The Street writes:

Vonage Holdings, moved to become the first major Internet telephony player to go public by filing Wednesday to raise up to $250 million via an initial offering of stock and named a Tyco International executive as CEO. Our revenues were $18.7million in 2003, $79.7million in 2004, and $174.0 million for the nine months ended Sept. 30, 2005," the company's prospectus says."While our revenues have grown rapidly, we have experienced increasing net losses, primarily driven by our increase in marketing expenses. From the period of inception through Sept.30, 2005, our cumulative net loss was $310 million. Our net loss for the nine months ended Sept.30, 2005, was $189.6million. During the same nine-month period, our marketing expenses were $176.3million.

People have been talking about this since late 2005. Vonage hopes to raise $600m in capital, something they can do by selling about 30m shares at $20/share. Their opening price may be less than that at $18/share, but it could rise/fall depending on the street.

Businessweek reflects the markets general anxiety about IPOs in the telecom space — calling the IPO "iffy".

Vonage, with more than half the North American market for the so-called Voice over Internet Protocol (VoIP) calling market, is going public in an environment fraught with accelerating competition and regulatory uncertainty. And a first glimpse at the telco's finances shows costs are headed in the wrong direction — fast.

Problem is, on a per-line basis, Vonage's sales are falling, while costs-per-subscriber are rising. According to the IPO filing with the SEC, Vonage spent $213.77 per subscriber on marketing in the first three quarters of 2005, compared with $137.70 in 2004. At the same time, average revenue per line has dropped to $26.63, from $30.99. If a customer has just one line (and most do), it would take more than eight months to recoup marketing expenses alone.

Vonage's expenses could rise further depending on regulatory changes. A U.S. Senate committee is currently debating whether to allow telcos such as Verizon (VZ) and BellSouth, which carry calls on behalf of providers like Vonage, to charge extra fees to ensure that traffic goes through glitch-free. Should such tolls be imposed, "then, it's going to be another cost of doing business they are going to have to bear," says Jon Arnold, principal at VoIP consultancy J. Arnold & Associates.

Sum up all these trends, and "it can only go one way for Vonage," says Arnold, who believes Vonage's operating margins will fall. "It's a company on the way down."

Reuters is saying that Vonage is seeking a $2-6 billion valuation. But telecom bloggers feel differently:

It strikes me as a desperate attempt by Vonage's investors, who have ponied up more than $400 million in venture capital, to get a decent return on their investment. Now, the $64,000 question is whether this deal will get done. Of course, it will because many institutional investors have no choice but to take a piece of this dodgy deal or risk getting cut out of the more attractive IPOs.

Replies on the same blog state it simply:

Agreed. But I would go further. As you say; they are losing money, largely due (it would appear) to unsustainable expenditures on marketing. The question is; will they ever be able to obtain a critical mass, such that:

  • they can be profitable at that level, and/or
  • they can achieve a tipping point, attracting more subscribers by sheer virtue of their current customer base (perhaps exploiting the Network Effect)

 

IP Democracy has a chart looking at Vonage's top line financials for the past 3+ years. For my post looking at Vonage's S-1 filing, click here.

It sounds like the waters are muddied but I'm more prone to listen to Tom Evslin, geek turned CEO and author of hackoff.com. (More on his rant here.)

Others have done a good job of analyzing Vonage financials both pro and con. For example, Om Malik points out that churn (telco speak for customers who unsubscribe) is high and that is expensive since each new customer costs over $200 to acquire. Ted Wallingford posts here that Vonage stock is appealing in part because “Vonage has pushed IP telephony into the mainstream and consumers recognize it as a brand leader in the sector.”

My personal prediction? Buy at the IPO price of $17/share, hold until they reach $100+ in one year, and then sell before the stock tanks to $5/share after that. đŸ˜‰ (Disclaimer, this is not real advice only comedy!)

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