Vonage Holdings Corp. Business Information, Profile, and History

Company Perspectives

We believe that our strong brand identity and reputation for quality communications services are instrumental to building our customer base. Our core business strategy is to enhance our brand image and the quality of our services in order to attract new customers. As we build on our leading brand and our above-mentioned strengths, we are pursuing the following additional business strategies: develop additional innovative features and products; expand distribution capabilities; continue to improve customer experience; expand into new geographic markets.

History of Vonage Holdings Corp.

Vonage Holdings Corp. provides broadband telephone services, offering services to residences and small businesses in the United States, Canada, and the United Kingdom. Vonage provides its customers with unlimited local and long-distance calling, using broadband connections and Voice over Internet Protocol technology to carry telephone conversations. Customers pay a flat monthly fee depending on their plan. Vonage's "Basic 500" plan, priced at $14.99, includes 500 minutes anywhere in the United States, Canada, and Puerto Rico. The "Premium Unlimited" plan offers unlimited local and long distance calls in the United States, Canada, Puerto Rico, and to certain European countries for $24.99. Vonage also offers two plans for business customers. The "Small Business Unlimited" plan, priced at $49.99, offers a dedicated fax line and unlimited local and long distance calls in the United States, Canada, Puerto Rico, and to certain European countries. The "Small Business Basic" plan features a dedicated fax line and 1,500 minutes anywhere in the United States, Canada, and Puerto Rico. Vonage's broadband-based service uses public Internet lines.

Origins

Before launching his assault on the telecommunications industry, Vonage founder Jeffrey A. Citron was forced out of his first profession, ordered never to return. The interdiction of the Securities and Exchange Commission (SEC) ended what had been an enormously successful career for the Staten Island, New York, native who developed an interest in the finance sector while in high school. Citron's interest was piqued by a stock-selection game developed by his economics teacher, which prompted him to apply for a job on Wall Street in the late 1980s right after finishing high school. "I don't have a lot of patience for things," he said in an August 23, 2004 interview with Time, referring to his decision to forgo college. "When I see something that I want, I completely go after it." Citron joined Datek Securities as a trader and flourished. By the time he turned 21 in 1992, he had made his first million dollars. He founded Island ECN, a developer of computerized, order-executing systems for stocks, in 1995, and became chief executive officer of Datek Online three years later. By the end of the 1990s, he had amassed a vast personal fortune, but his career on Wall Street quickly ended after the SEC began investigating him for stock manipulation. Citron resigned in 1999 and sold most of his interest in Datek Online for $225 million as the SEC conducted its investigation. The investigation concluded in 2003, when Citron, who admitted to no wrongdoing, paid a $22.5 million fine and was banned permanently from "associating with any broker or dealer," according to SEC documents.

The intervention of federal authorities put Citron at a crossroads in his career, forcing the young executive to begin another career before his 30th birthday. The Wall Street outcast opted to play the role of revolutionary with his next venture, founding Vonage in 2001. Vowing "to change the entire telecommunications landscape," as quoted in the August 23, 2004 issue of Time, Citron raised $12 million in private financing to launch Vonage, a company that promised to offer telephone service via high-speed Internet connections. His plan was to exploit Voice over Internet Protocol, or VoIP, a technology that enabled voice transmissions to be digitized, divided into small electronic packets, and routed to their destination over the public Internet. Telephone calls carried by Vonage would travel alongside e-mail messages, digital photos, and countless other packets of data sent and received through the Internet, offering consumers telephone service at a substantially reduced price. For conventional telephone companies, who relied on landlines to provide their service, Citron's concept sidestepped their billions of dollars worth of infrastructure, threatening, as its promoter had promised, to alter the way the telecommunications industry operated.

Designated as an "information service," VoIP was exempted from many of the taxes, fees, and, regulations applicable to conventional telephone companies. Consequently, Citron was able to offer service roughly half as expensive as regular telephone service, touting a flat monthly fee with unlimited long distance in the United States. The savings Citron could offer to potential customers gave him a clear advantage over his vastly larger and wealthier rivals, but there were numerous obstacles to overcome to make Vonage a financial success and a market winner. VoIP depended on high-speed Internet connections, through either a cable modem or a digital subscriber line (DSL). Despite sanguine predictions that foresaw droves of consumers embracing broadband, the market matured slowly, thereby limiting Vonage's potential base. Further, since Vonage relied on the public Internet to route its calls, rather than owning its own network, the company could not totally control the quality of the service it offered. Citron also faced the impending swoop of traditional communications companies into the fray, as well as a host of start-up VoIP ventures. The titans of telephony, industry pundits pointed out, had underestimated the threat posed by cellular-telephone companies, and they were unlikely to commit the same mistake with VoIP. Lastly, Citron faced the challenge of creating a financially viable business model. Operating costs threatened to mushroom as he attempted to convince consumers to forsake conventional telephone service for the decidedly more obscure VoIP-based service.

Service Beginning in 2002

Braced for the challenges ahead, Citron launched Vonage's service in March 2002, presiding over the company's commercial debut as its chairman and chief executive officer. He and his technology team scored an early success by developing components capable of carrying telephone calls over public Internet lines. The company's system, consisting of a telephone connected to a modem-like box that, in turn, was connected to a cable modem or DSL line, attracted a fair number of converts to VoIP-based service. By the end of the year, Vonage had signed up nearly 8,000 customers who completed five million calls over the network. The totals represented only a fraction of the figures that major telephone companies boasted--there were, for instance, 112 million traditional telephone lines in existence at the time--but Citron was convinced the numbers would increase exponentially in the coming months.

To spur demand for his VoIP services, Citron turned to marketing and promotional campaigns. He had to educate the public about the legitimacy of VoIP and win their business, an endeavor that would chew through the financial resources at his disposal. He gained another $35 million in financing in 2003, enabling him to launch a $15 million national campaign during the year that consisted of radio and television commercials. The campaign characterized Vonage as leading a grassroots movements against the telecommunications establishment, proclaiming, "Down with high phone bills, switch to Vonage." Thanks largely to marketing efforts, the company ended 2003 with more than 85,000 customers, a more than tenfold increase from the previous year's total. Revenues for the year reached $16.9 million, the company's first full year of operation. Vonage was beginning to gain momentum, "jumping from being an obscure little company no one has ever heard of to one that people are writing about and talking about," ADWEEK noted in its October 13, 2003 issue, but the stir created by Citron also was attracting unwanted attention. The major telecommunication companies had noticed the gains made by the Holmdel, New Jersey-based company and they were preparing to offer their response.

Citron faced a critical stage in Vonage's development as he prepared for 2004. He had $20 million set aside for marketing for the year, funds that would be used to support the company's "People Do Stupid Things" campaign, and he would need all the exposure he could afford to prevail against the industry giants ready to enter the VoIP fray. AT&T launched its own web-based telephone service, CallAdvantage, in March 2004. Verizon, branding its service VoiceWing, entered the market in July 2004. Cable behemoths Comcast and Time Warner were poised to launch their own VoIP services by the end of the year. The arrival of the industry's elite onto the scene gave industry observers little hope that Vonage would survive the onslaught. Cable companies such as Comcast and Time Warner could bundle their voice service with video, broadband access, and wireless service, while a company such as AT&T owned its own network, thereby maintaining full control over call quality. Further, each enjoyed vast financial resources, well-established distribution systems, and marketing arms with the ability to crush Vonage. Industry pundits gave Citron little chance of staving off the advances of his rivals. "In the long run," one analyst said in a June 20, 2005 interview with Business Week, "Vonage can't afford to be just about cheap phone calls." Another analyst, in an August 23, 2004 interview with Time, offered an equally pessimistic assessment of the company's chances for long-term success. "It's a question of being passed in the far left lane," the analyst said.

Despite consensus that Vonage inevitably would be subsumed by its larger rivals, Citron pressed ahead, confident that his company could withstand the competitive pressure. He raised a total of $145 million in two rounds of financing during 2004 and used the money to add as many new subscribers as possible. Vonage was adding 1,000 new customers a day midway through the year, selling its service through its web site and through a new distribution channel created during the year. Citron forged partnerships with retail companies to sell Vonage's services, reaching his first national agreement with Circuit City Stores. Partnerships with RadioShack, Best Buy, and Amazon.com followed, helping to increase Vonage's subscriber base to nearly 400,000 by the end of the year. In 2005, a year during which $200 million was raised in the company's fifth round of financing, Citron ventured into the wireless arena, hoping that a broader attack on the voice-service market would improve the company's chances of success. He began looking for partnerships to enable Vonage customers to use so-called Wi-Fi "hot spots," the Internet connections available in locations such as coffee shops and hotels, which promised to give Vonage customers service outside their residences or businesses. Wi-Fi telephones were unveiled in 2005.

Public Debut in 2006

Vonage reached a milestone in 2005 when its subscriber rolls eclipsed one million, but the exponential increase in customers did not translate into financial success. The company generated $269.2 million in revenues during the year and lost nearly as much, posting a $261.3 million deficit. With annual losses mounting, Citron was forced to consider either selling the company to one of his rivals or taking it public to relieve some of the financial strain. Citron reportedly wanted to sell the company, but he could not find a suitor willing to agree to his estimation of Vonage's worth. Consequently, he chose to take the company public, filing with the SEC in February 2006 for an initial public offering (IPO) of stock. That same month, he stepped aside as chief executive officer and assumed the title of "Chief Strategist." Citron's replacement was Mike Snyder, the former president of a security systems firm named ADT who took over day-to-day control of Vonage. In the months leading up to the IPO, the company waived its international calling rates to landlines in France, Ireland, Italy, and Spain for subscribers signed up to its Premium Unlimited Plan and its Small Business Unlimited Plan.

Vonage completed its IPO in May 2006, but its debut reflected the less than optimistic perception of the company held by parts of the investment community. Vonage shares were priced a $17 per share for the IPO, but the price fell to $14.85 by the end of the day's trading, a 12.7 percent decline that represented the worst first-day performance in two years. There remained many questions to be answered as Vonage sought to put to use the $531 million it raised from the IPO and plotted its course for the future. Internet-based telephone service offered plenty room for growth, with the number of subscribers projected to increase from roughly three million subscribers in 2006 to 27 million by 2009, but it remained to be seen whether Vonage would be able to turn a profit and effectively compete against a host of rivals.

Principal Subsidiaries

Vonage America, Inc.

Principal Competitors

AT&T Inc.; Time Warner Telecom Inc.; Comcast Corp.; Deltathree, Inc.; Dialpad Communications, Inc.; Net2Phone, Inc.

Chronology

• Key Dates
• 2001 Vonage is founded.
• 2002 Vonage's Internet-based telephone service is launched in March.
• 2003 Nearly 80,000 Vonage customers complete 107 million calls over the Internet.
• 2005 Vonage signs its one millionth customer.
• 2006 The company completes its initial public offering of stock.