Now, I bought into Google's IPO which worked out great, and I'm a fairly satisfied Vonage user, so buying into Vonage should be a sure thing, right? But after reading the Vonage prospectus, I'm staying far, far away from this one.
Let's take a little trip down memory lane and compare Google's story in the summer of 2004 with the Vonage story in the summer of 2006. We know how the Google story has evolved in two years, how will the Vonage story turn out?
IPO Auction
- Google shocked Wall Street by opening the IPO to individual investors through a Dutch auction process. Each investor independently determines how much a share of stock is worth and enters a bid in the auction. Winning bidders pay the clearing price, losing bidders get nothing.
- Vonage opened their IPO to Vonage customers, though there's no auction. Up to 13.5% of the total offering is reserved for customers, but if it is oversubscribed, a pro-rata allocation reduces the number of shares for each investor. Investors receive an allocation, they don't name a price.
- In the summer of 2004, Google was extraordinarily profitable, growing 125% year-over-year, and stealing market share. Of $423 in net revenue in Q2'04, Google delivered $171 million in operating income - a 40% operating margin. Incredibly, Google's margins have expanded since then, delivering a 48% operating margin in Q1'06, so that they earn 48 cents for every $1 in net revenue.
- Today, Vonage sales are growing rapidly, but operating margin is a whopping *negative* 102% for 2005. Vonage has no retained earnings, but has instead a $467 million accumulated deficit. Vonage is spending $2 for every $1 in revenue, and Vonage warns that there is no end in sight for the massive losses. At this rate, they'll eat through the IPO cash in about 20 months.
- Google had a lock on the online advertising market in 2004, and you could see that Google had a big R&D and ad network advantage over the competition. Keyword prices were rising, and Google's position looked secure. Google was making a ton of money offering free services to users, so price competition seemed unlikely.
- Vonage is the biggest player in a nascent market, but they're already seeing price competition driving down monthly fees. It's going to be tough to compete charging $30 a month for a service that Skype and every IM player provides for less, and that every cable company and telco is bundling with TV and broadband.
- Google and their founders had a squeaky clean reputation. The only blemish was when Google's founders were embarrassed by an interview given to Playboy that was published during the "quiet period" before the IPO. Nothing illegal or unethical or even questionable, but awkward all the same.
- Vonage's "founder, chairman and chief strategist" Jeffrey Citron has a whole section in the prospectus dedicated to his dicey background. The SEC has alleged that Citron "participated in an extensive fraudulent scheme" prior to joining Vonage, paid "extensive fines," and was banned from the securities industry. The prospectus says that banks and accounting firms have refused to do business with Vonage because of these issues. Ugly stuff.
But looking at the same factors for Vonage, and one can only come to the opposite conclusion. Opening the Vonage IPO to customers is likely to be a curse, not a gift.
