Vonage IPO

Vonage IPO
Vonage needs more cash… Lots more. It seems they have gone to many VCs for more and didn’t get it and as such are forced to do an IPO. The rumored multi-billion dollar IPO isn’t happening and to be honest, I am surprised at how little this IPO will bring — only $250 million to the company.

Here is an excerpt from an excellent article on the topic:

The IPO filing offers key metrics of the Vonage’s business for the first time, which competitors, analysts and market participants in general have been anxiously awaiting. Of its 1.4 million subscribers, Vonage said that more than 95 percent of its subscriber lines are U.S. customers. The company has grown dramatically from just $18.7 million in revenue in 2003 to $79.7 million in 2004 and $174 million in just the first three months of 2005. Fourth quarter results weren’t available at the time of the filing.

Despite that growth, the company’s expenses (specifically marketing costs) have skyrocketed resulting in more than $300 million in losses since its inception. And given the competitive landscape, Vonage is expecting to stay in the red for some time. Without going into specifics, the company warned “we are pursuing growth, rather than profitability, in the near term.”

Marketing costs alone represent 101 percent of total revenue in the first nine months of 2005. And if the company needed to maintain that run rate, Vonage will be hard-pressed to find additional financing sources, Stofega said.

“They are going to need more money. They’ve already been to every VC in town,” he said. “I don’t know where they’re going to get it but they’re going to need more.”

But Stofega also faults Vonage for not taking steps to diversify its strategy away from the highly competitive game of capturing a critical mass of subscribers. By offering value-added services or expanding vertically into video or Triple Play services, the IDC analyst believes Vonage could reduce its risk factors longer term.

“What we’ve heard and what we’ve seen is maybe you don’t need to be that huge company. Trying to replicate the PSTN in IP network, I don’t think anyone can do it,” Stofega said.

The question is while Vonage and more specifically ridiculously frequent Vonage commercials have been great for the VoIP industry as a whole and done a great job building awareness of VoIP, at what point can the company no longer afford to spend less than 101% of revenue on marketing?

One last comment I would like to make is that it is essential for the entire VoIP industry that this IPO do well and more importantly that Vonage focuses on profitable growth. Vonage is now the VoIP benchmark. If they succeed, the entire VoIP market succeeds… If not the rest of the VoIP market will have a rougher ride.

I have never seen so many new companies entering the VoIP space and it may not hurt us that much if the capital markets are more selective than they’ve been. Still, a positive IPO for this New Jersey based VoIP company will make it easier for VCs to see a positive exit strategy in the VoIP services market. Vonage, let me take this opportunity to wish you the best of luck!

For other interesting comments on this story check out posts from Tom Keating who details how Vonage customers can get involved in the IPO and posts from Om, Andy and Erik.

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  • Erick K Loss
    May 17, 2006 at 4:48 pm

    I am a systems integrator. I work with data, phone, TV and security systems everyday. I set up systems for colleges and hotels. I tried Vonage for our new office phone system. I could not get it to ring through consistently. Calls were not completed, some were dropped. For one week I had no phones at all. Customers would write e-mail or call my cell phone to ask if we were still in business. They would get messages saying that my number was disconnected or that it was not valid.
    I spent over 11 hours on-line or on hold trying to get help, most of it on hold. When I called to cancel service I told them that I needed to keep the number and it would take a few days for the phone company to connect me again. They cut me off right then. I had no phone service. Qwest could not reconnect me with that number unless it was active. I had to spend 3 hours trying to get Vonage to activate the number again. Then they gave me a temporary number for 3 days, which no one knew to call, before I got my old number and same crappy service back. When I was finally connected to a land line again they gave me a $12.50 credit for my troubles.
    Vonage should be put out of business. They ruined mine for almost a month. They have a cruddy product, lousy service and tech support and terrible business practices.
    If you have to choose between two cans and a string and Vonage, take the cans and string. You’ll be happier with the service.

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