Holmdel, New Jersey-based Vonage said it would appeal the verdict and develop workarounds to Sprint’s patents.
Still, Wall Street sent shares in the company down 33% to close at $1.30 on the New York Stock Exchange yesterday. They rallied 9 cents higher in after-hours trading.
Sprint’s lawsuit against Vonage, originally filed in 2005, alleged that the technology Vonage used to connect VoIP calls infringed on seven of its patents. A federal jury in Kansas yesterday found the company infringed on six Sprint patents. Vonage has denied any wrongdoing and questioned the validity of Sprint’s patents. We are disappointed that the jury did not recognize that our technology differs from that of Sprint’s patents, said Vonage chief legal officer Sharon O’Leary, in a statement.
It is the latest in a string of legal disappointments for Vonage. In March, another federal jury ruled it violated three patents owned by Verizon Communications that relate to voicemail and handing off VoIP calls to traditional phone networks. Vonage was ordered to pay $58m in damages to Verizon, as well as hefty royalty fees. Vonage has appealed the ruling.
In April, Jeffrey Citron took back control of the company he founded. As chief executive, he implemented a new plan to cut costs and control subscriber defection. Notably, Citron trimmed marketing costs to $68m, or 33% of revenue, during the company’s most recent fiscal quarter down from $91m, or 46% of its revenue, from the prior quarter.
During the quarter, Vonage also added 57,000 net customers, bringing total lines in service to 2.45 million. This was just a shadow of the 166,000 new customers it added in the previous quarter. Citron also cut an undisclosed number of jobs. At the time, Citron said he would continue to cut back-end operational costs but without further job losses.
Meanwhile, the company has been working to develop workarounds to the contested Verizon patents.
Vonage has already demonstrated that it can keep its focus on customers and on its core business while managing ongoing litigation, O’Leary said yesterday.
Still, customer churn during the recent quarter came in at 2.5%, up from 2.4% in the earlier quarter. And in total it lost $33.4m, or 22 cents a share.
Our View
If Vonage is unsuccessful in appealing both the Verizon and Sprint verdicts, the $127.5m in damages it must pay will significantly eat into the $191m it currently has in working capital. The company also has $344m in cash. But given the recent loss of subscribers and subscriber churn, Vonage needs all its reserves to keep afloat.
Even if Vonage is successful in appealing these rulings, it faces an uphill battle against larger, more stable and richer telco and cable rivals that bundle VoIP services in with other offerings.
