

Stepping back for a second: Analysts expect Vonage to deliver non-GAAP earnings of about $0.11 per share on sales of $218 million. That's essentially flat revenues year over year but nearly double the bottom-line income. Vonage's management doesn't do sales and earnings forecasts, but the company wants to hit adjusted EBITDA of at least $165 million for the full year, meaning $38 million or more in the fourth quarter. Besides that target, Vonage wants to see more gross line additions than it did a year ago.

In my view, Vonage's biggest problem is marketing. Sales numbers are going nowhere, though an annual customer churn of just 2.6% would turn nearly anybody green with envy. Verizon's (NYS: VZ) companywide churn is nearly twice that number. Fellow subscription service Netflix (NAS: NFLX) recently reported 5.3% churn in just one quarter, though in that company's defense, Netflix makes it easy to quit or come back.

In short, once you go Vonage, you're not likely to go back. And yet, few people are taking that crucial first plunge. A successful set of mobile apps could help turn that tide, so this is an important marketing tool in a pretty empty toolbox.

Since Vonage's last earnings report, the stock plunged as far as 22% in December, only to come roaring back with a market-beating 24% gain in 2012. I wish I could tell you where this report will send the stock, but Vonage is far too volatile to play short-term guessing games with. The catalysts management has lined up will take awhile to play out, too.

What I can tell you is that my bullish CAPScall on this stock is doing well, and should continue doing so over the next few years as the company matures and figures out a workable marketing strategy. Add Vonage to your watchlist and keep an eye out for fresh subscriber additions. Vonage is playing the trillion-dollar mobile market from a totally different angle.

At the time this article was published Fool contributor Anders Bylund owns shares of Netflix, but holds no other position in any of the companies mentioned. Motley Fool newsletter services have recommended buying shares of Netflix. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinion, but we all believe that considering a diverse range of insights makes us better investors. Check out Anders' holdings and bio, or follow him on Twitter and Google+. We have a disclosure policy.

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