Diggin' into Vonage's S-1
For anyone looking for a good Sunday afternoon read, Vonage's S-1 fits the bill. It offers some intriguing insight into the company's plan to raise as much as $646-million through an IPO. The positive news is Vonage now has more than 1.5 million customers who generate average revenue of $27.65 a month. The bad news is Vonage is still spending like crazy to attract new business. In the first-quarter, the company spent $88.3-million on marketing, which explains all those banner ads and television commercials. This led to a net loss of $72.5-million on sales of $118.8 million. For anyone who believes Vonage will suddenly turn off its marketing machine to reduce the red ink think again. In the S-1, Vonage said “in order to grow our revenue and customer base, we have chosen to increase our marketing expenditures significantly. 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”. Translation: A huge chunk of the IPO proceeds will be spent on marketing campaigns. \The S-1 also includes a lengthy list of risks, including the fact “attracting customers away from their existing providers will be more difficult as the early adopter market becomes saturated and mainstream customers make up more of our target market.” Translation: There's lot of competition with more marketing muscle than Vonage. After Vonage completes IPO, co-founder Jeff Citron's 33% stake will be worth about $850-million, while Vonage's venture capital investors (Bain Capital, Meritech, New Enterprise and 3i) will see their $400-million investment suddenly be worth $1.12-billion. Bottom line: the IPO is a slam dunk for existing investors but far from compelling for new shareholders.
April 30th, 2006 at 3:58 pm
Again,
With the greatest respect. This is virgin territory, how do you know how much to spend if you are changing the market. I certainly would not model my self agians tthe Wireless or RBOC providers.
Momentum stock for sure. My guess is they float 20% of the company continue to add customers and then at some point get acquired.
The real question is if they don;t go public in May or by Mid-June they will have to wait until October as bankers typcially holiday late June through labor day.
Not sure they have enough cushion cash to wait. They may slow down marketing expenses to save cash for the fall.
When do you think they will float the IPO?
April 30th, 2006 at 4:48 pm
MarK:
Does Vonage list the number of new accounts added during the previous quarter? We could calculate a customer acquisition cost number from that. A churn number would be interesting, too. With that and the number above we could calculate a customer lifetime value number.
April 30th, 2006 at 6:03 pm
The cost of acquisition (based on equipment subsidies, retail payments and advertising — it excludes in-house marketing staff) was $99M or $234 per gross addition. Of this amount, $22M was spent replacing the 94k subscribers who churned during the first quarter — in other words, even if they decided to drastically cut spending and stop net subscriber growth, Vonage might be marginally profitable on an EBITDA basis.
They may yet grow to sufficient scale that the business because a significant cash generator, but they aren't there yet. If 1.5M customers are not enough, and competition is increasing, the situation doesn't look great.
May 19th, 2006 at 7:32 pm
Many people are now stopping their vonage service. I had used the service for over two years but could no longer deal with the lack of customer service, lies and deceit. Evan a well respected Voip blogger cancelled his service this month. Vonage added insult to injury when they said the plan would terminate at the end of the month and then disconnected the service in the next 30 minutes with 18 days left in the prepaid month. After waiting 45 minutes to get to customer does not care service they informed me that they do not prorate for cancelled accounts. When I asked them to show me where this is stated in their terms of service they could not find it but did find a statement in section 3.4 that states they will return your prorated payment if the disconnect your service without notice. They tried to explain that I disconnected it not them and my argument was that my service should continue for the period that I had pre-paid. Again, an ugly discussion with a deceitful company. Do not subscribe to the IPO or you will lose money.