Net2Phone (NASDAQ:NTOP)
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Net2Phone, Inc. (Nasdaq: NTOP):
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*T
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Note: Net2Phone CEO Liore Alroy will host a conference call at 4:30
p.m. EST today. The call can be accessed at
http://web.net2phone.com/about/investor/ or www.vcall.com. A replay of
the conference call will be available online as well.
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*T
Net2Phone, Inc. (Nasdaq: NTOP), a leading provider of Voice over
IP (VoIP) services, today announced its fourth quarter and year end
results for fiscal year 2005, ended July 31, 2005.
Financial highlights and significant achievements for the quarter
and the year include:
-- Sequential increases in quarterly revenue and gross profit and
decrease in net loss
-- 57% quarter-over-quarter increase in broadband telephony
subscriber lines
-- Contracts to serve cable operators representing 3.1 million
homes as of the end of FY 2005, up from 1.2 million at the end
of FY 2004 and 2.4 million at the end of the third quarter
-- Cable telephony services now marketed to more than 1.2 million
homes
-- Strong balance sheet with $98.0 million in cash and marketable
securities as of July 31, 2005 (including restricted cash of
$20.4 million)
FOURTH QUARTER REVIEW
Revenue for the fourth quarter was $20.8 million, up 5% as
compared with $19.8 million in the prior quarter despite declines in
carrier revenue and down 1% compared with $21.1 million in the fourth
quarter of fiscal 2004.
Gross profit continued quarterly improvement, with fourth quarter
gross profit at $8.6 million on 41% gross margins, up from $8.2
million in the prior quarter on 41% gross margins and down from $9.3
million in the fourth quarter of 2004.
Year over year declines in revenue and gross profit are primarily
attributable to the de-emphasis of certain business lines, erosion of
certain direct-to-consumer services sold by NGS, as well as previously
disclosed revenue adjustments.
"We're very pleased with the quarter-over-quarter trends seen -
revenue has improved in almost every area of our business," said Liore
Alroy, CEO of Net2Phone. "We've seen continued interest in our
broadband telephony solutions across every type of partner we have -
cable operators, telcos, and our international reseller partners in
the emerging markets. The combination of cutting edge technology,
market experience, product knowledge and brand recognition has driven
continued growth in the quality and quantity of our partnerships."
The company's net loss for the fourth quarter totaled ($9.6)
million compared to ($9.8) million in the third quarter of fiscal 2005
and ($6.3) million in the fourth quarter of fiscal 2004. 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), net interest income, 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 aforementioned items have on the company's results.
Net loss before special and non-cash items in the fourth quarter
was ($4.4) million, as compared with ($4.8) million net loss before
special and non-cash items in the third quarter of fiscal 2005, and
($3.2) million net loss before special and non-cash items reported in
the fourth quarter of fiscal 2004. Net loss before special and
non-cash items is not a term defined by accounting principles
generally accepted in the United States (GAAP) and may not be
comparable to other similarly titled measures prepared 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 measures used by
management. Management uses this measure, instead of net loss, as a
basis for allocating resources and making other daily operating
decisions.
Net2Phone Global Services, LLC (NGS) generated revenue of $19.5
million, as compared with $19.4 million last quarter and $21.0 million
in the fourth quarter of 2004. NGS reported segment income of $1.4
million in the fourth quarter, up 17% over segment income of $1.2
million last quarter, and down from $1.5 million the fourth quarter of
2004. Sequential quarterly improvements demonstrate NGS' ability to
maintain profitability as it expands services to new markets or to new
resellers. 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.
In the fourth quarter, Net2Phone Global Services began offering
its VoiceLine broadband telephony service in conjunction with a number
of channel resellers globally, resulting in solid active subscriber
line growth. Concurrently, revenue from NGS' low-margin wholesale
carrier business declined. The company is optimistic that increased
channel revenue from "tier one" partnerships with operators such as
Empresa Telecomunicaciones de Bogota (ETB) in Colombia, Cable &
Wireless in the Caribbean and A5 in Brazil will ultimately result in
longer-term profitable and sustainable growth.
Net2Phone Cable Telephony, LLC (NCT) revenue was $1.3 million, up
160% as compared with $0.5 million last quarter, and up from $0.1
million in the fourth quarter of 2004. NCT reported segment loss of
($4.0) million in the fourth quarter, as compared with segment loss of
($4.2) million in the third quarter, and segment loss of ($2.7)
million in the fourth quarter of 2004. The increased segment loss
reflects the continued build out of NCT's infrastructure to support
the expected growth in the business as well as the early stage of
customer deployments, during which fixed costs are incurred to
initiate service while subscriber penetration has not yet achieved a
critical mass in these markets.
In the fourth quarter, the company delivered telephony solutions
for Bresnan Communications, Coditel Belgium, Coditel Luxembourg, EST
Videocommunication, Liberty Cablevision of Puerto Rico, Millennium
Digital Media, Northland Cable Television, and several members of the
National Cable Television Cooperative (NCTC). In the aggregate,
Net2Phone's services are being used by these operators to market cable
telephony services to approximately 1.2 million households in their
franchises.
As of the end of the quarter, Net2Phone was servicing more than
39,000 broadband telephony subscriber lines, which includes both
PacketCable telephony subscriber lines as well as VoiceLine subscriber
lines through Net2Phone's cable operator partners, channel partners
and web site. As of the end of the fourth quarter, Net2Phone has
executed contracts to serve cable operators serving franchises of over
3.1 million homes passed.
FISCAL YEAR 2005 REVIEW
Results for the fiscal year reflect the Company's commitment to
stabilizing its profitable core business and growing its cable
telephony business. Revenue for the fiscal year was $78.8 million,
down 5% from $82.8 million in the prior fiscal year. Year over year
decline in revenue is primarily attributable to the de-emphasis of
certain business lines, erosion of direct-to-consumer services sold by
NGS as well as previously disclosed revenue adjustments.
Net loss for the fiscal year was ($38.3) million compared to net
loss of ($11.2) million in fiscal 2004 which included other income of
$12.2 million primarily attributable to the gain of $12.6 million
realized from the buyout of ADIR's minority interest holders. Net loss
before special and non-cash items for the fiscal year was ($19.9)
million, as compared to ($12.1) million in fiscal 2004. Capital
expenditures during the fiscal year totaled $12.6 million. As of July
31, 2005, the Company held a total of $98.0 million in cash, cash
equivalents and marketable securities (including restricted cash of
$20.4 million), as compared to $132.8 million at the end of the prior
fiscal year (including restricted cash of $21.3 million).
Gross margin company-wide for the year was 40.4%. The company has
now achieved gross margins above 40% for four consecutive years.
NGS reported revenue of $76.3 million in fiscal year 2005 compared
to revenue of $81.1 million in fiscal 2004. Segment income was $3.7
million, as compared to segment income of $5.2 million in fiscal 2004
NCT reported revenue of $2.4 million in fiscal year 2005 compared
to revenue of $1.6 million in fiscal 2004. NCT reported a segment loss
of ($16.2) million in fiscal 2005 compared to a segment loss of ($9.3)
million in the prior fiscal year as it continued to invest in the
staff and resources necessary to address its opportunities in the
global cable telephony marketplace.
CORPORATE STRUCTURE
As the company has continued to deploy solutions to cable
operators and other service providers that feature similar service
elements, it became increasingly clear that managing the business
through two separate operating entities was becoming less efficient.
Recently, the company has integrated material portions of its
telecommunications administration operations under a single management
team. It has also consolidated overlapping portions of the Network
Operations Center that existed or were being developed at each of the
two subsidiaries. The company also recognized a strong trend toward
cross selling of products developed in one subsidiary through sales
channels built in the other subsidiary and, in response, the company
has recently centralized product management.
As a result, Net2Phone's management team and its Board of
Directors decided to reorganize the Company's management structure and
business plan to reflect these changes. This reorganization was
approved by the Board of Directors and finalized in August 2005 and
resulted in changes to managers' accountabilities and, therefore, to
the way the internal financial reports are organized and used by
management and the Board of Directors. The result of these internal
changes is that Net2Phone no longer qualifies for segment reporting
under applicable accounting standards. For that reason, beginning with
the first quarter of fiscal 2006, Net2Phone will no longer report
segment financial results. Instead, the Company will report its
revenue based on its four core sales channels: Cable, Consumer,
International Reseller and Carrier. By reporting the revenue generated
through each of these channels, Net2Phone believes investors will gain
a clearer understanding of the company's trends, prospects and
financial results.
"We are satisfied that our two original goals for creating the
segments have been achieved - demonstrating that we can manage a
business like NGS that operates in a competitive and dynamic market
for profitability plus showcasing the size of our investment and
commitment to our cable telephony business. We have done this, and
needed to review our organization in light of the current way we run
our business and cross-sell our products. We expect to now provide
more clarity within the sales channels in which we market and sell our
products, which will give the investment community deeper visibility
into our financial results and how we run our business," commented
Alroy.
Update on Internal Financial Controls
During the quarters ended January 31, 2005 and April 30, 2005, the
Company reported deficiencies in its internal financial controls
related to tracking fixed assets and depreciation expense, accounting
policies and financial controls related to deferred revenue, and
additional process related deficiencies relating to the adequacy of
its finance department staffing levels. Taken together, these
deficiencies were deemed significant enough to be reported as a
"material weakness" in the Company's financial controls during those
periods, as such term is defined by Public Company Accounting
Oversight Board's Auditing Standard No. 2. The Company is pleased to
report that these deficiencies have been remediated, and that as of
July 31, 2005, the Company believes that it does not have a material
weakness in its internal financial controls.
As required by Section 404 of the Sarbanes-Oxley Act of 2002,
management formally assessed the effectiveness of the Company's
internal controls over financial reporting as of July 31, 2005. In
making this assessment, management used the criteria set forth by the
Committee of Sponsoring Organizations of the Treadway Commission
(COSO) in its "Internal Control-Integrated Framework" report. Based on
this assessment of the Company's internal financial controls and the
COSO criteria, management will report in the Company's Annual Report
on Form 10-K, which it expects to file on or before October 14, 2005,
that management believes that the Company maintained effective
internal controls over financial reporting as of July 31, 2005.
About Net2Phone
Net2Phone provides VoIP PacketCable, SIP and wireless solutions
around the world. As a leader in turnkey 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
enterprise services in over 100 countries. Net2Phone helps cable
operators deliver a high-quality, primary-line-type service that
includes emergency calling, basic and enhanced features. 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 forward-looking statements and results include, but are
not limited to, 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,
identification of additional material weaknesses in the Company's
internal financial controls, 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, obtain patent protection, and obtain
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. All forward-looking statements and
risk factors included in this document are made 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 financial measures recorded in accordance with accounting
principles generally accepted in the United States (GAAP) for all
non-GAAP financial measures mentioned in this release.
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Condensed Consolidated Statements of Operations
(unaudited)
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(All Numbers in 000's 4Q05 4Q04 3Q05 Year Year
except EPS Ended Ended
Calculation)
July 31, July 31, April 30, July 31, July 31,
2005 2004 2005 2005 2004
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Revenue $20,817 $21,112 $19,815 $78,757 $82,779
Direct cost of revenue 12,219 11,813 11,615 46,931 46,794
Selling, general and
administrative 14,760 12,496 13,388 54,399 48,446
Depreciation and
amortization 2,141 2,715 2,356 8,488 10,530
Non-cash compensation 1,035 (105) 1,089 3,972 (3,168)
Non-cash services
provided by IDT 819 662 (702) 1,071 3,369
Restructuring,
severance, impairment
and other items 468 743 329 2,562 2,192
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Total cost and
expense 31,442 28,325 28,075 117,423 108,163
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Miscellaneous Income 509 21 699
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Loss from operations $(10,116) $(7,213) $(8,239) $(37,967)$(25,384)
Interest income, net 411 514 260 1,864 1,981
Other Income (loss) 72 418 (1,827) (2,182) 12,235
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Net loss available to
common stockholders $(9,633) $(6,281) $(9,806) $(38,285)$(11,168)
Net loss per common
share-basic and
diluted $(0.13) $(0.08) $(0.13) $(0.50) $(0.16)
Weighted Average number
of common shares used
in the calculation of
basic net loss per
common share 76,345 75,623 76,217 76,120 70,560
Weighted Average number
of common shares used
in the calculation of
diluted net loss per
common share 76,345 75,623 76,217 76,120 70,560
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Cash, cash equivalents
and marketable
securities(a) $98,024 $132,815 $105,944 $98,024 $132,815
Fixed assets (net) 22,805 18,929 21,476 22,805 18,929
Total assets 141,830 165,257 147,540 141,830 165,257
Total Stockholders'
Equity 95,619 128,625 103,061 95,619 128,625
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(a) Includes
Restricted Cash
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Net loss available to
common stockholders $(9,633) $(6,281) $(9,806) $(38,285)$(11,168)
EXCLUDING
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Depreciation and
amortization (2,141) (2,715) (2,356) (8,488) (10,530)
Inventory
obsolescence expense (11) - (353) (364) (556)
Non-recurring SG&A
expense (1,213) - (1,586) 168
Restructuring,
severance,
impairment and other
items (468) (743) (329) (2,562) (2,192)
Non-cash compensation (1,035) 105 (1,089) (3,972) 3,168
Non-cash services
provided by IDT (819) (662) 702 (1,071) (3,369)
Interest income, net 411 514 260 1,864 1,981
Other Income (loss) 72 418 (1,827) (2,182) 12,235
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Net loss before
special and non-cash
items $(4,429) $(3,198) $(4,814) $(19,924)$(12,073)
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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 $19,495 $21,000 $19,363 $76,322 $81,137
Net2Phone Global
Services (NGS) -
Segment Income 1,425 1,454 1,160 3,739 5,161
Net2Phone Cable
Telephony (NCT) -
Revenue 1,322 112 452 2,435 1,551
Net2Phone Cable
Telephony (NCT) -
Segment Loss (3,966) (2,711) (4,164) (16,171) (9,306)
Corporate / Other -
Revenue - - - - 91
Corporate / Other -
Segment Loss (1,888) (1,941) (1,810) (7,492) (7,928)
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Total - Revenue $20,817 $21,112 $19,815 $78,757 $82,779
Total - Segment Loss $(4,429) $(3,198) $(4,814) $(19,924)$(12,073)
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