ITXC article
Visit with ITXC CEO Tom Evslin
Tuesday, December 28, 1999 10:19 AM
by A. Sahoo
Researching stocks online isn't always easy. Carefully worded company press releases aggrandize unimportant news, bulletin board posters hype their favorites, and the individual investor rarely has the opportunity to look company management in the eye and decide for themselves if they believe in the team leading the company.
Last week, I had the opportunity to visit one of Internet telephony's fastest growing companies, ITXC Corp. (NASDAQ: ITXC). I began writing about ITXC just before its late September IPO, and since then, the company's stock has been on a steady rise amid weekly news of high-profile alliances and network expansion. Having seen other high-potential companies rise - and then fall - quickly, I wanted to see for myself if ITXC had the magic to keep growing.
The visit began with a tour of ITXC's large Princeton headquarters, with Mary Evslin, Vice President of Marketing. Mary knows the wholesale IT business inside and out, and underlined ITXC's commitment to quality of service. Because the fledgling Internet telephony market is still plagued by quality of service doubts, ITXC takes extra precautions to ensure its carrier and reseller customers will receive the best transmission quality with a minimum of downtime. This is accomplished through maximally redundant (backup) locations, rigorous on-site equipment testing and proprietary technology. The fact that ITXC recently celebrated its first "million minute day" (meaning that it carried more than 1 million minutes of voice and/or data over its net work in one day) with minimal system disruption underscores the robustness of its network and commitment to customer service.
ITXC has been growing quickly. The company has been hiring two new employees each week (evidenced by the boxes of incoming PCs in the reception area), and its revenues have mushroomed from $1 million last year to a projected $22 million for 1999. As the business expands into new markets, and ever-greater numbers of minutes are carried over ITXC's network, the operations of the company must also keep pace with staffing, management and corporate functions. (Remember the mantra, "managing growth"..). I was expecting a certain amount of chaos - yet, the overall impression I had of ITXC's Princeton headquarters was organized efficiency. Lots of busy people, who all seemed to know what they were doing, neatly organized in groups under large, colorful banners that read, "Marketing", "Sales", "Network" and so on.
I was also happy to see that, unlike some other newly-cash-rich companies, ITXC did not immediately spend a large chunk of its IPO proceeds on luxury furniture and fixtures. No English antiques or pricey prints in their reception area - their focus is business.
Now, please don't interpret this to mean that after a 30-minute tour, I am an expert on all of ITXC's inner workings. However, I have been in quickly growing companies where tension is rife, unhappy employees complain loudly of unresolved problems, and even a casual passer-by can't help but notice something is wrong. I believe that deep personnel problems like this can ultimately undermine commercialization of even the most promising technology, so, being a nosy person, I was curious whether ITXC was managing its triple digit growth. I think it is.
I believe that much of the credit for this should go to senior management. While company press releases and SEC filings detail ITXC's business activity, they cannot give an investor a sense of management's perspective and outlook. How do these people view their business? Do their aspirations seem wildly out of line with reality? Do you believe what they say? Does it all add up?
As CEO Tom Evslin and CFO Ed Jordan described the various aspects of ITXC's growth, I was struck by their focus on their core market, wholesale IT. No lofty dreams of diversifying into the retail sector, call-enabled websites, company-owned affiliates and ISPs, or some of the other add-ons that several of the flashier retail-oriented Internet telephony companies are pursuing. ITXC is wholly focused on building its network, currently the largest of all the wholesale IT sellers. (In fact, I couldn't help but notice that the most prevalent decorations adorning the walls were large global maps, depicting locations of ITXC's points of presence).
With its actively managed, 42-country Internet protocol network, ITXC is one of only 2 wholesale IT companies to transmit calls predominantly over the Internet rather than fiber optic wire (the other is competitor iBasis), so it can leverage the web's lower cost structure and ability to provide enhanced voice and data features to customers. ITXC is also piloting a unique program, whereby it will move its proprietary SNARC transmission equipment from the premises of its carrier customers, into the offices of their customers. This provides several advantages: it reduces "last mile" transmission trouble caused by lines between the end-user and ITXC's carrier customer; it provides lower cost; it may eventually offer the end user enhanced services such as unified messaging (link) and voice-enabled e-commerce; and perhaps just as importantly, it "locks customers in" to the ITXC service.
With a focus of routing telephone calls over the web, Mr. Evslin sees ITXC as an Internet infrastructure company. From a stock price perspective, that's an interesting statement. Infrastructure firms are normally thought of as those that, in a basic and fundamental way, enable the existence and proliferation of the Internet. Many times, they provide core technologies upon which other products and service rely. As their technology spreads, their stock rises higher and higher. Examples include Inktomi's (INKT) search and shopping engine software; Ariba's (ARBA) e-commerce solutions and Phone.com's (PHCM) wireless application protocol. All of these stocks are currently trading above $150. At its current price of $36, ITXC certainly looks like a bargain - unless certain risk factors materialize.
Chief among these is degradation of the price advantage offered by wholesale IT. One of the great advantages in carrying the long distance portion of calls over the web is its lower cost structure. This could change if prices from the traditional telcos continue to come down or if tariffs making the Internet more expensive are enacted. Some countries, like Singapore, even prohibit Internet telephony altogether. While such restrictions may not be an immediate threat due to the small size of the IT market now, if IT heads towards $4 billion by 2004 as projected, dominant national telephone companies threatened by loss of business may lobby regulators to intervene.
As of September 1999, 80% of ITXC's revenue was derived from just 10 customers. Trouble with any of these could shake the company's projections and affect share price.
Lastly, competition from other wholesalers - AT&T Clearinghouse (T), IBAS and GRIC is emerging, and even the RBOCs and CLECs have begun sticking their toes into the IT pool. In the aggregate, these companies could pose a competitive threat to ITXC's lead in the future.
Right now, 4 analysts are covering ITXC; two are giving the shares "strong buy" recommendations; one is calling it a "moderate buy" and one a "hold". When I asked Brian Boyer of First Analysis (one of the "strong buys" with a price target of $53) his opinion of the company, he said, "[ITXC] has great management and operates in a fast-growing industry". But he also pointed to the dynamic pricing structure of the industry as the single largest risk factor.
Before leaving ITXC, I asked Mr. Evslin why investors would buy ITXC stock. He replied, "Because it's cheap". Barring unforeseen market events or other surprises, I have to admit that I agree with him.
Disclosure: I currently hold positions in IBAS and ITXC.
Coming Next: TV adds (Internet) Telephony
Comments on this article or Internet telephony issues may be sent to A. Sahoo at lasertrolysis99@hotmail.com. |
