Vonage files for IPO

Internet phone provider Vonage is going public, hoping to raise $250 million in new investments.

On Wednesday, the Holmdel, N.J., company filed documents with the Securities and Exchange Commission, registering to become a public company. Vonage expects to make $250 million from the offering. A ticker symbol and initial share price have not been set yet.

Vonage also disclosed Wednesday that it has hired a new CEO. Michael Snyder, formerly the president of Tyco International subsidiary ADT Security Services, will take the helm starting Feb. 28.

Vonage founder Jeffrey Citron, who has been the company's chief executive since its inception, will serve as chairman of the board of directors and as the company's chief strategist, focusing on technology developments, employee culture and public relations, the company said in its SEC filing.

The company noted in its filing that Citron's tainted past has been a concern for some business partners. In 2003, Citron settled an SEC complaint that focused on a scheme involving improper use of the Nasdaq Stock Market's Small Order Execution System, or SOES. Without admitting or denying the allegations in the complaint, he paid a $22.5 million fine and agreed to accept an SEC order that bars him from associating with any securities broker or dealer.

Vonage is one of the most well known and successful Internet telephony players in the market. The four-year-old company essentially turns broadband connections into phone lines by transmitting phone calls over the Internet.

In the United States, the voice over Internet Protocol, or VoIP, market is still in its infancy, but analysts predict it will grow quickly over the next few years as consumers opt out of traditional phone services for lower-cost VoIP services. In 2004, approximately 900,000 to 1.5 million in North America used Internet telephony. That number is expected to grow to between 8.2 million and 15.3 million by the end of 2007.

The whole VoIP service category got a huge boost in September when eBay agreed to pay $2.6 billion for Skype, a small European company that offers free voice calling from computers and special VoIP phones free of charge.

Vonage believes it's in a good position to capitalize on the potential market growth. The company more than tripled its subscribers in 2005, and as of Feb. 8, 2006, it said, its VoIP service had more than 1.4 million subscribers.

Vonage has also rapidly grown revenues. In 2003, the company generated $18.7 million in revenue. That figure grew to $79.7 million in 2004. And for the nine months in 2005 ending in September, it made $170 million in revenue.

But despite its quick growth, the company has consistently racked up net losses. Since its inception, it has lost a total of $310 million, $189.6 million of which was lost in the first nine months of 2005. The company said in its prospectus filed with the SEC that the losses initially were driven by start-up and technology development costs, but more recently they have been the result of marketing costs, which were $176.3 million for the first nine months of 2005.

"We are pursuing growth, rather than profitability, in the near term to capitalize on the current expansion of the broadband and VoIP markets and enhance the future value of our company," the company said in the SEC prospectus. "This strategy, however, may not be successful, and we may never achieve profitability."

Vonage listed a series of other potential risk factors. Some of them were more general in nature, having to do with the adoption of VoIP technology by consumers, growing competitive pressures, and potential price cuts from incumbent phone companies.

Other risk factors named were more specific to the company's technology. For example, Vonage acknowledged issues with the way it deals with enhanced 911 calls, which offer emergency operators the location and phone number of people calling for help.

"Both our basic emergency calling service and our new E-911 calling service are more limited, in significant respects, than the emergency calling services offered by traditional wireline telephone companies," the company said in the prospectus. "In each case, those differences may cause significant delays, or even failures, in callers' receipt of the emergency assistance they need."

The issue of Citron's tainted past also was cited as a potential risk for investors. Before Vonage, Citron was a top executive of Datek Online, an Internet-based brokerage firm. While Citron was working for Datek, the SEC accused Datek Securities and executives, including Citron, of participating in the fraudulent scheme involving improper use of Nasdaq's SOES.

The company acknowledged that some financial institutions and accounting firms have declined to enter into business relationships with Vonage, in part due to Citron's past.

"While we believe that these matters have not had a material impact on our business, they may have a greater impact on us after we become a public company, including by adversely affecting our ability to enter into commercial relationships with third parties that we need to effectively and competitively grow our business," the company said in its prospectus. "Further, should Mr. Citron in the future be accused of, or be shown to have engaged in additional improper or illegal activities, the impact of those accusations or the potential penalties from such activities could be exacerbated because of the matters discussed above."