Net2Phone (NASDAQ:NTOP)
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Net2Phone Inc. (Nasdaq: NTOP):
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Note: Net2Phone CEO Liore Alroy will host a conference call at 4:30
p.m. EST today. The call-in number is (800) 811-0667. The call can be
accessed at http://web.net2phone.com/about/investor/ or www.vcall.com
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Net2Phone Inc. (Nasdaq: NTOP) today announced results for the
third quarter of fiscal 2005 ended April 30, 2005.
Highlights for the quarter and recent achievements include:
-- 79% quarterly increase in broadband telephony subscribers,
bringing the total to more than 25,000 subscribers
-- Cable operators marketing Net2Phone telephony to over one
million households as of April 30, 2005, triple the number of
households under market compared to the end of the prior
quarter
-- Commercial launches by Coditel, EST Videocommunication,
Bresnan, Millennium, Northland, Cable & Wireless Cayman
Islands and Empresa Telecomunicaciones de Bogota (ETB)
-- New cable contracts with operators representing approximately
500,000 households passed, bringing total number of households
passed to 2.4 million
"With our cable partners marketing to more than 1 million homes --
up threefold from just three months ago -- we now are starting to see
traction across all our partners both in the Americas and Europe,"
said Liore Alroy, CEO of Net2Phone. "Early feedback indicates that
customers want to buy phone service from their broadband providers. As
a premier provider of outsourced telephony to broadband operators, we
believe Net2Phone is well positioned to garner market share and bring
on many residential and enterprise subscribers to our system."
Revenue for the Company for the third quarter totaled $19.7
million, an 11% increase as compared with $17.8 million in the prior
quarter (which included a $2.0 million reduction to revenue that
resulted from a review of our quarterly deferred revenue adequacy
analysis, which is described in more detail in "Update on Internal
Financial Controls" below) and an 8% decrease as compared to $21.5
million in the third quarter of fiscal 2004. Gross margin for the
third quarter was 41.1%, as compared to 36.1% in the prior quarter
(42.5% on a pro forma basis excluding revenue adjustment) and 40.4% in
the third quarter of fiscal 2004.
Net loss for the third quarter was ($9.8) million compared to net
loss of ($10.6) million in the prior quarter and net loss of ($0.5)
million in the third quarter of fiscal 2004. Net loss for the second
quarter of fiscal 2005 reflects the aforementioned $2.0 million
revenue reduction. Net loss includes certain non-operational, non-cash
and/or non-recurring items that management excludes in assessing the
Company's performance. As a result, the Company also reports net loss
before special and non-cash items(1) (adjusted for depreciation and
amortization, other income (loss), interest income, net, non-cash
compensation, non-cash services provided by IDT, inventory
obsolescence expense, non-recurring selling, general and
administrative expenses and restructuring, severance, impairment and
other items), which excludes the impact these items have on the
Company's financial results.
Net loss before special and non-cash items for the quarter was
($4.8) million, compared to ($6.6) million in the prior quarter and
($3.1) million in the third quarter of fiscal 2004. Net loss before
special and non-cash items for the second quarter of fiscal 2005
reflects the aforementioned $2.0 million revenue reduction. Net loss
before special and non-cash items is not a term defined by generally
accepted accounting principles (GAAP) and may not be comparable to
other similarly titled measurements used by other companies. Such
non-GAAP measures should be considered in addition to, and not as a
substitute for, performance measures calculated in accordance with
GAAP.
The Company believes that net loss before special and non-cash
items provides investors with a measure of the Company's operational
and financial progress that corresponds with the measurements used by
management. Management uses this measurement, instead of net loss, as
a basis for allocating resources and making other daily operating
decisions. The accompanying table includes a detailed reconciliation
of net loss reported in accordance with GAAP to net loss before
special and non-cash items.
Capital expenditures during the third quarter were $1.9 million,
compared with $2.7 million in the prior quarter, and $1.4 million in
the third quarter of fiscal 2004. The Company reported cash, cash
equivalents and marketable securities of $105.9 million as of April
30, 2005, including $21.5 million of restricted funds. This quarter,
Net2Phone completed the payment of $7.5 million to certain of its
cable operator customers to help fund contractually defined capital
expenditures and other investments required of these customers to
support the deployment of Net2Phone Cable Telephony service. These
funds had been held in an escrow account, and were released to the
customers upon their meeting contractually specified objectives,
including upgrading and testing their networks to the extent necessary
to deploy our services to established numbers of households passed,
and marketing our services to these homes. The funds held in escrow
had previously been reported as short-term restricted cash.
Net2Phone Global Services (NGS)
NGS revenue for the third quarter was $19.3 million, as compared
to $17.5 million in the prior quarter and $20.1 million in the third
quarter of fiscal 2004. NGS revenue for the second quarter of fiscal
2005 reflects the aforementioned $2.0 million revenue reduction. NGS
reported segment income of $1.2 million this quarter, exceeding its
capital expenditures by $0.3 million, representing the eighth quarter
of the past nine quarters in which the business has earned more in
segment income than it spent on capital expenditures. Segment income
(loss) is the net income (loss) before special and non-cash items
directly attributable to the segment's operations less the allocation
of certain corporate expenses.
Net2Phone recently launched a suite of co-branded VoIP services
with Empresa Telecomunicaciones de Bogota (ETB), the largest telecom
operator in Colombia, and Cable & Wireless in the Cayman Islands, in
their respective markets. These partnerships build on Net2Phone's
strategy to offer hosted VoIP solutions to partners globally, enabling
them to expedite their time to market while benefiting from
outsourcing their deployments to a provider that has the technical
expertise, robust back-office and worldwide network to support
multiple services on a single platform. Net2Phone can help reduce
partners' capital expenditures and operating expenditures by managing
the back office billing, account generation, call rating, routing and
provisioning, while partners are responsible for sales, marketing,
distribution and tier one customer support.
Net2Phone Cable Telephony (NCT)
NCT revenue for the third quarter was $0.5 million as compared to
$0.3 million in the prior quarter and $1.4 million in the third
quarter of fiscal 2004.
NCT reported a segment loss of ($4.2) million this quarter, as
compared with ($4.4) million in the prior quarter and ($2.4) million
in the third quarter of fiscal 2004, reflecting the segment's
continued investment in cable telephony deployments.
In the third quarter, Northland Cable Television, Bresnan
Communications, Millennium Digital Media, Coditel Luxembourg, Coditel
Belgium and EST Videocommunication all launched cable telephone
service in initial markets - in the aggregate passing more than 1
million homes. As of the end of the quarter, Net2Phone was servicing
more than 25,000 broadband telephony subscribers, which includes both
PacketCable telephony subscribers as well as VoiceLine subscribers
through Net2Phone's web site, channel partners or cable operators.
Through signed agreements with more cable operators, Net2Phone added
another approximately 500,000 homes passed under contract, bringing
the total number of homes passed to 2.4 million.
"We are optimistic having seen the early trends in broadband
telephony subscriber growth. Seventy nine percent quarterly subscriber
growth is encouraging, considering that six of our seven
'telephony-ready' Net2Phone cable operator partners had only started
offering digital phone service during the course of the third
quarter," said Michael Pastor, President of Net2Phone Cable Telephony.
Update on Internal Financial Controls
As reported last quarter, the Company has identified deficiencies
in its internal financial controls. These deficiencies have yet to be
fully remediated. The first of these deficiencies relates to fixed
assets and depreciation expense. Management believes the systems
previously in place to track the Company's fixed assets and record
depreciation expense were "significantly deficient" as defined by
Public Company Accounting Oversight Board's Auditing Standard No. 2
("AS No. 2"). New systems have been designed and are currently in
service, and testing and refinement of these systems is ongoing.
The second financial control deficiency relates to deferred
revenue, which is the accounting liability booked to record
prepayments by customers. Beginning in the third quarter of fiscal
2002 and continuing through the first quarter of fiscal 2005, the
Company performed an analysis each quarter of its deferred revenue
account to determine whether the balance appropriately reflected the
Company's liability to provide services to their prepaid customers.
These analyses often resulted in increases to the deferred revenue
liability with corresponding and equal decreases to revenue, which
management believes resulted from revenue and deferred revenue being
misstated in periods prior to the third quarter of fiscal 2002. In the
aggregate, during the period from the third quarter of fiscal 2002
through the first quarter of fiscal 2005, these adjustments reduced
revenue by a total of $10.1 million. Since management was not able to
determine in which prior periods deferred revenue and revenue may have
been misstated, and by how much, the adjustments were recorded in the
quarter each analysis was completed and prior period financial results
were not restated.
In the second quarter of fiscal 2005, management determined the
controls that were in place to perform the quarterly evaluation of the
adequacy of the Company's deferred revenue liability were not
sufficient, as the information utilized in these analyses did not
effectively reflect certain terms and conditions related to some of
our products. Therefore, the Company updated these controls and
revised its revenue recognition policy to reflect the current process
of reviewing deferred revenue balances in light of the current terms
and conditions related to these products. The revised analysis
performed in the second quarter of fiscal 2005 resulted in an
additional increase to deferred revenue of $2.0 million, with a
corresponding and equal decrease to revenue.
Even though improvements have been implemented, the fixed
assets/depreciation and deferred revenue accounting processes will
continue to be considered "significantly deficient" until testing of
the improved systems is completed by the Company's internal audit team
and its independent registered public accounting firm.
As a result of the two aforementioned control issues, and
additional process related deficiencies concerning the adequacy of its
finance department staffing levels, the Company has determined that
the deficiencies, taken in the aggregate, remain significant enough to
continue to be reported as a "material weakness" in the Company's
financial controls as defined in AS No. 2.
As of July 31, 2005, the end of our fiscal year, we must report on
the effectiveness of our system of internal controls over financial
reporting as required by Section 404 of the Sarbanes-Oxley Act of 2002
and the rules and regulations adopted pursuant thereto. This report
must be included within our Annual Report on Form 10-K for the year
ending July 31, 2005. We are endeavoring to complete our assessment
and remediation procedures in a timely manner, and we believe we are
devoting sufficient resources to achieve this goal. However, we can
provide no assurances that we will meet this objective.
About Net2Phone
Net2Phone (NTOP) provides VoIP PacketCable, SIP and wireless
solutions around the world. As a leader in turn-key hosted VoIP
telephony services, Net2Phone has routed billions of VoIP minutes
globally, servicing more than 100,000 users in the US as well as
hundreds of thousands more overseas. Net2Phone provides partners with
a SIP-based broadband telephony solution, calling cards, prefix
dialing and/or enterprise services in over 100 countries. Net2Phone's
PacketCable platform provides cable operators with the ability to
deliver a high quality, primary line service with features such as
e911. For more information about Net2Phone's products and services,
please visit www.net2phone.com.
This press release contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. These
forward-looking statements involve risks and uncertainties and actual
results could differ materially from those discussed in the
forward-looking statements. For this purpose, any statements contained
in this press release that are not statements of historical fact may
be deemed to be forward-looking statements. Factors which may affect
the Company's results include, but are not limited to, the Company's
ability to satisfy in a timely manner the requirements of Section 404
of the Sarbanes-Oxley Act of 2002 and the rules and regulations
adopted pursuant thereto and any adverse results related to
management's assessment of our internal controls pursuant thereto, the
Company's ability to expand its customer base, the Company's ability
to develop additional and leverage its existing distribution channels
for its products and solutions, dependence on strategic and channel
partners including their ability to distribute the Company's products
and meet or renew their financial commitments, the Company's ability
to address international markets, the effectiveness of the Company's
sales and marketing activities, the acceptance of the Company's
products in the marketplace, the timing and scope of deployments of
the Company's products by customers, fluctuations in customer sales
cycles, customers' ability to obtain additional funding, technical
difficulties with respect to the Company's products or products in
development, the need for ongoing product development in an
environment of rapid technological change, the emergence of new
competitors in the marketplace, the Company's ability to compete
successfully against established competitors with greater resources,
the uncertainty of future governmental regulation, the Company's
ability to manage growth, secure patent protection, and raise
additional funds, general economic conditions and other risks
discussed in this press release and in the Company's filings with the
Securities and Exchange Commission, including those related to our
relationship with our controlling stockholder, IDT Corporation. All
forward-looking statements and risk factors included in this document
are communicated as of the date hereof, based on information available
to the Company as of the date thereof, and the Company assumes no
obligation to update any forward-looking statement or risk factors.
(1)The schedule accompanying this release provides reconciliations
to generally accepted accounting principles (GAAP) for all non-GAAP
financial measures mentioned in this release.
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Net2Phone, Inc.
Condensed Consolidated Statements of Operations
(unaudited)
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(All Numbers in 3Q05 3Q04 2Q05 YTD FY05 YTD FY04
000's except EPS
Calculation)
April 30, April 30, January 31, April 30, April 30,
2005 2004 2005 2005 2004
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Revenue(a) $19,703 $21,451 $17,816 57,828 $61,667
Direct cost of
revenue 11,615 12,790 11,376 34,712 34,981
Selling, general
and administrative 13,388 11,787 13,556 39,639 35,949
Depreciation and
amortization 2,356 2,668 2,097 6,347 7,815
Non-cash
compensation 1,089 (7,059) 1,165 2,937 (3,063)
Non-cash services
provided by IDT (702) 452 (504) 252 2,706
Restructuring,
severance,
impairment and
other items 329 421 887 2,094 1,449
- -
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Total cost and
expense 28,075 21,059 28,577 85,981 79,837
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Miscellaneous
Income(a) 133 - 168 301 -
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Income (loss) from
operations (8,239) 392 (10,593) (27,852) (18,170)
Interest income,
net 260 591 571 1,454 1,466
Other Income (loss) (1,827) (1,445) (581) (2,254) 11,817
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Net loss $(9,806) $(462) $(10,603) $(28,652) $(4,887)
Net loss per common
share-basic and
diluted $(0.13) $(0.01) $(0.14) $(0.38) $(0.07)
Weighted Average
number of common
shares used in the
calculation of
basic and diluted
net loss per
common share 76,217 75,559 76,166 76,068 68,860
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Cash, cash
equivalents and
marketable
securities(b) $105,944 $136,756 $118,022 $105,944 $136,756
Fixed assets (net) 21,476 20,029 20,010 21,476 20,029
Total assets 147,540 173,768 152,388 147,540 173,768
Total stockholders'
equity 103,061 135,055 112,911 103,061 135,055
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(a) Reflects
reclassification
in 2Q05 to
conform to the
current
quarter's
presentation
(b) Includes
Restricted Cash
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Net loss $(9,806) $(462) $(10,603) $(28,652) $(4,887)
EXCLUDING
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Other income
(loss) (1,827) (1,445) (581) (2,254) 11,817
Interest income,
net 260 591 571 1,454 1,466
Depreciation and
amortization (2,356) (2,668) (2,097) (6,347) (7,815)
Inventory
obsolescence
expense (353) - (353) (556)
Non-recurring
SG&A expense - - (374) (374) 168
Restructuring,
severance,
impairment and
other items (329) (421) (887) (2,094) (1,449)
Non-cash
compensation (1,089) 7,059 (1,165) (2,937) 3,063
Non-cash services
provided by IDT 702 (452) 504 (252) (2,706)
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Net loss before
special and non-
cash items $(4,814) $(3,126) $(6,574) $(15,495) $(8,875)
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SEGMENT RESULTS
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The following table summarizes the operating performance of
Net2Phone's business segments:
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Net2Phone Global
Services (NGS) -
Revenue $19,251 $20,058 $17,486 $56,715 $60,138
Net2Phone Global
Services (NGS) -
Segment Income 1,160 1,252 (284) 2,314 3,725
Net2Phone Cable
Telephony (NCT) -
Revenue 452 1,381 330 1,113 1,439
Net2Phone Cable
Telephony (NCT) -
Segment Loss (4,164) (2,382) (4,366) (12,204) (6,593)
Corporate / Other -
Revenue - 12 - - 90
Corporate / Other -
Segment Loss (1,810) (1,996) (1,924) (5,605) (6,007)
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Total - Revenue $19,703 $21,451 $17,816 $57,828 $61,667
Total - Segment
Loss $(4,814) $(3,126) $(6,574) $(15,495) $(8,875)
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