On the Vonage IPO

It's taken us a little time to digest the Vonage S-1, which you've probably heard about.  The part that everyone's excited about is the fact that their CEO Jeffrey Citron, will be forced to step aside, per an SEC dictum, due to his shady dealings when he was with Datek.com.  He will however be held on as a chief strategist.

Of course, it being an S-1 there's also some financial information here, and it ain't pretty. In the nine months ended September 30th, the company had sales of $174 million.  Ok, but they also had marketing costs of $176 million, so they're paying over a dollar, just to get a dollar back in revenue.  Of course, that's just one cost, and so their loss was $189.6 million, meaning that even if they stopped marketing entirely, they'd still be losing money.

They haven't stated yet how much they hope to raise, but it better be a lot, since they only have $126 million in cash in the bank, a figure they could easily burn through at the rates they're making losses.

We've written before about the bad experiences we've had with the company, and it's clear we're not alone, as monthly churn stands at over 2%.  If anyone has churn data on other voip companies, we'd be appreciative.  Churn for old-guard Verizon Wireless is just over 1%.

Here are two of the best parts from the discussion of risks:

Jeffrey A. Citron, our founder, Chairman, Chief Strategist and principal stockholder, will continue to exert significant influence over us.

        After completion of this offering, Mr. Citron will beneficially own approximately         % of our outstanding common stock. As a result, Mr. Citron will be able to exert significant influence over all matters presented to our stockholders for approval, including election and removal of our directors and change of control transactions. In addition, as our Chairman and Chief Strategist Mr. Citron has and will continue to have significant influence over our strategy. Mr. Citron's interests may not always coincide with the interests of other holders of our common stock.

Heh.  It's not his legal troubles that are worrisome, but his very existence and influence is cited as a risk.  Isn't that a deeply serious matter if the Chairman of the board doesn't act in the interest of shareholders?

This passage is not very inspiring:

We may require significant capital to pursue our growth strategy, but we may not be able to obtain additional financing on favorable terms or at all.

        We intend to continue spending substantial amounts on marketing and product development in order to grow our business. We may need to obtain additional financing to pursue this business strategy, to respond to new competitive pressures or to respond to opportunities to acquire complementary businesses or technologies. Our significant losses to date may prevent us from obtaining additional funds on favorable terms or at all. For the nine months ended September 30, 2005, we recorded a net loss of $189.6 million. Because of these losses and our limited tangible assets, we do not fit traditional credit lending criteria, which, in particular, could make it difficult for us to obtain loans or to access the capital markets. In addition, the terms of our outstanding convertible notes provide for additional shares to be issued upon conversion if we sell shares of our common stock after our initial public offering at a price that is less than the average trading price of our common stock over the 10-day period prior to any such sale, which might further limit our access to the capital markets. A failure to obtain additional financing could adversely affect our ability to grow and maintain our business.

Of course, companies are allowed to go public that are in shaky positions, and we don't expect them all to be profitable.  But this company looks less like XM or Sirius (very well capitalized companies that may eventually make a profit) and more like Net2phone.

It's also very possible that one day it may seem absurd to be charging for voice service, just as it would be ridiculous to charge for email, or watching streaming videos, or anything else we do with our internet connection.  Dealing with this issue will be a big one for them going forward.

Ok, as we read more, or hear more, we'll update this space.  We're going to try to get in touch with some corporate governance experts, to understand more about Citron not necessarily having the same interests as the shareholders, what that means, and how common that is.

More:  A reader points out that the S-1 details a recent sale of convertible debt, worth about $250 million.  This happened in December, so should be added to the cash number at the time of their September 30th balance sheet.