Analysts trash rumoured Vonage IPO

Universal damnation

We’re not quite sure which publication to attribute the leak/rumor to, but news organizations are awash with the idea that Vonage is about to apply for an IPO, hoping to raise $600m. Perhaps the Wall Street Journal, which is cited by many sources, was the origin of the story.

Already, before the company has gone public with the IPO terms, and before it has filed an S3 securities prospectus, analysts are universally damning the idea. Some are saying that by floating the rumor deliberately, this is an attempt at an exit of any kind and that the company hopes to be acquired.

Vonage is the single biggest company that specializes in VoIP and its worth was never in doubt until all the major portals, Google, AOL, Yahoo and MSN began considering VoIP services. But Faultline thinks that this pessimism is fairly misplaced and that if Vonage does opt for some kind of IPO, there will be immense demand for it.

VoIP services such as that launched this week by Google are all underpinned by other services. This is because they know that to invest in any amount of technology to ensure that even part of a voice message’s journey through the internet, in order to make it more likely to arrive intact and in high quality, is probably too much to ask. So they have opted for free services, but with no Quality of Service, as opposed to cheap, but more reliable.

In effect these are different things, and a different class of person will use them. Google Talk may well attract the early adopters that are also attracted to Skype, whereas the Vonage brand has the pedigree to attract home phone users that just want cheaper residential telephony. It is these customers that are likely to be first in line to buy the shares, grateful to the company that has freed them from the high prices and callous attitude that sometimes goes with being an RBOC voice customer. Vonage has raised more than $400m in venture capital and it has more than 800,000 customers paying $25 a month for “all you can eat” telephony. Its customer base is growing at a faster rate now than when it started out. That’s what brand can do for you.

Analyst worry that Vonage faces increasing competition from richer rivals, including AT&T (when did it last win a fight) and cable operators (which have never made big inroads to phone service except for Cablevision).

It also faces competition from a growing number of internet portals as we have said, which are adding voice components to instant messaging and gaming.

Bain Capital, which led a recent $200m investment round into Vonage, must have been pretty clear in its due diligence that the customer demand was there and that break even is not a million miles away, and we would fully expect it to get an IPO away, if not spectacularly oversubscribed, then at least safely, if it goes for one at all. With some analysts saying that the residential VoIP market will grow in the US from 1.1 million in 2004 to 24.3 million in 2008, Vonage needs a pretty low market share to make substantial margins.

Copyright © 2005, Faultline

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