|
These deals will give millions of ordinary folks a chance to try voice-over-the-Internet services -- for better or worse. But the poor sound quality of some Net phone calls makes analysts question the technology's business potential, despite its vast cost advantages. And with most of Net2Phone's partnerships promoting free domestic calling, plus the dozens of competitors, the business model hardly seems airtight. CISCO DEAL. Perhaps these dynamics explain why Net2Phone is expanding into the corporate market now. CEO Howard Balter denies that's the reason -- he says the company is just taking advantage of new revenue opportunities. But earlier this year, Net2Phone launched Internet-telephony products for large companies. Then, on Nov. 13, it debuted a new product line for midsize and small businesses. It's also forming a new company with Cisco Systems ( A year ago, such a panoply of big-name deals would have been the stuff of a soaring stock price. Net2Phone's growing user base and revenues would have also cheered investors. The company already boasts 1.2 million regular users, up from 325,000 a year ago. And for its fiscal fourth quarter, ended last July, it posted $25 million in revenues, up from $19 million the quarter before and $11 million the year before. Yet Net2Phone's stock price is down 60% this year and has traded below $20 for the past month. Believing the stock to be undervalued, the company is in the middle of buying back 5 million shares. CONVERGENCE OF SECTORS. To be sure, much of the decline is due to market conditions. "We're at the convergence of two great sectors," says Balter, referring to telecommunications and the Internet. "They are also two that have been destroyed in the market. So when you combine both together, people are not too thrilled." Robert Fagin, an analyst at Bear Stearns, agrees the slide is "largely market-related," since investors have lost interest in money-losing Web companies that are all trying to pull off what he terms a "flight to profitability." Given these conditions, Fagin has only a middling "accumulate" rating on the stock, but says, "the company is at the epicenter of what is clearly emerging as a very important market." Chase H&Q analyst David Levy rates Net2Phone a "buy" and says its position as a "voice-enabler of Web sites," as well as its exclusive relationships with the top portals, gives it an edge over its competition. Meanwhile, as Net2Phone builds out its network and spends to attract new customers, its losses are growing. For its fiscal 2000 fourth quarter, the company reported a net loss of $16 million, excluding some onetime charges, or 29 cents a share, up from a loss of $4 million, or 10 cents a share, a year earlier. Balter, who points to the company's 40% gross-profit margins, says it will be profitable in the next 24 months and could move into the black sooner depending on the success of its deals with Cisco and AT&T. But with $500 million in cash and no debt, he says, Net2Phone could last five to six years more even without improving its numbers. PATIENCE REQUIRED. As for concerns about the free-call offers, Balter says, those deals can produce advertising and sponsorship revenues, and also attract new customers, who can then be sold paid services. Besides, he adds, the bulk of the company's customers use its service to make calls outside the U.S., and all the new portal deals are just starting to bring in revenues. "A lot of these deals take a little patience," he says. Although some investors took it as a sign of weakness when the company announced the Cisco joint venture, Balter contends the deal validates his company's technology. "Just because existing business is successful doesn't mean you aren't going to take advantage of a new opportunity," he says. "It doesn't mean we're desperate." Balter also says the upcoming deal with AT&T could improve financial forecasts for the company. But Wall Street doesn't like to be kept waiting. For one, Dain Rauscher Wessels downgraded the stock to "buy" from "strong buy" on Oct. 6, citing unanswered questions about the impact of the Cisco joint venture and AT&T deal on revenues and cash flow. "NOT QUITE READY." But until it can cut its losses, Net2Phone's business model is still largely unproven. "There is the opportunity, but then they really need to find a business model that can take advantage of that opportunity," says Chris Nerney, senior analyst with Internet.com. "That is the big trick with the Internet." By way of example, he points to Amazon.com -- clearly the king of e-tailing, but still losing tons of money. For now, he says, Internet-telephony technology is "not quite ready for prime time." Net2Phone's slew of new portal deals will certainly provide that test in the next few months. Investors with an appetite for risk may want to take a chance on the leader in this new technology. But this is the hardest market for startups in years. So most investors will want to make sure Net2Phone is dialing all the right numbers before they buy the stock. Stone is an associate editor at Business Week Online EDITED BY THANE PETERSON |
