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Vonage: Better Quarter

Posted May 8, 2008 by Gary Kim - Comments (0)

Vonage's financial performance in its most-recent quarter was better than it has seen in some time. Revenue was up 15 percent year over year and up four percent sequentially. The company reported positive operating income compared to a double-digit loss in the same quarter last year. Average revenue per user was up, both year over year and sequentially.

One might still question how well Vonage will do compared to cable VoIP customers, but the market is growing. According to Harris Interactive, VoIP use has increased to 15 percent of U.S. users.

Vonage also inked a deal with Covad allowing Vonage to offer a dual-play offer including 3 Mbps or 6 Mbps digital subscriber line service in addition to voice. It isn't immediately clear how many potential customers will want to use Covad's "voice optimized" access, but that will improve user perception of voice quality.

Vonage Holdings Corp. recorded revenue in its first quarter 2008 up 15 percent from $196 million in the first quarter 2007 and up four percent sequentially, driven by an increase in subscriber lines and higher average revenue per user. Vonage also reported a GAAP net loss of $9 million, down from a loss of $72 million in the first quarter 2007.

Adjusted operating income was $8 million in the quarter, a significant improvement from an adjusted operating loss of $58 million in the year-ago quarter.

Average monthly revenue per line in the first quarter 2008 was $28.85, up from $28.31 in the year-ago quarter and $28.19 reported in the fourth quarter 2007. Average monthly telephony services revenue per line for the quarter increased to $27.87, up from $27.36 reported a year ago and up from $27.42 sequentially.

On a per line basis, average direct cost of telephony services was $7.26, down from $8.03 in the year ago quarter and up from $7.11 sequentially.

Direct cost of goods sold was $22 million, up from $13 million in the year-ago quarter and $17 million in the prior quarter as the Company utilized a large portion of its remaining inventory of higher cost CPE devices. Direct marginn remained flat year-over-year at 65 percent.

Selling, general and administrative expense was $79 million, down from $91 million in the year-ago quarter, and flat sequentially.

Marketing expense for the quarter was $61 million, or 27 percent of revenue, down sharply from $91 million, or 46 percent of revenue, a year ago, and down from $63 million, or 29 percent of revenue, sequentially.

Marketing cost per gross subscriber line addition was $216 in the first quarter 2008, down from $273 in the year-ago quarter and $223 sequentially.

The company expects SLAC to increase in the second quarter, consistent with prior year seasonal trends. Vonage expects to gradually increase marketing expenditures in the second half of 2008 to accelerate growth but continues to expect the cost of acquisition to fall within $225-$250 for the full year 2008.

Vonage added 30,000 net subscriber lines in the first quarter 2008 and finished the quarter with more than 2.6 million lines in service.

Vonage also announced a relationship with Covad whereby Vonage will offer a DSL service to both residential and small business customers. The Company expects this new service, called Vonage Broadband, to be available to customers by the end of the year.

Average monthly customer churn increased to 3.3 percent in the first quarter 2008 from three percent in the fourth quarter 2007. The company says it believes it has improved customer service enough that lower churn will result, in the second quarter.

Cbeyond Illustrates Channel Trends

Posted May 8, 2008 by Gary Kim - Comments (0)

Cbeyond's experience selling Microsoft applications and BlackBerry wireless services illustrates a trend in sales of telecom-related products. As it turns out, increased product complexity, and a broader range of new products, is leading to disproportionate sales results. To be specific, most of Cbeyond's application and wireless sales are made either by its direct sales force or by more-technical solution providers, rather than by Cbeyond's other channel partners.

That matches with what most service providers report: that IP services require more technical knowledge, and possibly more technology capabilities, than has been the case in the past. That portends changes in channel partners. Namely, more reliance on value-added resellers and value-added distributors, consultants and system integrators; less reliance on other partners.

Cbeyond Churn Issues: Why?

Posted May 8, 2008 by Gary Kim - Comments (0)

Cbeyond had to disconnect about 300 customers in the fourth quarter of 2007 for nonpayment, pushing its churn rate above historic levels. Cbeyond says it also disconnected about 300 customers, for nonpayment, in the first quarter of 2008. Company executives call this "uncontrollable" churn.

To be sure, Cbeyond has such low churn, normally about one percent, that a 0.3 percent increase in churn presents a 30-percent uptick in the rate.

Some observers have looked at the increase in churn rate and concluded that Cbeyond now is experiencing a different problem, namely an increase in customers coming to the end of their contract periods and not renewing.

That would be a much more dangerous trend, to be sure. But Cbeyond says that is not the case, and insists its two-quarter churn problem is strictly caused by non-paying customers. It is conceivable that is due to credit checks that should have been more stringent or the slowing economy.

Customer additions in the first quarter were, in fact, more uneven than Cbeyond is used to seeing, so economic sluggishness seems a likely contributor.

Cbeyond executives say they expect a return to more-normal metrics in the second quarter of 2008, on both the churn and customer acquisition fronts. Churn is trending lower in the second quarter and a return to more historical levels over the next couple of quarters is expected, the company says.

iProvo Overbuilder Network sold to Broadweave Networks

Posted May 7, 2008 by Gary Kim - Comments (1)

Provo, Utah's citywide fiberoptic network has been sold to Broadweave Networks, a local company that hopes to make a business out of triple-play services where Provo had not been able to do so. The network, called iProvo, was the largest municipally-owned fiber-to-the-premises network in the United States, reaching all 36,000 residences and businesses within the city.

Up to this point, Broadweave has served the Traverse Mountain planned community of 8,000 homes and 4.5 million square feet of office and retail space across 3,000 acres in Utah's technology belt. So the acquisition gives Broadweave about four times more homes passed than it currently has access to.

Broadweave will purchase the fiberoptic network for $40.6 million, which is enough to retire outstanding bonds incurred by Provo to build the system.

Under the terms of the deal, which is subject to municipal council approval, the city retains a license to use the network to connect city buildings, schools, and power infrastructure. Broadweave will operate as a retail provider, rather than as a wholesale provider of transport to third parties and says it will put more emphasis on services aimed at business customers.

One might draw several conclusions from iProvo's experience so far. Some will argue that overbuilders are going to have a tough time competing against both cable and telephone companies offering triple play services.

Others will say the sale shows municipalities really should not be running communication networks. Some will point to other fiber access networks in the Salt Lake City and Provo regions and argue that neither wholesale nor retail strategies have worked well.

The issue is what Broadweave's new management thinks it really can do to improve financial performance. One of the salient features of most networks serving entire communities is that there is an 80/20 rule for revenue. A small number of neighborhoods actually produce most of the revenue.

In fact, some studies suggest that as few as five to seven percent of neighborhoods of 500 homes or so produce half the revenue created by an entire citywide network. And the same sort of thing is true for business revenue as well. So it might not be so easy to boost revenues.

Broadweave will gain some scale benefits, though the difference between 8,000 and 44,000 might not be as large as you might think. Programming contracts won't be noticeably affected. There might still be a need for two headends. Installers can only do so many jobs a day. Some marketing and other overhead can be spread over a wider base of customers, of course.

Still, operating cost savings are unlikely to change the financial picture all that much. Only significant new sales volume is going to change the current iProvo financial model.

What Google, Cable Ops Get from Clearwire Deal

Posted May 7, 2008 by Gary Kim - Comments (0)

Google and several cable operators got some goodies in addition to equity in the new Clearwire national WiMAX network. And the advantages do not come from WiMAX, but from the Sprint 3G network.

Briefly, Google apps (YouTube, Google Maps, Gmail) get premiere placement on some Sprint devices, while Google Web, local search and location information become the default options for Sprint data customers.

The cable operators become resellers of Sprint 3G services, including voice. So now the three operators will be able to construct quadruple play services. That is the more important development, as interesting as the Clearwire resale agreement is. In the near term, cable operators need a viable mobile voice option more than they need a future mobile broadband option.

To be sure, Google and the new cable investors will become resellers of the WiMAX network as well.

Google will partner with the new Clearwire in the development of Internet services, advertising services and applications for mobile WiMAX devices. In addition, Google will be the search provider and a preferred provider of other applications for the new Clearwire’s retail product. As an open network, anybody can "partner" with Clearwire to develop applications or supply devices. But Google is a "preferred" and "default" provider, which historically has real value in the mobile arena.

The new Clearwire will support Google’s Android operating system software in its future voice and data devices that it provides to its retail customers.

But Sprint and Google have also entered into an agreement whereby Google will become the default provider of web and local search services, both of which will be enabled with location information, for Sprint, as well.

Sprint will also preload several Google services, including Google Maps for mobile, Gmail and YouTube, on select mobile phones and provide easier access to other Google services.

Comcast, Time Warner Cable, and Bright House Networks will be resellers of Clearwire’s mobile WiMAX service. More important, over the near term, all three cable operators now will become wholesale retailers of all Sprint 3G services, including voice services.

Clearwire is getting the attention. But Sprint 3G will be where the action is.

Multiple New Europe-India Cables: Price War Coming

Posted May 7, 2008 by Gary Kim - Comments (2)

A consortium of 16 telecommunications companies will construct the Europe-India Gateway cable system, a submarine cable that will span 15,000 km from the U.K. to India. EIG is projected to be completed in Q2 2010 at a cost of USD700 million, and will have maximum potential capacity of 3.84Tbps.

The EIG cable joins a long list of planned new undersea cable projects that will connect Europe, the Middle East and India and will be the fifth new cable due to enter service between Europe and Egypt in the 18-month period from the first quarter of 2009 and the second quarter of 2010, say analysts at TeleGeography.

Damage to two cables on this route, SMW-4 and FLAG Europe-Asia, caused significant disruptions to communications between Europe, the Middle East, and Asia earlier this year. The addition of these new cables will provide extra capacity and multiple options for routing traffic, improving the resiliency of networks in the region. The five new cables will combine to add 26.24Tbps of potential capacity.

The 16 telecoms companies investing in the project are: AT&T, Bharti Airtel, British Telecom, Cable & Wireless, Djibouti Telecom, Du, Gibtelecom, IAM, Libyan Post, Telecom and Information Technology Company, MTN Group, Omantel, PT Comunicacoes, Saudi Telecom, Telecom Egypt, Telkom South Africa, and Verizon. With the exception of Telecom Egypt, Saudi Telecom and Bharti, the members of the EIG consortium are not involved with any of the other planned projects on the route.

Industry executives fear a new price war on these routes. They are undoubtedly right.

Qwest Reports "Steady" Results

Posted May 6, 2008 by Gary Kim - Comments (1)

Under the current challenging circumstances, "typical" or "normal" performance is a good thing. And Qwest Communications International reported "steady operating results" for the first quarter of 2008. Adjusted EBITDA totaled $1.14 billion with adjusted EBITDA margins of 33.6 percent as data, Internet and video revenue grew by nine percent compared to the first quarter of 2007.

Broadband subscriptions were up 17 percent year-over-year while video subscribers were up 42 percent, year over year. Total data, Internet and video services revenue now represents nearly 40 percent of operating revenue.

The business market segment reported revenue of $995 million in the first quarter, up 3.1 percent year over year as data and Internet revenue grew 6.9 percent. Data and Internet revenue grew 29 percent over the same period a year ago.

Mass markets revenue was $1.48 billion in the quarter, a 0.7 percent decline compared to the prior year. Data, Internet and video revenue growth of 20.7 percent was offset by declines in both voice and wireless services.

Consumer average revenue per unit increased 7.8 percent to $55 from $51 a year ago. Qwest Broadband subscribers increased 90,000 in the quarter to reach 2.7 million, up 17.2 percent from a year ago.

Wholesale Markets reported revenue of $841 million in the quarter, down seven percent year over year largely due to long-distance revenue pricing and supplier consolidation. Data and Internet revenue was up three percent year over year.

VoIP Server Licenses Up 67% Globally

Posted May 6, 2008 by Gary Kim - Comments (1)

Whatever instability may be coming in some parts of the U.S. VoIP market, global growth--especially in Europe--is robust. The most recent analysis by iLocus shows 67 percent annual growth in VoIP server licenses sold globally, with traffic up 35 percent.

For the second consecutive year, Europe outpaced rest of the world in VoIP penetration. All major European operators--whether wireline or wireless--have a VoIP offering in place and have announced that they will be deploying IMS platforms.

The difference between deployments in the U.S. and European markets is the attitude and actions of incumbents. In the U.S. market, incumbents have not yet decided to make a major effort to sell VoIP; in Europe that already has happened. Because of carrier reluctance, challengers, especially the cable companies, have made significant market share gains.

What happened in Europe will happen in the U.S. market, however. At some point, AT&T and Verizon will decide to push VoIP aggressively, and the dynamics of the market will shift as much as they have in the fdial-up and broadband access markets, which initially were dominated by independent providers.

But fixed line replacement isn't the only place to watch for change. VoIP as a mobility and Web or enterprise application is early in its development right now. Though it might seem inconceivable, revenues from those sorts of applications will one day be significant. If that is not apparent it is simply because applications and business models in the mobility and Web and software spaces are seminal. Even Skype, as popular as it is, only represents two percent or so of global long-distance traffic, for example. So it will take some time before anybody notices.

Still, note that nearly 25 percent of mobile virtual network operators--wireless providers that do not own their own networks--already offering or testing mobile VoIP. By 2010 more than two thirds say they will have a mobile VoIP offering in place.

Femtocells: A Business or a Nice Feature?

Posted May 6, 2008 by Gary Kim - Comments (1)

ABI Research projects that 100,000 femtocell units wll ship in 2008. Volume deployments won't begin until 2010, when $100 price points will be possible, in volume. The other issue is whether femtocells are embedded in other widely-used consumer gear, such as Wi-Fi routers.

The really critical issue will be whether initial carrier deployments are supported by robust business models and service plans that extend beyond pure fixed-mobile substitution goals,” says ABI Research vice president and research director Stuart Carlaw.

The issue there is that some innovations are very useful and widely deployed, but don't necessarily create a business model. Wi-Fi is the best example of that. So one has to wonder whether femtocells will wind up being a very-useful technology--reducing service provider investment in macrocells, for example--or whether a new revenue stream of some sort can be created.

The most obvious example would be enhanced ability fo wireless providers to compete effectively in the wireline substitution business, where the new revenue stream is cannibalization of fixed line subscriptions. The other obvious issue is ability to sell voice-optimized fixed line broadband subscriptions.

French Internet Users: 94% on Broadband

Posted May 6, 2008 by Gary Kim - Comments (1)

One of the enduring claims observers make about the state of U.S. broadband is how woeful it is compared to other nations around the world. Consider France, which deregulated its telecommunications market in 2004, leading to heavy competition. In fact, broadband now is nearly synonymous with Internet use.

In March 2008, 93.5 percent of at-home Internet users in France enjoyed a broadband connection to the Internet, down slightly from the 94.2 percent who did so in the previous year. That's significant. The primary reason consumers buy broadband access is to use the Internet. Someday that will change, but right now broadband really is a way PCs can connect to the Internet.

So 94 percent of all home users of the Internet use broadband to do so. That's serious penetration. So note that about 52.4 percent of French homes had a broadband connection in 2007. That's a bit higher than U.S. broadband penetration, which is just about at 50 percent.

The point is that France has been highly successful at getting broadband adopted by Internet users. Fully 94 percent of all Internet users have broadband.

But note that household penetration is about 52 percent. There seem to be more dial-up users in the U.S. market than in France. But the point is worth noting: household penetration might not be the best way to measure penetration.

A household that doesn't use the Internet is hardly a candidate for broadband aimed at Internet users. The more relevant measure is how far broadband has penetrated homes where the Internet actually is used.