Thought you would be interested in the following. Looks to me as if everyone is working on the same batch of cookies, only that FTEL has|
the best ingredients(hard for folks to believe that ALL of these guys
are playing with second string gear):
Here is an article that appeared on "The Street.Com." This is a great service is you don't already subscribe.Top Stories: Bay Networks Buys into New Internet Technology
By Kevin Petrie
1/6/98 8:28 PM ET
Bay Networks (BAY:NYSE) has bought a pricey equity stake in Internet "telephony" player NetSpeak (NSPK:Nasdaq), in an attempt to secure at least a piece of a potentially explosive market. Bay is making its $37.6 million wager at a time when the leading networker, Cisco (CSCO:Nasdaq), is gaining ground in Internet telephony, a rising technology that promises to blend voice and data systems. At the same time, after a 160% run-up from late April to mid-October, profit taking and Asian worries have taken their toll on Bay's stock. Tuesday's deal summoned little cheer -- Bay slipped 1/8 to 26 9/16, and NetSpeak dropped 2 3/4 to 24 1/4.
"This is clearly a response to seeing Cisco gaining such a huge early advantage," says analyst Mike Cristinziano at Gerard Klauer Mattison. Cisco is helping the carrier Qwest (QWST:Nasdaq) build an net-Protocol (IP) system that intends to relay voice calls cheaply. Cristinziano's firm has no underwriting relationship with the companies he discussed.
According to the agreement disclosed Tuesday, Bay will insert NetSpeak software into its BayStack and other hardware products to relay fax and voice calls over corporations' networks. That's a big business -- if it works effectively -- and Bay doesn't want to miss out. "I think it's a bit of a hedge" says Cristinziano, who rates the move neutral to positive. Why not buy all of NetSpeak? While Bay has bought other concerns outright, its investment constitutes only 9% of NetSpeak. Bay officials say the structure of this partnership makes the most strategic sense. Internet telephony represents a potentially large but arguably distant market. Bay has previously committed wholeheartedly to technologies with more immediate prospects. In June 1997, it purchased all of Rapid City for $155 million in stock. Rapid produces so-called gigabit ethernet systems, essentially a faster version of traditional corporate-network technology.
In addition, NetSpeak commands a rich price when measured by typical standards. The stock has risen 177.1% from its IPO price on May 29, and now trades at an eye-popping 60 times trailing revenue (calculated by annualizing the first nine months of calendar 1997 -- Q4 1996 numbers were unavailable). Bay is purchasing shares at a 3.9% premium to Monday's closing price. Cristinziano and Bay officials say that given NetSpeak's coming product shipments, the price-to-sales ratio doesn't effectively gauge its worth. NetSpeak president Robert Kennedy says Netspeak has no desire to be bought. He adds that Bay "put some skin in the game" -- namely, an equity investment -- to prove its commitment to co-developing products.
The deal has precedents. Analyst Amar Senan at Volpe, Brown Whelan compares Bay's move with one by Deutsche Telekom (DT:NYSE), which last week cemented a prior agreement to take a 21.1% stake in VocalTec (VOCLF:Nasdaq) and to purchase more than $30 million of products and services. His firm has no underwriting relationship with the companies he discussed. Deutsche Telekom is paying a lower price, measuring by sales. VocalTec, which is losing money, currently trades at 12.5-times trailing revenue (still quite rich by many standards). Deutsche Telekom is paying roughly a 28% premium over VocalTec's share price, which has lost more than one-third of its value since mid-October. Internet telephony is an awkward but cost-saving technology. The Internet ships large volumes of data by dividing them into packets, then reassembling them at the destination. It was not designed to deliver continuous audio streams in a real-time fashion. However, Bay officials say the evolution of more powerful computer processors, more advanced voice-encoding algorithms and one uniform Internet Protocol have enabled the transport of voice traffic. One challenge is that phone users grow impatient with delays. In an article for last month's issue of Business Communications Review, consultant David Passmore points out that delays of greater than 100 milliseconds tend to frustrate the speakers on a phone call -- and it will be a major challenge for current Internet voice systems to beat that threshold, he says. Netspeak officials say their current products run at delays or latency of roughly 160 milliseconds, but add that customers are comfortable with the current quality and that they are working to reduce latency. And, to be sure, many phone conversations via satellite systems run delays exceeding 300 milliseconds.
While it has topped First Call numbers for two quarters, NetSpeak's financials show choppy growth. In the third quarter ended Sept. 30, it posted a net loss of $1.15 million, or 11 cents per share, widening from a net loss of $823,000, or 10 cents per share, one year earlier (shares outstanding increased during the interim). Revenue did grow 665.3% year-over-year to $1.5 million.
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