In a long-anticipated move, Vonage has filed to go public. The Internet telephony upstart has been thriving, winning over landline phone users with its dirt cheap service, and it's poised to be one of the more popular IPOs this year. That's saying plenty, given the success of Chipotle Mexican Grill
After purchasing a phone adapter that hooks up to a home's broadband connection, Vonage subscribers pay just $24.99 a month for unlimited voice-over-Internet-protocol (VoIP) telephone service throughout the United States, Puerto Rico and Canada. That's cheaper than many local telephone accounts. Vonage also offers a cheaper $14.99 plan that caps the usage at 500 monthly minutes.
Vonage's current financials don't look too appealing. The company has lost $190 million through the first nine months of 2005, significantly wider than the $43 million that it lost over the same nine months a year earlier. Sales growth has been spectacular, though, up 245% in that time to a hearty $174 million.
That's why potential investors shouldn't read too much into the losses. The company is in the customer acquisition phase, where its near-term costs are temporarily greater than the revenue generated by its accounts. It's similar to what's happening with Sirius Satellite Radio
Vonage is in a slightly different situation. It has a million subscribers, but it also has plenty of competition from other VoIP providers and free online providers. eBay
Vonage's other potential threats include leading instant messenger providers such as Yahoo!
This doesn't mean that Vonage is doomed. However, it does explain why the company is going public now. It can probably use the cash to compete more effectively against its growing competitors, and it's better to do so now than risk losing ground in a couple years, when it may not be able to tap the public equity market for capital.
Last year, I wrote about Vonage in a special report for Motley Fool Rule Breakers subscribers describing three companies that we wished would go public. I'm still looking forward to the Vonage IPO -- and you should, too -- but I'm a bit more cautious now. It's important for Vonage to enter the market at a reasonable price, especially now that it faces greater risk from the Grandbaby Bells. Let's hope that Vonage isn't making the call too late.
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Longtime Fool contributor Rick Munarriz is not a Vonage user, though he's been impressed with the company and its two top executives. He does not own shares in any of the companies mentioned in this article. Microsoft is a Motley Fool Inside Value pick. eBay is a Motley Fool Stock Advisor selection. The Fool has a disclosure policy. Rick is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early.