Vonage loss widens, but settlement boosts shares

Litigation costs eat away at earnings, but settlement with AT&T raises hope that Vonage's legal problems may soon end.

Internet calling company Vonage Holdings on Thursday reported a bigger quarterly loss on litigation costs, but a legal settlement with AT&T raised hopes that such problems were coming to an end.

Vonage shares rose more than 21 percent, even as the company reported a rise in cancellations due to customer service problems and negative publicity from patent lawsuits.

The third-quarter net loss expanded to $162 million, or $1.04 per share, from $62 million, or 40 cents a share, a year earlier.

Since going public in May 2006, Vonage has been hit by patent lawsuits from large phone companies like AT&T and Verizon Communications.

Vonage said it had agreed to pay AT&T $39 million over five years, although final terms were still under discussion. Vonage has also settled patent disputes with Verizon and Sprint Nextel.

Excluding charges, including those from the patent lawsuits, the company said its loss narrowed to $16 million, or 10 cents a share.

Revenue rose 30 percent to $211 million. That was largely in line with market expectations, according to Reuters Estimates.

Despite the settlements, analysts have said the company still faces myriad problems, and its growth prospects are unclear.

Vonage shares were up 47 cents, or 21.5 percent, at $2.66 in morning New York Stock Exchange trade. But they were still a fraction of their initial public offering price of $17.

While considered a pioneer in offering a low-cost, Web-based alternative to traditional phone services, Vonage has recently faced growing competition from cable and Internet companies.

Churn, or cancellations, rose to 3 percent from 2.5 percent in the second quarter, it said.

Vonage said did so because of "poor experience." Some users have had to call several times to get problems fixed, Chairman Jeffrey Citron said.

"The result of the existing care problems and negative press associated with the litigation caused churn to rise to 3 percent," he told Reuters. "The first thing the company needs to do is fix the customer service issue."

The company has been trimming marketing costs due to investor concerns that it was overspending. But the cuts have resulted in a sharp drop in subscribers.

Vonage said it had added 78,000 subscriber lines during the quarter, compared to 204,000 additions a year earlier.

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