Vonage Cuts Costs, Clears Obstacles

Vonage Holdings today issued its second-quarter earnings report. In that report the Holmdel, N.J.-based company said it narrowed losses from $60 million a year ago to $18 million after job cuts and other cost-saving measures. Vonage also said it gained 57,000 new subscribers during the quarter. Shares are at $2.37 in morning trading.

“We made significant strides this quarter in reducing costs and narrowing our losses,” said Vonage CEO Jeffrey Citron. “Despite the continued challenges associated with the Verizon litigation, the company maintained its focus on achieving adjusted operating profitability.”

Vonage also announced that it has completed workarounds of the Verizon patents that are a key part of a $58 million infringement award against the struggling Internet telephone provider.

The Verizon patents fall into two key VoIP areas: WiFi and name translation. The Verizon Wi-Fi patent covers wireless VoIP-enabled devices while the name translation technology involves how Internet calls travel across traditional telephone networks.

“We have substantially completed the deployment of workarounds for the two name translation patents and have completed the development of the wireless patent workaround,” Citron said on a conference call. “This is a significant step toward moving ahead with our business in the wake of the Verizon litigation.”

In March, a Virginia jury ruled Vonage infringed on three Verizon patents. In addition to the $58 million in damages, Judge Claude Hilton ordered a permanent injunction against Vonage using the Verizon technology and ordered Vonage to stop recruiting news customers.

The permanent injunction was stayed while Vonage appealed the decision. While the stay is pending, Vonage is paying Verizon a 5.5 percent per customer royalty to the nation’s second-largest telecom carrier. The U.S. Federal Court of Appeals heard the case in June and is now expected to rule sometime in September.

“The workarounds did not infringe on the Verizon patents as defined by the court,” Citron said, adding the Verizon litigation has so far cost the company $6 million. “We remain confident in the strength of our appeal.”

At the June appeals hearing, Vonage lawyer Roger Wren said that even if Vonage loses the case, a permanent injunction is not justified, contending the damage award and royalty payments more than compensate Verizon.

Vonage is also under legal attack from Sprint Nextel, the country’s third-largest wireless carrier, over seven patents Sprint Nextel claims Vonage infringes. Wednesday, a federal judge in Kansas City refused to grant Vonage a summary judgment, and the case is expected to begin on Sept. 4.

The Verizon patents, filed in 1997, cover the translation of domain names and IP addresses to telephone numbers when Internet calls are passed off to the traditional telephone system. Since a VoIP call is nothing more than another packet on the Internet, VoIP providers must translate an IP address into a telephone number recognized by the PSTN (define) for the call to connect.

Verizon claims Vonage has taken away more than a million customers from the company, which also operates its own VoIP service. Vonage admits it loses more than 600,000 customers a year and, without the ability to recruit new customers, bankruptcy would loom for the company.

Adapted from an article first published on internetnews.com

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