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Vonage Gives Grim Picture On Verizon Ruling

Shortly after replacing its CEO, VoIP provider Vonage warned investors that its ongoing patent dispute with Verizon could lead to bankruptcy.

Characterizing the legal battle as “damaging and disrupting” Vonage said the possibility of bankruptcy loomed if its emergency stay is not extended throughout its appeals process. A judge is set to rule on whether to extend the stay on April 24. If the stay is not granted, Vonage may be forced to stop signing up new subscribers.

Vonage also said it was attempting to design a work-around for the Verizon patents but that such an effort may not be feasible, may disrupt its service or “be temporarily or permanently incompatible with some of the features we currently offer.

“If service interruptions affect the perceived reliability of our service or if we are required to limit our offering of service features, we may have difficulty attracting and retaining customers and our brand reputation, results of operations and financial condition could be materially and adversely affected,” Vonage said.

The warning, in the company’s annual report filed with the Securities and Exchange Commission last week, came on the heels of a turbulent week in which Vonage was temporarily told on April 6 that it could no longer sign up new customers. It was a win, of sorts, for Vonage – Verizon wanted a full shut down of the company’s services until it stopped using Verizon’s patented technology.

Roger Warin, Vonage’s lawyer, described the ruling as a “slow strangling,” the difference between “cutting off oxygen or a bullet to the head.”

Later that same day a Federal Circuit Court granted Vonage an emergency stay, allowing them to continue to sign up new subscribers.

Vonage claimed “business as usual” in a statement, while Verizon said it expected the ruling to be upheld on appeal.

Internal business will not continue as usual for the VoIP firm, however. On April 16, Vonage CEO Mike Snyder announced he was stepping down to be replaced on an interim basis by company founder and current chairman Jeffrey Citron.

Along with Snyder’s resignation, Vonage also announced a ten percent reduction in its workforce and a $110 million cut to its 2007 ad budget. Vonage still expects to spend $310 million on ads this year.

Vonage’s survival hinges not only on a judge’s gavel but on the execution of a series of corrections the firm needs to undertake, said Sally Cohen, analyst, Forrester Research. “They can’t spend the amount they do per subscriber and sustain the churn they have,” Cohen said.

The company re-affirmed its retail strategy, noting that it is currently negotiating with “several major retailers to expand our retail sales network.” National retailers, the company said, “give our displays prominence in their selling space and direct most customer inquiries about VoIP to our service.”

A Best Buy spokesperson said that the company was monitoring the situation but not taking any action. “It’s premature to speculate on a legal outcome. We continue to believe that VoIP represents a significant cost savings for the consumer and we continue to be intrigued by the technology,” he said.