It’s been a while since we said anything at all about Vonage. Mostly because we were starting to feel like rubber-neckers staring at a car accident. And there was no-one left to convince that the company was screwed on crack, toast, over.
Well, apparently they still exist. But not in a money making way. This morning we spoke to a customer who recently attempted to cancel his service and discovered that Vonage is offering incredibly steep discounts to customers in order to avoid losing them. They are basically making Vonage free.
The deal this customer was offered was a $5 monthly plan, plus a $60 credit to his account. After we plugged this in to the DealBreaker Financial Modeling Device, we discovered that $60 is twelve times $5. Which means that Vonage is giving away a year of service in order to keep its customers.
How long can Vonage continue without customer revenue? How many customers are getting this discount? More importantly, if Vonage keeps losing customers, will they start paying people to use their service?
Vonage warned yesterday that it’s troubles with Verizon have it teetering on the edge of bankruptcy, more or less prompting everyone in the world who doesn’t own stock in the company to say “we told you so.” Even as Vonage went public last year, skeptical observers and short sellers have been tearing into the company’s prospects. Until now, Vonage management’s statements have made it sound like they were born with rose-tinted glasses in their mouths.
Since the initial public offering, Vonage’s shares have dropped more than 80 percent. They are locked in a life-or-death patent infringement case against Verizon.
Over at the Motley Fool, Dave Mock greets the news with mock-shock and horror.
Absolutely stunned. That was my reaction to Internet telephony provider Vonageadmitting in its recent 10-K filing that it could be forced into bankruptcy at the behest of legal attacks from the likes of rival Verizon Communications. Who would have thought it could end like this?
We actually dropped Vonage, more or less, from DealBreaker commentary sometime last year. Our graphic—representing Vonage screwed on crack, toast, and in a freefall—was simply too cluttered to keep up with the company’s bad news.
Vonage’s chief executive, Mike Snyder, wants you to know that he’s very disappointed in your stupidity. How dare you sell his stock?
“The fact is we’ve been preparing for this verdict and the possibility of an injunction for months,” Snyder added. “For the market to react the way it did to the recent rulings shows an unfortunate lack of understanding of the judicial/appellate system, a lack of appreciation of Vonage’s resourcefulness, or, perhaps, both. Anyone who’s counting Vonage out is making a huge mistake.”
If you can find one, go ahead and pick up a Vonage phone. That’s not a dial-tone you hear. It’s a flatline.
We’re not ones to gloat. Oh, wait. We totally are.
We’ve been talking about how Vonage is screwed for as long as we can remember. Even our Vonage graphic spells it out. It’s official description is “Vonage is screwed-on-crack, toasted, with share price dive-bombing.” (If our graphics guy wasn’t already drunk, we’d add a train-wreck to that picture today.) We wrote about the problems with this company so much that we had to impose a moratorium on ourselves.
This morning a judge slapped an injunction ordering Vonage not to let its customers make calls to standard phone lines, saying it’s voice over internet protocol infringed on Verizon’s intellectual property. There will be an appeal, of course. And the injunction doesn’t take place fo a couple of weeks. But the bottom all but dropped out of Vonage today, as the share price dropped 25%. It didn’t have far to fall, of course, so 25% means Vonage holders lost about a buck a share.
The New York Times is reporting that brokerage firms are sending letters shaking down holdout Vonage investors who haven’t yet paid for their shares.
Vonage Holdings investors who have balked at paying for shares they bought in the company’s initial public offering, now worth less than half of the original price, began receiving letters this week from brokerage firms telling them to write a check or risk legal action.
We’re still not sure there is a practical way for Vonage or brokers to force these holdouts to pay. If there are a few customers who ordered lots of shares and haven’t paid, a lawsuit may make sense. But suing smaller investors probably isn’t worth the money that would be spent in litigation.
But what we really want is a copy of one of these letters. From our comments we know at least a couple of DealBreaker readers bought into the IPO. Did you get a letter? Send it our way. All personal details will be redacted and your identity will be kept confidential.
[Note: Need an explanation for our Vonage graphic? Click here.]
We’re ending our moratorium on Vonage—there were only so many times we could say Vonage was screwed/on crack/toast—to bring to your attention Nickel Capital’s Mark Langner analysis arguing that “there is no value to VG equity as a stand alone entity and little value as a takeover target.”
The problem with Vonage is that its marginal customer creates negative value for the firm – i.e., the cost of customers acquired today is never recouped by the EBITDA that those customers generate before they churn off the network. This is exacerbated by the fact that this negative contribution is incrementally increasing with each new customer as the cost of reaching the marginal customer becomes more expensive over time (the easiest customers are found first). Finally, since VOIP has moved through the early adopter (meaning the easy customers have been found), there is no evidence that the trend that is driving the negative NPV will reverse itself at all, let alone move into positive territory before the company runs out of cash.
Of course, Langner’s short Vonage but if you think you need to be conflicted or self-serving to see that Vonage is screwed, consider this—whatever fancy tech name you give the service Vonage supplies—Voice-Over-IP—it is still basically delivering telephone landlines to customers. Do you really believe the future of telephony is in landlines?
Most analysts, however, are unimpressed. What is unclear is exactly how much money these customers have actually paid. Remember, the company set aside 13.5% of its IPO for its own customers. It’s unclear if the 60% to 70% represents all the customers who bought the shares -around 10,000-or the total amount of stock set aside in the DSP program. A company spokeswoman declined to provide more details until the release of second-quarter earnings, but its conceivable that most of the DSP remains uncollected even if most of the 10,000 participants paid up.
One thing is certain: Vonage’s problems go beyond its problems convincing customers to pay $17 a share for a stock now trading under $7. Competition is growing while the company loses money and patent disputes are eating into the company’s bottom line. Meanwhile, the company faces a number of class action lawsuits over its disastrous IPO. One lawsuit, filed by Motley Rice alleges, “both the Company [Vonage] and Company insiders…embarked on an illegal course of conduct to sell shares of the Company in a public market.”
And here’s another follow up question. Does the sixty to seventy percent figure reflect sixty to seventy percent of the shares bought by customers, or just sixty to seventy percent of customers ordering shares? If customers did not evenly buy shares, the two numbers could be very different. If six out of ten customers bought just a few hundred shares each, and the remaining four out of ten bought lots of shares, Vonage could still be left with a significant shortfall from its IPO.
Vonage: Sign Up…Pay Up? [SquawkBlog]
Under Vonage logic, it is apparently a good thing when your customers suddenly lose lots of money. CNBC’s Charlie Gasparino reported this morning that something like sixty to seventy percent of Vonage customers who signed up for the IPO under the company’s special offer that let customers participate in the offering have paid up for their shares despite the immediate decline in share price. Gasparino said the company is happy that so many customer-investors have paid up.
There were widespread reports that customers wouldn’t pay, and Vonage initially flip-flopped about whether it would take legal action to force those customers to pay for shares they had ordered. It always seemed unlikely that Vonage would actually sue customers—the cost of launching thousands of lawsuits against individual customers probably exceeded any likely recovery. But it seems that enough customers either believe that Vonage shares will someday recover the value lost in the weeks since the offering or that they were in fact obligated, either legally or ethically, to pay for ordered shares.
So congratulations Vonage. You screwed your customers. Well done.
Everyone hates Vonage, even the people who sold you the stock. Feel suckered? Too bad. Thems the rules. As Henry Blodget explains:
A month after the deal was shoved into the hands of customers and others at $17, it is trading at $8.25. And now, in an action that demonstrates the drawbacks of the “new era” of Wall Street research, in which analysts have no role in the IPO process, two of the underwriter analysts have dissed the stock. One is troubled by the company’s execution. The other is worried about competition, heavy spending, and IPO lawsuits.
Now, let’s look at this from the perspective of an IPO buyer. Your trusted Citigroup or UBS financial advisor calls up and says, “We’ve got this great new IPO you should buy—a cool Internet phone company that’s growing like mad.”
You: “Sounds great. What do your experts think of it?”
Advisor: “Well, our analysts aren’t allowed to tell us what they think anymore, because that would be a conflict of interest, but our bankers are experts, too, and they LOVE it!”
You: “Awesome, sign me up!”
[Editor’s Note: Since it’s been awhile, maybe we should explain our Vonage graphic. It represents “Is Vonage Screwed On Crack/Toast/While It’s Stock Price Dives?”]
Vonage spokeswoman Brooke Schulz tried to rebut an analyst who recently said the company might be “toast.” But as far as we can tell, her comments have only helped draw attention to the analyst’s assessment and the “toast” metaphor.
Especially here at DealBreaker, where we have taken the extraordinary step of modifying our “Vonage-Screwed-On-Crack- And-Freefalling-Stock-Chart” graphic by adding, yes, toast.
Vonage: “We’re Not Toast” [Business Week]
File this one under “jobs you couldn’t pay us enough to do”:
Vonage America today announced that it had named Craig A. Streem as Senior Vice President of Investor Relations for the company. This is a new position that will report directly to Vonage CEO, Mike Snyder.
Vonage shares are now down to almost half the IPO price following two additional bits of bad news. Today Vonage said that it is being sued for patent infrigement related to its internet phone technology by a division of Verizon. On Friday Vonage was forced to retract an earlier statement that the Federal Trade Commission had ended its probe into the compaqny’s compliance with 911-emergency compliance.
In other news, Vonage continues to decline to adopt our “screwed on crack with share price free-falling” graphic as part of its official branding strategy.
Vonage shareholders saw the price of their shares drop even further when analyst at Pali Research downgraded the stock after discovering that the voice-over-internet phone company was offering existing customers a discount rate of $19.99 to convince them not to switch carriers. New customers are currently asked to pay $24.99. The discount seems to indicate that Vonage is having difficulty retaining customers, which doesn’t bode well for the company.
Barron’s Tech Trader Daily reports on the burgeoning number of class action lawsuits related to the Vonage IPO. We’re up to nine now, which means that any day the price of Vonage shares will sink below the number of class action suits against it.
We’re betting a lot of folks who bought Vonage shares in the IPO wish they had seen this video of a customer reacting to his experience with the service. The last thirty seconds are the best part.
Yesterday we provided a quick summary of the Vonage complaint, together with a downloadable pdf of the entire complaint. Today we learn from Business Week’s columnist Tim Mullaney that at least part of the complaint was based on a typo!
In federal court filings, plaintiff’s firm Motley Rice LLC claimed underwriters led by Citigroup took 17% of the $531 million deal as fees — more than double the usual 7%. The charge was so shocking Motley Rice made it in bold italics: “Investors were willing to and did pay these large underwriting fees…because investors believed that such fees were being paid, in substantial part, to assure that the underwriters had conducted a thorough analysis of the transaction..
Invited to to explain their math, though, Motley Rice ‘fessed up to its own due-diligence slip: The charge was a typo. Underwriters were actually paid a little over 7%. Motley Rice insisted the goof won’t affect the case. “The whole gist is that the IPO was bungled,“ lawyer James E. Evangelista tried to explain. Oh sure.
Now, to be fair, the premium for due-diligence was a pretty small part of the complaint. But you can bet there’s some associate down in South Carolina, where Motley Rice is based, putting together a resume right now.
A friend of DealBreaker has reminded us that Jeffrey Citron, the former CEO of Vonage and a major shareholder, bought the house of Robert Brennan, the fallen financier whose bankruptcy case was brought to a conclusion in March after more than a decade in the courts. Citron bulldozed the property on Linden Lane in Monmouth County, New Jersey and built a $3 million mansion on the grounds. The Coast Star describes the house as a “majestic home on Linden Lane overlooking the Manasquan River.”
Next time maybe they should try salting the ground or hiring an exorcist to rid the property of the poltergeist of financial scandal.
DealBreaker has obtained a copy of the complaint against Vonage. The complaint accuses Vonage, its directors and its underwriters of violating securities laws and improperly selling shares to customers. “
The lawsuit claims that the sale of shares to customers in the IPO violated NASD rules requiring issuers to consider whether purchasing the shares is appropriate given the customers financial status and investment objectives. The complaint describes this violation as part of a scheme by the owners of Vonage “desperate to execute an exit strategy for themselves.” A lack of institutional interest in Vonage stocks forced the owners of Vonage to seek out less sophisticated investors—namely, the customers, according to the complaint. It also alleges that the Vonage underwriters failed to undertake a proper due diligence investigation of the company.
Keep in mind that making these kind of allegations is what class action lawyers do. But just because cows chew cud doesn’t mean that cud wasn’t grass before they swallowed it for the first time. Or something. We’ve never been good at making up those homey-sounding, Dan Rather analogies.
Vonage Holdings Corp., the Internet phone company whose shares have fallen 30 percent since their debut, was accused in a class-action lawsuit of violating securities laws and improperly selling shares to customers.
The suit was filed June 2 in the U.S. District Court in New Jersey by Mount Pleasant, South Carolina-based Motley Rice LLC, according to the law firm’s Web site. On May 23, Vonage amended a May 22 filing and strengthened its warning that it may have made technical errors in its IPO.
Those errors, it said, may give customers buying shares the right “to require us to repurchase their shares at the IPO price.” Holmdel, New Jersey-based Vonage sold 31.3 million shares and raised $531.3 million on May 23.
About 10,000 of Vonage’s 1.6 million customers had agreed to buy shares, which were priced at $17. Some customers have said they won’t pay for the shares; the company responded by saying it may sue.
If Milberg Weiss were still on the top of its game we’re pretty sure this suit would have been filed sometime last week.
(The above left graphic, in case you’re wondering, is “screwed on crack.”)
It’s been a while since we said anything at all about Vonage. Mostly because we were starting to feel like rubber-neckers staring at a car accident. And there was no-one left to convince that the company was screwed on crack, toast, over.
File this one under “jobs you couldn’t pay us enough to do”:
Yesterday we provided a quick summary of the Vonage complaint, together with a downloadable pdf of the entire complaint. Today we learn from Business Week’s columnist Tim Mullaney that at least part of the complaint was based on a typo!
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DealBreaker has obtained a copy of the complaint against Vonage. The complaint accuses Vonage, its directors and its underwriters of violating securities laws and improperly selling shares to customers. “
