Today, Vonage got slapped with an injunction in its patent-infringement legal battle with Verizon. A judge will decide whether to stay the injunction for 120 days or permanently, or to impose it immediately in two weeks.
As a result, Vonage's stock is down 26%. Yes, things don't look good. But I find the magnitude of the stock slump surprising, considering that everyone, all of the experts I've talked to, expected this injunction to fall.
I think that what's happening is, investors are starting to question Vonage's viability. It's a valid concern. But there are several factors going in Vonage's favor. For starters, as of December, the company had $500 million in cash and marketable securities. Considering that, last year, Vonage burned through $189 million in cash, that means that the company has enough dough to last for another two years, assuming the same rate of cash burn. Meanwhile, Vonage expects its cash burn to fall; it guided for operational profitability in as early as in the first quarter of 2008. If Vonage's appeal fails, and the company is forced to pay Verizon $58 million in back royalty fees, that will make a dent in Vonage's coffers, but the company will still have enough money left for two more years.
Vonage's profitability could suffer, however, if the company is forced to pay Verizon royalty fees, which are pretty steep, going forward. But Vonage still claims it won't have to pay those, that it will develop a work-around around Verizon's technology.
Vonage may have a little bit of time left still to develop that work-around. First off, in two weeks' time, the judge might yet grant a stay. Secondly, even if he doesn't, Vonage can immediately file an appeal of the stay decision. Usually, when such an appeal is filed, courts grant the appealing party a 30-day temporary stay. So Vonage might have at least six weeks to work with here.
That said, that work-around may be hard to develop, as Verizon's patents in this case have been defined very broadly, and they cover a lot of ground.