NEW YORK – Shares of Vonage Holdings Corp., the Internet telephone pioneer, dropped sharply in their trading debut yesterday, dismaying customers who had been given a chance to participate in the initial public offering.
The shares closed at $14.85 on the New York Stock Exchange, down 12.6 percent from the offering price of $17 set late Tuesday.
It was the worst first-day drop for an IPO this year.
The drop was surprising, considering pre-IPO demand had appeared healthy. The 31.25 million shares sold in the middle of the expected range $16 to $18 each.
James DeStefano, an IPO analyst at Renaissance Capital, said the market appeared to be focusing on the long-term risks to Vonage's business model, which involves heavy spending on advertising to draw customers. The company has been unprofitable and doesn't expect profits anytime soon. At the same time, competition is increasing.
The stock opened close to its IPO price, then quickly dipped, which panicked some investors, DeStefano said.
“I think you've seen a lot people get spooked by how it's trading,” DeStefano said.
Vonage's 1.6 million subscribers plug their phones into adapters that connect to their broadband Internet connections. Under one of its plans, it charges $25 a month for unlimited calling to the United States, Canada and parts of Europe.
In an unusual move, the Holmdel, N.J., company had set aside up to 13.5 percent of the IPO shares for its customers, and promoted the offering to them via voice mail.
Anthony Sgroi of Bergen County, N.J., has had Vonage service for a year and half, and asked for 1,000 IPO shares. He received 300. Other Vonage customers on an online forum reported similar allocations, indicating strong interest from the group.
It wasn't the company's long-term prospects that attracted Sgroi to the deal, however.
“I'm not a big stock market guy . . . when I got the option to buy the IPO, I figured it was a chance to make some quick cash,” Sgroi said. “I was planning to sell within a week or so anyway.”
He sold the stock yesterday morning at a loss. Now, he plans to cancel his Vonage account and switch to the local cable company's competing service, which he said would save him $10 a month.
“I'll try to recoup some of my losses that way,” Sgroi said.
In a report earlier this week, Pali Research analyst Richard Greenfield said he was concerned that the Vonage customers had chosen the service because of price. They might jump ship if something cheaper comes along – or force Vonage to cut its prices.
Vonage has stayed ahead of the pack by advertising aggressively. It added a record 328,000 subscribers in the first quarter. It has added them so quickly, in fact, that its customer service department has had a hard time maintaining its service level, according to the company's prospectus. That has led to a slight rise in the number of subscribers who cancel service.
Much of the net IPO proceeds of $493 million are expected to go into additional advertising.
Vonage shares are trading under the symbol VG.
