Net2Phone celebrates the party line
By Sarah Stirland
Redherring.com
August 26, 1999
Shares of Internet telephony provider Net2Phone (Nasdaq: NTOP) leaped higher in the past couple of days as the company emerged from its post-IPO quiet period and told the world what it has been up to since its successful offering on July 30.
[an error occurred while processing this directive] On Tuesday, shares of Net2Phone closed $6 higher, up 12.7 percent, at $53.13, after reaching a day's high of $58.25. Wednesday was even better: NTOP ended the day at $70.13, up 32 percent from yesterday's close. That's 367.5 percent up from Net2Phone's original offering price of $15.
Several announcements fueled the activity. Net2Phone said it had recruited Bloomberg's general manager of new media, Jonathan Fram, to be its new president. The company also issued a press release about its new distribution agreement with Compaq Computer (NYSE: CPQ).
Net2Phone rose 77 percent in its first day of public trading.
The real future for telephony isn't in Internet phone calls, it's in IP.
The use of IP networks for telephony spell the end of traditional phone companies.
Net2Phone cranked up the hype machine even more on Wednesday with its Sprint Callternatives announcement. Sprint plans on experimenting with voice-over-IP by offering its customers Net2Phone's services, which will allow Sprint customers to call people in Hong Kong, China, Taiwan, Vietnam, India, Thailand, and Japan over the Internet.
A new research note issued Tuesday by one of Net2Phone's underwriters, Hambrecht & Quist (NYSE: HQ), rated Net2Phone a Buy, which also helped the firm's stock price rise upwards.
In the report, H&Q analysts Daniel Rimer and David Levy brought a little hyperbole to their recommendation, writing, "We view Net2Phone as an investment in the next big wave to hit the Internet. Net2Phone is more than low prices; Net2Phone is about critical mass, ubiquity and dominating the Internet landscape."
STRONG RECOMMENDATION
Net2Phone provides low-cost long-distance phone services to businesses and consumers by carrying the traffic over the public Internet as well as through its own IP network. Many industry pundits believe that this technology is what telephone companies will increasingly use in the future as long-distance telephone calls become commoditized. With this future in mind, the Hambrecht & Quist analysts believe that cheap long-distance calls are only Net2Phone's first step toward establishing a more comprehensive e-commerce strategy.
For example, they think that Net2Phone has the opportunity to provide e-tailers with voice-enabled e-commerce applications that will let customer-service representatives talk with customers while they are online. The analysts also say that Net2Phone could start selling advertising on the client software on consumers' PCs.
Net2Phone currently makes most of its money by having users establish prepaid accounts for their long-distance calls, which they can make using either traditional phones or Net2Phone software on their PCs. Regardless of the device, Net2Phone customer calls are routed over the Internet or over Net2Phone's IP network.
Like the majority of Internet firms, the firm is growing rapidly, but is still not profitable. The firm had revenues of $12 million last year, and so far this year, revenues are up to $32 million. Last year, the firm lost 11 cents a share, and this year it is projected to lose 24 cents a share. The Hambrecht & Quist analysts project that those losses will widen to a loss of 77 cents a share in 2001.
The analysts call Net2Phone a pioneer of a new category of Internet firms and believe that the firm should be valued on par with Internet infrastructure and services firms such as Verisign (Nasdaq: VRSN, Infospace (Nasdaq: INSP), and Critical Path (Nasdaq: CPTH). They write in their research report that Net2Phone could grow in popularity as quickly and in the same way as firms providing other popular applications, such as email service provider Hotmail (bought by Microsoft [Nasdaq: MSFT]), instant messaging firm ICQ (now owned by America Online [NYSE: AOL]), online digital music format MP3 (used by such companies as MP3.com [Nasdaq: MPPP]), or online information service Ask Jeeves (Nasdaq: ASKJ).
On an aggregate level, Forrester Research (Nasdaq: FORR) predicts that consumers will spend $1 billion on Internet telephony by 2002, citing a "Gold Rush" mentality on the part of the firms scrambling to capture an exploding consumer demand for cheaper long-distance telephone calls.
SPREADING THE WORD
Net2Phone has raised a high profile in the industry by rapidly cutting deals with thousands of resellers and online firms to redistribute its software and services. The most important deals are with a variety of online firms, such as General Electric's (NYSE: GE) NBC Web ventures, including its Snap.com portal, NBC.com, and the NBC Interactive Neighborhood; America Online's ICQ and Netscape; Yahoo (Nasdaq: YHOO); and Excite@Home (Nasdaq: ATHM).
Tuesday's Compaq announcement is the latest in a string of these distribution deals. Under the terms of the agreement, Compaq will put a button on its Presario notebooks that will take its users to a joint Net2Phone/Compaq Web site, where users will be able to download the software and sign up for Net2Phone's services. These Presarios are being shipped internationally.
"People are banking on strong user growth and the company leveraging the technology into other businesses," says Robert Fagin, a Bear Stearns (NYSE: BSC) analyst. He believes that Net2Phone has taken an early lead in the Internet telephony business.
Mr. Fagin calculates that the market for Net2Phone's services could climb to $968 million by 2002.
FRESH FRAM
Investors may also be betting that Mr. Fram, a veteran of the new-media landscape in his role at Bloomberg, can continue to cut the distribution deals that are giving Net2Phone such a boost.
Net2Phone officials say that Mr. Fram's main role will be to continue expanding the firm's product distribution and to cut even more deals with Internet service providers and communications firms around the globe. They stress his work at Bloomberg, where he forged relationships with more than 30 Internet distribution partners.
For his part, Mr. Fram says that the lure of the new job is the opportunity to get involved in a company that he expects will bring about sweeping changes to an industry.
"Clearly, this IP tidal wave is hitting this huge industry," he says. "The whole world will become [reachable through] a local phone call."
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