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Story URL: http://www.silicon.com/research/specialreports/voip/0,3800004463,39156315,00.htm

Vonage heads for $250m IPO
And hires new CEO...

By Marguerite Reardon

Published: Thursday 09 February 2006

Internet phone provider Vonage is going public, hoping to raise $250m in new investments.

On Wednesday the company filed documents with the Securities and Exchange Commission (SEC), registering to become a public company. Vonage expects to make $250m from the offering. A ticker symbol and initial share price have not been set yet.

Vonage also disclosed on Wednesday that it has hired a new CEO. Michael Snyder, formerly the president of Tyco International subsidiary ADT Security Services, will take the helm starting 28 February.

Vonage founder Jeffrey Citron, who has been the company's chief executive since its inception, will serve as chairman of the board of directors and as the company's chief strategist, focusing on technology developments, employee culture and public relations, the company said in its SEC filing.

The company noted in its filing that Citron's tainted past has been a concern for some business partners. In 2003, Citron settled an SEC complaint that focused on a scheme involving improper use of the Nasdaq Stock Market's Small Order Execution System, or Soes. Without admitting or denying the allegations in the complaint, he paid a $22.5m fine and agreed to accept an SEC order that bars him from associating with any securities broker or dealer.

In the US, the voice over IP, or VoIP, market is still in its infancy but analysts predict it will grow quickly over the next few years as consumers opt out of traditional phone services for lower-cost VoIP services. In 2004, approximately 900,000 to 1.5 million people in North America used VoIP. That number is expected to grow to between 8.2 million and 15.3 million by the end of 2007.

Four-year-old Vonage believes it's in a good position to capitalise on the potential market growth. The company more than tripled its subscribers in 2005, and as of 8 February, 2006, it said, its VoIP service had more than 1.4 million subscribers.

Vonage has also rapidly grown revenues. In 2003, the company generated $18.7m in revenue. That figure grew to $79.7m in 2004. And for the nine months in 2005 ending in September, it made $170m in revenue.

But despite its quick growth, the company has consistently racked up net losses. Since its inception, it has lost a total of $310m, $189.6m of which was lost in the first nine months of 2005. The company said in its prospectus filed with the SEC that the losses initially were driven by start-up and technology development costs but more recently they have been the result of marketing costs, which were $176.3m for the first nine months of 2005.

The company added: "We are pursuing growth, rather than profitability, in the near term to capitalise on the current expansion of the broadband and VoIP markets and enhance the future value of our company. This strategy, however, may not be successful, and we may never achieve profitability."

Vonage listed a series of other potential risk factors. Some of them were more general in nature, having to do with the adoption of VoIP technology by consumers, growing competitive pressures and potential price cuts from incumbent phone companies.

The issue of Citron's tainted past was also cited as a potential risk for investors. Before Vonage, Citron was a top executive of Datek Online, an internet-based brokerage company. While Citron was working for Datek, the SEC accused Datek Securities and executives, including Citron, of participating in the fraudulent scheme involving improper use of Nasdaq's Soes.

Marguerite Reardon writes for CNET News.com