Knobias Clip Report (10-8-2007)

Sumbmited From Knobias ClipReport

VG: Despite Settlement, Company Still Not Out of the Woods

Monday’s session was a bit slow as some enjoyed the Columbus Day holiday. Earning’s season kicks off on Tuesday with Alcoa reporting, while the market continues to digest the labor report from Friday. Google shares hit $600 for the first time, continuing its rally from their IPO as technology stocks were strong for most of the day.

Another technology player in the small cap space reported news that had many investors excited about its future. Vonage Holding Corporation (VG). The Company is a provider of broadband Voice over Internet Protocol services to residential and small and home office customers.

On Monday, the Company announced that it has settled its pending patent dispute with Sprint Communications LP and entered into a licensing arrangement under Sprint's Voice over Packet patent portfolio. The parties have entered into an agreement to resolve this patent dispute as well as entered into a business relationship. In addition, Sprint has agreed to license Vonage its VOP portfolio.

The agreement is valued at $80 million, including $35 million for past use of license, $40 million for a fully paid future license, and $5 million in prepayment for services. On September 25, 2007, a Kansas jury handed down a verdict finding that Vonage had infringed six Sprint patents.

But many analysts note the Company is not out of the woods yet.

Bear Stearns notes that the workarounds Vonage put in place to avoid patent infringement could also be subject to patent litigation. The firm expects Verizon to examine the validity of the workarounds and sees the settlement as only temporary relief with the Company only paying a smaller amount versus the potential damages awarded by a court.

Stanford analysts note that they believe the Company still has liquidity issues and still believes bankruptcy is possible in December of 2008.

Then there is the 911 factor that the Company has attempted to rectify. With VoiP phone services, 911 services aren’t available which scares many consumers. With the pending litigation and patent infringement problems that have surrounded the Company since its IPO, the Company has not added customers at the rate at which was originally planned. According to numbers from the second quarter, the Company only had 2.3 million subscribers.

Earlier this month, the Company announced that they paid Fritts Group $160,000 in the first six months of 2007 to lobby the federal government, according to a disclosure form. The firm lobbied Congress and the Federal Communications Commission to ensure that Internet phone services would be guaranteed emergency access to 911, and on legislation to make it easier for consumers to keep their phone number when switching service providers.

Monday’s optimism saw shares gain 123% on over 34.8 million shares traded, closing at $1.42. While the news on Monday was positive, the name still faces challenges in workaround patent litigation, 911 services, customers’ ability to keep their numbers, and the high cost of attracting new customers in the light of these factors. With these things in mind, investors would be wise to watch.



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