Part II: David Rocker, Rocker Partners (major shareholder): I apologize if I ask a redundant question.
Steve: David, how could you ask a redundant question.
David: Thanks. Not only redundant, he says “thanks” twice. [laughter]. You mentioned in your comments that you were in comprehensive advanced discussions with parties in the U.S. and abroad. Could you give a …. and you talked about the ‘imminence’ of the expected conclusion of that. Could you put some time context on what imminence means and secondarily could you give an idea of [the substance of] …?
Steve: When I thought about what I would say and I know I specifically said and I mean it, that results are imminent, I kind of anticipated that someone would ask me David. So I actually, and I don’t mean this in a facetious way, I mean it very seriously – I am going to give you the definition that we get when we turn to the reference source, and what they say is “imminence” means the following: “Likely to happen without delay.” And I think that in terms of what’s going on in this world [‘cable co./ntop world’], I believe that these contracts that everybody is waiting to see us announce are likely to happen without delay. And I think that it wouldn’t serve my shareholders, my employees, or the MSOs – the many MSOs we are dealing with – to go any further than that now, other than to say I meant every word I’ve said in that little speech, and it is likely to happen without delay. (*)
David: Okay. Could you define what you view as – you’ve always said that the key area here is in the secondary size MSO’s, how large that market is potentially in terms of …
Steve: Okay. Let me … I’ll let Mike Pastor get to the size of .. what we are really talking about here is Tier Two MSOs, which is a large majority of MSOs in the world. But we do have interest from a number of Tier One’s, but our real sweet spot, for a number of reasons coming out of the box – seems to be Tier Twos. But Mike, would you give David some concept of what we are talking about by way of market size?
Mike P.: Sure. David, Mike Pastor, how are you?
David: Hi, Mike.
Mike P.: In terms of defining the overall Tier Two market size, there is no definitive data that we can put our hands on and say we know this is accurate, but through a compilation of a number of sources and primarily through Kagan research as well as our own internal analysis, if you look at the three markets that we target, and that’s Latin America, Western Europe along with some of the Eastern European countries, and the U.S., and then you apply some terms of Tier Two, and it’s a little bit different by each market so I am not going to grill into that piece, but in the U.S., you are talking about approximately 105 million homes passed, of which approximately 20 million of those homes are served by Tier Two or Tier Three cable operators. In Western Europe, you are looking at about 90 million approximately homes passed, and it’s a little bit higher percentage that are served by Tier Two’s as far as we can tell – it’s closer to about a third. I mean maybe 30 to 35 million homes passed. And in Latin America, you are looking at approximately 50 million homes passed total on the cable and about again we estimate there are about a third – maybe 25% to maybe a third of that market being Tier Two as well. So you are looking at maybe another 15 million or so homes in Latin America.
David: And the monthly revenue you would anticipate for people who do sign up with your would be roughly?
Steve: Well, that is going to vary.
David: Right, but as a general range?
Steve: Market to market and I think because we are really in negotiations now and have Non-Disclosure Agreements that are outstanding, it would be improper for me to go there.
David: Okay. Thanks very much.
Steve: David, thank you and you were not redundant. [laughter]
Vic Grover, Needham: Hey guys, how are you doing?
Steve: Good Vic. Nice to hear your voice.
Vic: Good. Nice to hear you guys made some more progress. Just coming back, and I don’t mind being redundant, I’ll maybe hit some of the stuff you’ve already talked about, but going back to the economics of the launch, I think if I remember correctly, Liberty was offering two plans initially in the pilot. One was the everyday plan and the other was a kind of more robust plan that had some international calling. What are your expectations about the take rate of the plan that offers I think it was three or four hours of international calling, and do you think that this system will achieve a penetration rate similar to what we see in some of the domestic MSOs with their voIP trials and 30%or 40% of the installed base? And I guess on the follow up, are there any milestones, and maybe this is a question you can’t even answer, but any kind of milestones or anything we should look for or what is Liberty looking for before they take this to some of their other proportionalte subscribers around the world?
Steve: I’ll ask Mike to answer the first part, and then we’ll both give you our views on the second.
Mike P.: Hi, Vic, how are you?
Vic: Hi. How are you doing?
Mike P.: Very well. In terms of the take rate of the two different types of plans they are offering, and you characterized them correctly – one is more similar to an incumbent RBOC plan where you pay a flat rate for unlimited local calling and then all your calling – regional or international via metered, versus what they call the “Celebrity” plan which would be more akin to your cell phone plan that includes a bucket of essentially all distance minutes across the island of Puerto Rico as well as to the U.S. The take rate is about two-thirds and one-third. Two-thirds are taking the everyday or more basic plan and about a third are taking the Celebrity plan.
The second piece … or that covers you ..
Vic: Well, I guess … what I am trying to figure out I will you be terminating the minutes for these minutes for these plans around the world and what kind of usage has it been. You talk about, you know, 1,000 minutes a month usage overall but how much – how many minutes would you terminate and are you acting as – are you getting paid on a per minute basis or are you getting a flat monthly fee per sub in this hosted model?
Mike P.: We get paid for any carrier services we provide. And we provide all of the services in Puerto Rico. So whether the calls terminate locally on the island or to the U.S., or anywhere internationally in the world, those minutes run through us and we get paid on a variable basis for each minute of use.
Vic: And to these 125 thousand subs that I guess are marketable – it is kind of interesting that the incumbent there is owned by Verizon – do they all have phones already? I guess that’s kind of a simple answer but …
Mike P.: Yeah, phone penetration is – I don’t know the number off the top of my head, but it is very, very high and cellular penetration approaches, you know, 70% as well.
Vic: Right.
Mike P.: But in terms of minutes used going back, you know we see 1000 to 1100 minutes use a month. About 35% of that is inbound. So about 65% of that is outbound and generates a variable termination fee to Net2Phone.
Vic: Okay.
Mike P.: Whether that’s you know, local, regional, or international.
Vic: Okay, I guess we can make up our own assumptions on that. Alright, and then I guess the follow up was the kind of milestones or what should we think about in terms of additional launches, because they have got another 20 million subs potentially for you to go after.
Steve: I think that what you’ve seen in today’s announcement there and it’s also a very significant announcement. Obviously, moving to a full production agreement with Liberty, for all the obvious reasons for Net2Phone, is a milestone in and of itself. And you know, remember that this is an entity and Jose Alegra, who is the General Manager, is an excellent manager and has his own P&L, and you can read what he says in the release.
And I think it does nothing but bode well for Net2Phone and our continuing relationship with Liberty and I think it bodes well if we can perform similarly, which I believe we can, in other properties that have a relationship to the folks at Liberty. So I think this is a milestone in and of itself.
Vic: Okay, fair enough. And I guess a couple of follow ups. On the international growth in NGS, I understand – I hear where you are coming from in terms of pricing pressure and you know, obviously applaud you not selling below your cost, but at the same time we are seeing very significant pricing pressure for the pure wholesalers like ITXC, and so, you know even with the markets that are already deregulated it would seem like there is plenty of opportunity to grow that business. I mean, what is the challenge there? You just can’t find the right agents or umm, … because it seems like the cost .. the line costs would still be coming down to help you have ample margin even if you could just talk bout a small growth rate, so I just am kind of confused why there is just no growth at all there. Maybe there is just growth, but you are just disconnecting even Union Telecard business or something. So, just get a little granular on that? And then secondarily or even the follow up to that, that’s got to be dozens of consolidation candidates out there that could help you grow, that are probably available for sale for pennies on the dollar in revenue, so what are you seeing out there, or is basically the company focusing on just cleaning up the NGS revenue base and what you have and focusing everything on the cable opportunity?
Steve: I am going to ask Brian Wiener, who deals with this day-to-day, to answer you there.
Brian: Hey Vic, on the NGS side, I think we need to separate some of the revenue decline as Arthur has mentioned is coming from the deemphasis of our disposable calling card business in the U.S. That’s something we have been talking about for quite some time.
Vic: Right.
Brian: And that continues to trail down to where some time in the fiscal year it will be an absolute non-factor. And that’s a business where it was harming our profitability as opposed to enhancing it, which is why you will see our gross profit not impacted in absolute dollars by the deemphasis of that business.
Vic: So, last year’s 10K, Union Telecard was 20% of revenues. What was it down to in the fourth quarter? Not last year, I mean FY02? I mean are we talking now it’s down to 5% to 10%? I mean, is it accounting for the bulk of the sequential decline in NGS?
Brian: It’s a significant amount of decline. I would defer the question to Arthur, because I don’t know that we break out break out specific product lines.
Vic: That’s fair enough.
Brian: I would say that that is making up a significant portion of the decline as is wholesale carriers. Now as to your reference to ITXC. We are in a completely different business than them. They are a carrier’s carrier. So …
Vic: I understand that. But you could use them to terminate, so if their cost of termination is down to a nickel or whatever it is, why can’t you guys sell a prepaid product internationally, let’s say in an Indian café for ten or twenty cents, and still find some growth? I mean you know we’re seeing companies like [Telco Group, Sam Profic?] ramp to $500 million in revenues in three years and he’s wildly profitable with the prepaid product and even Ibasis seems to be getting into the prepaid market. It’s not necessarily where you want to focus, but it seems like there is growth out there. I am just kind of confused why NGS can’t grow.
Brian: Vic, let me clarify it. Minutes are growing internationally. So, and our costs are decreasing actually at a faster rate than the revenue per minute decline, which is why you are seeing margins that are strong. And they are very, very strong internationally. The issue is when the cost to terminate drops 50%, and your minutes grow 25%, and …
Vic: Right.
Brian: …and since everybody’s costs are dropping, not just Net2Phone, but with a price per minute decline of say 25%, you’re going to have – you’re not going to have an increase in revenue even though you have an increase in minutes. So, I don’t want to …
Vic: No, I understand. We can take it offline. It seems like the plasticity should help you, but maybe it’s just; – it’s okay, we’ll take this
Steve: Why don’t we take it offline.
Vic: Last question is the new structure. Can you talk about that with your two new subsidiaries. Any kind of update on a new investment? Is that something you are holding out to cable MSOs as a carrot to maybe give them some juice to come into the game and let you deploy, or how do you think about that?
Steve: I think you should think about it in the following context that we are … we believe that we are partnering with the cable world in terms of delivering IP telephony. And as I said earlier, we sit down with each MSO and try to come up with a model that is unique and particularly works for them. And sometimes the model can vary from the hosted model, but we do what we believe is appropriate in terms of a return for us and making sure that the cable company gets the kind of telephony service that it needs and that could go in any one of a number of directions. …….. Vic, thank you.
Vic: Thanks guys.
Follow-up question:
Ari: I had one more question regarding the cable business as far as the ongoing negotiations. I know something has been mentioned in the past of a – and I don’t want to use the wrong term here but – a sticking point or a negotiating point was the issue of alternate ownership by the cable operators. I was wondering if you are still seeing that as an issue – if that’s kind of what is either holding up negotiations or if it is popping up during the negotiations?
Steve: The answer to your question is it is not a barrier. It is not holding up anything. It is an issue. And we deal with it in any one of a number of ways because you know clearly this is a service. It’s a very important service. Is it something that the cable companies understand and will grow to a very valuable service? Yeah, so part of the modeling function takes it into account Ari, but it is in no way a sticking point, a hurdle, or anything like that. It’s just another factor that we include in these ongoing discussions.
Ari: Okay. And just for some balance, I’ll ask a question on the NGS side of the business. And I guess some of this is what Vic was alluding to. We have seen a sequential uptake in revenue last quarter for the first time through your structuring. I was kind of looking to see that again. And I understand I guess there could be some quarterly bumps in the road, but as far as from a guidance perspective, I think the number you have given previously was roughly 100% growth over a five-year period. Do you still see that growth? Is there any reason to think that the impacts you are seeing now are long term or more short term bumps?
Steve: The answer to your question is I still see that growth. I do believe that there will be 100% growth over a five-year period. And you know, I think that looking at NGS, and I said this quarter to quarter to me is not – and I want to choose the right adjective because you guys are a lot smarter than I am – I just think that this company, and NGS, which I have said, and I know you’ve been in the audience, is going to grow very nicely. It’s not going to be a hockey stick the way Cable will. You know Cable I said many times, is going to grow in a hockey stick fashion. But it is complementary. This is a good business. And it’s a solid business. And voIP is really just reaching the promised land right now. And I believe that I have no reason in the world to back off from what I have said in terms of a five-year window, there being 100% growth.
Ari: Okay. Great. Thank you.
Steve: Okay?
Ari: Thank you very much.
Closing remarks: Steve: I just want to say thank you for the participation, for the excellent questions, and I look forward to speaking with all of you as we do in the not too distant future. So have a good evening and thank you very much. |
