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Technology Stocks : IDT *(idtc) following this new issue?* -- Ignore unavailable to you. Want to Upgrade?

To: Smear_campaign who wrote (24035)	6/26/2001 8:16:55 AM
From: Art Baeckel	Respond to of 30916

et2Phone The Insanity Has Stopped, Hasn't It? By Aram Fuchs In a past column entitled "Two Welcome Signs Of Sanity," I mentioned Net2Phone (NTOP) and concluded by saying, "While I am encouraged that some of the more rational operators are starting to curb capacity, it is not clear if enough capacity will be taken out of the market to staunch the red ink that is flowing on most telecommunications companies' income statements. With that worry in mind, I began digging through Net2Phone's third quarter earnings release and conference call. I was trying to figure out if, owing to the bankruptcies of carriers, such as Teligent (TGNTQ) and Winstar Communications (WCIIQ), and the financial difficulties of others, we have finally reached a bottom in telecommunications pricing. We would then have an opportunity to buy Net2Phone stock. I came away with mixed feelings. There were some very good things that happened during the quarter, as well as some bad things. Here were the good things: 1.The company said it would no longer subsidize any free minutes for its partners Yahoo! (YHOO) and Microsoft (MSFT). Net2Phone also said it's been able to convert a very impressive 2% to 5% of free users to paying users, and that the average Microsoft user is paying $0.16 per minute (proving that consumers are demanding high-margin international calls compared with low-margin domestic calls). 2.The company sold a four-year, $20 million license to Liberty Media (LMG) that will make Net2Phone's IP telephony services available to Liberty Media's international cable affiliates. 3.On the conference call, the company said it has seen no significant external pricing pressures and thus is actually raising prices on certain routes. 4.Net2Phone said gross margins grew to approximately 30% to 35% for the months of April, May, and the beginning of June, compared with the 15% it garnered for the entire third quarter. 5.As of the end of the April quarter, the company had approximately $5 per share in cash and $3 per share in equity of Adir Technologies. If capital expenditures start to fall off as management is projecting, there should be enough cash to see the company through to breakeven. But there were definitely some bad things in the quarter that should scare shareholders. They were: 1.Net2Phone had a software screw-up that didn't allow it to receive the lowest possible cost for the bandwidth it needed to serve its customers. 2.The company took write-downs of a whopping $88 million, which were associated with investments and the closure of overseas operations, as well as costs associated with employee stock options. This is twice as much as the company's $40 million in revenue. 3.Net2Phone used $25.3 million of its cash balances for capital expenditures and saw a $24 million reduction in its marketable securities. This dramatic decline should serve as a warning sign to investors. They must watch the Cash and Marketable Securities line in the balance sheet carefully, because this is serving as a floor for Net2Phone's stock right now. In the next quarter, make sure that the company has fulfilled its promise to cut capital expenditures by 40% to 50%. All in all, Net2Phone's quarter was mixed. I am simply not confident that we have seen the bottom in long distance pricing. I would need to see substantial increases in full-quarter gross margin without any major write-offs in order to get excited about this stock. The shares closed at $6.21 on June 21. Aram Fuchs is the CEO of Fertilemind.net. At the time of publication he did not have any interest in the securities mentioned in this article. Aram Fuchs frequently buys and sells securities that are the subject of his/her articles, both before and after publication. The value of any particular securities discussed may change at any time and are always available for review in a wide variety of financial publications and web sites. Under no circumstances should any information discussed in this article be considered financial advice or a recommendation to buy or sell securities. View the text only version for easier printing. For comments, questions, rants or raves, please e-mail us at TTA@multex.com. Previous Next Send to a friend. thetelecommanalyst.com