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Beleaguered Internet phone company Vonage in settlement talks with AT&T, adds customers in 3Q
[November 08, 2007]

Beleaguered Internet phone company Vonage in settlement talks with AT&T, adds customers in 3Q

By PETER SVENSSON AP Technology Writer
The Associated Press

Internet phone company Vonage (News - Alert) Holdings Corp. on Thursday said it was in talks with AT&T to settle a patent suit, the last of several filed against it by traditional phone companies.

The Holmdel, N.J., company also said it managed to add subscribers in the third quarter, despite cutting back on its ad spending.

The news sent Vonage's volatile stock soaring 23 percent to $2.70 in premarket trading. On Sept. 26, the stock hit an all-time low of 89 cents. The company went public a year and a half ago at $17 per share.

Vonage said it and AT&T are discussing settling the suit for $39 million. In October, it settled with Sprint Nextel Corp. for $80 million, and with Verizon (News - Alert) Communications Inc. for between $80 million and $120 million, depending on the outcome of a court hearing.

Those settlements weighed heavily on Vonage's earnings report Thursday. The company lost $161.7 million, or $1.04 per share, in the quarter ended Sept. 30, including $132 million in charges due to the settlements. In the same quarter last year, it lost $62.1 million, or 40 cents a share.

Revenue rose 30 percent to $210.5 million from $161.8 million a year ago. It added 78,000 subscribers during the quarter, even though it cut back on advertising and has been under a cloud of litigation.

Some analysts had been predicting a bankruptcy for Vonage, but the company may have pulled out of its dive. It ended the quarter with $154 million in free cash, down from $356 million, but the worst of its patent setbacks may be behind it. The talks with AT&T (News - Alert) call for the $39 million payment to be made over five years.

The third-quarter loss excluding some charges was $16 million, or 10 cents per share, compared with $62 million, or 40 cents per share in last year's third quarter.

Analysts polled by Thomson (News - Alert) Financial had expected a loss of 13 cents a share, excluding charges.

Vonage paid $206 in advertising and other costs to acquire each new customer, down from above $300 in some recent quarters. At one point, Vonage was the largest buyer of advertising on the Internet, but it has pulled back on the blanket campaigns in favor of more targeted approaches.

The company's service enables subscribers to connect their phones to their broadband connections using an adapter. It charges $25 a month for unlimited domestic calls.

In a worrisome sign, the number of customers leaving the company every month, also known as the "churn" rate, rose to 3 percent in the third quarter. Chairman Jeffrey Citron said 70 percent of customers leave because of a poor user experience, and the company was now focusing on improving it.

"We have to answer customer calls more effectively," Citron said. "Customers sometimes call several times before their problems are resolved, and this is unacceptable."

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