Friday, May 12, 2006

Vonage IPO Doesn't Add Up

Vonage is doing an interesting thing with their IPO in that they are reserving shares for their customers to buy. Vonage is the largest provider of VOIP services with 1.6M customers and any of them who signed up for service prior to December 15th, 2005 will be eligible to participate in the IPO, which could be as much as 15% of the planned sale. Others have written that this offering is a sign of desperation. I don't agree with this because tapping into an additional pool of demand is a smart way to increase the shares values regardless of how hot or cold the IPO is. However, there is too much about the IPO that doesn't add up to me.

I'm not a savvy public market investor by any means, nor am I really qualified to speak about the issue at all but this is my blog so here are my thoughts on the issue anyway. On one hand Vonage's revenue ramp is very impressive:

$19M '03
$80M '04
$270M '05
$120M '06 (through March)

However, on the other hand they also had a net loss of $261M in '05 and have already lost $73M this year. Also, their CEO Jeff Citron is stepping aside because he is banned from the securities business after misconduct at a previous company. which lead to at $22.5M fine, which at the time was one of the largest fines ever given to an individual. While Sarbanes-Oxley makes it pretty unlikely that Vonage's books have been cooked by Citron, the SEC clearly doesn't want him anywhere near retail investors and that is a strong signal to stay away from Vonage. But lastly and most importantly, competition in the VOIP business is increasing rapidly and I don't think Vonage's revenue ramp is sustainable. One of Vonage's most direct competitors, Packet8, has been on a marketing tear recently and other serious competition is starting to shape up from the likes of Skype, Verizon cutting their costs and Yahoo's voice service. Furthermore, a new entrant, VoipStunt, is offering virtually free calls for just 10 euros per quarter.

I do have a couple of friends who have expressed interest in purchasing the IPO but only because they think they might get a quick pop with in the first couple of days. While this is certainly possible, short-term behavioral investing from retail investors is nothing more than gambling unless one has insider information... and then of course its illegal.

Anyone looking for more information on the Vonage IPO may want to read these posts:

V is for Vonage... T is for Takerover
Surprise, Surprise... Vonage Plans to File for IPO
Vonage IPO Smells Like Bait
Why I don't buy IPOs

Vonage's IPO

Like Vonage Service? Buy Some Shares
Vonage pitches IPO shares to customers

Vonage dumps on themselves

Vonage online IPO offering to Vonage customers

Vonage Offering Shares To Customers

Should I do it?

Vonage panics

Vonage's Uses VOIP Spam To Push IPO On Customers

Vonage IPO: Customer Directed Share Program
Vonage Open IPO


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