VOIP services

Skype: Revenue Doubles, Growth Slows

Skype Ltd. , the VOIP pioneer best known for its free IP telephony service, reported revenues of $77 million in the first quarter of this year, according to the latest earnings report from its parent company eBay Inc. (Nasdaq: EBAY). (See EBay Reports Q1.)

That's up 119 percent from the same period a year earlier, and up 22 percent from the prior quarter. (See table below.)

Table 1: Skype Revenues 2006-2007
    Q1 2006   Q2 2006   Q3 2006   Q4 2006   Q1 2007 
Revenues (in millions) $35.16 $44.16 $50.02 $63.42 $77.01
Current quarter vs prior quarter 42% 26% 13% 27% 22%
Current quarter vs prior year quarter NA NA NA 156% 119%
Percent of revenues from international (outside U.S.) 87% 86% 84% 84% 85%
NA = not applicable (eBay completed Skype acquisition in October 2005)
Source: eBay

Skype's figures show that in calendar 2006, it pulled in $192.76 in revenues, and in the past 12 months, $234.61 million. EBay, which acquired Skype for $2.6 billion in late 2005, doesn't provide operating profits or margin breakdowns for its various business units, though, so how much Skype is adding to the bottom line is unknown. (See EBay Buys Skype for $2.6B and Skype Feels Pressure to Pay Its Way.)

Skype's user numbers also grew significantly during the past year. By March 31 it had 196 million registered users, up 107 percent from 95 million a year earlier, though the company doesn't provide figures to show how many of those subscribers are active. (See table below.)

Table 2: Skype Registered User Growth 2006-2007
Q1 2006 Q2 2006 Q3 2006 Q4 2006 Q1 2007
Registered users (millions) 95 113 136 171 196
Current quarter vs prior quarter 27% 20% 20% 26% 14%
Current quarter vs prior year quarter NA NA NA 129% 107%
NA = not applicable (eBay completed Skype acquisition in October 2005)
Source: eBay

But while the annual user growth is impressive, some of the sequential numbers display signs of a potential slowdown. For example, quarter-on-quarter subscriber numbers grew just 14 percent, far lower (in percentage terms) than during any other sequential period in the previous year. Skype added 25 million unique users in the first quarter, while in the previous quarter it added 35 million.

More worrying to the eBay financial team will be the sudden halt in the volume of Skype Out calls -- that is, calls that go from a Skype account to a PSTN number, and which generate revenue (while Skype-to-Skype calls are still free of charge). (See table below.)

Table 3: Skype VOIP Traffic Volumes 2006-2007
Q1 2006 Q2 2006 Q3 2006 Q4 2006 Q1 2007
Skype to Skype Minutes (in billions) 6.9 7.1 6.6 7.6 7.7
Year on year growth NA NA NA 46% 11%
Skype Out Minutes (in billions) 0.7 0.9 1.1 1.5 1.5
Year on year growth NA NA NA 189% 131%
NA = not applicable (eBay completed Skype acquisition in October 2005)
Source: eBay

While the volume of Skype Out minutes grew sequentially during 2006, and in fact more than doubled from the first quarter's 0.7 billion to 1.5 billion in the fourth quarter, the first quarter of 2007 saw Skype Out call minutes remain flat on a sequential basis at 1.5 billion.

There was also only a small rise in the number of free Skype-to-Skype minutes in the first quarter of this year -- 7.7 billion minutes, compared with 7.6 billion in the final three months of 2006.

This means that more Skype users are spending less time using the service, according to Ovum Ltd. analysts Mark Main and Steven Hartley. "Given that we estimate that approximately one sixth of users are regular users (at least once a week), there is now additional pressure to grow an active user base," they say in a research note.

They note, though, that the sudden halt in Skype Out minutes might be due to some revenue-generating calls having shifted to one of Skype's new services, Skype Pro, for which there are no current usage statistics. Skype Pro bundles a number of services, including free in-country calls to PSTN lines and voicemail, into a single package. (See Skype Unveils New Pricing.)

Also, they note, short-term promotions of free Skype Out calls made available last year would have bumped up the minutes volumes beyond normal growth patterns in the last few months of the year, which would explain the big leap from the third quarter of 2006 to the fourth quarter (1.1 biilion to 1.5 billion minutes).

However, Skype "is now coming up against both traditional telcos and specialist VOIP providers and its rapid growth is diminishing," so further service innovations are expected, note the Ovum analysts.

— Ray Le Maistre, International News Editor, Light Reading

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