Wow - check out this article
Don't know if its been posted yet but it says great things about
the internet telephony sector!
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. |
