More on Vonage Debt Buyback

Televolution founder and CEO David Beckemeyer sent me some comments on my post Is Third Time a Charm for Vonage Debt Buyback? . David points out that there have been contrarian opinions about Vonage right along, despite the general industry cheerleading:

"The funny (sad) thing is you could have said most of these same things (no business) back in 2003. Some of us did say it back then, but the capital markets were blinded at that time. What I said back then:

• Minutes would be commoditized, cost approaches zero - at the time, Vonage was charging $40/mo and "experts" said it was cheap  
  
•  Regulatory Issues would be a nightmare - check
  
•  911 isn't going away (thus changing their cost advantage) - check
  
•  ILECs will retaliate - turns out they haven't had to, Vonage isn't a big enough threat

I recognized right away (unlike Vonage investors) that Vonage had few, if any cost advantages over a regular telco. The only difference is they don't put the wires in the ground - but unlike Cable and ILEC, that's also a disadvantage because they don't own or control the pipe into the home. And Vonage also lacks the buying power of the telcos.

But the most important problem for Vonage has, and continues to be, and I think this is still the biggest elephant in the VoIP room: THE HOME PHONE IS NOT BROKEN. It is not high enough on the radar of problems to make switching to unreliable VoIP worth the trouble, for most people."

And while we're traveling down memory lane, in Nov. 2004 I also suggested that the emperor's financial pants didn't 'pencil out' in "Is Vonage Overvalued?" Turns out I was right. Maybe I can get a job running an investment bank.

Is Third Time a Charm for Vonage Debt Buyback?

In the face of viral bank failures and an imploding credit market, it's reasonable to ask whether pure-play VoIP leader Vonage can close its debt refinancing deal, given the company's bottom-line red ink and a stock price in a death spiral.

to repurchase the remainder of its in convertible notes, the Journal story said. Vonage needed to raise money for the repurchase by December 16 or risk bankruptcy

Last month Vonage extended its offer to buyback $253 million of debt for the third time, Reuters reported on September 30. The new expiration date is Oct. 15.  Vonage launched the offer last summer in conjunction with a $215 million debt refinancing deal with hedge fund Silver Point Finance.However, the Silverpoint deal has yet to close and the parties are "still in discussion," according to the Reuters report. If Vonage deosn't raise the money by December 16, the company may go under.

Although Vonage's Q2 revenue was up 11 percent from 2007 to $228 million, the company still lost $7 million — which is better than 2007's $23 million loss for the same quarter last year. Still, "losing less money than last year" isn't a confidence-inspiring message for a company that's been in business nearly eight years. 

Jon Fisher author of Strategic Entrepreneurism: Shattering the Start-Up Entrepreneurial Myths, doesn't mince words about Vonage's prospects in the current climate — or any other, for that matter. Fisher has led three startups in the past 15 years, through booms and busts, and his most recent venture, Internet security firm Bharosa, was acquired by Oracle in 2007. One of his truisms is, "If you don't have a P&L that makes sense, you're in trouble."

"Vonage loses money quarter after quarter and year after year, and therefore I don't consider Vonage to be a company — or at least a for-profit company," he wrote in an email.

"It's companies like these that will have the most trouble attracting or refinancing capital in the wake of an unprecedented credit and liquidity crunch and I say that's a good thing. The biggest problem we have in this country is using debt to keep companies in business that are not companies."

Tough words. Then again, these are tough times.