Vonage, an Internet phone company, is in negotiation talks with AT&T to settle a lawsuit involving patent infringements. Vanage is asking to pay $39 million over the next five years to put things right. In October, Vonage settled with Sprint Nextel for $80 million and with Verizon Communications for between $80 million and $120 million, the amount to be determined in a future court hearing.
Last year, Vonage offered investors an initial public offering of stock at $17 a share. Much of this money is being used to pay for the company’s legal woes. Because of the lawsuits, Vonage stock dropped to as low as $0.89 in September of this year. As plaintiff companies have agreed to settlement offers, Vonage stock has risen accordingly. As of Thursday afternoon, the stock sold for $2.28.
The company’s third quarter numbers were poor. Vonage lost nearly $162 million which computes to $1.04 per share. $132 million in losses were due to legal settlements. In last year’s third quarter, the company lost $62 million, or $0.40 per share. Vontage ended the quarter with $154 million in free cash, down from $356 million.
Vonage’s churn rate rose to 3% in the third quarter. Churn rate is the number of customers that drop the service every month. Chairman Jeffery Citron said a majority of customers leave because of poor user experience. The company is focusing on improving customer service.
“We have to answer customer calls more effectively,” Citron said. “Customers sometimes call several times before their problems are resolved, and this is unacceptable.”
In recent years, Vonage has been the traditional phone companies’ biggest competitor. Because of poor customer service and legal troubles, cable companies like Comcast and Time Warner Cable have surpassed it in the number of phone subscriptions.
I realize this isn’t a story about a mobile phone company or product. It is a cautionary tale. The Vanage sales pitch is that you get unlimited calling anytime to anywhere in the United States for $25 a month. I’m sure investors were salivating at the prospect. But hidden somewhere in the back of their heads, the investors who bought the stock when it was around $17 a share, must of heard that it was all too good to be true.