Voice on the Internet pioneer Net2Phone on Tuesday, Oct. 23, announced that its year-end losses more than doubled, its CEO has quit, and a consortium formed by AT&T, IDT and Liberty Media has taken over management and now controls 60 percent of voting shares.
The new management hopes to parlay Net2Phones Voice-over-Broadband technology into profits for a company best known for its cheap, PC-to-phone calling.
As part of the restructuring, Net2Phones Howard Balter has handed over the CEO mantle to IDT Chairman Howard Jonas. Balter, who has been with Net2Phone since 1999, and before that was an IDT executive, also quit the board of directors, but will continue as a consultant until the end of 2001.
"Ive spent the past nine years with IDT and Net2Phone, building these businesses from the ground up. This has been a most rewarding and challenging experience, and I am glad to be leaving the company in capable hands," Balter said. "With EBITDA [earnings before interest, taxes, depreciation and amortization] improving and gross margins rising to over 40 percent, I feel a tremendous sense of accomplishment in delivering on my promises and am looking forward to seeing Net2Phone achieve profitability shortly."
Net2Phone reported a yearend loss of $355.6 million, or $6.25 per share, on revenue of $150.2 million, compared with a loss of $118 million, or $2.29 per share, on revenue of $72.4 million last year.
For the fourth quarter, losses narrowed to $65.8 million, or $11.4 per share, on revenue of $44.2 million, from losses of $24.9 million, or $1.46 per share, on revenue of $81.1 million in the fourth quarter of 2001. EBITDA losses improved by 37 percent, standing at $17 million for the quarter, compared with $27.1 million in the third quarter, and EBITDA losses of $16.8 million in the same period a year ago. Analysts had expected a fourth-quarter EBITDA loss of $21.8 million.
To reach profitability, acting CEO Jonas said Net2Phone must refocus on its more promising business segments, particularly its Voice-over-IP for broadband systems.
Net2Phone earlier this year signed a memorandum of understanding in which Liberty Media said it would use Net2Phones IP technology to deploy telephony on its European cable systems, but how that rollout would occur was never nailed down.
"There were two great possibilities for Net2Phone," Jonas said. "One was telephony that would move in the direction of Voice-over-IP, and although that was happening, the industry is remonopolizing. With capital markets the way they are, there is no great incentive for people to move toward next-generation solutions, but the great dream has been cable telephony.
"We are now entering an era where in America the regional Bells are dominant and the foreign PTTs [postal telephone and telegraphs] have achieved complete dominance. The only natural competitors to the phone companies are the cable systems," he added. "In my mind, there is no question that if we concentrate our managerial assets, technology assets and relationships, that this company is going to change communications."
Liberty Media, the largest cable operator outside of the U.S., is controlled by John Malone, who masterminded the roll up of cable giant Tele-Communications Inc., and AT&T and who saw great promise for the resulting AT&T Broadband to deliver telephone service over cable lines. As of June, there were about 1.3 million cable telephony customers, most receiving service over circuit switched networks. Improvements in voice over IP technology are expected to boost that number even higher.
"The goal here is Voice-over-IP for broadband, at first for international second-line service, leading to domestic second-line service and then leading to primary service," said Sara Hofstetter, a Net2Phone spokeswoman.
To form the consortium, IDT, a founder of Net2Phone, and AT&T contributed 10 million and 18.9 million shares respectively to a limited liability corporation. The LLC then sold a "substantial portion" of its shares to Liberty Media. IDT is the consortiums managing partner. AT&T acquired its Net2Phone stake from IDT in 2000, when shares were trading at about $75. Net2Phone closed at $4.15 on Tuesday, Oct. 23.
The company also announced today that it has expanded its board to 13 directors. Jonas will take the 13th seat. In addition, Stephen Brown, IDTs chief financial officer, will replace David Nagel, who left AT&T earlier this year. John Petrillo, executive vice president of AT&T, has resigned, and will be replaced by Jesse King, chief operating officer of the Daniels Fund. Joyce Mason, IDTs general counsel, will replace Balter.