Customer lifetime value ... how can Vonage survive?

After writing last week about why Sirius XM is likely to end up in Chapter 11, from a customer lifetime value perspective, I was looking around for other companies in a similar situation (customer subscription business, facing financial difficulties).

Vonage (www.vonage.com) is an independent US-based IP phone services provider. I can vouch for the quality of their services, since I was a user for several years. Unfortunately, they have encountered losses for several quarters and have raised debt exceeding $500 MM.

Vonage is going to release its annual results in late February. Meanwhile I analyzed their Q3 results (click here) from a customer lifetime value perspective.

Here are the summarized customer lifetime value metrics:

• ARPU (Revenue per user per month): $ 28.96
• Direct monthly variable cash costs : $7.20
• Monthly fixed opex cash costs (excludes depreciation, interest, taxes), mainly SG&A: $9.82
  
• Subscriber acquisition cost: $ 301.4 (of which $48 is spent on equipment subsidy)
• Monthly Churn rate: 3.1% ; which implies an average lifetime of 32 months
• Capital (assets less cash) of $315 MM (which amounts to $120 per subscriber)

Each new subscriber generates $ 385 of cumulative lifetime cashflow (($28.96 - $7.20 - $ 9.82)*32).
This is barely enough to compensate for the upfront SAC of $301 per gross add and capital requirement of $120 per subscriber, after discounting.

I think Vonage can survive if they continue to improve their business in the following ways:

• Launch a proactive retention strategy (use predictive analytics to understand which customer is likely to churn, and launch proactive offers to retain them) to reduce the churn rate
• Reduce SG&A costs ($73 MM in Q3) by optimizing the salesforce
• Reduce marketing costs ($254 per gross add) by:

1. re-examining the channel strategy (using direct and other low-cost channels (e.g., referral) as opposed to distributors and retail)
2. continue reducing online advertising costs (click here)
   

• Increase ARPU (which currently is only a few $ more than the monthly unlimited subscription rate) -- by promoting services that generate incremental ARPU (international calling, faxing, virtual phonelines)

Would love to hear what you think...