Vonage IPO Turns Ugly

The Net phone provider slides 12% in its debut.
Author:
Publish date:

Updated from 11:24 a.m.

The

Vonage

(VG) - Get Report

IPO got off to a rocky start Wednesday, with shares falling 12% in heavy trading.

The Holmdel, N.J., Net calling shop

priced its initial public offering late Tuesday at $17 a share, raising some $531 million. But Vonage tanked soon after Wednesday morning's opening, dropping as low as $14.49 on the

New York Stock Exchange

with 27 million shares changing hands. Early Wednesday afternoon, the stock was down $2 at $15.

The selloff came as investors fret over the hefty valuation of the money-losing company, which faces cutthroat competition in delivering voice-over-Internet protocol, or VoIP, service.

"Vonage is a ride-along service" using other companies' broadband connections to deliver calls, says one telecom investor who is not buying the initial offering. "There is no sustainable advantage as cable rolls out VoIP."

Indeed, Vonage's appeal to investors has been

waning as more players rush to offer VoIP services. Between low-cost calling plans from cable companies and telcos, and the fast-growing appeal of free phone service from outfits like

eBay's

(EBAY) - Get Report

Skype, Vonage faces a formidable cast of challengers.

Wednesday's steep drop represents a setback for the company's backers and another black eye for tech stocks. The Nasdaq has dropped 10 times in 11 sessions, and blue chips ranging from

Yahoo!

(YHOO)

and

Google

(GOOG) - Get Report

to

Dell

(DELL) - Get Report

and

Microsoft

(MSFT) - Get Report

have gotten pasted as investors worry about slow growth and the rise of inflation.

Vonage managed to accumulate 1.6 million users and booked $119 million in revenue in the first quarter ended in March. But to keep the top line growing, Vonage needs to spend a lot more money, which is among the reasons it turned to the public market for financing.

As one of the nation's biggest advertisers, Vonage has racked up massive marketing expenses. In the first quarter, Vonage spent $88.3 million on marketing, up 59% from a year earlier. As of March 31, Vonage had an accumulated deficit of $467.4 million.

Vonage's appeal, unlike many of the bigger tech names, is its fast growth. During 2005, the number of Vonage subscriber lines tripled, according to the company.

"Our revenues were $18.7 million in 2003, $79.7 million in 2004, and $174.0 million for the nine months ended Sept. 30, 2005," the company's

prospectus says.

That lack of profitability has made the IPO an

acid test for those who were watching to see what level of investor interest could be garnered by a company that has accumulated massive amounts of debt and faces growing competition in the VOiP phone sector.

Comcast

(CMCSA) - Get Report

and

Cablevision

(CVC)

, among others, have put increasing emphasis on grabbing Net phone users in recent years.

Public investors now hold 20% of Vonage. Early stage investors hold 45% and founder Jeffrey Citron controls a 31% stake. Vonage cautioned investors about Citron's prior association with

Datek Securities

, a daytrading firm that ran afoul of the

Securities and Exchange Commission

. Citron settled the SEC charges against him without admitting to any wrongdoing.

In April, Vonage said it planned to offer the shares at a range of $16 to $18 each in an effort to raise about $500 million for expansion and general corporate purposes and to cover its operating loss.

Despite the flood of red ink and the competitive pressure, the IPO gives Vonage a value of more than $2.3 billion, based on the 155.7 million total shares outstanding.

"The valuation on this thing makes no sense to us," the New York-based telecom investor says.