Waiting for Net2Phone to Pick Up
JUNE 8, 2004 •
By Amey Stone
Business Week
Wall Street appears inpatient with the Net telephony pioneer's progress, and that could be an opening for long-term investors
businessweek.com
The business of placing phone calls over the Internet has come of age in 2004. No longer a diversion of hobbyists, voice-over-Internet-protocol (VoIP) services are being rolled out by cable companies including Comcast (CMCSA ) and Time Warner (TWX ), as well as independent startups like Primus and Vonage, which boasted in a June 7 press release that its 170,000 customers had spent 1 billion minutes talking on its network.
Net2Phone (NTOP ), a pioneer in the business and the most established VoIP stock, has announced a slew of promising deals this year. Investors are most excited about the side of Net2Phone's business that aims to become the outsourcer of choice for small and midsize cable companies that want to offer Internet phone calling to their customers. Net2Phone still derives the vast majority of revenues from its core business of selling VoIP services to 600,000 customers worldwide, mostly via prepaid phone cards, but investors value the company almost entirely on its cable business potential.
The recent flurry of cable agreements, however, hasn't been enough to keep Net2Phone investors happy. The stock, which had climbed to $8 in early 2004 on expectations that the cable-outsourcing strategy would take hold at a quicker pace, has done an about-face. As Net2Phone prepares to report results on June 9 for its third fiscal quarter, its shares are down to near $4, even as the broader market has been climbing.
"ENCOURAGING." Part of the sell-off is due to investors' dissatisfaction with the size and scope of Net2Phone's announcements. The cable deals mostly use somewhat vague language, indicating Net2Phone has signed a "letter of intent" or, in one case, a "binding term sheet," with cable companies.
However, for investors who have a long-term focus and an appetite for risk, this year's sell-off in the face of positive news should make Net2Phone more appealing. "As the stock has come down, it has gotten more attractive, particularly because it has made some encouraging announcements," says Richard Klugman, an analyst with Jefferies, which has done investing-banking business with Net2Phone in the past year.
On May 24, Net2Phone announced that after a successful trial, Liberty Cablevision of Puerto Rico had launched VoIP networkwide, making it available to nearly 300,000 homes. On May 13, Bresnan Communications, the 13th-largest U.S. cable provider, with 300,000 subscribers, signed a letter of intent with Net2Phone. May 3 brought news of a deal with Northland Cable Television, which passes 315,000 homes. On Mar. 23, Altice One, which has locations in Belgium, France, and Luxembourg said it planned to use Net2Phone technology.
CHANGE OF SENTIMENT? Net2Phone now has agreements with six cable operators in five countries, representing 2.3 million homes. "The market is beginning to unfold as we have forecast it would," says Michael Pastor, president of Net2Phone's cable telephony business. While 2004 and 2005 will continue to be years of signing agreements and rolling out service, by fiscal 2006 and 2007, subscriber growth will start accelerating, he says.
Still, Klugman warns that Net2Phone is operating in "an unproven niche. They only have one true definitive deal with customers to date" -- with Liberty Cablevision of Puerto Rico, which is wholly owned by Liberty Media (L ). Klugman notes that Liberty is a major shareholder in Net2Phone. He also says investors are disappointed that a "memorandum of understanding" inked with Cebridge Connections late last year hasn't turned into a solid deal yet. "People want to hear definitive action. They want to see deals that translate into real customers," says Klugman.
Others blame the decline in Net2Phone shares on a change in overall market sentiment. "The market's appetite for speculative stories has diminished quite a bit this year," says Vivian Mamelak, an analyst with Natexis Bleichroeder. "Investors are much more risk-averse, particularly when it comes to high tech." She estimates Net2Phone will report $20.2 million in revenues and a loss of 13 cents a share in the fiscal third quarter.
"NOT JUST A STARTUP." Market sentiment could change quickly, especially if the June 9 announcement brings news of faster-than-expected subscriber growth in Puerto Rico or a firming up of one of the earlier announced deals. Her share-price target for the next 18 to 24 months is $8.40. "People want something they can sink their teeth into," says Mamelak, who doesn't expect Net2Phone's cable business to generate free cash flow until near the end of 2005.
Net2Phone isn't too worried about the stock's lull. Analysts point out that its phone-card business is cash-flow-positive and that it can rely on the financial strength and industry connections of its parent, telecom company IDT (IDT ), and Liberty Media to execute its strategy prudently -- avoiding mistakes in a rush to profitability. "We're not just a startup," says Pastor.
One long-term investor who has been adding to his position this year as the stock has fallen says of Net2Phone: "It's not particularly expensive" and "if its long-term business strategy works out, it's pretty exciting." That may be reason enough to keep watching the news from Net2Phone. |
