Thread,
You all have made many excellent posts. I have unfortunately been to busy to participate lately. I few thoughts and misc. comments on my stock list-
SNDK - down, but of course not out. Excellent news about MP3 design in successes on SNDK thread. Is it time to buy more?
IDTC- Ready to takeoff!!! Read excellent article below from Raging Bull. It says it all pretty well I think.
IFCI - Sold at 7 for a small profit. The hokey way they reported the 4th quarter results, or didn't report them you might say, took the luster off the stock for the moment. I see it drifting down to 6 or high fives. I have an order in to rebuy at 6( but I'm thinking of buying more IDTC instead; might be time for more sndk?) for a quick nickle. IMO I think it will continue to grow revenue and profit. How can they not given all the business out there. Many people, however, will be waiting for reassurance in the next quarter's numbers so I suspect this stock will drift down or go sideways until then.
C Y B E R S T O C K
Net2Phone - A Budding
Broadband Star?
April 2, 1999
By Matthew W. Ragas, Editor
Ragas Speaks for the Week
NET2PHONE - A BUDDING BROADBAND STAR?
What do Switchboard.com, CBS's (CBS) Web properties,
NBC's (GE) Web properties and Alta Vista have in common?
Their parent companies have each expressed an interest in
spinning-off their Web assets and filing for IPOs.
Who can blame them? Wall Street and the investment
community at large continues its love affair with Internet
stocks, and these spin-off IPOs would allow investors to get a
shot at "pure play" Internet companies liberated from their
hulking parents.
Case in point: this Tuesday, computer publishing giant
Ziff-Davis (ZD) successfully launched initial public sales of
"tracking" shares in its online publishing unit, ZD Net (ZDZ). As
of yesterday's closing bell, ZD Net sports a market cap of
$3.48 billion.
The kicker? The Street currently values parent company
Ziff-Davis at only $2.27 billion. Clearly investors have no
appetite for ZD's slow-growing pulp and ink business.
WHO'S NEXT?
The recent maneuvers made by international long distance
company IDT (IDTC) suggest they are taking the necessary
steps to launch the next explosive Internet spin-off IPO.
Net2Phone, their Internet phone group, should file to go public
within the next three weeks. Net2Phone offers a variety of
Internet telephony products, including Net2Phone Direct,
Net2Fax, and Click2Talk.
In December of 1998, IDT announced that it was reviewing
strategic options for Net2Phone, including a spin-off IPO of its
Internet services group. The company then went mum on its
future plans for Net2Phone until earlier this week.
On Monday, IDT announced plans to buy back $100 million in
bonds from existing investors. This move will allow the
company to pursue other forms of financing for Net2Phone. IDT
also reported that it had arranged a $150 million credit facility
from CIBC Oppenheimer, Banker's Trust and Lehman
Commercial Paper Inc. to purchase the bond notes. (I would
be surprised if some of these investment banks don't turn out
to be the underwriters on a Net2Phone IPO).
IDT's Monday press release notes that the company is taking
these steps "primarily for the purpose of enabling IDT to effect
one or more possible financing transactions involving
Net2Phone, Inc." The release further notes that "Net2Phone
has executed a term sheet with significant strategic investors
relating to an investment in Net2Phone's equity securities."
If that is not pre-IPO maneuvering, then I don't know what is.
UNDERSTANDING IDT'S SPIN-OFF MOTIVATIONS
IDT's primary businesses are the following: 1) Internet service
2) International and domestic long distance 3) Prepaid calling
cards 4) ezsurf.com - a shopping portal powered by Internet
telephony - and 5) Net2Phone, the company's Internet
telephony group.
Emerging international carrier IDT has been a pioneer in a
process known as "callback" or "re-origination" - an arbitrage
opportunity that allows IDT customers worldwide to get
outbound U.S. rates. The company is also aggressively
building private IP telephony networks in which voice traffic runs
over data networks based on the Internet protocol.
Last year, these four businesses racked up sales of $335
million and inspired a growth rate of almost 150% for the
company and founder and CEO, Howard Jonas. However,
pricing pressure in the wholesale long distance market and
increased competition among distributors in the pre-paid calling
card business have hindered earnings and pulled IDT's stock
from a 52 week high of 38 1/2 to Thursday's close at 17 7/8.
NET2PHONE'S GROWTH PROSPECTS
Meanwhile, the potentially lucrative Net2Phone remains
trapped inside IDT. Last quarter, the Internet division racked up
sales of $7.2 million - a 167% gain in revenue over last year's
comparable period - and IDT currently claims a customer base
of over 1.25 million Net2Phone users. Last quarter total
Net2Phone usage minutes grew to 53 million, a 54% increase
over the previous quarter's 34.5 million minutes. The company
was also awarded the 1998 Product of the Year award by
Internet Telephony magazine.
And there is more to come. Internet telephony will be one of
the next great waves of growth on the Internet and Net2Phone
is positioned to be one of the primary providers. Voice quality
for Net-based phone calls will continue to improve as
broadband (and the "always on" nature of broadband
connections) makes Internet-based calls a natural extension of
Web use.
To wit, as part of its acquisition of cable giant TCI, AT&T (T) is
already beginning moving its cable-based local telephone
services toward packet-switched Internet protocols. Without
even realizing it, most consumers will eventually end up using
voice-over-I.P. technology for their phone calls.
Further, Cisco Systems (CSCO) CEO, John Chambers, has
stated that he wants his company to begin deploying phone
systems based on Internet technology by next year. This is yet
another positive sign for Internet telephony firm Net2Phone with
its installed base of over 1.25 million users.
ICQ+NET2PHONE?
As noted in last week's report, I believe future versions of
Internet messaging devices will incorporate online music
services similar to Imagine Radio or Spinner.com. Beyond
that, I also believe AOL's (AOL) Instant Messenger and ICQ
will eventually incorporate Internet telephony packages like
Net2Phone into their instant messaging interfaces.
Millions of Web users now spend hundreds of minutes each
month chatting via services like AOL's Instant Messenger and
ICQ - frantically typing away on their keyboards. The natural
next step is for users to have the ability to place an instant
Web-based call by simply by clicking a button on their instant
messaging device.
It makes perfect sense for users and, importantly, it allows
companies like Yahoo! (YHOO) and America Online to
squeeze a reliable revenue stream out of their chat
applications.
This development would be a huge win for IP software players
like Net2Phone. Under this scenario, telephony providers could
cut revenue-sharing deals with instant messaging players like
AOL, Excite (XCIT), Yahoo and others. A distribution deal with
ICQ alone would reach over 30 million chat users.
SPEAKING OF DISTRIBUTION, HELLO NETSCAPE!
The wild card that Net2Phone critics underestimate is the vast
distribution deal that IDT unveiled with Netscape (NSCP) a few
weeks ago. The multi-year agreement calls for Net2Phone's
software to be exclusively bundled with the upcoming version of
the Netscape Communicator browser to be released this
summer. It also provides Net2Phone with its own button on the
Netscape browser's personal toolbar.
This distribution coup means Net2Phone's software will
eventually be distributed to 50 million Web users - roughly 46%
of the Web browser market. In addition, since Netscape is now
a wholly owned subsidiary of AOL, Net2Phone will likely
hammer-out a similar deal targeting AOL service and browser
users.
Other Net2Phone marketing and distribution deals include
broadcast.com (BCST), NEC Packard Bell, GeoCities
(GCTY), Yahoo!, IBM (IBM), and Excite among others. The key
to Net2Phone's long term success is in achieving wide-ranging
distribution of their software to stimulate trial usage. They are
now executing nicely in this arena.
POSSIBLE NET2PHONE INVESTORS
One question remains. Who are the two investors with whom
IDT has executed a term sheet for an investment in
Net2Phone? After piecing together various bits of information, I
believe the two investors will turn out to be online giant AOL
and frequent Internet investor Softbank.
This is pure speculation on my part, but here is the reasoning.
Why would Netscape, a division of AOL, give such a
sweetheart distribution deal to Net2Phone without taking an
equity stake in the company? Getting a piece of the action
from their online partners has always been in AOL's blood.
Softbank is a likely candidate because in December of 1998,
IDT announced that it was in discussions with a "major media
conglomerate with extensive holdings in leading Internet
companies." With ownership in Ziff Davis and investments in
over 60 Internet companies (including Yahoo!, GeoCities, and
E*TRADE) Softbank could definitely be our silent benefactor.
To add more grist to the rumor mill, a Briefing.com article
re-capping the mid-January DLJ Internet conference noted that
a Softbank partner sitting on a venture capital panel quipped
that his company had "invested in an Internet phone company
who will shortly be doing a major IPO." Could it be Net2Phone?
(Remember that Softbank portfolio companies GeoCities and
Yahoo! already have distribution deals with Net2Phone.)
NET2PHONE: THE NEXT FEW WEEKS
Shortly after the holiday, the suspense around IDT's plans for
Net2Phone should break. The mystery investors will be
unveiled and plans for a Net2Phone IPO will be announced at
the same time.
The Yahoo! buy-out of broadcast.com for $5.7 billion may have
come at a particularly opportune time for IDT chief Howard
Jonas. Yahoo!'s acquisition price values each broadcast.com
user at roughly $640. Using that valuation metric, Net2Phone's
1.25 million users make IDT's Internet telephony division worth
roughly $800 million.
Is that an overly optimistic valuation? Probably. Jonas would be
thrilled if the market valued Net2Phone at half of that. But be
that as it may, rest assured, there is a lot of interesting math
going on in the Jonas household this holiday weekend.
Quote of the Week
"Yahoo's assembling the all-star team. It's great news for
Yahoo's stock. Being able to say, 'Hey we're the market leader
in search, directory, home pages, video and audio aggregation,
yackety yackety, makes a lot of sense."
-- Comments made this week by Lanny Baker, an analyst at
Salomon Smith Barney, regarding Yahoo!'s announcement that
it plans to acquire broadcast.com for $5.7 billion in stock. |
