Vonage Tries a $250M IPO

Vonage Holdings Corp., capitalizing on the rapid growth of voice-over-Internet protocol telephony services, filed on Feb. 8 for an initial public offering to raise up to $250 million.

The U.S. VoIP leader with about 1.4 million customers, Vonage had been rumored to be putting together an IPO for months. It appears to want most of the cash for marketing costs. Vonage spent $176.3 million on marketing during the first nine months of 2005, up from $31.3 million in the same period in 2004, according to the prospectus filed at the Securities and Exchange Commission.

“To grow our revenue and customer base and enhance awareness of our brand, we have chosen to spend significant amounts on our marketing activities, and we intend to continue to do so,” Vonage said.

Cable companies like Time Warner Cable and Cablevision Systems Corp. — which own both the broadband pipe and the telephony service — are catching up fast. Time Warner ended the fourth quarter with 1.1 million VoIP subscribers. Cablevision had about 601,000 in the third quarter and analysts think that number topped 700,000 at year’s end. For its part, Vonage has secured few cable allies.

Vonage founder Jeffrey Citron is a complicating factor. He 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. He admitted no wrongdoing, but was barred from being associated with any securities broker or dealer.

Citron isn’t barred from running Vonage, but the VoIP provider conceded his past history could spook some potential investors.

“There is a risk that some third parties will not do business with us, that some prospective investors will not purchase our securities or that some customers may be wary of signing up for service,” as a result of the allegations against Citron, Vonage said in the prospectus. It also believes that in the past, some financial institutions and accounting firms have declined to do business with Vonage because of Citron’s checkered past.

Possibly addressing those issues, Vonage said former ADT Security Services president Michael Snyder will become CEO effective Feb. 27. Citron will become chairman of the board and chief strategist.

The prospectus quantifies Vonage rapid growth since 2002. Revenue for the first nine months of 2005 was $174 million, from $971,000 in 2002. Losses have ballooned, too, to $189.6 million in the first nine months of 2005 from a $12.7 million loss in 2004.

The prospectus does not state how many shares will be sold to the public nor does it offer a price range. Citron is currently Vonage’s largest shareholder with 141 million shares (41% of outstanding stock) but the document does not say if that position will change after the IPO.

Citigroup, Deutsche Bank Securities and UBS Investment Bank were listed as underwriters in the prospectus.