Posted by: Aaron Pressman on February 8, 2006
Hot Internet telephony provider Vonage just filed for an initial public offering. No per-share price estimate in this first filing but lots of info about the company and its financials. Greater experts will no doubt weigh in soon, but I am left wondering how can this company go public? After the $2.6 billion that Ebay paid for Skype, Vonage’s effort to go public is just more proof that the IP telephony market is in full bubble mode.
For the first nine months of 2005, revenue of $174 million was about 3.4 times as much as in the same period a year earlier but expenses of $367 million were 3.9 times as high as the year earlier period. And cash flow from operations was a negative $131 million, ALMOST SIX TIMES the cash outflow of the earlier period. Dig a little deeper and you discover that the average marketing cost to add a subscriber was over $213 up from $138 in the 2004 period. Pay more to acquire customers as your loss expands? This sounds familiar.
In a way, this story is like many of the failed dot-com era IPOs. Here’s Vonage summarizing the current strategy: “We are pursuing growth, rather than profitability, in the near term to capitalize on the current expansion of the broadband and VoIP markets and enhance the future value of our company.”
The company had to sell a $250 million convertible bond issue in December and January. Maybe that’s because cash on hand at the end of September was only $126 million, less than the prior nine months of operational cash burn (not even including $37 million in capital spending).
A final warning sign - I can’t remember reading an IPO filing before that had to explain so much negative background about the CEO. Or should I say ex-CEO. Jeffrey Citron, who founded Vonage almost six years ago, has been the subject of SEC and NASD enforcement actions, to put it mildly. Citron ended up paying $22.5 million in penalties for his involvement in the brokerage firm Datek Securities. Perhaps not surprisingly, the filing reveals that a new CEO is taking over on February 27. The new guy, Michael Snyder, is the president of ADT Security Services, Inc., a subsidiary of Tyco International.