Vonage: No IPO Plans
The VoIP provider will use $200 million from a private security sale to support its growth.
Red herring
May 9, 2005
redherring.com
Vonage said Monday it has no plans for a public offering this year following the $200-million private financing round announced last week.
“Raising money in the private market is a lot more efficient use of management time,” CFO John Rego said in an interview. “This is a critical time for the company and we are building an exploding business right now. We need to be focused on that.”
Analysts have speculated for months about a possible IPO this year. But Mr. Rego said “the company doesn’t feel a compelling need to be a public company right now. Like everything else, there are pluses and minuses. We are happy to be doing it this way.”
If Vonage wanted to go public, it would face questions about CEO Jeffrey Citron, who paid $22.5 million to settle SEC charges that he and others participated in an “extensive fraudulent scheme” that involved creating fictitious books at Datek Securities from 1993 until 1998. As part of the settlement, Mr. Citron was permanently barred from associating with any broker or dealer.
Mr. Rego denied the settlement played a role in the decision to remain private. “Jeffrey is the best asset that that company has,” said Mr. Rego. “I can’t comment on Jeffrey’s personal things from his past, but as far as I know that is finished and in the past.”
The private fund involving 22 investors was disclosed in an SEC filing last week. It is one of the biggest private financings for a technology company since the bubble burst five years ago and brings Vonage’s total funding to $408 million. The company plans to use the funds to fuel its rapid growth in the nascent VoIP market.
Bain Capital Ventures, a division of Bain Capital, was the lead investor in the round, while the company’s previous investors, NEA, 3i, Meritech Capital, and Institutional Venture Partners, added to the fund along with Vonage management.
The money will help to ensure that Vonage is big enough to battle the giant cable companies and phone companies, which have been moving at a slower pace in the nascent market. “The fund will fuel the growth engine and continue our expansion throughout the U.S. as well as expand globally,” Mr. Rego said.
The Internet phone company is the largest independent VoIP provider, and has been adding subscribers to its 650,000-customer base at a heated rate. Vonage hopes to have 1 million subscribers by the end of the year.
Some of those customers could be overseas. The company moved into Canada last year, along with the U.K. earlier this year, and plans to offer service in Asia-Pacific by the end of this year.
In the U.S., Vonage is trying to become entrenched so it can better withstand challenges coming from telephone and cable companies.
Phone companies like Verizon and cable operators like Comcast have been investing in VoIP, looking to use size and long-time brands to attract subscribers.
Because Vonage doesn’t own the networks and rents access, capital costs are low, and the company can spend heavily on marketing. Vonage spends anywhere from $150 to $200 in marketing costs to acquire each customer, bringing the current total cash to create the brand to roughly $130 million.
Focus on Growth
The company’s existing customers generate free cash flow, but the company has been deferring the company’s profitability to expand the business. Getting big is the company’s key goal, but several issues remain.
The company has also been investing in enabling access to emergency services, and has recently made deals with RBOCs like Verizon and Bell South.
Vonage says it intends to spend $10 million to get emergency service access up and running, along with $1 million per month to keep the services operating.
Vonage will also be spending on legal battles because the states of Texas and Connecticut are suing the company over its alleged lack of reliable emergency services.
Other legal fights this year will look at local and state public utilities that want the company to pay various taxes, and at an FCC ruling that will examine whether the company will be regulated as an information or telecommunication service. |
