Tuesday 6/1/99 - IDT Corporation (IDTC)/Net2Phone (NTOP)
IDT Corporation (IDTC) will announce Q3 1999 earnings on the morning of Thursday, June 3rd. The last earnings report that came out on 3/3/99 showed revenues of $160.7 million in the quarter, an increase of 126% over the same quarter in 1998, and 21% above Q1 1999 revenues. EPS was .06. Not only is IDTC showing impressive independent growth, but they also own 66% of Net2Phone (NTOP), an Internet telephony service provider that recently filed for IPO.
Net2Phone has some impressive investors backing it up with Softbank (which has large holdings in Yahoo, Geocities, E*Trade, ZDNet, and many other internet companies) owning 10.8%, AOL owning 5.4% and GE Capital (which just formed NBC Internet with Xoom.com, NBC, and Snap.com) owning 5.4%. Additionally, NTOP had inked several key deals in the last three months, including:
3/9/99 - Signed a deal to offer an affiliate program for 3.5 million Geocities homesteaders to act as sales representatives for Net2Phone services.
3/10/99 - Signed a multi-year agreement with Netscape to have Net2Phone services bundled on Netscape's browser (an icon on the Netscape Navigator Personal Toolbar) and prominently featured on Netscape Netcenter.
4/5/99 - Prodigy announced they will soon offer Net2Phone services to their customers.
4/6/99 - Signed an agreement with InfoSpace.com to enable one-click dialling by integrating Net2Phone technology into InfoSpace.com white and yellow page directories (which includes all white and yellow page listings in Netscape Netcenter, the Microsoft Network, the GO Network, and Xoom.com).
5/3/99 - Signed a deal with ZDnet to feature Net2Phone services in a new ZDNet communications center and Net2Phone will be the preferred Internet Telephony provider throughout ZDNet websites.
NTOP Internet telephony software will also be integrated into Excite's international Web sites, and negotiations are going on to integrate NTOP services into Excite's U.S. Web sites. Possible deals with companies including Snap.com, @Home & AOL, the GO Network, and Yahoo! may also be in the works.
Here are some highlights from the Net2Phone S1 filing with the SEC:
Net2Phone is a leading provider of voice-enhanced Internet communication services to individuals and businesses worldwide. NTOP services enable customers to make low-cost, high-quality phone calls (and send faxes) over the Internet using their personal computers or traditional telephones (the software is distributed free of charge over the Internet and through bundling agreements with strategic partners; over 25 million units of Net2Phone software are expected to be distributed in 1999 - download the software at the Net2Phone website and make calls over the Intenet in minutes!!).
In August 1996, NTOP introduced their first service, PC2Phone (which has made up 68% of NTOP revenues to date). According to Probe Research, a market research firm, PC2Phone was the first commercial telephone service to connect calls between personal computers and telephones over the Internet. In September 1997, NTOP introduced Phone2Phone (which has made up 20% of NTOP revenue to date), a service that enables international and domestic calls to be made over the Internet using traditional telephones.
As of March 31, 1999, NTOP was serving approximately 250,000 active customers (as of 1/31/99 approximately 60% of NTOP customers making up about 58% of NTOP revenues for the six month period ended on that date were based outside of the United States) and handling over 20 million minutes of use per month (It is important to understand that while all NTOP services are prepaid currently, NTOP only recognizes the revenue as the customer utilizes the balance in their prepaid account by placing calls, so there is probably a hefty chunk of deferred revenues just waiting to be earned). NTOP revenue has grown substantially, increasing from approximately $2.7 million in the fiscal year ended July 31, 1997 to approximately $12.0 million ($8 million for PC2Phone and $2 million for Phone2Phone) in the fiscal year ended July 31, 1998. In addition, NTOP had revenue of approximately $13.2 million: $8.6 million for PC2Phone (up 177% from the six month period ending 1/31/98) and $3.6 million for Phone2Phone (up 1500% from the six month period ending 1/31/98) for the six month period ending January 31, 1999 (up 164% from $5 million for the same six month period ending 1/31/98).
NTOP is leveraging their Internet telephony expertise to integrate real-time voice communication capabilities into the Web. Their simple, easy-to-use software operates on a user's personal computer and allows individuals and businesses to:
*speak with sales or customer service representatives of online retailers and other Web-based businesses while visiting their Web sites;
*speak with individuals or businesses listed on various online directories, such as Yahoo! People Search; and
*call almost any telephone number in the world (NTOP makes U.S. and Canadian toll-free numbers including 800, 877, and 888 prefixes available worldwide).
NTOP plans to introduce new products and services, including PC2PC, which will allow high-quality Internet telephony from one personal computer to another, and anonymous chat, which will enable two parties to engage in an online chat room discussion and establish direct voice communication with each other while maintaining anonymity. Future products may also include:
*unified messaging services, which will include voice, fax, and electronic messaging with multiple points of access, including the Web and conventional telephones;
*online commerce applications which will provide customer service representatives of online retailers with real-time access to a caller's profile, and enable them to "push" specific content onto a caller's personal computer screen in order to better assist the customer;
*customer payment applications which will allow customers to pay for online commerce transactions by debiting their Net2Phone account; and
*real-time video communications between two or more personal computer users over the Internet.
Regarding possible future revenue streams, NTOP intends to pursue new Web-based revenue opportunities from banner and audio advertising, as well as from sponsorship opportunities on their user interface and their EZsurf.com shopping portal. NTOP also intends to explore the availability of transaction-based revenue opportunities, introduce a variety of value-added services and Internet commerce solutions, and sell Web-based advertising to further leverage their customer reach.
Regarding the Internet industry, the Internet is experiencing unprecedented growth as a global medium for communications and commerce. International Data Corporation estimates that the number of Internet users worldwide will grow from approximately 142 million at the end of 1998 to 399 million by the end of 2002. These users are increasingly using the Internet as a communications medium. A recent study by E-marketer, a market research firm, estimated that 9.4 billion e-mail messages are delivered daily. Real-time text communication through online "chat" rooms is also gaining widespread acceptance. Jupiter Communications, a market research firm, estimates that approximately 53% of all Internet users participate in online "chat" rooms.
Online commerce is also becoming widely accepted as a means of doing business. According to International Data Corporation, Internet users worldwide purchased more than $50.0 billion of goods and services in 1998, and that number will grow to approximately $1.3 trillion of goods and services in 2003.
Regarding the Internet telephony business, TeleGeography, a market research firm, estimates that the international long distance market will grow from $26.8 billion in 1998 to $79.0 billion in 2001, with consumers and businesses making an estimated 143.1 billion minutes of international long distance calls in 2001. Despite the large size of this market and the number of minutes of calls made, traditional international long distance calls routed over domestic and foreign public switched telephone networks are still relatively expensive for the consumer. The primary reason for this expense is tariffs set by foreign governments and carriers that are passed on to consumers in the form of higher long distance rates.
Internet telephony has emerged as a low cost alternative to traditional long distance telephony. International Data Corporation projects that the Internet telephony market will grow rapidly to over $23.4 billion in 2003.
Internet telephony calls are less expensive than traditional international long distance calls primarily because these calls are routed over the Internet, bypassing a significant portion of international long distance tariffs. Routing calls over the Internet is also more cost-effective than routing calls over traditional circuit-switched networks, because the packet-switching technology that enables Internet telephony is more efficient than traditional circuit-switched voice technology. Packet-based networks, unlike circuit-based networks, do not require a fixed amount of bandwidth to be reserved for each call. This allows voice and data calls to be pooled, which means that packet networks can carry more calls with the same amount of bandwidth. This greater efficiency creates network cost savings that can be passed on to the consumer in the form of lower long distance rates.
Regarding the integration of voice into the Web, NTOP believes that Internet telephony offers significant benefits to consumers and businesses over and above international long distance cost savings. The technologies that enable Internet telephony can be applied to integrate real-time voice communication into the Web. This integration can further enhance the potential for the Internet to become the preferred medium for both communications and commerce. For example, the integration of voice into the Web could supplement existing text-based models of Internet communication such as e-mail and online chat by adding a real-time, secure, low-cost or free voice communication alternative.
In addition, voice-enabling the Web would give Internet shoppers the ability to speak directly with customer service representatives of online retailers to ask questions and alleviate concerns about online security. This may increase the probability that a sale is made and may give online retailers a key competitive advantage by providing them with cross- and up-sell opportunities. It will also give online retailers the ability to provide more responsive customer support and service (Net2Phone owns the EZSurf.com shopping portal which allows voice communications with over 300 Web retailers).
Integrating real-time voice into the Web would also enable portals and destination sites to offer enhanced communications services, such as providing Internet users with a central source for retrieving voicemail, e-mail, faxes and pages. This would allow these portals and destination sites to attract more users to their sites and to increase the amount of time these users spend on their sites.
Internet telephony growth has been limited to date due to technological and bandwidth issues. However, recent improvements in packet-switching and compression technology, new software and improved hardware, and the use of private networks to transmit calls instead of the public Internet is helping to alleviate these problems. Additionally, the emergence of broadband DSL and cable modems are addressing the local bandwidth issue.
Regarding the competition, several large long-distance carriers, including AT&T and Sprint, have announced Internet telephony service offerings. However, many of these service offerings have not been deployed on a large scale. Many also require users to purchase other telecommunications services or allow only domestic calling. Smaller internet telephony service providers also offer low-cost Internet telephony services. These services, however, are available only in limited geographic areas and require payment by credit card which may preclude many international customers from signing up for these services. Existing Internet telephony service providers rely upon technologies and systems that lack large-scale billing, network management and monitoring systems, and customer service capabilities required for the integration of voice communication into the Web.
In addition, many other companies currently provide Internet telephony software and services that allow Internet telephone calls to be made between personal computers. However, most of these companies require both the initiator and the recipient of the call to have the same software installed on their personal computers and to be online at the same time.
As far as the NTOP/IDTC business relationship goes, several agreements between NTOP and IDTC were made in May 1999. NTOP will pay IDTC for certain administrative (accounting, payroll, and benefits), customer support and other services that IDTC will provide NTOP at the cost of service plus 20%. The companies also agreed to jointly advertise and market their products with links to each other's Web sites, and cross-selling of products. NTOP expects to continue to utilize IDTC's interntaional and domestic networks at the current fair market value rates for termination. IDTC granted NTOP the right to use portions of its current DS3 Network for two years, and NTOP will pay IDTC $60,000 per month for the right to use those portions of its existing newtwork. NTOP also agreed to pay IDTC a one-time fee of approximately $6 million (payable over 5 years in monthly installments with interest of 9%) for a 20-year right to use part of the capacity of a new DS3 network which is under construction, and an additional installation fee of $600,000 for this network. NTOP will also reimburse IDTC for all maintenance and upgrade costs incurred by IDTC with respect to those portions of the network that NTOP will use. Further, NTOP will pay IDTC an aggregate of $1.2 million over a two-year period for the right to use IDTC equipment and other assets at its backbone points of presence and its network operations center. After that, NTOP has the right to purchase any of the equipment at fair market value.
Those are the facts. With IDTC currently trading at near $21.50 (a market cap of $500 million), 9/99 $30 call options (IQJIF) are $3.25 at the ask price, and 9/99 $35 call options (IQJIG) are $2.75 at the ask price. 12/99 $25 call options (IQJLE) are $6.375 at the ask price, 12/99 $30 options are $5.125 at the ask price, and 12/99 $35 call options (IQJLG) are $4.125 at the ask price. If NTOP can IPO at a value of $3 billion, then IDTC's 66% of NTOP alone will be worth $2 billion, or over $80 per IDTC share. An NTOP valuation of $2 billion is worth over $56 per IDTC share. Do the math on these options, and imagine the possibilities.
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