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Vonage Falls Hard & Fast in Public Debut

Shares of the consumer VOIP player Vonage Holdings Corp. (NYSE: VG) began trading on Wall Street Wednesday and investors quickly discounted its status as a technology pioneer, focusing instead on the fact that the company is bleeding cash.

After opening at $17, Vonage shares fell about 12 percent to $14.94 as of 2 PM ET. (See Vonage Prices IPO.)

Skepticism over Vonage's business had been widespread leading up to the IPO, and appears to be bearing out in the company's stock price. (See US VOIP Revenues Triple.)

Holmdel, New Jersey-based Vonage has never had a profitable quarter and has said it expects its losses to continue. The firm spent $261.3 million on customer acquisition during 2005. Its revenues that year were $269.2 million and the company reported a loss of $73 million.

According to a May 23 SEC filing, Vonage's cumulative losses since launching in 2002 amount to $467.4 million as of March 31, 2006. Its debt was $253.4 million.

It also doesn't help that the company's founder and former CEO, Jeffrey Citron, has a tattered reputation on Wall Street. Citron, while affiliated with Datek Online Holdings Corp., an online brokerage firm, was accused by the SEC of participating "in an extensive fraudulent scheme involving improper use of the Nasdaq Stock Market's Small Order Execution System, or SOES," according to Vonage's earlier filings with the SEC.

"Mr. Citron and other individuals entered into settlements with the SEC in 2002 and 2003, which resulted in extensive fines, bans from future association with securities brokers or dealers and enjoinments against future violations of certain U.S. securities laws," the filings state. (See Vonage Appoints CEO, Chairman.)

Vonage, however, wants to focus on the future. The company hopes to convince investors that with broadband booming and Vonage subscriber numbers growing, the firm can't help but get in the way of some serious profits.

But the company is also facing strong competition and downward pricing pressure in the consumer VOIP space. The perceived worth of Vonage's service is being challenged by competing VOIP products from Internet companies which cost less, and in some cases cost nothing at all.

eBay Inc. (Nasdaq: EBAY) announced May 15 its Skype Ltd. service would feature free PSTN-connected calling to the U.S. and Canada until the end of the year and perhaps beyond. (See Analysts: Skype Freebie Is Defensive.) Time Warner Inc. (NYSE: TWX) division AOL recently announced it would give away free VOIP phone numbers for use with its new PSTN-connected IM-based Phoneline VOIP service. (See AOL Phoneline.)

As Vonage notes in its SEC filings: "Such competition or continued price decreases may require us to lower our prices to remain competitive, may result in reduced revenue, a loss of customers or a decrease in our subscriber line growth and may delay or prevent our future profitability."

Vonage set its share price in an Securities and Exchange Commission (SEC) filing after market close Tuesday. The company sold 31.25 million shares, or about 20 percent of the company, and has raised about $467 million, given its 2 PM share price. (See Vonage Targets $500M From IPO.)

— Mark Sullivan, Reporter, Light Reading

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alchemy 12/5/2012 | 3:53:24 AM
re: Vonage Falls Hard & Fast in Public Debut Somehow, I can't get that Tom Petty song out of my head.

This a "The Emperor has no Clothes" IPO. If I were a VC, I'd be unloading my private investment in Vonage as quickly as I could.
digits 12/5/2012 | 3:53:24 AM
re: Vonage Falls Hard & Fast in Public Debut Uh oh.... current price, after two-and-a-bit hours of trading -- $15.05,a drop of more than 11 percent...
whyiswhy 12/5/2012 | 3:53:21 AM
re: Vonage Falls Hard & Fast in Public Debut Any IPO is a good IPO, for those who did not pre-buy it. The only ones getting their butts in a pucker are the investment bankers. Couldn't happen to a nicer bunch.

JMHO

-Why
geof hollingsworth 12/5/2012 | 3:53:20 AM
re: Vonage Falls Hard & Fast in Public Debut The reason it is bad for the IBankers is that at least at this point they are the ones who are the major holders of the shares. When a deal breaks as badly as this one, the smart money institutions unload back to the people who sold it to them, and the bankers now have to re-sell the used merchandise, hopefully for more than they purchased it for. That can take months. But since this is a company that is vaporizing cash at a prodigious rate, holding onto the shares for awhile in the hopes that good operating results will cause an uptick in demand for the shares must seem pretty risky to the bankers.

Another disastrous aspect of this is the affect on the Vonage customer base, all of whom were encouraged (some might say badgered) to buy shares in the offering. I will bet that many of them are feeling abused, and will be looking to move on from both the stock and the service at their earliest opportunity. A monumental customer relationship blunder.
googol_byte 12/5/2012 | 3:53:20 AM
re: Vonage Falls Hard & Fast in Public Debut Why are you saying it's bad for the investment bankers? The underwriters of an IPO make about 7% of the capital raised, so that's about $35M in fees for a couple of months work.

If anything, they are the winners in this whole thing...
alchemy 12/5/2012 | 3:53:18 AM
re: Vonage Falls Hard & Fast in Public Debut First comment:
Vonage chewed through almost a billion in VC money to land 1.5 million customers who are only using Vonage because it's inexpensive. That's $600 per customer to land a $20/month revenue stream that can churn at a moments notice to a lower cost provider. Anybody can enter the business for a few million in capital equipment and undercut them. Deep pockets internet companies like Google, eBay, and AOL with other sources of revenue can put Vonage out of business in no time at all by offering the same service at a lower price.

2nd comment:
The cable operators have the largest residential VoIP network in existance with over 3 million subscribers and rapid growth. This is a premium product with QoS and telco-level availability that competes directly with telco residential wireline service.

3rd comment:
IMS is a walled garden architecture designed to work on cellular networks with licensed spectrum. You'd never use IMS technology for an "over the top" best-effort product like Vonage. Personally, I don't think IMS is particularly useful for basic cell phone calls where 2.5G is more efficient. Instead, it's a means to let the cell phone access other value-added services inside the walled garden like push-to-talk, video clips, games, and the like. I don't have any cellular operator data to know one way or the other whether the revenues from those value-added services justify the business case for deploying an IMS network with all the value-add applications.
dljvjbsl 12/5/2012 | 3:53:18 AM
re: Vonage Falls Hard & Fast in Public Debut What the market is really showing is that VoIP iwill be a commodity that exisits to serve some other application. Standalone VoIP providers have no reason to exist.

Now consider this along with the IMS hype that we have been reading both here and elsewhere. If VoIP cannot standalone as a profotable application then why would anyone think that IMS has a chance in the real world. IMS will vanaish jsut like ISDN vanished as a technology that cannot create applications that are of any customer value.
twill009 12/5/2012 | 3:53:16 AM
re: Vonage Falls Hard & Fast in Public Debut VG down another 11% today. This could be uglier than Webvan. If you know anybody who bought shares, tell them to cut their losses and run.

I saw the company's roadshow presentation -- no plans ever to be profitable. Ever. What kind of stinky business model is that?

I agree with the earlier point -- the I-Bankers have gotten their 7% and are already calculating their bonus for the year. That said, they do prefer the stock to go up on an IPO because it enables them to win more business in the future.

The people who get hurt are the investors -- i feel especially sorry for the Vonage customers who save $20 per month on phone calls but just lost $1000 in two days with the IPO. They should sell before they lose everything.
tmc1 12/5/2012 | 3:53:13 AM
re: Vonage Falls Hard & Fast in Public Debut Another disastrous aspect of this is the affect on the Vonage customer base, all of whom were encouraged (some might say badgered) to buy shares in the offering. I will bet that many of them are feeling abused, and will be looking to move on from both the stock and the service at their earliest opportunity. A monumental customer relationship blunder.
----------------------------------------

According to the email/letter the offer was to "thank" their customers... I wonder how thankful those customers that took them up on it are feeling right now.
twill009 12/5/2012 | 3:53:11 AM
re: Vonage Falls Hard & Fast in Public Debut It would not be unusual for a stock like this (i.e., unprofitable for the foreseeable future) to trade at 1x sales. Vonage is hoping to hit $600 million in sales this year. With close to 200 million shares outstanding post-IPO, that implies a stock price of around $3.

If you have friends or family that bought into this deal, tell them to read the prospectus and ask themselves if they really believe this company has a plan to make money. This could potentially be the worst value vacuum seen in years.
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