Vonage battles to stay in the VoIP game

Vonage Holdings has "substantially completed" the deployment of work-arounds for two of three VoIP patents claimed by Verizon Communications, Vonage announced Thursday.

Vonage, the largest independent VoIP provider, began deploying the two work-arounds about July 1,  chairman and interim CEO Jeffrey Citron said during a conference call on the company's second-quarter fiscal 2007 earnings. The two work-arounds target most of Vonage's customers, with the third work-around covering wireless voice, Citron said.

"The impact of the deployment is transparent to our customers," he said.

Vonage has completed development on the third work-around, Citron added. The company consulted outside experts to ensure that the work-arounds do not violate Verizon's patents, he said.

Verizon sued Vonage in June 2006, accusing the smaller company of infringing seven of its patents. In March, a federal jury found that Vonage had infringed three Verizon patents and awarded Verizon $58 million. Vonage has filed an appeal of the jury's decision, and that appeal is pending.

The work-arounds, which Citron didn't describe in depth, would protect the company if its appeal isn't successful, he said. "We ... remain confident in the strength of our appeal," he added.

The court verdict has slowed subscriber growth for Vonage, Citron said. The company added about 57,000 subscriber lines during its most recent quarter, compared to 166,000 in the first quarter of fiscal 2007, and 256,000 in the second quarter of fiscal 2006. Vonage now has 2.45 million lines in service.

But Vonage officials said they were happy with their second-quarter financial results. Revenue for the quarter, which ended June 30, was a record $205.9 million, compared to $144.4 million for the second quarter of fiscal 2006.

The company's net loss for the quarter was $33.6 million, compared to $74.1 million a year ago.

Vonage's adjusted loss from operations, excluding one-time charges such as $6 million in patent legal bills, was $3.1 million. The company cut marketing costs, and is working on cutting back office expenses, Citron said.

"I am confident we are taking the appropriate steps for turning our business around," Citron said. "I believe we are turning the corner on one of the most difficult periods in Vonage's history. We are close to achieving positive adjusted operating profit."

Independent telecom analyst Jeff Kagan said Vonage continues to "battle through a very tough time." After the sudden demise of Vonage competitor SunRocket, some VoIP customers may worry about the viability of other providers, Kagan wrote in an e-mail.

"Going forward, I do believe this kind of VoIP service will continue to gain popularity and will continue to get better quality," he added. "However, there will be many SunRocket-like problems in the mix."

Vonage, which offers stand-alone VoIP service, faces an uphill battle against telecom and cable providers, which offer a bundle of services, including television and Internet service, according to Kagan.

"Most customers will choose the big bundle since this is where the bargains will be," he added. "That means [Vonage] can only compete for the smaller group of customers."