Vonage to Go Public

If all goes according to plan, VoIP poster child Vonage will raise as much as $250 million in an initial public stock offering underwritten by Citigroup, Deutsche Bank Securities, and UBS Investment Bank.

Vonage plans to devote the proceeds of the IPO “to fund the expansion of our business, including funding marketing expenses and operating losses” according to the prospectus summary section of the SEC filing. (The provider, which has experienced steadily growing losses since its launch, expects those losses to continue into the foreseeable future.)

In a related announcement, Vonage founder Jeffry Citron stepped aside as CEO, to be replaced in that role by Michael Snyder, a former executive at the ADT Security Services division of Tyco International Ltd. Citron, who owns 41 percent of the company (before IPO) retains his position as Chairman, and takes on a new title, Chief Strategist.

It is widely believed (and this belief is directly supported by wording in the SEC filing) that Citron’s title change is aimed at removing potential SEC opposition to the Vonage IPO. In 2003, Citron and several associates in Datek Securities were charged by the SEC with trading improprieties. Citron paid in excess of $22 million in civil penalties and agreed to leave the brokerage business&#151without admitting to or denying the charges.

With 1.4 million customers, Vonage is currently the single largest provider of consumer VoIP services, but, as noted above, that market share has been achieved at the expense of profitability. Nor does the company appear to be changing its basic business strategy—continuing to favor growth over profits.

While there is a considerable stir in investment circles around the Vonage IPO, the company’s prospectus characterizes the investment as involving “a high degree of risk.” Among the specific risks enumerated in the prospectus is the highly competitive nature of the telecommunications environment. Indeed, while Vonage is the dominant force in residential VoIP, many analysts believe that the momentum may soon swing to cable providers

One significant advantage the cablecos can claim is ownership and control of the networks on which their voice services run. Not only does Vonage’s service rely to some degree on the public Internet, but, as the prospectus puts it, “the success of our business relies on customers’ continued and unimpeded access to broadband service. Providers of broadband services may be able to block our services, which could adversely affect our revenue and growth.”

Still, the company does envision very strong growth, citing analysts’ predictions of subscriber numbers growing to between 8 and 15 million by the end of 2007. It further stresses expansion of products and services, noting technology partnerships that will facilitate the widespread adoption of Vonage’s basic stock in trade, phone calls over IP networks.

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