Vonage(VG)

VG: Continued Debt Repayment Will Reward Shareholders

May 6th, 2010 by Yehuda Fruchter   |   No Comments

There were many positives in VG’s earnings announcement yesterday, but the one that I think is the most exciting for investors is the company’s $23 million debt prepayment. Aside from reflecting significant cash-flow improvements at the company, the debt prepayment suggests strongly that management will be aggressively looking to improve VG’s mangled balance sheet. Importantly, during the conference call, Marc Lefar, VG’s CEO, remarked:

“Over the next year, we anticipate making substantial prepayment offers to debt holders as the company continues to generate cash.”

As I’ve mentioned in the past, VG’s continues to generate improving EBITDA, but unfortunately the company’s high interest debt (raised during the peak of the financial crisis), continues to consume a huge portion of free cash-flow. However, if the company succeeds in prepaying a significant portion of this debt and is then somehow able to refinance other portions, VG’s shareholders should be rewarded. This debt prepayment combined with low churn, continued progress on the top-line, and eventual subscriber growth, should send the shares sharply higher over the coming year.

Disclosure: Affiliates of Envoy Global Research, and its principals, own shares in VG. We first wrote up VG at $0.40. All ideas, opinions, and/or forecasts, expressed or implied herein, are for informational purposes only and should not be construed as a recommendation to invest, trade, and/or speculate in the markets. Any investments, trades, and/or speculations made in light of the ideas, opinions, and/or forecasts, expressed or implied herein, are committed at your own risk, financial or otherwise.

Buying Vonage (VG)

July 27th, 2009 by Yehuda Fruchter   |   1 Comment

I’ve written about Vonage (VG, current price $0.40) awhile ago, and I now believe the stock offers a good risk/reward at current prices.

Vonage (VG) is one of the leading providers of VOIP services.

The main reasons for entering a position now are as follows:

  • The stock is trading near its all-time low of around $0.30.
  • Almost anyone who hears you mention VG as a potential investment, will shudder at the prospect.
  • There are nearly zero Wall Street analysts covering the company.
  • Despite the negative halo surrounding the company, financials are beginning to show dramatic improvement, with EBITDA jumping last quarter to over $18 million from $8 million last year.
  • Debt has been entirely restructured and there are no near-term major repayments.
  • On the subject of debt: Vonage is highly leveraged, but given their improving cash-flow, we think the company will have an easy time refinancing this debt in the future, at much lower interest rates, and thereby greatly increasing returns for equity holders
  • Valuation is incredibly low with an EV/Sales of around 0.3 despite very good margins and the recurring nature of the business.

    • Incidentally, I have two Vonage lines and have used them happily for five years already. The service is great and I’m probably a customer for life. I’m sure there are many people like me, so clearly there is a business here. How much of a business, I have no idea. But it’s obviously viable, even if it does not have major growth prospects.

    So if VG is able to continue to report solid profitability improvements the value of the company’s equity should increase dramatically. At the same time, if the company disappoints I don’t see much downside, since the equity is already considered practically worthless.