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Can You Here Me Now?
Investors Are Making A Hefty Bet On The Future Of
Telecommunications
March 17,
2004
By Lawrence Carrel
Shares of WorldQuest Networks rocketed
82% to a nearly four-year high of $6.75 Wednesday after the tiny telecom outfit
agreed to merge with Ntera Holdings, a privately held provider of voice over
Internet protocol, or VoIP, technology. WorldQuest is in the business of selling
phone cards that route calls over VoIP networks like Ntera's.
"People
are going crazy over VoIP," says Kate Griffin, senior analyst at the Yankee
Group, a Boston research firm. "It's a whole new way to make a phone call. The
convergence we've been talking about for 10 years is finally happening."
Also known as broadband telephony, VoIP allows calls to be made over the
Internet through standard landline phones. The big advantage: It's generally
much cheaper than making calls via traditional carriers. And according to
Griffin, VoIP also allows consumers to manage phone calls in much the same way
as email, such as setting up filters to block unwanted callers.
"It will
continue to bleed the lines between computers, the Internet and telephony," she
says. Griffin's 2004 forecast for local VoIP access is less than 200,000
subscribers, but she sees the number growing to two million by 2007. (Griffin
doesn't own shares of WorldQuest Networks; Yankee Group doesn't do investment
banking.)
VoIP started out as a way to make free - or nearly free -
phone calls between computers. In the early days, extra equipment was required,
and the connections were spotty at best. VoIP was more a curiosity than a
business. As technology evolved, WorldQuest took the idea a step further by
selling prepaid phone cards that allowed cheap long-distance calls to be made
with regular phones over VoIP networks. Customers dial an access number, enter a
PIN, and the WorldQuest computers digitize the call and send it over the
Internet. While the system is in its infancy, the idea is catching on.
"Total U.S. revenue, when you mix in the computer-to-computer service
providers with these types of services, for consumers alone was $154.4 million
in 2003," says Daryl Schoolar, an analyst at In-Stat/MDR, a telecom market
research firm in Scottsdale, Ariz. "That was 44% growth from 2002, and it's
expected to grow this year by 65% to $255.3 million. The market is growing
rapidly. By 2007, I expected it to reach $2.05 billion."
The industry's
growth is also benefiting from few regulations, Schoolar says, so companies are
paying little in the way of fees and taxes, which can account for nearly 30% of
a typical phone bill. (Schoolar doesn't own shares of WorldQuest Networks;
In-Stat/MDR doesn't do investment banking.)
While WorldQuest, based in
Dallas, didn't disclose the financial terms of the deal, Chief Financial Officer
Victor Grijalva told SmartMoney.com that 29 million shares would be issued to
Ntera. WorldQuest has 6.4 million shares outstanding right now. Once the merger
is finalized within the next six months, Ntera will control 80% of the combined
company. Existing WorldQuest stockholders will hold the remaining 20%.
WorldQuest also agreed to extend a $2 million bridge loan to Ntera.
Ntera has the upper hand in the deal because it owns its own VoIP
network. WorldQuest currently buys space on other's networks. Ntera's clients
include Sprint, Qwest and Verizon.
Ntera claims its VoIP network
connects 100 U.S. cities, 100 Mexican cities and 23 Canadian cities, along with
major cities around the world, through a network with a capacity to handle four
billion minutes a month.
After the deal closes, WorldQuest, which will
remain publicly traded, won't have to rent network space, and can even sell its
excess capacity to others. The combined company also plans to compete in the
high-margin retail market against larger VoIP service providers such as Vonage,
8x8 and DeltaThree.
That's no small shakes for WorldQuest, which hasn't
posted a profit since its founding in 1996. For the nine months ended Sept. 30,
the company posted a net loss of $2.7 million, or 42 cents a share, on revenues
of $7.2 million.
After the merger, WorldQuest expects to record 2004
sales of $150 million. CFO Grijalva declined to forecast when the company will
post a profit. For the third quarter, it had a cash-burn rate of $600,000.
WorldQuest will move to Miami, where Ntera is based. Chief Executive
Stephen Polley, who's resigning, the company says, because he doesn't want to
relocate, will be replaced by B. Michael Adler, the founder and chairman of
WorldQuest. Adler currently owns 42% of WorldQuest's outstanding stock.
While the fledgling sector is certainly speculative, one vote of
confidence comes from an unlikely source: Peter Lynch. The Fidelity legend who
made famous the investing manta, "Buy what you know," holds a 10% stake in
WorldQuest.
Quote:
"Today there are about 150,000 VoIP packet
lines," says Charles Golvin, principal analyst at Forrester Research, a
technology market research firm in Cambridge, Mass. "That's not necessarily
people using PCs to make calls, but connections to VoIP boxes in substitution
for a traditional network. Our forecast is that by 2006 there will be 4.8
million VoIP lines driven by cable operators such as Cablevision and Time
Warner. That's a lot of growth, but bear in mind that five million lines in 2006
still represents well less than 5% of the total number of households and number
of lines. That means there is a lot more room for growth over the next 15
years." (Golvin doesn't own shares of WorldQuest Networks; Forrester Research
doesn't do investment banking.)
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