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Jolted by patent news, SeaChange delays earnings

Wed, 05/29/2002 - 8:00pm
Jeff Baumgartner

SeaChange International, admittedly "surprised and disappointed" by a potentially damaging jury verdict involving a video-on-demand patent, said Wednesday that it will postpone the release of its first quarter financial results until the beginning of next week.

That decision stems from a verdict by a Delaware District Court jury yesterday that upheld rival nCUBE Corp's patent for VOD delivery, and ruled that SeaChange International has "willfully infringed" the nCUBE patent. The presiding judge has yet to hand down a final ruling.

In connection, nCUBE said the jury ruled that SeaChange must pay nCUBE "over two million dollars" in damages, plus a seven percent royalty on all sales of infringing products after Feb. 1, 2002.

SeaChange executives, in a conference call Wednesday afternoon with analysts and reporters, said the company needed more time to ascertain the basis of the royalty payments tied to the jury verdict, and will likely accrue those monies in the interim or until all appeals are exhausted.

SeaChange said it disagreed with the verdict, but acknowledged that the jury decision "will require material adjustments" to the company's first quarter financial results. However, SeaChange said revenues for the first quarter were $33.7 million, up 12 percent versus the year-ago period, and weren't affected by the jury verdict.

The company also posted record VOD system revenues of $16.1 million, up 40 percent versus the comparable quarter last year. SeaChange also said it shipped 60,000 video streams for residential VOD systems, giving it anaggregate of 226,000.

The jury decision overshadowed that bright financial news, however, as SeaChange shares got pummeled Wednesday, closing down 14.7 percent to $10.39per share.

Dueling lawsuits

Wednesday's jury ruling likely won't mark the end of the ongoing litigious battles between SeaChange and nCUBE.

In June 2000, SeaChange filed a lawsuit against nCUBE for patent infringement. In that case, SeaChange defended U.S. Patent No. 5,862,312, which was granted on Jan. 19, 1999. The '312 patent describes a "loosely coupled mass storage computer cluster."

A different Delaware District Court jury rejected nCUBE's challenge on Sept. 25, 2000, ruling that SeaChange's patent was valid. SeaChange then asked the court to enter a judgment of infringement and a permanent injunction against nCUBE's MediaCube-4 video servers.

nCUBE has since said it has developed a remedy that works around SeaChange's '312 patent. Both companies are still awaiting a final judgment pertaining to SeaChange's claim of permanent injunction and undisclosed financial damages in that case.

On Jan. 8, 2001, nCUBE returned serve with its own lawsuit, alleging that SeaChange's iTV System infringed on U.S. Patent 5,805,804, which was issued to nCUBE on Sept. 8, 1998. The '804 patent describes "a unique video server architecture specially suited for VOD delivery." Further, the patent describes how video servers under that architecture can be made compatible — "while requiring only minimal changes" — with the existing systems of other providers. The '804 patent was the subject of Wednesday's jury verdict.

Judge Joseph J. Farnan Jr. has yet to hand down a final decision on the '804 case. He's also presiding over the '312 case.

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