VOIP Pioneer Faces Meltdown

VocalTec needs money, and fast, if it is to survive, but all it has is a promise note from old friend Jeff Pulver

July 14, 2005

5 Min Read
VOIP Pioneer Faces Meltdown

Time is running out for VocalTec Communications Ltd. (Nasdaq: VOCL), one of the pioneers of the VOIP sector, as its management desperately seeks new funding to keep the company afloat (see VocalTec Seeks New Funds).

The softswitch and media gateway vendor, which has been shipping IP telephony equipment since 1995, has seen its sales continue to slide this year and its cash reserves melt away (see VocalTec Reports Q1). Its quarterly revenues have been flat at just $1.1 million for the past two quarters, and earlier this year CEO Elon Ganor said the company was running out of cash and needed new funding. That was in February (see VocalTec on the Brink).

Since then Ganor has secured only a commitment from VOIP industry name Jeff Pulver to purchase an equity stake in the company (more on that later), and continues to seek a white knight. In the company's recent annual report, it noted that:

"We need to raise additional funds to sustain our operations, research and development and sales infrastructure. To date, we have not raised such additional funds and there is a substantial doubt as to the Company's ability to continue as a going concern; such funds, if available, will likely dilute our shareholders significantly and may impose on us restrictions and covenants… Even if we increase our revenues significantly, we nevertheless have to further reduce expenses and raise additional capital or funds in order to cover the cost of our operations, research and development and sales infrastructures… As a result, the Company is considering, in the absence of positive developments in negotiations currently held between the Company and potential investors for a capital investment in the Company, to take immediate measures to significantly reduce the cash use by the Company."

Basically, VocalTec desperately needs more than just a promise from Pulver. The company is burning cash at a rate of about $3 million per quarter, and at the end of March this year the vendor had just $5 million in the bank. With the firm's staffing levels unchanged at about 100 people, VocalTec has enough money to last until the end of August.

It seems that VocalTec is a prime example of what can happen to vendors that ride a wave without continually innovating and updating their technology. It developed a market for its all-in-one H.323-based VOIP package as international operators found it was cheaper to send voice traffic around the world as packets, but then rested on its laurels until last year, when it followed the market by offering its technology as specialized, modular products and renamed its product line Essentra (see VocalTec Wakes Up).

In the meantime, its sales slipped away. In 2000, the company recorded revenues of $37.5 million and a net profit of $28.8 million. In 2004 those numbers had plummeted to revenues of $5.5 million and a net loss of $13.1 million.

The company's share price performance mirrors that slide. In July 2000 the firm's stock hit $25.12. Yesterday it closed down 3 cents at $0.64, valuing the vendor at just less than $7.8 million.

Infonetics Research Inc. analyst Kevin Mitchell believes the company took too long to adapt to an increasingly SIP-centric and best-of-breed market, and reckons there's little hope it can pull itself back from the brink. "VocalTec was a VOIP pioneer but it didn't evolve with the times and grow beyond its original business of international long distance and toll bypass. I believe it's been holding on for some sales of its new Essentra line to Deutsche Telekom."

The German national operator's international business is not only one of VocalTec's long-standing customers, but also its largest single investor, holding 15.25 percent of the stock. In 2004, DT accounted for $1.7 million, or 31 percent, of VocalTec's total sales. But that was a significant drop from 2003, when the German operator accounted for $9.8 million of the firm's revenues, nearly half of the $18.7 million total.

Now, of course, VocalTec has a marketing pitch, including SIP functionality and voice-over-broadband capabilities, to rival other VOIP system players, but its new line has failed to attract any major users (see VocalTec Upgrades Softswitch , Spain's Nova Deploys VocalTec VOIP, Afripa Uses VocalTec for VOIP, and VocalTec Bolsters Its BAX).

So what's the latest update? A VocalTec spokeswoman says there is no investment news to divulge, and while operating costs have been cut across the company, none of the staff have been laid off. She also couldn't comment on whether the vendor was considering making staff redundant to reduce its cash burn.

But she did confirm that while VOIP sector figure Jeff Pulver has made a commitment to invest in the company, he hasn't done so yet, and she couldn't say if or when that might happen, or what level of investment that might be.

And Pulver, normally quick to respond to requests from the media, has failed to return emails and calls during the past week concerning his potential involvement in VocalTec.

One of the questions left unanswered so far is why Pulver would consider sinking some of his business's cash into a company that looks set for the telecom graveyard.

One former VocalTec employee, who requested anonymity, believes he knows why Pulver would at least lend his name to VocalTec's fundraising campaign and publicize an intention to invest. The executive says that back in the mid 1990s Pulver faced legal proceedings from the Federal Communications Commission (FCC) for sending packetized voice calls across a basic T-1 data connection, and that VocalTec stepped up to support Pulver with an offer to pay his legal fees. The executive believes that Pulver's current show of support for the vendor is a return favor.

— Ray Le Maistre, International News Editor, Light Reading

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