Vonage (VG)

VG, C, 7

Voice over Internet Protocol, broadband

Post-IPO shrs:156mm

Holmdel, New Jersey

2003

2004

2005

March 3mos

IPO Mkt

Revenue ($mm)

$19

$80

$269

$119

Cap (mm)

Gross profit %*

28%

46%

54%

54%

$2,652

Operating income %

-27%

13%

13%

25%

@$17

Operating loss ($mm)

($28)

($72)

($264)

($82)

Operating loss %

-150%

-89%

-98%

-69%

*Includes 'direct cost of telephony services" and "direct cost of goods'

VALUATION RATIOS

IPO Mrkt

Price /

Price /

Price /

Price /

% offered

Cap (mm)

Sales

Earnings

BookValue

TangibleBV

in IPO

Vonage (VG)

$2,652

5.6

-8

6.0

5.9

20%

SCORECARD

Mgt

Market

Market Do-

Proprie-

Total

1-5, 5 is high

Growth

mination

tary

rating

20 is perfect

2

2

2

1

7

Grade of 'C' because this is clearly 'public venture capital'

which means high risk, but the market is growing, albeit with increasing competition

However: operating & valuation statistics

. Cost of customer acquisition: $210

. Monthly revenue per line: $25.97

. Gross profit per line: $17.10

. If all gross profit went to profit, it would take 12.3 months to break even, assuming no churn

. Churn rate: about 2% per month, which means the static customer base disappears after 48 months

Valuation ratios

Value per customer and acquisition cost

. With 1.6 million customer lines and a price-range mid-point of $17, each line is valued at $1657

. But the acquisition cost per line is $210, so why is each line valued at eight times the acquisition cost?

. This disparity suggests a valuation disconnect

Price to an acquirer

. If SG&A and marketing all disappeared, and applying a 40% tax rate

. Then VG is valued at 18.4 times 'earnings with no SG&A and marketing', which seems high

(annualizing results for the quarter ended March 31, 2006)

Cash drain

. VG operating loss is 69% of revenue for the March 31, quarter

. Annualizing that loss and dividing in the market cap at the price range mid-point

. We get a price-to-earnings ratio of minus 8

. Which is in the range of a highly negative cash flow biopharma company with no sales

. Which often do not do well in the IPO aftermarket

Note:

This following comment from the SEC filing suggests that management is

either optimistic or desperate about aftermarket performance of the IPO

"We have requested that, pursuant to our Directed Share Programs, the underwriters

reserve up to 13.5% and 1.5% of the common stock offered in this prospectus for

sale to certain of our customers and other persons related to us, respectively, at the

initial public offering price. "

Business

A leading provider of broadband telephone services with over 1.6 million subscriber lines

as of April 1, 2006.

. Services use Voice over Internet Protocol, or VoIP, technology, which enables voice

communications over the Internet through the conversion and compression of voice

signals into data packets.

. In order to use VG’s service offerings, customers must have access to a broadband

Internet connection with sufficient bandwidth (generally 60 kilobits per second or more)

for transmitting those data packets.

. Launched service in the United States in October 2002, in Canada in November 2004

and in the United Kingdom in May 2005.

. Bills to customers' credit cards one month in advance.

Customer acquisition

. Acquires customers through a number of sales channels, including VG’s websites, toll

free numbers and VG’s presence in major retailers located in the United States, Canada

and the United Kingdom with whom VG have developed relationships.

. Also acquires a significant number of new customers through Refer-a-Friend, VG’s

online customer referral program.

. "VG intends to continue to pursue growth because it believes growth will position VG as

a strong competitor in the long term. "This strategy, however, will result in further net

losses, which generally have increased quarterly since VG’s inception."

Competition

Several competitors are working to develop new integrated offerings that VG cannot

provide and that could make competitor’s services more attractive to customers. These

offerings could negatively affect VG’s ability to acquire new customers or retain existing

customers

Telecommunications industry

. AT&T, Inc. (formerly SBC Communications Inc.), BellSouth Corp., Citizens

Communications Corp., Qwest Communications International Inc. and Verizon

Communications, Inc., which provide telephone service based on the public switched

telephone network.

. Some of these traditional providers also have added or are planning to add VoIP

services to their existing telephone and broadband offerings

Cable companies

Cablevision Systems Corp., Charter Communications, Inc., Comcast Corporation, Cox

Communications, Inc. and Time Warner Cable (a division of Time Warner Inc.), which

have added or are planning to add VoIP services to their existing cable television, voice

and broadband offerings.

Wireless providers

Cingular Wireless LLC, Sprint Nextel Corporation, T-Mobile USA Inc. and Verizon

Wireless, offer services that some customers may prefer over wireline service.

. In the future, as wireless companies offer more minutes at lower prices, their services

may become more attractive to customers as a replacement for wireline service.

. Some of these providers may be developing a dual mode phone that will be able to use

VoIP where broadband access is available and cellular phone service elsewhere, which

will pose additional competition to our offerings.

VoIP service companies

Skype (a service of eBay), in particular, has a large group of users, many of whom may

potentially use Skype as their only phone service. With Skype, however, the ability to

make and receive calls over the public switched telephone network is a feature that costs

extra and which only a fraction of Skype users purchase, as compared to Skype's free

service that has a larger market penetration.

Internet companies

America Online, Google, Microsoft and Yahoo!, which have launched or plan to launch

VoIP-enabled instant messaging services.

Use of $494mm in IPO proceeds

To fund the expansion of the business, including funding marketing expenses and

operating losses.

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