Business Insight Zone

Internet telephony company Vonage has been in the news lately for all the wrong reasons — most notably, for the withering blow it received when a federal judge ruled that its technology infringes on patents held by rival phone company Verizon. For now, Vonage is able to soldier on because an appeals court stayed that ruling; the company has also launched a big p.r. campaign to attack Verizon’s lawsuit and improve its own image.

Vonage’s image has suffered problems throughout its life as a public company. When it debuted on the New York Stock Exchange in mid-2006, investors gave it a cool reception: Vonage shares fell from $17.00 to $14.79 on the first day of trading, and have continued to slide since. Many factors have contributed, from poorly received television ads to a revolving door in the CEO suite. But underlying it all is a business model that has delivered explosive growth but no profits. While Vonage’s revenue grew from less than $100 million in 2004 to more than $600 million in 2006, losses also mounted during the same period, climbing from $69.9 million in 2004 to $338.6 million in 2006. All this and patent troubles, too? No wonder investors have fled for the exits.

By contrast, consider the wireless service provider MetroPCS, which had its own IPO just last week. Although the company’s offer price for its shares was $23.00, the first bid for them came at $25.10, and by the end of the first day of trading, the price had climbed to $27.40. MetroPCS hasn’t been lavishing its funds on huge ad campaigns, but it has grown quickly and racked up profits. It brought in more than $1 billion in revenues each of the past two years, and turned solid profits in both 2005 and 2006 despite substantial expansion costs.

Market watchers often want to use the performance of individual IPOs as an indicator for the health of an entire sector. Sometimes that’s warranted, and in general the atmosphere around telecom IPOs seems to be better now than it has been for a couple of years. But sometimes an IPO is just an IPO, and reflects the performance of the company making the offering, not the sector as a whole. That seems to be the lesson to take from the strong debut of MetroPCS and the cautionary tale of Vonage, anyway.

Category: IPOs, Telecom