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Net2Phone Cuts Back Staff, Wholesale Biz

By Ryan Naraine

With net losses ballooning and an early backer dumping its stock at every turn, Web telephone company Net2Phone, Inc. on Thursday announced it would lay off 110 employees and scale back unprofitable businesses.

Net2Phone, a pioneer in the Voice-over Internet Protocol (Vo-IP) business, said the staff cuts represented about 28 percent of its workforce and mostly affected the wholesale division of its operations.

"Unprofitable businesses such as certain international wholesale services will be scaled back and resources will be channeled towards its consumer and enterprise communications services with a long-term emphasis on broadband."

"Wholesale gives us low-margins with high capital infrastructure. Keeping retail, especially through our distribution network internationally, enables us to continue to serve consumers and enterprises at much higher margins than wholesale," company spokesperson Sarah Hofstetter told atNewYork.

Net2Phone said its sister companies IDT Corp. and Winstar would help provide employment for some of the affected workers but it did not provide additional details.

It is the second round of staff cuts in less than a year at Net2Phone, which was spun off from IDT in 1995 to sell Web-based telephone services over Vo-IP networks. Last November, the company fired 290 employees, or 43 percent of its staff.

The latest belt-tightening comes as no surprise. IN addition to widening quarterly losses, mega-portal Yahoo! , an early Net2Phone backer, has been quietly dumping Net2Phone's stock in recent months, causing minor panic among investors.

Between November and December last year, Yahoo! unloaded approximately 1.6 million Net2Phone shares at prices ranging from $3.76 to $6.76. As part of a $150 million stock swap transaction hammered out in March 2000, Yahoo! once held a 5 percent stake in the New Jersey-based Net2Phone.

While spokespersons from both companies have declined to address the stock sale, Net2Phone officials are privately grumbling about the decision by Yahoo! to dump the stock. "They (Yahoo!) are the biggest thorn in our side," one insider said.

Net2Phone, which is in the midst of rolling out broadband-based services with partner and investor Liberty Media, said the latest retrenchment would not affect those cable telephone plans.

"To ensure continued growth and innovation within the company, Net2Phone is engaged in the development of a Vo-IP solution for broadband operators. Liberty Media, Net2Phone's strategic partner and investor, is working with Net2Phone to deliver cable telephony over IP networks, and resources and personnel remain in place to deliver a viable solution," the company said.

"Demand for Net2Phone's communications services internationally continues to be strong in both the consumer and enterprise markets. Over the past year, revenues from this division have grown by over 80 percent with gross margins in excess of 40 percent," according to Net2Phone.

Net2Phone expects to take a restructuring charge, which includes severance payments and related costs but did not provide financial details of those charges.

In the fiscal first quarter, Net2Phone reported net losses of $41.5 million (72 cents per share), compared with a loss of $5.2 million, or 9 cents a share, in the same year-ago period. Excluding charges related to restructuring and losses from its ADIR Technologies subsidiary, the company's losses reached $20.3 million (35 cents per share).