Vonage, AT&T Talking $39 Million Settlement in Patent Case
AT&T has agreed in principle to accept $39 million from Vonage to settle its patent lawsuit filed last month in the U.S. District Court for Western Wisconsin, Vonage said Thursday. The company also released mostly strong Q3 earnings results. Vonage generated cash from operations for the first time in company history and saw its 19th consecutive quarter of double-digit revenue growth year-to- year. But the VoIP company’s churn remained high because of “poor execution,” CEO Jeffrey Citron said in an analyst call.
Sign up for a free preview to unlock the rest of this article
Export Compliance Daily combines U.S. export control news, foreign border import regulation and policy developments into a single daily information service that reliably informs its trade professional readers about important current issues affecting their operations.
Vonage and AT&T must nail down settlement details, but the companies are discussing an arrangement that would require the VoIP company to pay AT&T $39 million over five years, Vonage said. AT&T would dismiss its lawsuit against Vonage, and Vonage would withdraw allegations against AT&T in a U.S. District Court case in Northern Texas that Vonage inherited by acquiring Digital Packet Licensing. If settlement talks fail, “Vonage intends to vigorously defend itself in this matter,” it said. An AT&T spokesman acknowledged talks: “We are in discussions with Vonage, as we have been for the last 2 1/2 years.”
The settlement amount is higher than expected, but the five-year payout reduces the pain for Vonage, Stanford Group analyst Clay Moran said Thursday. Moran’s main concern has been near-term liquidity. Vonage won’t be “significantly” hurt if the parties agree to the terms, he said.
Regardless of the AT&T deal, litigation will take a toll on Vonage’s cash supply in the fourth quarter. Vonage finished Q3 with $356 million, including $78 million of restricted cash “used as collateral for the Verizon bond and first escrow payment,” it said. In the fourth quarter, Vonage must pay Verizon $80 million and put aside $40 million until an appeal of the companies’ case is decided. Vonage must pay the $40 million to Verizon unless it wins a rehearing on one of the patents in dispute or the court revokes an injunction. Vonage must also pay Sprint Nextel $80 million and $2 million in “other IP litigation settlements,” it said. That leaves Vonage with $194 million cash -- $154 million if it must pay Verizon the $40 million.
Vonage revenue and income were up significantly. Revenue increased 30 percent year-over-year to $211 million, and operating losses narrowed 98 percent to $1 million. Vonage expects positive operating income in 2008, it said.
Subscriber adds were “better than expected,” Moran said. Vonage added 78,000 net subscriber lines, up 37 percent from the previous quarter. By October, Vonage had more than 2.5 million lines in service, it said. Meanwhile, more consistent and informative marketing reduced customer acquisition costs to $206 on average, the lowest since Q1 2005, Citron said.
But third quarter churn was “unacceptable,” even considering bad publicity from the patent cases, Citron said. Vonage reported 3 percent monthly turnover Q3, up 0.5 percentage points from the second quarter and 0.4 points from Q3 2006. About 70 percent of departing customers left because of a “poor user experience,” Citron said. Customers are “not leaving us for a better deal,” he said. “They're leaving us because we do not meet their expectations.”
“Our primary focus today is to improve the customer experience to reduce churn,” Citron said. Vonage is working on improving customer service and service quality, he said. Vonage will adopt improved customer-care technology to improve speed of answer and reduce hold times, he said. New devices and phone features coming this year should also help with turnover, he added.
Analysts were mostly silent on the Thursday morning call. The only question came from Stanford’s Moran. Interest in Vonage may be waning because of its low stock price -- $2.44 per share at our deadline -- Moran said. Many big mutual funds and other large institutional investors don’t look at stocks under $5, he said.