Info on IXTC, and the Internet Telephony Biz.....
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Stocks set to soar in Internet phone businesses
A roaring new sector is emerging: Software, equipment, service and billing for 'voice over Internet protocol.' Among the fastest growing are iBasis, ITXC and GRIC.
By Michael Parrish
You already buy books, listen to music and check stock quotes over the Internet. Why not make a phone call? A lot of people are today, making the once-geeky dream of "voice over Internet protocol" (VoIP) a roaring new business.
Telecom giants AT&T (T) and MCI WorldCom (WCOM), you may be surprised to learn, already are using the Internet to carry some of your calls overseas, according to John S. Bain, an AT&T veteran turned telecommunications analyst at Texas brokerage Hoak Breedlove Wesneski. "It's a tremendous growth area -- like what happened in the early '80s, with cellular," he says.
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Indeed, analysis at San Francisco brokerage Robertson Stephens projects worldwide Internet phone revenues rocketing at a rate of 110% a year over the next half a decade -- from $1.8 billion this year to $19 billion by 2004. "It's going to be a very strong market going into the end of 2000, as well as 2001," predicts Rick Juarez, Robertson Stephens senior analyst in e-commerce infrastructure services.
The big prospects
Analysts see at least two groups of small companies with solid prospects:
Carriers' carriers. These include early leaders such as iBasis (IBAS), ITXC (ITXC) and GRIC Communications (GRIC), which transport the big carriers' phone calls over the Internet and figure out the billing among all parties, a process known as the settlement. They accept a conventional local call (with no interruption to the caller), then they send it over the Internet to a terminal at the other end, where they hand it back again to a conventional carrier -- in essence, turning a long-distance call into two local calls. This can save big bucks. It avoids, for instance, an access charge of $2.40 per minute for a conventional long-distance call to Russia.
Software, equipment and service providers. On the desktop side of things are companies that aim to allow ordinary Joes to make phone calls directly from one personal computer to another. These include Net2Phone (NTOP), deltathree.com (DDDC) and newly public WorldQuest Networks (WQNI). Meanwhile, supplying various players are such hot equipment and software manufacturers as Clarent (CLRN), Brooktrout (BRKT) and VocalTec Communications (VOCL), the latter having started the whole PC-based telephony strategy in 1995.
"The two strong wholesale IP providers are iBasis and ITXC," says Judy Reed Smith, chief executive at Atlantic-ACM, a Boston-based telecom-industry strategy and research firm. "Both have very smart managers, with good technical people and strong financing behind them." All will be needed as the VoIP business evolves.
"In the first stage of IP voice development," Smith notes, "the advantage has been that you eliminate some access fees for some kinds of calls. But in the long term, what will sell these services will be the wonderfully enhanced services that can be written for an Internet platform more cost-effectively than they were written to switched (conventional) platforms." And both iBasis and ITXC recently announced such new services.
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For instance iBasis, once known as VIP Calling, has been working with Cisco Systems (CSCO) to offer universal messaging, in which the user can retrieve e-mail from a mobile phone, for example, or vice versa. iBasis, which has a $2 billion market capitalization, is also known for its guarantee of high-grade "toll-quality" voice, whether or not the Internet is clogged. The iBasis Network automatically and seamlessly switches a call to a non-public network or even back into the conventional system if the Internet becomes so tangled that voice quality is about to degrade.
Bain started covering iBasis in December, with a target price of $45. The stock has boomed more than 100% since, from about $38 to $71 recently (down from a 52-week high of $94). He picked up ITXC, which has a $3 billion market cap, the month before and promptly downgraded the stock because its valuation at $47 a share seemed out of line with iBasis. "It promptly went to $107," Bain laughs.
ITXC (its name derived from Internet Telephony eXchange Carrier) handles calls to more than 37 countries through deals with carriers that include China Telecom (CHL), Korea Telecom (KTC), Japan Telecom and Bell Atlantic (BEL). "We tell our institutional investors, 'We agree that nobody knows why these stocks are trading where they are. Now do you want to invest in this industry or not?' " says Bain.
Andrew M. Schroepfer, an analyst at U.S. Bancorp Piper Jaffray, has a "strong buy" rating not only on iBasis, but also on GRIC. "Its business model is a necessary piece of the evolution of the industry as it stands today," he believes. But, going forward, he sees an even-brighter picture for the $1 billion company, which has boomed from $15 to more than $60 a share since going public in December. That future is wireless. "They have a billing and settlement engine that will make them a kind of middleman, enabling a new type of e-commerce to emerge over wireless means," Schroepfer says.
But the other half of GRIC's business is Internet roaming -- eliminating the need for travelers to get on the Internet from their home ISPs -- and that attracts Martin Pyykkonen, senior analyst of networking equipment and Internet infrastructure at CIBC World Markets. GRIC's alliances with more than 300 ISPs and big telecom companies over the past four years have made them, he says, "the Visa of the Internet -- except they do it for profit."
More players
Net2Phone, deltathree.com (95% controlled by RSL Communications (RSLC)), WorldQuest Networks and others started life in what many consider the "pure" VoIP space, PC-to-PC, though they are expanding now in various directions.
Net2Phone is king of the computer dial tone, with more than 325,000 customers and investors that include Softbank, General Electric (GE) and America Online (AOL). Net2Phone has gained a lot of attention lately by advertising phone calls anywhere in the country at a penny a minute. Schroepfer, who has a "strong buy" rating on the company, sees two sides to greater involvement with America Online. "I think it's a great thing for the stock," he says, "but I don't know if it's a great thing for the company from a go-for-it, stand-alone basis." Smaller deltathree.com lays claim to a portfolio of enhanced services designed to make computer-originated (and phone-originated) calls easier and more dependable to users. Schroepfer sees that as a "very attractive" business model.
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Tracking the growth
VoIP equipment makers also are growing with the industry. Clarent, for instance, makes the hardware that turns a phone call into Internet packets. "And it's doing very, very well," says Ted Jackson, senior technology analyst at U.S. Bancorp Piper Jaffray. Clarent has a market cap of $3.4 billion. Its stock has soared almost 270% in the past six months, and Jackson has a reason: Customers, including AT&T, are using it.
"There are studies that track the number of minutes of use going over different people's solutions, and Clarent is the leader by a substantial margin -- and that margin has been growing," Jackson says.
While VocalTec and NetSpeak (NSPK) are focusing more on VoIP software these days, other important hardware makers in this field include AudioCodes (AUDC), which specializes in voice compression and associated packet-building tasks; Natural MicroSystems (NMSS), which specializes in call-processing systems; and Brooktrout, a messaging hardware and software maker. Jackson has "strong buy" ratings on AudioCodes, Natural MicroSystems and Brooktrout.
"AudioCodes is a pure play" on VoIP, says Jackson, "and the fastest-growing portions of business for Natural and Brooktrout is IP telephony."
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