NTOP earnings call transcript – October 22, 2003
Part I:
Introduction:
Sarah Hofstetter – forward looking statements.
Steve Greenberg: Thank you Sarah, and good afternoon to all you. I hope you are all well and I hope you’ve had a moment to review the press release that went out right after the close.
Let me first provide the highlights of the subjects we will talk about during today’s call.
First, we have executed a full production agreement with Liberty Cablevision of Puerto Rico, and we now offer cable telephony services through their upgraded digital two-way footprint, marking the first of what we believe will be many agreements to come with leading cable companies.
Secondly, in our soon to be filed 10K, we will disclose segment reporting for the first time. When you read it, you will see that Net2Phone Global Services, our core business, achieved a $22.4 million dollar improvement in profitability, reporting $1.8 million in segment income for the past fiscal year. Furthermore, NGS is starting our new fiscal year with an attractive pipeline that includes delivering a suite of voIP services and services through a best of breed group of partners.
Third, firm wide, our losses continue to narrow. Our gross margins are stable for the 9th consecutive quarter, at or around 40%.
I want to kick this call off by talking about cable, because it is clear to me that many of our investors have been carefully watching that opportunity and what Net2Phone will do within that arena. We expect our executed contract to move to a full-scale deployment with Liberty Cablevision in Puerto Rico will clearly serve as a catalyst among similarly sized cable operators, that being the market we have always viewed as the most fertile for us. Liberty Cablevision is the ideal customer for us, as they represent the right size cable operator, having an optimal footprint and operational resources to leverage our distributed architecture and flexible business model.
This kind of “Missouri show me” type rollout with Liberty’s stipulated demonstrated success in call quality, usage, and scalability has truly validated the Net2Phone offering. In fact, Liberty Cablevision is and has been our greatest marketing tool. Beyond helping us to win in the labs of the cable companies who are at this moment trialing our services, we are now benefiting from being able to show usage in Puerto Rico that is in line with regional Bell operating company phone calling patterns, with average minutes per subscriber exceeding 1,000 per month and more than 35% of those 1,000 per month minutes are in-bound, clearly demonstrating that those customers are giving out their cable telephony number as their point of contact.
We have now reached a point where we have been validated from both a tech standpoint in the lab, from a quality standpoint in the minds of users, and from a business standpoint from an executed full deployment contract with Liberty – powerful proof for potential cable operating partners. We will continue to provide you with information regarding future deployment in the coming months.
Since our solution here at Net2Phone is very different from other cable telephony offerings in the market, I want to give you a very clear snapshot of what it is we do for companies like Liberty Cablevision. We are putting these companies in the phone business to effectively compete with the RBOCs, using a powerfully synergistic combination of their cable network and our global voIP network, leveraging the telecommunications structure of IDT and its WinStar subsidiary, all part of our family of companies right here at 520 Broad Street in Newark, New Jersey. This is not a surrogate like the ones you have been hearing so much about that simply use an adapter and then use the public Internet to route phone calls! This is truly a full replacement phone service, that each of you on this call would use as much as you would use your regular telephone service at home. It will work with any phone in your house and will demonstrate quality that is equivalent to that provided by your RBOC.
In order to provide that level of service, we manage the cable operator’s networks for them. We do a complete assessment of each cable operator’s network to ensure that it can support quality, reliable phone service. We have Service Level Agreements with these operators to ensure that they get telco quality and rely on the cost efficiencies and CLEC of WinStar and IXE status of IDT. The fact that our solution combines voIP expertise, telcom breadth, PacketCable compliance, and CLEC status makes our offering both unique and robust.
Now of course once you start talking about offering a solution that fully integrates with a cable operator’s existing network, you are not selling white bread. This is a very intricate solution and contracts cannot just get signed over night or even over a couple of weeks. We are in comprehensive advanced discussions with a significant number of cable operators both [here] and in the U.S. – both here, “excuse me” in the U.S. and abroad and we are very optimistic about the opportunity and confident about our ability to deliver.
We have learned that the sales process is a long and multi-factored one; however, results are imminent. We very much view the prospects of our two subsidiaries – Cable and Global Services – as complimentary – the projected explosive growth of Cable matched up with the progressive growth of Global Services. Both units spent the past fiscal year laying important groundwork for the next 12 to 36 months. While the models and opportunities for each unit differ, each division relies on quality partners for distribution and each utilizes a centralized platform to deliver retail services at a low incremental cost. While there are many similarities between our two subs, each has its own particular focus, core competencies, and addressable market.
Now, you’ve heard a lot about cable. I want to talk about Net2Phone Global Services.
We here have firmed up NGS in a number of critical areas. First, the business on a stand alone basis, including its share of corporate costs, has reached segment income profitability today! While this business has historically been solid with attractive margins, we yet today are still weaning off our domestic disposable calling card segment, as well as some of our wholesale carrier services. Our firm belief in the viability, both short-term and long-term, of the NGS business is important both as a cash generator to Net2Phone, as well as a long-term opportunity to emerge as a full-service, global telecom supplier providing voIP technology. We have laid the foundation to supporting more mature partners with more robust services over the course of the past fiscal year. We spent the year continuing to reap the benefits from unregulated markets and moving up the food chain, offering a suite of telco grade services to both incumbent telcom companies, as well as the new entrants to the market.
We have been strengthening our international sales force, focusing on cultivating the right partners in each region of the world. Over the past two weeks we have announced significant advances to our platform, which now empowers enterprises via our MAX PDN offering, satellite broadband providers per our deal with AFSET***, and CLECs half way around the world. Our voIP platform is incredibly powerful and gives our partners, such as the recently added Lanca Bell, the ability to quickly deploy multiple voIP products and services without wasting incremental expense and time to do it themselves.
The beauty of our platform is that we are not spending more in order to deliver more products. We are leveraging the fixed costs of our market-tested network. We have pared this company down considerably over the past two years, but that has not weakened the platform that we have built, tested, supported, and deployed worldwide for the past eight years. Within NGS, we have also identified new opportunities in technology, clearly evidenced by our partnership with Hughes Network Systems to deliver managed voIP services over satellite to remote locations, and we are continuing to lay the foundation for WiFi internationally, all utilizing that same platform.
The NGS unit has been cutting its fixed costs over the past 18 to 24 months and is now at the point where building its top line revenue to capitalize on those fixed costs will fall right to the bottom line. This past quarter you’ve seen top line revenue come down, while margins are holding in the 40% range. Rates to high revenue destinations have simply declined over the last several quarters, an expected result of the more competitive environment to some of our more established services in existing markets. The company had expected to bridge the revenue gap with new-found high margin minutes in corporate and consumer retail services in conjunction with telcom providers in newly liberalized markets. There has been a larger than anticipated gap between announced liberalization of telecommunications markets and the actual implementation of that competition. While this is somewhat disconcerting, we are more than pleased to note that there are more counties with liberalization polices between now and 2006 than we had originally anticipated as well. So while the actual implementation has not been hitting the deadline that our internal projections had shown, the opportunity over the next few years is actually larger than we had anticipated. This delay in implementation of competition has contributed to a slow down in the growth of our top line revenue, as our existing minute base has lower revenue per minute without the expected level of new minutes in new markets. As such, we faced a short term dilemma – do we simply cut our prices considerably to boost top line at the expense of our margins? The answer to us was clear and we decided against it as our focus on profitability was simply more important to us than a downward blip on our top line.
The growth opportunity in this business is longer term than just a couple of quarters. We are more interested in seeing a correction in pricing per minute, as well as realizing revenue from new markets as they come on line and they get up to speed. While we believe the growth opportunity to be well worth the investment in time, resources, and capital, we look at this business as needing a 12 to 24 month period while it gets significantly ramped up. Thankfully, we here are well funded to continue here on this tact, with more than $94 million dollars in cash and cash equivalents at the end of this quarter and this year. We have the financial strength to continue to make investments as necessary to grow both lines of our business. We will continue to lay the great groundwork for NGF and grow it in an extensible fashion while we initiate cable telephony rollouts and continue to negotiate more MSO contracts, keeping our focus on a very exciting future for all of us.
We talked about voIP getting to the starting line in the past. I believe we are there. On the last quarterly call, I noted that I no longer have to give detailed explanations of what voIP is and how it should be viewed as the future of communication. On this call, I am pleased to note that an increasingly larger group of people and companies now actually speak IP fluently. In fact, over the last three months I have seen more analysts, investors, and press display interest in this subject than in my previous two years as the CEO of this company.
So to recap. In its simplest form, our company is gaining strength and momentum as we focus on the largest opportunity in our corporate history. We remain more focused on a few core businesses than ever before and we are seeing our cable business value proposition hit home with cable companies looking to strengthen their competitive position. So I would like now to thank you or listening to what I have to say and to turn to my CFO, Arthur Dubroff, to discuss the financial details of our past fiscal year and this quarter.
Art: [fiscal discussion – earnings performance/for quarter, year, and current financial strength] …10K with details will be filed next Wednesday.
Questions and Answers:
Ari Moses, Blaylock & Partners (Analyst covering NTOP). Guys, how are you? Good afternoon. I just wanted to talk a little bit about the Liberty deal. I am very pleased to see that this has been announced, but I want to understand the point here regarding the successful 12-month market trial that you lay out. I am trying to understand does that include the trial that has been ongoing until now and will be completed at the end of a full 12-month period. Is there a new trial that is going to be launched? And, I was trying to understand …you know ….
…Ari, this is Steve.
Ari: Yeah.
Steve: How are you? First, I will ask [Mike Taxa?] who is here and has been the guy overseeing what has been going on here. This is a full production agreement. This is not a trial. Okay? So Michael, you want to comment on that please?
Michael: So the 12 months that is referenced in the release is behind us.
Ari: Okay.
Michael: We are no longer a pilot. We are in production and we are scaling the platform so that Liberty can market cable telephony services to any of their digital two-way upgraded homes passed.
Ari: Okay, and what size is that base?
Michael: I don’t know if they have shared that information publicly, but I can give you some other sizing regarding Puerto Rico that will help you in terms of … at least serve as a proxy. They pass approximately 310,000 homes total. And they have about 120,000 basic video subscribers. And I can tell you that, I think without disclosing anything that they haven’t shared publicly, that the digital two-way homes passed are significantly above the 120,000 basic video subscribers they have today.
Ari: So theoretically they could have – there could be subs without video that could take the service?
Michael: Correct.
Ari: Okay. And they obviously could now use it as a marketing tool to bring those people onto video as well.
Michael: Yes. They don’t limit who they can market any of their services to. So they could sell then just telephony without video or high speed data and then try and upsell those other services to them.
Ari: Okay. And from a deployment perspective, are they built out to serve their entire base now or are they starting a new buildout – I believe the last time we spoke they had the 200 sub-trial. Is there a period of time when they are now going to have to build out in order to meet it or will they start in the near term?
Michael: We have the telephony facilities in place …
Ari: Okay.
Michael: … to support north of 20,000 telephony subscribers today. And that could quickly scale to support north of 40,000 telephony subscribers. So from a support standpoint, the infrastructure and platform is in place now.
Ari: Okay. Alright. Great. And last piece on that, from your perspective is there a timeframe in which you are guiding us to when we might start seeing (a) a revenue contribution, or (b) a meaningful revenue contribution from this deployment?
Steve: We are not going to go there, Ari.
Ari: Okay.
Steve: Ari, thank you for the question.
Ari: Okay, thank you.
Eric Botz (?) from Janco Partners: Good afternoon, Steve. A couple of questions. First, it is not quite clear to me whether this is the franchise model or the hosted model? You will be collecting the whole …
Steve: This is the hosted model.
Eric: This is the hosted model. Okay. So Liberty will be taking the capital cost of the deployment itself?
Steve: Yes.
Eric: And it will be fully branded – the service will be branded under their name or will you have Net2Phone in the branding as well?
Steve: Correct. That will be … it will be … we are blind to the customer.
Eric: You are blind to the customer?
Steve: Yeah, we are blind to the customer. We offer the service. It is purely a Liberty offering.
Eric: Okay. Good. And then secondly, you were talking about the sales cycle and that there were a number of key hurdles … or a number of issues that you have to negotiate through and overcome. Can you kind of identify what the key objections are if you will, by the operators and what you have to convince them of to [get their business]?
Steve: It is not a question of objection at all! Just the opposite. The operators are particularly keen on reducing their churn and increasing their penetration rate and getting this triple play, which everybody knows is very important. And that’s not the sell. I mean, we had the technology, and what I said I meant in terms of our ability to deliver something that nobody else has, which is robust, and especially because of what we have with IDT and WinStar. We have a panoply of telephony services! We put them in business immediately.
What happens, however, and what I was referring to, is not only is every MSO different, but every market is different. And we define a market as perhaps let’s say 250,000. And we have learned that with our solution, which I try to make clear is very distinguishable from anything else that is out there. I mean we are coming in there and offering them an RBOC type solution to deliver telephony! So the modeling – it’s the business modeling – to make sure that not only is it perfect from the technology standpoint, but it really meets Net2Phone’s needs and our partner, the MSO’s needs. And that’s what’s time consuming. (*)
You know, the fact that it works is clear. The fact that, you know, the QoS is excellent is clear. It’s really the business modeling that takes the longest period of time. And we are in the midst of a number of those right now (*).
Eric: Okay.
Steve: So, it’s not a hurdle.
Eric: I understand. I understand. And then I assume that you are marketing .. you mentioned marketing in the international side as well. Do you have any expectations of whether you will penetrate faster in Europe versus the U.S.?
Steve: No. I think they are both deployments on a similar timeline. We have … maybe not quantitatively in terms of the number of MSOs, but in terms of the level of interest and where they are in the timeline, I think there is equality between domestic and international interests and where we are in our pipeline.
Eric: Okay, thanks.
Steve: Thank you. |
