Vonage Settles Verizon Suit, But Challenges Remain

In his post, Vonage is Toast, Douglas McIntyre at 24/7 Wall Street writes about the recent settlement of the patent suit filed by Verizon against voice over IP provider Vonage. Under the settlement, should Vonage lose its appeal, it will pay Verizon $120 million for patent infringement. Even if it wins the appeal, the settlement will likely be in the range of $80 million.

McIntyre notes that upon announcing the settlement, Vonage shares soared 70% to more than $2 per share. But while the settlement may be seen as a positive, McIntyre opines that the future for Vonage does not look rosy.

Vonage has about $250 million in cash at the end of the June quarter. The Verizon settlement will probably cost $100 million. AT&T is going to want something. And, in the most recently reported period, Vonage had an operating loss of $33 million.

McIntyre also points out that the pricing advantage that Vonage had at its start has largely disappeared as the telcos are now able to reap the rewards of their large investment in fiber optic cable in recent years.

Vonage had a large pricing advantage over its competition when it first came to market. That is gone now. And, with little cash left, so is Vonage.

Analysts seem to agree. In its recent report on Vonage, prior to the announced settlement terms with Verizon, Stanford Financial Group analyst Clayton Moran stated:

Pro-forma for the $80 million payment to Sprint and an anticipated minimum award of $40 million to Verizon (VZ, Not Rated), Vonage will have cash of approximately $224 million, but only $71 million of working capital. Vonage has $253 million of convertible debt, which can be put to the company in December of 2008. As such, we fear a pending liquidity crisis.

Following the settlement, Bear Stearns’ Mike McCormack added:

While we are encouraged by the recent settlements with Sprint, Verizon, and Klausner Technologies, we continue to believe that
Vonage faces severe competition, significant operational risks, and new litigation risk from the recently filed patent suit by AT&T. In addition, we remain concerned the company may have difficulty addressing the December 2008 put options of its convertible debt.

The Stanford Financial report on Vonage is available for purchase.

Technorati Tags: (VG), (VZ), telecom, Verizon, Vonage

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Friday, October 26th, 2007 : Equity Research : No Comments

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