Vonage Faces More Woes After IPO

Vonage Holdings Corp.’s recent initial public offering — the worst performing IPO in two years — helped the voice-over-Internet Protocol telephony marketer raise about $535 million.

But questions remain as to whether a plan to allow customers to participate in the offer could turn into a public-relations nightmare for the company and lead to customer defections.

As part of the IPO, Vonage set aside about 13.5% — about 4.2 million shares — of stock in its Vonage Customer Directed Share program to allow select customers to get in on the ground floor of the offering. Vonage said in Securities and Exchange Commission filings after the IPO that customers participating in the program had until May 30 to pay for their stock.


But as the stock continued to slide, Vonage suggested that it might repurchase at least some of those shares from customers who had not yet paid for their stock.

“While all avenues are available to us, we cannot imagine alienating our customers in that way. If certain Directed Share customers don’t pay, we expect to repurchase shares from the underwriters if necessary,” Vonage said in a statement to cable network CNBC on May 30.

At the opening IPO price of $17 per share, Vonage would have to pony up $71.4 million if all customer participants failed to pay for their stock.

A day later, Vonage issued a statement that reversed that stance.

“To be clear, we have not offered and are not offering to repurchase any of the shares of common stock from our customers,” Vonage said in a statement.

That might be a question of semantics. While Vonage will not buy back shares directly from customers, it will have to reimburse underwriters for any shares customers don’t pay for.

Vonage said it would pursue payment from customers in the program, but did not give details on how it would go about doing that.

According to a report in BusinessWeek, about 9,000 customers have participated in the Customer Directed Share Program. That same report said that as many as 40% of participants had yet to pay for their shares as of May 26.

Meanwhile, Vonage stock has continued to decline. After opening to much fanfare on May 24 at $17 per share, Vonage stock dipped 12.6% ($2.15) on its first day of trading, closing at $14.85. The pain continued in subsequent trading, with the stock closing at $12.02 on May 31, 29% below its IPO price. It was the worst debut IPO performance since nanotechnology firm Lumera Corp. dropped 13.5% in its first day of trading in July 2004, according to The Wall Street Journal.

Part of the reason for the poor performance could be the precarious situation in Internet phone calling, a market full of large and small competitors and characterized by brutal price wars. Also adding to the uncertainty is the checkered past of founder and chief strategist Jeffrey Citron.


Citron was fined $22.5 million by the SEC in 2003 relating to his involvement with online brokerages Datek Securities Corp. and Datek Online Holdings Corp. While Citron admitted no wrongdoing, he was barred from being associated with any securities broker or dealer.

Though he is not banned from running Vonage, the VoIP provider admitted in its IPO filing that Citron’s past problems could spook some potential investors.

In its February prospectus, Vonage said some financial institutions and accounting firms have declined to do business with Vonage because of Citron’s history.

While Vonage has about 1.6 million customers — adding about 200,000 subscribers between February and April — some analysts cautioned that the main factor that drove those customers to Vonage in the first place — price — could drive them away again.

Pali Research media analyst Richard Greenfield — who has a “sell” rating and an $11.50 price target on the stock — said the customer share program debacle adds to the uncertainty he originally felt surrounded Vonage.

Greenfield said the customer share program was intended to increase customer loyalty. “It appears to have largely backfired and generated a tremendous amount of bad publicity and customer frustration,” he said.

“When I look at near-term churn, I’m worried about churn levels ticking up and I worry about how much money the company is going to have to spend to rebuild its public image,” Greenfield said.


In a May 25 research report, Greenfield initiated coverage of Vonage and worried that the carrier would not be able to maintain price points and that management’s focus on the Vonage brand and customer loyalty could be misplaced.

Greenfield warned in the report that most Vonage customers switched to the service because of price and would likely switch to a lower cost provider again. Greenfield estimated 60% of Vonage’s subscribers have signed on in the past year.

Although Greenfield still expects Vonage to end 2006 with estimated subscriber additions of around 352,000, the picture could worsen in 2008 and beyond. He anticipates Vonage will be under more pressure to reduce prices as cable companies continue their aggressive rollout of VoIP and free services like Vonage gain steam.

Cable companies are also investigating offering lower-priced voice packages, including industry leader Time Warner Cable. At the Morgan Stanley Media & Entertainment Conference in Washington, D.C., May 24, Time Warner Cable chief financial officer John Martin said voice services at lower price points than the current $39 per month could be on the horizon.

“I would suspect that you’re going to start to see more segmented triple play offerings as we try to reach more and more areas of our population that today’s offering just might not be attractive for,” Martin said.