Net2Phone Inc. (Nasdaq: NTOP): -0- *T
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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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*T 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. -0- *T Net2Phone,
Inc. Condensed Consolidated Statements of Operations (unaudited)
------------------- ----------- ------------------- (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 ------------------- ----------- -------------------
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 - - -------------------
----------- ------------------- Total cost and expense 28,075
21,059 28,577 85,981 79,837 ------------------- -----------
------------------- Miscellaneous Income(a) 133 - 168 301 -
------------------- ----------- ------------------- 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 ------------------- -----------
------------------- 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 -------------------
----------- ------------------- ------------------- -----------
------------------- 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 -------------------
----------- ------------------- (a) Reflects reclassification in
2Q05 to conform to the current quarter's presentation (b) Includes
Restricted Cash ------------------- ----------- -------------------
Net loss $(9,806) $(462) $(10,603) $(28,652) $(4,887) EXCLUDING
--------- 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) -------------------
----------- ------------------- Net loss before special and non-
cash items $(4,814) $(3,126) $(6,574) $(15,495) $(8,875)
------------------- ----------- ------------------- SEGMENT RESULTS
--------------- The following table summarizes the operating
performance of Net2Phone's business segments: -------------------
----------- ------------------- 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) ------------------- ----------- ------------------- 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)
------------------- ----------- ------------------- *T
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