I don't know of any other industry that has better potential than
IP Telephony.
I would say Morgan Stanley Dean Witter would agree with you Dave about the ip telephony industry. Get a load of IDT Corp. IP-telephony is going to get hotter
IMHO. Here is friday's news release on IDTC.....
Friday September 18, 10:37 am Eastern Time
RESEARCH ALERT - Morgan starts two telecoms cos
NEW YORK, Sept 18 (Reuters) - Morgan Stanley Dean Witter said Friday that it initiated coverage on telecommunications companies IDT Corp. (Nasdaq:IDTC - news) and Global Crossing Ltd. (Nasdaq:GBLX - news) with ratings of outperform.
-- No further details were available.
-- IDT shares rose 1/4 to 19 on Friday.
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As a refresher on IDT Corp read this article from Motley Fool
and by the way look at the profit margin on IDT only 3.1% (April, 98) I am hoping
DGIV can do better.
THE MOTLEY FOOL - Apr 20 6:03am
MOTLEY FOOL | THESTREET.COM | ISDEX | ONLINE INVESTOR | FINANCE HOME
The Daily Double (Archive)
Apr 16, 1998
IDT Corp.
(Nasdaq:IDTC - news)
Phone: 201-928-1000
Website: idt.net
Price (4/15/98): $31 7/16
HOW DID IT DOUBLE?
IDT Corp. has been dialing for dollars -- Internet telephony dollars -- and investors have heard
the call loud and clear. A year ago, this stock was stuck in the muck at $4, with the company
bleeding cash from a mass market sales pitch to provide ho-hum dial-up Internet access. But a
change of strategy and 5-cents-per-minute phone-to-phone calls via the Internet have helped IDT
connect for a ten-bagger since then.
For the first six months of FY98, sales soared 111% to $126 million, good for untaxed earnings
per share of $0.23 versus a $0.24 per share loss for the comparable period of FY97. IDT grew
its low-margin but profitable revenues from wholesale telephone services by 177% while
pumping up sales of its pre-paid calling cards. Meanwhile, a 48% plunge in unprofitable
Internet revenues actually helped matters, on balance, since cutbacks on the marketing front
helped drop selling, general & administrative (SG&A) expenses from 40% to 19% of overall
sales.
What's really ringing investors' bells, though, is IDT's Net2Phone Direct, which allows
consumers to make 5-cents-per-minute domestic long-distance calls and enjoy up to 90%
savings on international calls. These are phone-to-phone Internet calls, no PC required. IDT's
mass-marketing effort includes a savvy deal to offer the service to Yahoo!'s (Nasdaq:YHOO -
news) customers.
IDT has also managed to fill its war chest with a 5 million share offering in February that
brought in $120 million and a notes offering good for another $97 million. The company is using
some of that money to invest in troubled Executive Telecard's (Nasdaq:EXTL - news)
international network and to make other acquisitions.
On April 8, IDT offered $120 million in cash and stock to acquire InterExchange, a provider of
satellite frame relay networking and carrier-grade Internet telephony to over 20 international
destinations. The deal is expected to be "significantly accretive" since it should cut IDT's costs
and facilitate its rapid network buildout plan.
BUSINESS DESCRIPTION
IDT Corp. is an emerging multinational telephone carrier looking to grow its Internet telephony
services, which include Net2Phone (a PC-to-phone service used by over 300,000 customers),
Net2Phone Direct (an Internet-based long-distance service for consumers), and Net2Fax, a
real-time Internet-based faxing service.
For the first six months of FY98, however, traditional telecommunications services accounted
for 88% of revenue, with about 67% of these sales coming from supplying other carriers with
long-distance service, 21% coming from sales of prepaid calling cards, primarily to
international customers, and 10% from international retail services. Fees from its Internet
access business fell to 8% of total revenues from 32%. Internet telephony accounted for just
$4.8 million in sales, or 4% of overall revenue.
Net2Phone Direct's proprietary system (patents pending) works this way. A user calls a local or
toll-free number, which connects the call to an outbound switch server that converts the call
from the telephone circuit switch network to the Internet's more efficient (and thus less
expensive) packet switch network.
The user is then asked for her account number and the telephone number she wishes to reach.
The call goes over the Internet to an inbound switch server located at IDT's Hackensack, New
Jersey office. That server switches the call onto the local telephone network, completing the
call. Having traveled just a short distance on the circuit switch network, the call costs less.
Insiders own 41% of the stock, with most held by Chair/CEO Howard Jones.
FINANCIAL FACTS
Income Statement
12-month sales: $201.2 million
12-month income: $6.2 million
12-month EPS: $0.25
Profit Margin: 3.1%
Market Cap: $980.9 million
Balance Sheet*
Cash: $209.3 million
Current Assets: $246.6 million
Current Liabilities: $32.2 million
Long-term Debt: $118.6 million
(*Reflects February stock & debt offerings but not subsequent investments)
Ratios
Price-to-earnings: 125.8
Price-to-sales: 4.9
HOW COULD YOU HAVE FOUND THIS DOUBLE?
The market for Internet telephony is potentially huge. Forrester Research estimates that 4% of
all long-distance calls (about $2 billion worth) will be carried over the Internet by 2004. Others
see even stronger growth, with Kagan Telecom Associates estimating that by 2003, 10% to 15%
of long-distance calls could be carried over the Internet.
While price wars followed the breakup of Ma Bell, some suggest that Internet telephony could
move the industry into a new, more intense price deflation/product enhancement spiral, one
similar to that which has marked the PC industry in recent years. The productivity payoffs and
price savings for America's corporations and consumers could be enormous.
An investor intrigued by this story could have hunted down IDT, with its fledgling PC-to-phone
calling business. Signs of real progress were apparent by late last summer. With the stock in the
$8 range, the company reported a $0.04 per share July quarter profit versus a $0.21 per share
loss in the prior year period. In early September, it officially announced its Net2Phone Direct
product, which offers unrestricted phone-to-phone calling with True Phone Quality.
WHERE TO FROM HERE?
First Call shows current earnings estimates of $0.53 a share for the year ending in July and
$0.78 per share for FY99. So IDT is now trading at a rich 40 times estimates 15 months out.
One analyst sees 40% long-term growth ahead, suggesting an aggressive YPEG fair value of
$31.
Despite the great promise of Internet telephony and the good job IDT has done of selling its
story, the company's sales in this area have so far been minuscule. Also, everyone agrees that
larger players, from Qwest Communications (Nasdaq:QWST - news) to AT&T (NYSE:T -
news) , will compete in this space.
The shares were also jolted in early April by word that the Federal Communications
Commission (FCC) might make Internet telephony outfits pay the universal service fees that
other long-distance providers pay. The company has offered mixed signals about how potential
FCC action might affect its infant business.
On April 4, Associated Press quoted IDT President Jim Courter as saying, "Depending on what
they did, it could very well double the cost of an Internet telephone call from 5 cents a minute to
10 cents a minute. It would be devastating."
Yet an April 6 press release from the company said, "IDT pays termination fees to local
licensed carriers who are ALREADY paying charges into the universal service fund. Thus, the
proposed regulation should have NO impact on IDT's bottom line."
Congress will have a hard time putting such an albatross around the Internet telephony business.
But telecom legislation can also be a quagmire of well-paid lobbyists locked in mano a mano
combat.
So while the emerging Internet telephony biz appears to be a growth story for the new millennium, investors need to do their homework before making any call on the winners.
-- Louis Corrigan
(TMFSeymor@aol.com)
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