<PAGE>
Filed by ITXC Corp.
Pursuant to Rule 425 under the
Securities Act of 1933 and deemed filed pursuant
to Rule 14a-12 of the Securities Exchange Act of 1934
Subject Company: ITXC Corp.
Commission File No.: 000-26739
TRANSCRIPT OF
ITXC
SECOND QUARTER EARNINGS CONFERENCE CALL
JULY 26, 2000
Operator: Welcome to the ITXC Second Quarter Earnings Call. The guest
speaker will be Tom Evslin. After the speaker's remarks, there
will be a question and answer session. If you would like to ask
a question during this time, please press the number one on your
telephone keypad. If you would like to withdraw your question,
press the pound key. Thank you. You may begin your conference.
Tom Evslin: Good morning. Thank you for joining us. This is Tom Evslin and
Ed Jordan. We're here in Beaverton, Oregon, where it's five
o'clock in the morning, but we wanted to be here last night when
we announced to the people of eFusion that we signed our
definitive agreement, which we'll talk about in a little while.
Now as usual, let me turn the meeting over to Ed Jordan to
review the second quarter financial results and, after that,
we'll talk. I'll give some
<PAGE>
comments on those and talk about the transaction that we just
did or signed a definitive agreement for. And then, as usual,
we'll open it up for your questions. We're recording this and
webcasting it as we always do. And the webcast will be available
for replay through the ITXC Web site. Ed?
Ed Jordan: Thanks, Tom. Thanks again for joining our call today. We are
very excited to report another quarter of very strong results.
Let me start off again by reading the forward-looking statements
disclaimer, then I'll review the line-by-line items of the
release.
I want to remind you that all of our non-historical statements
today constitute forward-looking statements under the Private
Securities Litigation Reform Act of 1995. Our ability to
perform in accordance with these statements could be materially
adversely affected by numerous risks and uncertainties,
including the factors described in our press releases and the
risks disclosed in our SEC filings.
I also want to remind everyone that we've pro forma'd the per
share loss numbers again for the second quarter of 1999 to
reflect the conversion of all classes of our previously issued
preferred stock to common stock which took place at our IPO on
October 1st of 1999. For this reason, when you're looking at the
comparable numbers, the net loss per share line, please make
sure that you focus on the per share loss number of 15 cents for
the second quarter of 2000 as compared to pro forma loss per
share of 16 cents for the second quarter of 1999.
2
<PAGE>
Our revenues for the quarter were $18.6 million, up from $4.6
million in the second quarter of 1999. This represented an
increase of over 400%. It will also represent an increase of
23% over the first quarter of 2000 revenues, which were $15.1
million. For the quarter, we carried 201 million minutes of
use, traffic, up from 24.5 million minutes in the second quarter
of 1999, and up 53% from the 131 million minutes we carried in
the first quarter of this year.
During the quarter, WWeXchange traffic represented 78% of our
total traffic or 157 million minutes. That traffic was up over
35 million minutes over last quarter. And our webtalkNOW!
Service(SM) that we introduced in the middle of the first
quarter of this year, had great growth to over 44 million
minutes for the quarter and that was up from 8.5 million in the
first quarter of this year.
As we mentioned during our last call, we'll begin to break out
the average rate per minute or ARPM by service offering.
WWeXchange had an ARPM of 11.2 cents, which is only an 8%
reduction in ARPM from Q1. Our webtalkNOW! ARPM was actually
2.1 cents, which was up slightly from the ARPM in Q1. As
always, average price per minute will fluctuate based upon the
mix of destination in any given quarter. The variable margin on
webtalkNOW! remains strong, coming in again north of 20%.
At the end of the second quarter, we had 132 active customers.
That was up from 100 at the end of 1999. Our customer
concentrations continue to decrease, as our top ten customers
represented only 57%
3
<PAGE>
of revenue. During the quarter, we only had one customer that
represented more than 10% of revenue. And in fact, they were at
10.01%. So probably next quarter we won't have any 10%
customers.
Our daily communications telecommunications costs were $16.5
million for the quarter or 88.7% of revenue. That was down over
200 basis points from Q1. These costs include the variable
costs associated with terminating traffic to our affiliates and
carriers as well as the IP and connectivity costs to reach these
affiliates or carriers.
Network operations costs were $1 million for the quarter, or
5.6% of revenue, and represent the cost of running our Network
Operations Customer Support Center and costs associated with
deploying our customers and affiliates.
We generated a gross profit for the quarter of $1 million, a
great milestone for the Company as this was the third
consecutive quarter we accomplished positive gross margin.
SG&A costs represent all of our non-cost of sales operating
expenses and include development, sales, marketing, and
traditional G&A expenses. The primary component of these costs
is headcount and headcount related costs. At the end of the
quarter we had 159 employees. The SG&A costs for the fourth
[sic: second] quarter were at $6.5 million, or 35% of revenue,
down from the 39% of revenue they represented in Q1. As we
continue to grow our revenues, we expect these SG&A costs to
grow as well, but again, they still will be coming
4
<PAGE>
down as a smaller percentage of revenue as we continue to
leverage these costs on a much larger basis.
At the EBITDA line item, we had an EBITDA loss of $5.5 million.
I just wanted to highlight that as a percentage of revenues, the
EBITDA margin was negative 30%. That is an improvement over the
first quarter of 1999 [sic: 2000] where the EBITDA margin was
39% negative. And if we look back two quarters, Q4 of 1999 was
44% negative and Q3 of 1999 was 70% negative. So continued good
improvement there on the EBITDA line item as we grow revenues.
Our non-cash expenses include: depreciation and amortization
costs, as well as non-cash employee compensation charges. The
depreciation and amortization represents the costs associated
with depreciating of our fixed assets, primarily gateway
switches, routers and servers, and back office software.
Depreciation and amortization expenses for the quarter were $2.5
million, up from the previous quarter as we continue to expand
the network hubs and the network components. Non-cash employee
compensation costs were the result of the accounting treatment
of stock options issues prior to IPO and remain constant at
approximately $1 million for the quarter.
Interest income, net for the quarter was $3.2 million, up
substantially from Q1, primarily due to the investment of the
proceeds from our filing offering in March. At the end of the
quarter, we had over $210 million in cash and marketable
securities. And since we're in a net loss position, we have no
provision for income taxes at this time.
5
<PAGE>
The net loss per share for the quarter was 15 cents on a share
count of 38.5 million shares, and as I mentioned at the start of
the call, that's compared to our pro forma net loss of 20 cents
on 36.6 million shares for the first quarter of 2000 and our per
share loss of 16 cents for the comparable quarter in 1999.
I want to give you some details on the eFusion acquisition,
which we announced yesterday just after we announced earnings.
The transaction is an all stock deal. We'll be issuing
5,659,000 shares of ITXC common stock, plus some shares to pay
them for their cash-on-hand at closing. We anticipate that
we'll be closing probably in two to three months, depending upon
the regulatory approvals. Of that 5.6 million shares that we're
issuing, approximately 80% of those shares will be locked up for
a period of six months.
Just some quick highlights here in terms of projections for
eFusion. We anticipate fully integrating eFusion into the ITXC
model and we're working on that at this time. We have done some
analysis of their stand-alone performance and their results and
projections. And we are anticipating that on a stand-alone
basis, before synergies, that for 2001, they will generate
somewhere in the neighborhood of $20 million in terms of
revenue, generate gross margins between 40 and 50% on that
revenue, and have operating expenses between $4 and $4.5 million
per quarter. We'll get back to most everyone here as we fine
tune that model and complete the synergy analysis with the ITXC
model.
6
<PAGE>
Let me turn you over to Tom now to talk about the quarter and to
give you all the highlights on the eFusion transaction.
TOM EVSLIN: Great. Hello, again. Just a few comments on the financials, then
I'll go back into our performance in general, and then I'll go
back into the eFusion transaction. Obviously, the over $1
million in positive gross margin are just in services, was very,
very positive for us. This is now the third quarter in a row
that we've had positive gross margin well in advance of when
anybody expected us to. It keeps growing, and it should because
we have a pretty simple business model. We sell stuff for more
than we buy it for, and as we do increasing volumes and do a
good job of keeping SG&A under control, we move forward towards
profitability.
Towards the end of May, we brought up our London switch. The
good news in that is traffic volume is picking up very quickly.
The bad news, which is behind us on that, is we had hoped to
bring it up much earlier in the quarter and learned a lot of
things about bringing up a super PoP in London that delayed us
during the bringing it up.
As Ed pointed, the webtalkNOW! Service(SM) continued to grow
very, very quickly. Be careful of projecting from that growth.
It's extremely volatile: the customers forward and service
itself, our new business model -- we charge per minute of
course, but many of our customers give the service away. And it
fluctuates radically from a very low percentage of our volume to
up to 25% of our volume almost on a day-
7
<PAGE>
to-day basis. So although we did many more minutes of
webtalkNOW! in the second quarter than we thought we would,
we're not ready to project that we'd even do that many minutes
in the third quarter. We just don't know. Similarly, ARPM on
webtalkNOW! was up in the second quarter over the first quarter.
That reflects mixed, that there was less traffic on a percentage
basis, that resulted from US termination and more traffic for
overseas termination. Of course, we're very attractive for
overseas termination because of our network, but that could
fluctuate as well. Traffic from large customers like Dialpad --
has gone up, gone down. None of our customers are covered - are
required to give us substantial amounts of traffic. So it's a
great deal of volatility in the webtalkNOW! traffic. We
anticipate that will continue to grow, but it doesn't have the
predictability yet that the WWX traffic has. That doesn't
affect, we don't believe, in any way our ability to meet our
goals, but I didn't want you to make a too quick projection on
that.
A couple of other pieces of good news that you've seen in our
press releases. Now, 13 out of 14 of the major US based
international carriers are using, are under contract with us to
carry their international traffic: continued testament to the
good quality, excellent quality, that we can deliver over the
Internet consistently. The quarter is tasked. I pointed out
that we're terminating traffic with RBOCs now, although I can't
name the RBOC involved, we're also originating traffic, that is,
we're taking traffic from RBOCs, that's generated by their
customers and terminating it to the rest of the world. That
just started after the end
8
<PAGE>
of the second quarter, so none of that is included in the second
quarter results. That's starting out very, very well and over
time, not necessarily in the third quarter, we see that building
to a huge business as the RBOCs compete more and more through
retail dollars.
I think what we've seen is that we have the ability to take a
business, like WWX business, from the investment phase on a
steady march towards profitability. As Ed and I both pointed
out, WWX is now substantially gross margin positive. We expect
that to continue in a very predictable way and as lines increase
for that service to be profitable. What we've always said that
we would do is layer new services with higher margins onto our
network. And with those services, we start out just as we did
with our WWX service in the investment mode and then we will
take those services in the same organized way and manage them
towards profitability just as we did WWX.
So from our point of view, that's what this transaction that we
announced with eFusion is all about. It accelerates our move
into enhanced services, brings enhanced services to
ITXC. net(TM), more quickly than we would have been able to if
we had developed all the enhanced services on our own.
Generically, we call our enhanced services e-calling. And some
of you may have heard us talk about e-calling before. E-calling
is really the successor to traditional phone calling, just as e-
mail is the successor to traditional mail. E-calling is phone
calling on the Internet, but phone
9
<PAGE>
calling that's desirable, voice calling that's desirable, not
only because it's cheaper, but also because it's much, much
better. Just as we don't only use e-mail because it's cheaper,
we use e-mail because it's better. We just don't want to run out
and get a stamp and get an envelope. We want to be able to send
a letter to a lot of people. E-calling has those same
characteristics. With e-calling, for example, you don't have to
have a zillion different phone numbers for everywhere that you
might be. You can have a single identifier the way that you do
with e-mail. When somebody calls you with e-call, they don't
have to guess where you are and then try to call a phone that's
near you any more than anybody has to know where you are when
they send you an e-mail because the same kind of Internet
addressing is used to locate the recipient of an e-call wherever
that recipient may be. E-calling is combined with other things
that people might be doing on the web like browsing. E-calling
is inherently multimedia for devices being used in multimedia.
E-calling is inherently multi-party so that it's no more
difficult to have ten people on the call. You don't have to make
the kind of special provision that we did for this conference
call. It's no more difficult to have ten people on the call than
it is to have two people on the call. In not too long, people
are going to do Internet calling not only because it's cheaper,
although it will always be very cheap, but because it's much,
much better, because it gives them capabilities which they
simply can't get on the public switch telephone network and soon
will find that they can't live without.
10
<PAGE>
eFusion, with their existing services, provides us with many of
the pieces of technology and deployed services that we need to
fill in pieces of the e-calling checkerboard, particularly when
it's combined with our webtalkNOW! service and run over
ITXC.net, the world's largest Internet telephony network. There
are two very significant deployed services that eFusion has.
It's the synergy here that's really great. One of them is their
Internet Suite Adeline(SM) product which is an Internet Call
Waiting product - somewhat of a misnomer because it not only
makes sure that you can receive calls while your telephone line
is tied up with your Internet connection, but it's also a call
management capability that opens the way to integrating calling
with your e-mail, integrating voice mail with your e-mail. It
also already has follow-me capabilities, so that you can be
located through your home phone number wherever you happen to
be, without the caller having to know where you are. You can
use Suite Adeline so that calls come to your PC when you're not
at home without the person who called having to know. It's
another critical piece of e-calling.
The second service that's already deployed with Lighthouse
customers by eFusion is their Push to Talk (PtT)(TM) service
which we feel is the best degree in push to talk. Push to Talk
is sold to and paid for by merchant websites who want to allow
their customers the option of voice communication with a live
agent. What the merchant websites have found, is that when they
allow this option, shopping cart abandonment goes way down and
the close rate per person who comes
11
<PAGE>
by browsing goes way up. And so the merchant websites are
willing to pay a considerable amount per call, in fact more than
they pay for an 800 call. This is not cost avoidance: this is
revenue generation from the standpoint of the web merchants.
If you think about it, this is another aspect of e-calling
because once the connection is made from the website to the
agent using Internet addressing, then the agent also has the
capability with other technology, that's developed by eFusion,
to do what we call co-browsing. That is, the agent can push
pages at the customer who's pushed the Push to Talk button. So
if the customer is inquiring about a cruise, then the agent can
say, `Hey, here's a picture from the bridge of the boat, here's
what the cabin looks like'. That also adds a lot to the
merchant websites, and it's a good example of combining voice
with the other things that are available on the Internet.
With the eFusion purchase when it closes, hopefully in September
or a little bit later, we get not only this deployed technology,
not only the Lighthouse customers for it, but also the people
who developed these services: very, very good developers, very,
very good engineers, very, very good marketers, who brought
these services to market. And we're looking forward to
maintaining and expanding our capability here in Beaverton.
Those of you who know something about eFusion know that it has
an Intel heritage. Many of the founders, and many of the people
who are here, came from Intel. Intel is an investor in eFusion.
Part of the Intel
12
<PAGE>
legacy is patent protection and eFusion has an extremely good
portfolio of patents which have already been granted that
protects the technology and services that ITXC is getting as
part of this acquisition.
Of course, in the synergy, what ITXC provides is our network, by
far the world's largest network for Internet telephony with Best
Value Routing (TM), which assures good quality even though we're
getting the economics of using the public Internet. We provide
scalability; that network is already a critical mass. You've
seen from our financial statements that the cost of operating
that network on a permitted basis continually comes down.
ITXC brings its demonstrated skill at scaling, its demonstrated
skill at taking a service from inception on a path towards
profitability. ITXC also brings capital. Thanks to our IPO and
thanks to our secondary, we have over $200 million in capital.
And the combined business model, the business model for ITXC
with eFusion and the very aggressive rollout of the e-calling
services that eFusion makes possible - that business model is
fully funded with the capital we have. No need to go back to
the capital markets to fully exploit, not only what we were
doing, but what we're now capable of doing more quickly with the
eFusion acquisition.
The QED, the bottom line on all of this, is what we're doing is
combining the world's largest Internet telephony network, the
lowest cost network for delivering Internet telephony, with a
stack of high margin services. Many of these services are on a
different revenue model, they're not on
13
<PAGE>
a per minute revenue model, they're on a per call revenue model,
or on a per month account revenue model, but they're high margin
services with margins upwards of 40, 50%. Gross margins upwards
of 40 or 50%. So when you put high margin services on top of a
low cost network, you've got a very good recipe for
profitability.
That's the end of the fixed portion of the presentation.
Operator, if you will please now open this up for questions,
please.
OPERATOR: At this time, I would like to remind everyone that if you wish
to ask a question, press the number one at this time. The first
question comes from Tim Horan from CIBC.
TOM EVSLIN: Hi, Tim.
TIM HORAN: Hi, guys. Congratulations.
TOM EVSLIN: Thank you.
TIM HORAN: Tom, quick question more on a longer term vision of where e-
calling is going. Do we need kind of open protocols or
standards? Are there any standards' bodies working on this for
global interoperability? And it would seem to me it's going to
be pretty difficult for you, longer term, to kind of come up
with all the applications you need for e-calling, and I'm
assuming you're going to be looking for other partnerships and
14
<PAGE>
outsourcing, but I'm not sure what you're thinking about that.
Or is this a world where it's going to be kind of a race to
winners take all and someone's going to come up with the best
kind of suite of applications and network that ends up kind of
dominating e-calling, maybe, you know, somebody can do what AOL
has been able to do in the consumer market with some of their
products?
TOM EVSLIN: I would never use a word like dominate when we're going into HSR
review. But, you know, you're absolutely right Tim but in order
for e-calling to grow -- by the way, e-calling is not an ITXC
trademark: it's something that we see as a generic term, like e-
mail or e-commerce for the future of calling, and we don't think
that we'll be the only provider or even that we'll provide every
possible e-calling service. We think that there will be other
providers. We often think, we think that other providers will
often use our network to provide pieces of the e-calling puzzle.
You're absolutely right about standards being required so that
all these puzzle pieces can fit together. One of the standards
that's very important to that is the iNOW! standard that we
worked on and then turned over the IMTC that Intel, Lucent,
VocalTec, Cisco, ITXC, most other major vendors in the area
support, that's an extension of H323. It's now been extended
from gateway to gateway, gateway to gatekeeper, and now client
to gateway, which opens the way to enhanced services.
15
<PAGE>
It's certain that SIP will play a role in there and we're
actively working in standard bodies to find a way to combine the
benefits of SIP with the benefits of iNOW!. It's not winner
take all. It's much too big for that. Like e-mail itself,
because it has the potential for being as big or bigger than e-
mail, as voice traffic shifts over to the Internet, as voice is
enhanced by the Internet and as voice enhances Internet
applications. So we certainly don't plan to develop it all.
People will develop stuff independent of us. People will
develop stuff and run it on our network. We'll get access to
technology through various kinds of alliances, not necessarily
acquisitions, but not to rule that out either. Does that answer
your question?
TIM HORAN: Yeah. And just a quick follow up. It seems to me maybe like,
someone like Microsoft's Outlook product is in a perfect
position to kind of make this migration and maybe to control a
lot of what goes on. I don't know how you feel about that or is
that maybe just an application that's not really suited for e-
calling?
TOM EVSLIN: No, I think it is. And I think you'll find part of e-calling is
the integration of various communication applications. I'm not
a great fan of unified messaging because I don't think people
are going to want to go out and get a new e-mail address, a new
phone number, a new voice mail system, all at the same time. I
think what they want to do is integrate their communications.
So since obviously a lot of people use Outlook
16
<PAGE>
as their communication client, mostly for mail communication, we
think a lot of people are going to get their voice mail from
Outlook as well. And when people -- and it will make a good
front end so that if somebody wants to respond to a voice mail
with either a live phone call or another voice mail, they'll be
able to do that from their Outlook client or other communication
clients that they're using. I have a particular soft spot for
that because it was my product when I was at Microsoft, but I
think it is a very good example of a communication application
that had a narrow communication use: e-mail, which will expand
into a broader communication. And you can easily see how the
voice component of it ties into the scheduling parts of Outlook
as well as the mail handling of Outlook. So that's a very good
example, Tim.
TIM HORAN: Thank you.
Operator: Your next question comes from Bill Garrahan from Lehman
Brothers.
TOM EVSLIN: Hi, Bill.
BILL GARRAHAN: Good morning. Tom, could you maybe walk through a little bit
more about eFusion? Maybe give us some kind of glimpse as to
other kinds of products that could get rolled out and maybe a
little bit of the status of the current couple of products that
you mentioned as far as where they are in the development roll-
out life cycle?
17
<PAGE>
TOM EVSLIN: Sure. I don't want to answer on future products other than the
evolution that serves more pieces of e-calling: I don't like to
announce things that aren't in the market yet. The products
that I announced, that I talked about, the Suite Adeline
Internet Call Waiting product and the Push to Talk product, are
both in market deployment phases -- we listed a few of their
customers, of eFusion's customers, in the press release. Not
all of their customers have been announced, and I'd anticipate
other announcements of customers by them prior to when we close
the transaction. And then more announcements by both of us.
But in the case of both those products, Internet Call Waiting
and Push to Talk, Internet Call Waiting is being distributed by
carriers and ISP's to their end users. eFusion, like ITXC,
doesn't sell to end users so it's in a wholesale model for
distribution. And there are also Lighthouse customers, actual
live merchant websites that are using the Push to Talk product
and are having a great deal of success in increasing the close
rate and the sell rate by using that Push to Talk capability.
I'm still not one to announce new product. It's very easy to
see how the Internet Call Waiting product evolves into much more
complete communication management, call management capability,
integrating voice mail with e-mail, integrating calling with
other things that people do, providing the essential
capabilities for follow-me, which it really does already even
though it's not marketed in that way. And similarly, properly
in order to serve the early market, the Push to Talk software
18
<PAGE>
works very well even in the case where a call center is using
old PSTN switches and equipment, in order to process calls. In
the future, the market will develop with electronic call centers
where calls don't have to convert to PSTN's, and obviously, the
products will evolve in that direction as well.
BILL GARRAHAN: Just a couple of, I guess, details on the company. Has the
number of employees been announced and is the amount of cash
we're talking about here at all significant?
TOM EVSLIN: The number of employees is around a hundred. And no, the -- we
don't know the exact amount of cash and the only reason we
didn't put that in, is we don't know the close date. So that
makes it hard to know what the amount of cash will be, but it
would be $10 million or less depending on what the close date
is, is what I would anticipate. Not a significant amount in the
transaction.
BILL GARRAHAN: Great. Could you maybe talk a little bit about the PC based
call quality and what you see happening to improve call quality
here over time?
TOM EVSLIN: Sure. PC based call quality, ironically when the calls are going
over the Internet, in general, is not as good as phone to phone
quality when calls are going over the Internet. As you know, in
our WWeXchange service(R), major carriers re-sell calls going
over the Internet to their customers
19
<PAGE>
without telling them the calls go over the Internet. They can do
that because the quality is so good that the customers can't
tell the difference. That's not quite true of calls made over
PCs, that originate over PCs and then go to phones for two
reasons. One is the PC wasn't designed to be a telephone. And so
generally, if you're just using the speaker and microphone on
your PC, you just don't get as good sound quality as you get
when you're holding a telephone handset up to your mouth. A lot
of people have gotten around that by getting headsets. And a lot
of people find, frankly, that they don't get the quality they
want when they're using a PC unless they use a headset or one of
the new handsets that have been designed for PCs. Secondly, the
quality varies according to what kind of sound card is in the
PC. And if there's an old sound card, that's not full duplex for
example, then you can't get full duplex sound through the PC.
The old telephony clients were not optimized for sound quality
either. One of the reasons that ITXC supports the new clients
for Intel, as we announced previously, is a great engineering
job was done by Intel in overcoming some of the limitations of
the PC technology and getting very, very good sound quality. And
then the final part to quality is network. When ITXC carries
calls phone-to-phone, we have some control over the network
connections at both ends: the connection to the Internet. The
problem is more complex when somebody's calling from their PC
because they're calling from a random ISP. In fact, companies
that say they provide managed service use dedicated networks to
get quality, are
20
<PAGE>
particularly incapable of solving that problem because they
can't run their managed network to everybody who's using their
PC to talk. ITXC's Best Value Routing(TM), we believe provides
the very best quality possible when somebody's calling up from
most ISP's, but it can't overcome the problem of a very bad last
mile, a very bad ISP, meaning an ISP that does not have a good
connection to the backbone. So, net is there's a lot more
variability in PC to phone quality today, even though it's
getting much, much better, than there is in phone-to-phone
qualities. And so the early growth of PC to phone and it's been
pretty explosive this year, but it's been among people with some
tolerance for uneven quality: students and others. There are
tens of millions of early adopters, but the PC to phone quality
isn't at the level yet of the phone-to-phone quality. One of our
successes has been in bringing to phone-to-phone quality where
we can sell to major carriers, where we can sell to RBOCs, we
intend to go along exactly that same path with PC to phone
quality and successfully eliminate quality as an obstacle to
use.
BILL GARRAHAN: Thank you and congratulations on the quarter and the eFusion
acquisition.
TOM EVSLIN: Thanks a lot.
OPERATOR: Your next question comes from Brian Boyer from First Analysis.
21
<PAGE>
TOM EVSLIN: Hi, Brian.
BRIAN BOYER: Good morning, guys. I had three questions. One was, Tom, can you
give us the percentage of traffic that is non-US originated in
the quarter?
TOM EVSLIN: Yeah. It's a very tiny number of - it's a big number, but it's
tiny on the sheet and Ed is pointing to it. It's 23.4%.
BRIAN BOYER: 23.4 % of all traffic, all minutes were originated outside the
US?
TOM EVSLIN: Yeah. That's actually on our WWX Service because on webtalkNOW!
there isn't any way for us to know that.
BRIAN BOYER: Right. That's seems like it's a pretty good jump over previous
quarters.
TOM EVSLIN: Yeah. Two reasons for that, three reasons for that. One is we
opened the London switch. So obviously all the, even though it
wasn't the full quarter, it was more than a month and it ramped
very quickly, so all the traffic coming out of there is non-US.
Secondly, the SNARC program continues to be a successful way to
take traffic directly from the switches of non-US carriers and
feed it into our network. And third, on our expansion of
relationships with foreign PTTs, we start out being mostly
terminators, then they originate more and more traffic. China
22
<PAGE>
Telecom is an example of that, the amount of traffic that China
Telecom originates, I can't give, I'm not allowed to give the
precise numbers, but the amount continues to increase, and it
increases as a proportion of the total traffic. So those three
things together account for the growth in non-US originated
traffic.
BRIAN BOYER: Is China a big piece of the non-US originated traffic?
TOM EVSLIN: It's probably, other than London, it's probably, I'm not
positive, Brian, but it's probably the largest other source of
non-US traffic.
BRIAN BOYER: Other than London?
TOM EVSLIN: Other than London where we have our super PoP, so we're taking
more traffic out of there.
BRIAN BOYER: Right.
TOM EVSLIN: London serves as a gateway for Europe, so that isn't really just
traffic from the UK.
BRIAN BOYER: Right. And a question on CAPEX. I know you gave the number, I
believe, but I can't, I don't recall what it was. Can you give
me the CAPEX number again?
23
<PAGE>
ED JORDAN: Yeah, Brian. I think it was $8 million for the quarter and we're
still comfortable with the target for this year which I think was
$35 million total CAPEX for the year.
BRIAN BOYER: Right. And lastly, a question on eFusion. My understanding is
that they are acting as a service provider in the way that they
offer the Internet Call Waiting and Push to Talk services. Do
they have, they don't operate a network per se, but they have
like point servers where they, you know, sort of offer this
capability up to their customers, is that the way it works?
TOM EVSLIN: Yeah. That's correct. In order for them to expand, if we hadn't
made this arrangement, they would have had to build out a
network. And so one of the synergies are we can take these
services and deploy them much more quickly and much more widely
and with much better economics when there's an existing network
to deploy them on. And so that's a lot of what ITXC is, the old
ITXC, is contributing in synergies. You have it exactly right,
today they have point servers but really what's needed is a
complete network, an edge network that these services are, where
the service is being provided out over the network.
BRIAN BOYER: So they don't really have per se network assets. It's mostly just
the server they operate out of their facility there?
24
<PAGE>
TOM EVSLIN: That's right. The servers are actually in their facility. The
servers that they operate in one facility, and we do not see this
as an acquisition of network assets, but as an acquisition of
enhanced services that lay over our network.
BRIAN BOYER: And the idea is they would be run as a stand-alone, somewhat
technology development operation, for ITXC?
TOM EVSLIN: No. I think that's oversimplifying it. The Push to Talk service,
which we call, and this isn't a brand name, but we think of it as
e-calling/e-commerce services. The product unit for that, meaning
the marketing as well, will remain headquartered in Beaverton,
just as our WWX service will remain headquartered in Princeton.
The e-call subscriber services, again not a brand name, but the
things like Internet Call Waiting and integrated messaging,
Follow-Me, the things that we sell and hopefully all of them are
sold to end users in corporations for communication enhancement
will be headquartered out of New Jersey, but it will really be a
collaborative effort with a lot of the development capability
coming out of Beaverton. So it's not just a place for
engineering, even though it's a very important part of our
engineering, it's the product unit headquarters for the Push to
Talk product as well.
BRIAN BOYER: Got it. Thanks guys. Nice quarter.
25
<PAGE>
TOM EVSLIN: Thanks a lot.
OPERATOR: The last question comes from Tom Lloyd Butler from Gruber McBain.
TOM EVSLIN: Hi, Tom.
TOM LLOYD BUTLER: Two questions. First of all, on the revenue side of the
acquired company, e-whatever it is --
TOM EVSLIN: eFusion.
TOM LLOYD BUTLER: eFusion. Could you give me a sense -- I think you said that
they were going to have about $20 million of revenue; is that
correct?
ED JORDAN: Yeah. Tom, this is Ed.
TOM LLOYD BUTLER: Yeah.
ED JORDAN: We will not be reporting it as a separate entity going forward.
And again as I said, you know, this is a pretty quick process for
us to get the definitive agreement, so we're fine tuning the
numbers in terms of how we'll report the total synergistic
revenues, but just to give people some guidance on a stand-alone
basis, if they remained stand-alone, they
26
<PAGE>
would have generated about $20 million for 2001. Pretty nominal
for the fourth quarter of this year - somewhere in the
neighborhood of $1 million, $1.5 million.
TOM LLOYD BUTLER: All right. So I guess my point is you also said that it was
going to be at a 40% gross margin.
ED JORDAN: That's correct.
TOM LLOYD BUTLER: That would, in my book, based upon what you said about that
business, does that mean that all of their revenues come from
what you would characterize as advanced or enhanced services?
TOM EVSLIN: Yeah. Let me explain that. In the early part of their life, they
were a technology company and their revenues came from
technology licensing.
TOM LLOYD BUTLER: I see.
TOM EVSLIN: Since the beginning of this year, they've been changing their
model to become an ASP and to become a service provider
themselves. There's a little bit of residual revenue that comes
from the software licensing. Other than honoring current
agreements, that's not really our business, and not something
that either they intended to carry forward
27
<PAGE>
in their new model or we intend to carry forward. So the revenues
that Ed's talking about in the future are strictly service
provider revenues.
TOM LLOYD BUTLER: Okay. Now assuming that they had built up a revenue
projection of $20 million, to whom were they planning on selling
these services and now that they've been acquired by you, does
that change?
TOM EVSLIN: It expands; their plan for selling the services for the Internet
Call Waiting services typically get sold through carriers or ISPs
and actually often through local phone companies whose main
motive is that they don't want their customers to go out and get
another line because that's expensive to provide. Those are
exactly the same channels that we would use, only in addition to
the carriers and ISPs that they've been talking to, we have a
very strong set of carrier and ISP relationships. Some overlap,
some unique. So same kind of customers, but now we have a
greater, or at least after closing, we have a greater customer
set that we can sell to and in many cases, we're already working,
we at ITXC, are already working with the carriers and ISPs, who
will become the market.
Marketing of the Push to Talk, initial marketing of Push to Talk,
a little different from the ITXC model because the initial sales
were being made directly to the websites, the merchant websites
that are providing the service. Their plan and the plan that we
agree with, is to probably continue to do that for very large
accounts like if it was a national
28
<PAGE>
accounts group, but to develop other channels, ISPs for example,
web hosting services, to reach the vast majority of web
merchants, not to grow a huge sales force.
So the people that they would have sold to or through are a
subset of the people that ITXC already has relationships with. We
absolutely agree on their channel strategies, but we're able to
bring more prospects into that channel, because we're already
dealing with a lot of the players in the channel.
TOM LLOYD BUTLER: Okay. Very good. And then finally, as far as the churn of
the customer levels on some of the other customers that you've
got, particularly in the, you know, web --.
TOM EVSLIN: webtalkNOW!
TOM LLOYD BUTLER: Yeah, webtalkNOW!. Do you have any idea what that is or
what's happening there?
TOM EVSLIN: In a technical sense, there's zero churn, that is the contracts
that we have remain in force. Now, I don't want to overstate
that because most of the contracts have very low or no minimum
amount of traffic, and the daily traffic from customers goes up
and down pretty radically. These guys are new businesses,
they're trying out new business models, they're trying out a
bunch of subscribers. So, as I said, the overall
29
<PAGE>
traffic on any given day can vary from 5% of our total traffic to
25% of our total traffic. It's running now around 10% of our
total traffic. Similarly in the WWX business, the churn is very,
very low: customers very, very rarely cut off their physical
connection dots. As a matter of fact, what churn there has been
in that business historically, it's usually been initiated by us,
when we felt the customer was not a good enough credit risk
anymore. But this is not a high churn business but the
webtalkNOW! is highly volatile in the amount of traffic that we
get from that customer set.
TOM LLOYD BUTLER: I see. Okay.
OPERATOR: We have a follow up question from Tim Horan.
TOM EVSLIN: Hi, Tim.
TIM HORAN: Hi, guys. Sorry, just a quick question on the financials. Ed, I
don't mean to put you on the spot, if you're still there. But
for next year, we were estimating roughly around $225 million in
revenue and about an EBITDA margin around a negative 11%. I'm
assuming the EBITDA margin should stay probably in that range as
a result of this acquisition, but should we be projecting out
for next year more like $250 million in revenue? Would that be
safe to say?
30
<PAGE>
(Overspeaking)
TIM HORAN: That's basically it.
ED JORDAN: Okay. Yes, Tim. I think, as I said before, you know, we want to
come back to you guys with a complete model when we've got all
the synergies figured out in the plan. The one thing I will tell
you is that one of the things we are very impressed about with
the eFusion plan on a stand-alone basis, is that their targets
for becoming EBITDA positive were in line with ours, so I guess
the guides that I'd give you right now is that there will be some
marginal revenue. We think the EBITDA margins will remain
constant and we won't be pushing out our EBITDA positive date.
TIM HORAN: Thank you.
OPERATOR: There are no further questions at this time.
TOM EVSLIN: Great. Thank you all very much. Let me just summarize by saying
that we're very excited. We're very gratified by the move toward
profitability in our existing businesses and now the opportunity
to layer on the pieces of e-calling very, very quickly to the
network are a great prospect. We haven't gotten a lot of sleep in
the last couple of weeks and we're looking forward to not getting
much sleep in the future. But
31
<PAGE>
this acquisition really accelerates the industry's march into e-
calling and ITXC's march into enhanced services. We're looking
forward to closing it as quickly as we can and getting this
product sweep deployed on our network. Thank you very much.
OPERATOR: Thank you. You may all disconnect.
ITXC CORP. PLANS TO FILE A REGISTRATION STATEMENT ON SEC FORM S-4 IN CONNECTION
WITH THE MERGER DESCRIBED IN THE CONFERENCE CALL AND THE PARTIES EXPECT TO MAIL
A PROXY STATEMENT/PROSPECTUS TO THEIR SHAREHOLDERS CONTAINING INFORMATION ABOUT
THE MERGER. INVESTORS AND SECURITY HOLDERS ARE URGED TO READ THE REGISTRATION
STATEMENT AND THE PROXY STATEMENT/PROSPECTUS CAREFULLY WHEN THEY ARE AVAILABLE.
THE REGISTRATION STATEMENT AND THE PROXY STATEMENT/PROSPECTUS WILL CONTAIN
IMPORTANT INFORMATION ABOUT ITXC, EFUSION, THE MERGER AND RELATED MATTERS.
INVESTORS AND SECURITY HOLDERS WILL BE ABLE TO OBTAIN FREE COPIES OF THESE
DOCUMENTS THROUGH THE WEB SITE MAINTAINED BY THE U.S. SECURITIES AND EXCHANGE
COMMISSION AT HTTP//WWW.SEC.GOV. IN ADDITION TO THE REGISTRATION STATEMENT AND
THE PROXY STATEMENT/PROSPECTUS, ITXC FILES ANNUAL, QUARTERLY AND SPECIAL
REPORTS, PROXY STATEMENTS AND OTHER INFORMATION WITH THE SECURITIES AND EXCHANGE
COMMISSION. YOU MAY READ AND COPY ANY REPORTS, STATEMENTS AND OTHER INFORMATION
FILED BY ITXC AT THE SEC PUBLIC REFERENCE ROOMS AT 450 FIFTH STREET, N.W.,
WASHINGTON, D.C. 20549 OR AT THE COMMISSION'S OTHER PUBLIC REFERENCE ROOMS IN
NEW YORK, NEW YORK AND CHICAGO, ILLINOIS. PLEASE CALL THE COMMISSION AT 1-800-
SEC-0330 FOR FURTHER INFORMATION ON PUBLIC REFERENCE ROOMS. ITXC'S FILINGS WITH
THE COMMISSION ALSO ARE AVAILABLE TO THE PUBLIC FROM COMMERCIAL DOCUMENT-
RETRIEVAL SERVICES AND AT THE WEB SITE MAINTAINED BY THE COMMISSION AT
HTTP//WWW.SEC.GOV.
EFUSION, ITS DIRECTORS, EXECUTIVE OFFICERS AND CERTAIN MEMBERS OF MANAGEMENT AND
EMPLOYEES MAY BE SOLICITING PROXIES FROM EFUSION'S STOCKHOLDERS IN FAVOR OF THE
ADOPTION OF THE MERGER AGREEMENT. A DESCRIPTION OF ANY INTERESTS THAT EFUSION'S
DIRECTORS AND EXECUTIVE OFFICERS HAVE IN THE MERGER WILL BE AVAILABLE IN THE
PROXY STATEMENT/PROSPECTUS.
ITXC, ITS DIRECTORS, EXECUTIVE OFFICERS AND CERTAIN MEMBERS OF MANAGEMENT AND
EMPLOYEES MAY BE SOLICITING PROXIES FROM ITXC'S STOCKHOLDERS IN FAVOR OF THE
TRANSACTION. A DESCRIPTION OF ANY INTERESTS THAT ITXC'S DIRECTORS AND EXECUTIVE
OFFICERS HAVE IN THE MERGER WILL BE AVAILABLE IN THE PROXY STATEMENT/PROSPECTUS.
32
