NEW YORK – Jeffrey Citron, the chief executive of Vonage, stood above the floor of the New York Stock Exchange in May, celebrating the initial public offering of the Internet phone company that he grew from a bud.
He proudly bought the first 100 shares. Then he watched as their value plummeted, along with the new holdings of tens of thousands of other shareholders. The stock dropped 13 percent from the opening price that day, then kept falling.
“I was a little, I guess, confused,” Citron said last week, in one of his first interviews since that day. His face flushed slightly when the subject came up.
Citron, who turns 36 Tuesday, said the decline had resulted from a dour market and heavy pressure from short sellers, who make profits when stocks fall. But it was clear that he would rather not talk about those days.
Instead, he steered the conversation toward Vonage’s strategy for beating its formidable competitors, which include tiny newcomers as well as cable giants.
In an interview, Citron said Vonage was now “in good shape.” He said the company was improving customer service to help retain subscribers and was adding customers and introducing products that would help it stand out.
The company was planning to announce Monday that it had reached the level of two million subscribers, up from 1.6 million at the end of the first quarter. Vonage went public at $17 and bottomed out at $6.30 in July. It closed Friday at $8.90.
Early last month, Citron bought 188,000 shares for $1.3 million. “We definitely believe the shares were undervalued,” he said. Investors and analysts remain skeptical. In what qualifies as good news these days for Vonage, at least one analyst has changed his rating on the stock from a sell to a hold.
“I get the sense there’s a slight change in the way they’ve approached their business,” said that analyst, Qaisar Hasan, of Buckingham Research, explaining why he changed his rating Aug. 2. He noted that the company had sounded more serious about improving customer service, where problems have contributed to Vonage’s loss of 2.3 percent of its customers each month. But Hasan’s 12-month target price for the stock is still $6, below its current level.
“There are still lingering questions about the fundamentals of the business,” he said. “This company could be belly-up in three years’ time or be very successful.”
A chief concern is that Vonage, which helped popularize Internet telephone calling, faces brutal competitive pressure from well-heeled and bigger telecommunications players. That makes it expensive for Vonage to acquire customers and, in turn, to make them profitable.
Internet calling allows voice traffic to be sent as packets of data, using the infrastructure of the Internet rather than expensive phone networks.
Competitors, particularly cable companies, continue to erode Vonage’s market share.
After the first quarter, Vonage had 29.7 percent of the market for Internet phone service. That was down from 31 percent at the end of 2005 and from 34 percent at the end of 2004, according to research by Sanford C. Bernstein & Co.
Smaller rivals are making inroads, too. SunRocket said last month that it had raised $33 million in private financing. SunRocket sells unlimited phone service for $199 a year, or less than $17 a month, compared with the $25 that Vonage charges.
Richard Greenfield, an analyst with Pali Research, said investor backing of a lower-cost rival suggested a new challenge for Vonage. The fact that SunRocket can continue to raise significant capital from private equity investors “increases our concern for Vonage’s shares,” Greenfield wrote in a note to investors last week.
Citron said Vonage must reduce the number of customers lost each month. To do so, he said, it is hiring more customer service workers and trying to train them better so they can resolve problems the first time subscribers call.
“Customer care was the biggest issue,” he said. Of the efforts to improve service, he said, “it’ll take us another quarter before we get it wrapped up.”
He said Vonage also needed to stand out from the competition. The company is trying to push the capabilities of the Internet by developing new products, notably the V-Phone. Introduced July 1, the V-Phone is as big as a cigarette lighter and can be plugged into a USB port on any Internet-connected computer.
After plugging a headset into the other end of the $40 device, a Vonage customer can then place or receive calls over the Internet, using a Vonage phone number, from anywhere in the world.
Citron hopes the product, unique in the market, will become a signature of Vonage’s effort to define itself as a portable service loaded with features.
“Portability will win out over time, ” he said. “The richest features will take over old stodgy phone service over time.” He added that Vonage “wants to make you reachable as many places as possible with one number.”
Citron said the company also wanted to give customers more control over who reached them and where. He envisions a time when subscribers might send certain callers automatically to voice mail – for instance, work calls during a weekend – or put various priorities on personal calls.
Analysts said Vonage’s fate might depend less on new technology than on its ability to stave off rivals. Albert Lin, an industry analyst with American Technology Research, said the V-Phone probably would not have the impact that Vonage anticipated. “It’s a little more important from an appearance standpoint,” Lin said. “Almost anybody could develop that kind of software.”
Yet Lin is bullish on Vonage, perhaps more than any other analyst. He has a buy rating on the stock and a 12-month target price of $15. “Despite all this competition, they’ve been able to obtain a sizable and loyal customer base,” he said.
In its second-quarter earnings report, released Aug. 1, the company reported a loss of $74 million.
Lin said Vonage needed about five million customers to become profitable. But before that happens, Lin said, a bigger company will probably come along and pluck up Vonage for its customer base.
“They’re an acquisition candidate well before they’re likely to become a stand- alone profitable company,” he said.
Fuente: International Herald Tribune, Matt Richtel